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The issue of how new collateralized loan obligations in Europe comply with the Capital Requirements Directive's Article 122a rule on risk retention--the so-called'skin-in-the-game' clause--is weighing heavily on industry minds in light of this year's market revival.
A securitization lawyer in London told SI that risk retention is creating headaches since, under the Article 122a, certain investors have to ensure that the deals they invest in are 122a compliant, while others are not subject to the rules.
"Some investors are not subject to it, but they still want to have the ability to say the deal is 122a compliant, in order to make it a more liquid instrument and [have the ability] to sell it," the lawyer explained. "If they don't, it'll make it harder for them to sell to people who do need to comply, and therefore that makes it less liquid."
The 5% skin-in-the-game clause, which securitization issuers are required to meet as part of compliance with the European Union's implementation of Basel III under the Capital Requirements Directive, is designed to shore up investor confidence in the post-crisis market. But the way in which CLOs comply has become an increasingly hot topic in Europe as the market for new-issue CLOs has re-emerged this year.
"CLOs are going to be...