January 23, 2017 - 2016 started where 2015 left off: With a great deal of work to be done on the regulatory front! And this year is shaping up the same way. Below, we recap several of last year’s efforts and flag initiatives that continue into 2017.
The LSTA kicked off 2016 by submitting a comment letter on January 13th on the SEC’s proposed Open End Fund Liquidity Risk Management Rules, which had been issued in September 2015. In particular, we focused on the impact on open end loan mutual funds, which hold more than $100 billion of loans. During the first half of 2016, we met with a number of SEC staff to walk them through loans, loan mutual funds and how managers deal with liquidity and redemption risk. The final rule emerged in October 2016. The early consensus? It is a dramatic improvement over the proposed rules, which would have required every fund to categorize every asset into one of six baskets based on the number of days it would take to covert that asset to cash (e.g., sell and settle the sale). While the final rule is much better, loan mutual funds – indeed all open end funds – have a great deal of work to do before the 2018 implementation date. The LSTA is assisting its loan mutual fund members in these efforts.
The LSTA also has been busy on the CLO and risk retention front. In October 2014, the LSTA sued the SEC and Federal Reserve on the application of risk retention to open market CLOs. We spent 2015 preparing briefs for the Court. In February 2016, we had our oral arguments in the U.S. Court of Appeals for the DC circuit; subsequently, for jurisdictional reasons, we were transferred to DC District Court. On December 22, 2016 – two days before the risk retention rule went live – the DC District Court ruled in favor of the SEC and the Federal Reserve. While unfortunate, the District Court ruling is not entirely surprising. Nor is our response: On January 5, 2017, we appealed the ruling back up to the Court of Appeals.
In addition to litigation, the LSTA continued its efforts to get “Qualified CLO” legislation through Congress. This legislation would permit the manager of a “Qualified CLO” – one that met restrictions in six categories – to purchase and retain 5% of the equity, rather than 5% of the notional amount of the CLO. The legislation passed through the House Financial Services Committee 42-15, but was never taken up by the full House. As a result, the election of Donald Trump resets the clock for 2017.
Finally, on the Leveraged Lending Guidance front, the LSTA’s role last year was more one of observer and facilitator. We hosted a number of roundtables to help bankers implement the (ever-evolving!) Leveraged Lending Guidance. In addition, we are closely monitoring the ECB’s proposed guidance on leveraged lending, a process that may continue for years.
Importantly, while regulation might be eased in the U.S. in coming years, it may be tightened in Europe. The EU recently released amendments that, while allegedly meant to facilitate securitization, could well stymie activity for many asset classes, including CLOs. Meanwhile, the ECB’s proposed guidance on leveraged lending looks similar to that of the U.S. – but is rather stricter. Thus, three of the LSTA’s major regulatory initiatives – Open End Fund Liquidity Risk Management, Risk Retention and Leveraged Lending Guidance – continue apace. Indeed, 2017 seems to be starting where 2016 left off With a great deal of work to be done on the regulatory front!