LMA responds to FSB's Evaluation of the Effects of the G20 Financial Regulatory Reforms on Securitisation consultation report
10 September 2024The LMA has responded to Financial Stability Board’s Evaluation of the Effects of the G20 Financial Regulatory Reforms on Securitisation consultation report. Our response concentrated particularly on the impact on CLOs.
Nicholas Voisey, Managing Director – LMA, said
“Whilst much of the regulation following the GFC was necessary and proportionate to reduce systemic risk, we believe that in the case of CLOs, regulation has gone too far and is not necessary given the robustness of the product, which has been evidenced, not just through the GFC but since.”
In our response, we noted amongst others that:
- Post-GFC regulatory reforms including those relating to risk retention and prudential requirements, to the extent that they have been applied to CLOs, were and are unnecessary and have stifled what has been a key source of funding for corporates that access the European broadly syndicated leveraged loan market;
- CLO structures have proved resilient throughout both the GFC and more recent instances of market disruption. Our response provided evidence to support this position by emphasising the structural robustness of the product and the performance over a considerable period of time, with data on defaults and ratings migration.
In our response, we noted annual default rates of CLOs for the period from 2001 to the end of 2023 was a fraction of the annual default rate of investment grade corporate debt; and in no year during that period has the annual default rate of CLOs exceeded 0.5%. Additionally, since the establishment of the European CLO 2.0 in the post-GFC period with further enhanced structural improvements, not one of these securities has defaulted.