Cadwalader attorneys examined the implications of "Brexit" for the UK Collateralized Loan Obligation ("CLO") market. They questioned whether the UK continues to remain within the scope of the EU Single Market Directives – particularly the Markets in Financial Instruments Directive ("MiFID"). If not, then that status potentially could impact the ability of UK entities to act as collateral managers and retention holders in European CLOs. The attorneys cautioned that other transaction parties who are UK entities, including investors, may be unable to act as well.
If the UK no longer lay within the scope of MiFID, then a UK collateral manager would be unable to act as a "sponsor" for a European CLO, even if that collateral manager was subject to UK financial services regulation. The attorneys suggested that it may be necessary for European CLOs to include a mechanism that permits the collateral manager to "switch" to an "originator" structure (which does not require an originator retention holder to be regulated currently in order to be an eligible retainer under the EU risk retention rules). The attorneys emphasized that the legislative effects of Brexit are not immediate:
As Brexit continues to unfold over the coming days, weeks and months, it is important to note that, at least for now, EU law still applies, and there are solutions available to CLO market participants to plan for, and address, issues as they present themselves.
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