Key Highlights: Potential Impact of Proposed Risk Retention Changes

In light of ESMA’s recent announcement on proposed changes to risk retention rules, we assessed the participants and structures of risk retention vehicles within a sample of 205 European CLO transactions issued between 2024 and Q1 2025 to identify those potentially affected.

Our findings:

• 78 out of 205 transactions are likely to be impacted or would require managers to confirm compliance in line with the updated interpretation. Of these, 57 transactions involve third-party or captive retention structures.
• Q1 2025: 25 of 61 transactions could be impacted.
• Full Year 2024: 53 of 144 reviewed final offering circulars would likely be affected.
• Overall retention path across all samples: 127 transactions used horizontal retention, and 78 transactions used vertical retention.

These findings highlight a significant portion of the CLO market that may face compliance risks if the proposed rules are adopted.

EU CLOs Face Compliance Shake-Up:

The Joint Committee of the European Supervisory Authorities has proposed a stricter interpretation of the Securitisation Regulation—redefining the “predominant source of revenue” test for CLO originators. If adopted, this could invalidate the current market norm of 5–15%, raising the threshold to 50%.

Our analysis of 2024 and Q1 2025 deals reveals that: 36% and 41% of CLOs, respectively, may fall short under the proposed rules. Investors will need to scrutinize structures, engage with managers, and potentially demand changes to remain compliant. Managers will most likely need to allocate more capital to risk retention and rethink business models. Law firms might be required to revisit risk retention structures.

The status quo is under threat. Ask for our in-depth analysis to engage with managers on risk retention compliance and understand what it could mean for your portfolio.