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News Analysis
How it took four years to close a loophole — and throw European CLOs into chaos
by Kathryn Gaw
The fraught relationship between the EU regulator and the growing CLO market came into focus last month.
In early August, the European Banking Authority (EBA) surprised the market by issuing a response to a question posted four years previously regarding risk retention. In its response, the EBA clarified that CLO managers cannot be defined as originators within the EU’s securitisation framework, effectively bringing an end to the years-long practice of conditional sale agreements (CSAs) and pushing managers towards forward purchase agreements (FPAs) or forward sales agreements (FSAs).
Timeline of EU risk retention regulation
Within days of the announcement, a Dealscribe report was published stating that the EBA decision meant that more than half of all European CLOs became non-compliant overnight. A few weeks later, a Deutsche Bank analysis identified 366 deals mentioning CSAs in their documents out of a potential 622 deals.
Joanne McEnteggart, global head of debt, capital markets and corporate at IQ-EQ, said that in the immediate aftermath of the announcement, CLO managers scrambled to understand what this change could mean for their business, resulting in some new issuance being paused.
“Those conversations are ongoing in relation to how it impacts them specifically,” said McEnteggart. “They have to reconsider the impacts of what this means for them in relation to how they can structure the deals and how to structure the underlying books as well. One manager that we were chatting to, they’re going to have to revisit the whole model as they had assessed it.”
Andrew Bryan, knowledge director at Clifford Chance, said that within hours of the risk retention rule being announced, most of the London market lawyers were on a call exploring its implications.
One CLO lawyer, who asked to remain anonymous, said: “Four years and a Friday in the middle of August — that suggests someone who hasn’t really got their finger on the pulse as to how business works.”
There are thousands of pages of rules nobody can fully understand
Ian Borman
Partner
Winston & Strawn
It is understood that the EBA has been surprised at the outcry from the industry. In the EBA’s view, it was merely closing a loophole that created unnecessary risk for investors. Going forward, managers will have to maintain skin in the game either by making use of FPAs, FSAs or third-party originators. But the lack of consultation with the market, and the sudden implementation of such a consequential rule, has created frustration.
“I think the CLO market has a bit of an image problem in the EU,” said Bryan. “And that, I think, comes down to difficulties with communication. Transfers tend to happen between academia and government more than industry and government.
“The result is that unless industry is really effective at communicating what it’s doing and why, then there’s a potential for misunderstanding.”
Securitisation regulation is not widely understood, said Ian Borman, partner at Winston & Strawn. “A very bureaucratic approach to solving problems has resulted in thousands of pages of rules that nobody can fully understand. You need a lot of time, a lot of patience, and usually a lot of background knowledge to interpret what the regulations are trying to say.”
Despite ongoing concerns about the rising cost of regulation stymieing growth in the European CLO market, a month on from the risk retention clarification, the market seems to have absorbed the shock and started implementing fixes.
According to Deutsche Bank, originator ‘fix’ notices gathered pace toward the end of August and beginning of September, with eight managers releasing notices for 84 deals between 20 August and 5 September.
Meanwhile, the regulator has listened to criticism from market participants, and further clarification of the risk retention rule is coming. As previously reported by Creditflux, there are imminent plans to bring together all 27 EU country supervisors to discuss the implementation of the rule and any potential penalties for non-compliance.
What does the risk retention clarification actually mean?
On 8 August 2025, the European Banking Authority (EBA) responded to a question posed to the European Commission’s Single Rulebook Q&A in 2021 asking whether an entity that manages and establishes a securitisation can be classified as an ‘originator’ under EU Securitisation Regulation 2017/2402 by entering into a conditional sale agreement (CSA) with a CLO issuer.
The EBA said: “[If] an entity has not purchased the assets but has entered into a conditional sale agreement with the SSPE [securitisation special purpose entity] whereby the entity is obliged to acquire relevant assets from the SSPE, such entity does not qualify as an originator and therefore cannot fulfil the risk retention requirement on this basis.”
In short, the answer was ‘no’. This means that from 8 August 2025, European CLO managers can no longer use CSAs to help them meet risk retention requirements.
A CSA is an agreement where a CLO manager agrees to purchase loans in the future, subject to certain terms and conditions. This has raised concerns that, in the event of a default, the CLO manager may not honour the agreement because it is conditional.
The regulator now says CLO managers must actually purchase and own assets before transferring them to the SSPE. This is likely to result in the wider use of forward purchase agreements and third-party originators.
