Risk retention regulations. Senator Hagan, who is a key member of the Banking Committee, is concerned that the risk retention requirements regarding CLOs, if finalized in their present form, would eliminate the incentive to arrange or manage a CLO, and would significantly damage this important source of financing for American businesses. Many companies that rely on CLOs for financing could be forced to set aside plans for business expansion. The re-proposed regulations retain the original proposal, which would require CLO managers to satisfy the minimum risk retention requirement for each CLO securitization transaction that they manage, despite the fact that CLO managers do not originate the underlying assets and have limited balance sheets with which to retain a 5 percent share of the CLO.
Recognizing the shortcomings of the original proposal, the re-proposal introduces a new option that is intended to avoid significant disruption to the CLO market. Under this re- proposal, arrangers of a loan syndication that includes a "CLO-eligible" tranche would be required to hold a 5 percent share of that tranche until the loan is repaid, matures or defaults, and would be prohibited from selling or hedging such exposure.