In addition to the market uncertainty caused earlier this year as a result of the European Commission (the “Commission”) adding the Cayman Islands to its list of jurisdictions that have “strategic deficiencies” in the area of anti‑money laundering and counter‑terrorist financing regimes, a new challenge has arisen in the context of establishing U.S. CLOs that are structured to be compliant with the EU and UK risk retention requirements.
On Monday, October 10, 2022, the Commission published its report (the “Report”) mandated by Article 46 of the EU Securitization Regulations (“EUSR”) on the functioning of the EUSR.
Unfortunately for the U.S. CLO market and EU and UK institutional investors, the Commission took a hard-line approach to EUSR disclosure requirements with respect to United States and other non‑EU country securitizations. The Commission confirmed in the Report that in the context of these securitizations, EU institutional investors will only be able to satisfy their diligence obligations under the EUSR if the disclosure information provided to such investors in respect of such securitizations strictly complies with the technical standards on disclosure requirements published by the European Securities and Markets Authority (“ESMA”). As a result, in the context of a U.S. CLO that has been structured to be in compliance with EU and UK risk retention requirements, even if the scope of information provided to EU institutional investors is consistent in substance with the risk retention disclosure requirements of the EUSR, an EU investor will not be deemed to be in compliance with such requirements if such information is not provided in the specific reporting templates proscribed by the ESMA.
Providing information in strict compliance with the ESMA templates will present significant challenges to many industry participants.
Additional information regarding the implications of the Report on U.S. CLO market participants will be available shortly on the Seward & Kissel website (www.sewkis.com).