New risk retention rules for collateralised loan obligations (CLOs) arrive in the US in December 2016. Deutsche Bank's Trust and Agency Services team reveal the industry’s readiness to comply with the new rules and why they are creating uncertainty even for the large managers of these instruments
Which themes are your structured finance clients facing?
Our clients face uncertainty caused by three pressing themes; the negative interest rate environment, the Brexit referendum and regulatory changes. Regarding the third theme, new risk retention rules in the US are challenging the CLO issuance market, which now faces more uncertainty than at any other point since the financial crisis. This once booming market, which set an all time record for issuance for a single year in 2014, saw a decrease in deal making in 2015, pressured by intense volatility that challenged financial markets broadly, and things have been similarly difficult this year. In addition to this uncertainty, managers of those CLOs will have to ensure their structures are compliant with the new risk retention rules, which will be implemented in December. They are going to have to experiment with different compliant structures for their CLOs - the manager-owned affiliate (MOA), the capital manager vehicle (CMV), or the hybrid capitalised manager owned affiliate - to see what works best.
Will CLO managers be ready for the implementation of the risk retention rules in December?
In essence, the new risk retention rules stipulate that managers should have ownership of the structures they manage. However, these managers do not want ownership of the underlying positions in those deals. This requirement for risk compliant deals in 2016, where managers need to hold onto a portion of the risk in those deals, is putting the industry to the test, particularly since the new regulations stipulate that agents in these deals must hold up to 5% of capital.
In our role as trustee and service provider for CLO issuances, we talk to many managers and we see that even the largest of them are not fully certain if their structures are compliant. Some of them are experimenting and testing their structures on some deals but because those structures have not been given the official sign off by the regulator, they do not wish to be the first ones to officially “go to market” with the regulators.
Given the uncertainty, how is Deutsche Bank helping managers as agents in those CLO issuances?
With all these changes taking place in the marketplace, we can help them navigate the uncertainty with our technology. The role of technology in enabling deal transparency has been a theme for a long time. However, given that the CLO market has not been as technologically advanced as other equity type products, it has traditionally been a struggle for managers to get a real time view of their portfolio. The ownership requirements of the new risk retention rules means that they may struggle even more.
To help these managers meet the new requirements, Deutsche Bank’s Issuer Services Deal Manager platform now makes it easier for a CLO manager to get real time information about their portfolio whenever they want, regardless of their physical location. Via the platform, managers have online access to their transactions and holdings, providing them with the transparency and the risk mitigation requirements which the new rules are driving. Issuer Services Deal Manager is already being used by most, if not all of our clients. The next step is to make it a routine part of our offering to the outside world globally.
How does the platform fit within the Strategy 2020 objectives of the bank and where is it available?
Issuer Services Deal Manager is a firsthand look at where the bank is investing the Eu1bn in Global Transaction Banking so that all clients in the corporate trust world can achieve the goal of regulatory compliance and reporting. Managers, underwriters and investors (with permission) can use the online platform to view their transactions in real-time. The web-based platform is available through our Deutsche Bank Autobahn App Market - users simply log in to view their portfolio in real time, using their own personal devices. They can sign-in from anywhere to see their positions and also see all of the compliance status requirements.
How can Deutsche Bank’s technology help CLO managers?
Historically a portfolio manager could not be sure what positions the trustee has on their books. Now they have an online look at where their transaction sits at any point in time. This is something that market participants have been looking at for a long time. Issuer Services Deal Manager could also potentially lead to some managers no longer needing an in-house system to manage their portfolio. The next step will be for us to provide real-time loan level information and data the way you might do with CUSIPs, the alphanumeric code that identifies a North American financial security. I think that will be a big focus for us and the rest of the market going forward.
The market has changed a lot for our business and to that end it has really benefited the managers that we serve. The technology investments we have made as a service provider means clients actually get better service and enhanced technology, without increased fees.
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