In a recent interview with The Hedge Fund Law Report, Partner Anthony Schouten detailed how risk retention and margin segregation regulations are impacting the way equity investors and financial institutions conduct business.
Schouten, who specializes in structured finance and derivatives, has worked extensively in the collateralized loan obligations (“CLO”) space advising managers and investors. He told HFLR, “although risk retention arguably was put in place to protect investors, some of the ramifications of risk-retention financing have made the deals potentially less attractive to equity investors,” adding, “many of the managers are borrowing to finance their obligations to purchase their risk retention slice, and that borrowing puts restrictions on them that would not apply to managers that self-fund their risk retention.”
Those restrictions, he explained, could eventually put some managers out of business, or force their consolidation, though not necessarily in the form of formal mergers and acquisitions.
Schouten also believes that the remainder of 2017 will be especially busy for attorneys working on the regulatory aspects of these deals, as the Commodity Futures Trading Commission (“CFTC”) pushed back new margin rules, which had been set to come out in March, to a September implementation date. As a result, the new margin rules will take effect at the same time the independent amount segregation rules are expected to roll out.
Schouten told HFLR that it would make sense for the CFTC to postpone the implementation date for the independent amount rules. Otherwise, market participants may very well be unable to manage the sheer volume of contracts they will need to adopt.