Aug. 1 (Bloomberg) -- Collateralized loan obligations shouldn’t be subject to the risk retention rules proposed by the Dodd-Frank Act, the Loan Syndications and Trading Association said today in a letter submitted to regulators.
The New York-based trade organization is asking regulators to exempt CLOs from holding at least a 5 percent stake in debt they package or sell. The proposal is designed to rein in the trade of easy credit blamed for fueling the financial crisis. The LSTA says most CLOs are independent investors and should be exempt from the provision.
“If the risk retention rules were applied to managers of open market CLOs, we would risk a shutdown of business that provides much needed credit to U.S. companies that create jobs and invest in growth,” Bram Smith, LSTA executive director, said in a statement.
CLOs are a type of collateralized debt obligation that pool high-yield, high-risk loans and slice them into securities of varying risk and return. The securities are different from other securitizations and shouldn’t fall under the definition in Dodd- Frank rules, the LSTA said.
Unlike an “originate to distribute” model, in which lenders make loans and securitize them in order to remove them from their balance sheet, these CLOs are a third-party purchaser that exist only to buy loans in the open market as an investment, according to the LSTA.
Managers of these funds achieve the bulk of their compensation only if the CLO performs as expected. If investors in the CLOs do not receive their interest payments, managers don’t receive most of their fees, according to the letter.
--Editors: Faris Khan, Richard Bedard
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