The 31 March, Monday, Joint Committee Report on the implementation and functioning of the Securitisation Regulation could create regulatory uncertainty for pre-priced and not yet placed CLOs deals worth billions.
In 1Q25, the European securitization grew. However, new interpretations of European standards that European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and European Securities and Markets Authority (ESMA) proposed in March 2025 could impact on new placements (press release).
The Joint Committee Report on the implementation and functioning of the Securitisation Regulation that EBA, EIOPA and ESMA released on 31 March, Monday, introduced an important interpretation of the risk retention rules that concern the CLOs (Collateralised Loan Obligations).
The last report of Association for Financial Markets in Europe (AFME) said that the issuance of asset-backed notes amounts to 61.5 billion euros (-2.3% from 4Q24 and -9% from 1Q24). However, the number of placements increased for a total value of 38 billion accounting for 61.9% of issued amount (49.4% of 4Q24 worth 31.1 billion out of 63 billion and 47.4% of 1Q24 – 32 billion out of 67.6 billion).
The placements of pan-European CLOs grew from 12.9 billion in 4Q24 to 17.8 billion in 1Q25, those for UK RMBS (Residential Mortgage-Backed Securities) amounted to 8.5 billion (unchanged) and those for German ABS (Asset-Backed Securities) are worth 2.5 billion.
The European retention rules for securitizations require originators or sponsors to hold at least 5% of the deal’s economic risk (BeBeez Academy of June 2022 about EBA’s final draft of Regulatory Technical Standards – RTS and see here a previous post by BeBeez).
EBA, EIOPA and ESMA pointed out that the retention entity must generate at least 50% of its revenues from sources other than the CLO itself to avoid the use of shell companies whose only purpose is to circumvent the rules.
This interpretation had an immediate and destabilising effect on the market. Bloomberg said that in early April 2025, 61 CLO structured according to EU regulations and with a total value of 26 billion suddenly ended up in a regulatory grey area, as many of these deals were priced but not yet actually placed. Investors fear that such CLOs will require substantial changes for complying with the new rules before reaching their finalizations. European spvs issued CLOs 14.4 billion while US spvs issued European rules – compliant CLOs for 12.9 billion dollars.
The authorities report says that the interpretation will only apply to transactions pre-securitised on or after 1 April, Tuesday and excludes earlier securitisations already at an advanced stage. Such a regulatory uncertainty is however also creating concerns for market participants about the impact on refinancings and resets of existing CLOs.
