Friday, February 21, 2014

Senator Donnelly Urges SEC and Fed to Protect Collateralized Loan Obligations in Risk Retention Regulations

Senator Joe Donnelly (D-IN) fears the potential negative effects of the proposed regulations implementing the Dodd-Frank credit risk retention provisions on  open-market collateralized loan obligations (CLOs), which he described as an important source of financing to U.S. businesses. He noted that CLOs finance about $300 billion in loans, and such financing supports the expansion of businesses, the employment of more workers, and greater economic growth.

In a letter to SEC Chair Mary Jo White and Fed Chair Janet Yellen, Senator Donnelly acknowledged  that in their August 2013 re-proposal the regulators sought improvements over the original April 2011 proposal to avoid significant disruption to the CLO market. The re-proposed regulations acknowledge that  the agencies' goal in proposing this alternative risk retention option is to avoid having the general risk retention requirements create unnecessary barriers to potential open-market CLO managers sponsoring CLO securitizations. However, despite this language, the Senator said that the regulations  will still unnecessarily restrict the market and result in fewer CLO issuances and less competition. When issuing the final risk retention  regulations, he asked the SEC and bank regulators to carefully consider these concerns.

He added that he supports efforts on risk retention to ensure that complex financial products do not pose grave risks to the greater economy. But in the process of minimizing broader risk, he noted, regulators must strike a balance and do so in a way that does not threaten CLOs, which he views as a vital source of financing. He urged the regulators to ensure that the final regulations do not risk harming the CLO market's ability to fund the business lending that is important to the nation.