12. CLOS AND REGULATION
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12. CLOs and regulation
12. CLOs and regulation
Contributors:
Contributors:
Christopher Duerden,
Partner, Dechert
Ronan Mellon,
Partner, DLA Piper
Regulation has been constantly re-shaping the CLO market since the crash of 2008. Some of the rules we have seen emerge, such as the risk retention rules and the Volcker rule, directly prohibit the marketing or purchase of certain investments unless certain conditions are met. Managers have had to adapt their CLO structures to cater for these rules.
A lasting legacy
While some of these new rules remain in place (such as the European risk retention regulations discussed later in this chapter) others have faded away. Despite that, many of the changes in structure that the new regulations brought about are still being followed by the market.
The Volcker Rule
Risk retention was not the only prominent regulatory matter to get an update in the US since the first edition of this Guide. The Volcker Rule, which became effective in December 2013 pursuant to Section 619 of the Dodd-Frank Act, has undergone some significant revision since its original inception. Although the Volcker Rule was part of a broader reform of the banking sector in response to the great credit crisis of 2007-2008, certain provisions had a material impact on the CLO market.
The Volcker Rule, among other things, prohibits “banking entities” from certain proprietary trading activities and restricts sponsorship or ownership of “covered funds.” The definition of “covered fund” in the Volcker Rule includes (generally) any entity that would be an investment company under the Investment Company Act but for the exemption provided under Sections 3(c)(1) or 3(c)(7). CLO issuers predominately rely on Section 3(c)(7) and are thus considered to be covered funds. On the surface you would not expect an investor in the secured debt of a CLO to be considered to have an ownership interest in the related issuer. However, the original Volcker Rule provisions defined “ownership interest” quite broadly. For example, under the original rules the right to remove a collateral manager for cause (as well as select a successor manager) without also declaring an event of default would have been considered an indication of an ownership interest.
Fortunately, the Volcker Rule and the implementing regulations contained certain limited exceptions and or exclusions. The US CLO market has largely relied on the “loan securitization exclusion,” which created an exclusion from the definition of covered fund for those issuers of asset backed securities whose portfolio of assets, in general, consist only of loans, assets or rights designed to ensure the servicing or timely distribution of proceeds to CLO investors, or that are related or incidental to purchasing or otherwise acquiring and holding loans and assets received in lieu of debts previously contracted. In effect this meant CLOs intending to comply with the loan securitization exclusion could no longer hold bonds and had to analyze whether or not non-loan assets (such as warrants or other equity securities) received in connection with a workout or restructuring were indeed received in lieu of debts previously contracted.
Despite the popularity of the covered fund approach, some US CLOs have been (and continue to be) structured to comply with rule 3a-7 of the Investment Company Act 1940 instead. Rule 3a-7 provides an exemption from registration under the act for those issuers that satisfy certain criteria. In particular, an issuer relying on Rule 3a-7 has to manage the portfolio such that it is not traded for the primary purpose of realizing gains or avoiding losses resulting from market value changes. Although CLO portfolios are generally not traded for such a primary purpose (and the acquisition and disposition of assets is otherwise constrained by various criteria), there are circumstances where CLO managers would find it difficult to comply with this restriction. One example is the trading of credit improved or credit impaired assets in the context of various market conditions. Hence, this alternative to avoid covered fund status has largely been followed by only a small portion of the CLO market.
Volcker amendments
On 25 June 2020, the five regulators responsible for the enforcement of the Volcker Rule published revisions to the Volcker Rule. These revisions became effective on 1 October 2020 and among other things:
The Volcker amendments have, in turn, resulted in a number of recent changes in the US CLO market. CLO issuers are now permitted to acquire bonds, securities and other assets that they would not have been permitted to acquire prior to the effective date of the changes. Although a number of CLOs continue to follow the loan securitization exclusion, a substantial number of recent CLOs have taken the position that the loan securitization exclusion is not required to be followed given the changes noted in clauses (ii) and (iii) above.
- permit “covered funds” relying on the loan securitization exclusion from the Volcker Rule to acquire assets that do not constitute loans and other assets or rights currently not permitted under the loan securitization exclusion, in an aggregate amount not to exceed 5% of the aggregate value
- of the issuing entity’s assets exclude from the definition of “ownership interest” certain “senior loans” or “senior debt interests” issued by a covered fund
- clarify that the right to participate in the removal or replacement of a collateral manager is not a feature that results in a “banking entity” having an ownership interest in a covered fund
Making life easier in distressed situations
Aside from limitations on bond buckets (as of this publication many CLO debt investors still require a 5% limit on bonds and other non-loan assets even for CLOs not following the loan securitization exclusion), an important consequence for CLO issuers not following the exclusion is that they no longer have to analyze whether a non-loan asset received in connection with a workout or restructuring is received in lieu of debts previously contracted. The various permutations of workouts and restructurings over the last several years have made this analysis complicated for many CLO issuers, and that complication was compounded by the lack of clarify in the Volcker Rule as to how broadly “received in lieu of debts previously contracted” should be interpreted (an example would be how to consider a warrant offered to lenders in a restructuring where the lenders had to pay additional money for such warrants but were economically incentivized to do so in order to recover as much of the value of the original loan as possible). This is a welcome relief to many CLO issuers, particularly given that CLOs are generally constrained in the types of workouts and restructurings that they can participate in, let alone dictate terms.
Risk retention: the basics
The financial crisis of 2007 and 2008 led to much greater regulatory oversight of all securitisation structures, even though most non-mortgage-related asset classes continued to perform well. Regulators took the view that securitisation allowed banks to underwrite risky assets and pass on all the risk to investors – the so-called “originate-to-distribute” model.
To counter this, rules relating to the retention of risk by the originating bank, or by the sponsor of a securitisation which buys third party assets, have been introduced on both sides of the Atlantic. The EU rules came into force on 1 January 2011, whilst the US equivalent will come into force in December 2016. Whilst actual default rates in products such as managed CLOs remained low during the crisis, and despite the structural safeguards already embedded in a CLO transaction (such as deleveraging when collateral quality falls below certain triggers), they qualified as securitisation transactions under both sets of retention rules.
Sponsor route
For CLO managers which are able to satisfy the sponsor definition (as discussed further below), they are eligible to retain the required vertical or horizontal strip required under the retention requirements (the retained interest). However, it is not always the case that a CLO manager will have the ability or desire to finance such retained interest particularly for multiple CLOs. Seeing an opportunity, a number of market participants began offering secured funding to CLO managers. The retained interest may be used as collateral for secured funding purposes as long as such use does not transfer the credit risk of the retained interest to a third party, so any such funding is typically provided on a full-recourse basis or often in repo format. Retention funding does not come without its issues though. Should the relevant CLO manager default on its obligations under the full-recourse facility or repo transaction and the retained interest passes to or cannot be recovered from the relevant counterparty, the CLO is likely to become non- compliant with the relevant retention requirements.
US risk retention under Dodd-Frank
On 24 December 2016 the final rules implementing the credit risk retention requirements of Section 941 of the Dodd-Frank Act became effective. Generally speaking, the rules require one of the “sponsors” of an asset-backed securitization or a “majority-owned affiliate” to retain not less than 5% of the credit risk of the assets collateralizing the issuer’s securities. This reflects the requirement in Section 941 of the Dodd-Frank Act that a “securitizer” of a securitization retain and hold 5% of the credit risk of the related securitization issuance. The US federal agencies tasked with implementing the Dodd-Frank Act requirements had largely concluded that the collateral manager of a CLO was the appropriate (and, depending on the structure, only) entity to satisfy the role of “sponsor” as far the final rules were concerned (as a sponsor under the final rules would in turn be considered a “securitizer” as defined under Section 941 of the Dodd-Frank Act).
In general, a sponsor can hold the retention interest through holding a: vertical interest - a single vertical security or an interest in equal proportion of each class of notes issued by the related issuer including the equity horizontal residual interest - a first loss tranche any combination of these two - as long as the combined interest is no less than 5% of the credit risk of the CLO.
Importantly, a vertical interest is measured as the percentage of the face value of each class of interests issued in the CLO which are held by the sponsor, while the amount of the horizontal residual interest is measured as the fair value of such interest divided by the fair value of all interests issued in the CLO.
In response to the US risk retention requirements, the CLO market quickly crafted a handful of capital structures (and financing arrangements) to help managers raise additional funds to hold the requisite retention interest. However, on 9 February 2018, the US Court of Appeals for the District of Columbia Circuit held that the federal agencies responsible for the US risk retention rules exceeded their statutory authority when designating the collateral manager of an “open-market CLO” (described in the ruling as a CLO where assets are acquired from “arms-length negotiations and trading on an open market”) as the securitizer of the open-market CLO. The DC Circuit Court ruling became effective on 5 April 5 2018.
In particular, the court concluded that in order to be a “securitizer” as defined under Section 941 of the Dodd-Frank Act, an entity must actually transfer assets and otherwise relinquish ownership and/or control of assets to an issuer. The collateral manager of an open-market CLO, as described in the DC Circuit Court ruling, neither transfers assets to the CLO issuer nor is in a position to “retain” the associated credit risk because it never held that credit risk to begin with.
Although the ruling did not focus on balance sheet CLOs (other than noting those are CLOs comprised of assets transferred from one or more originators or original holders of the assets), the analysis in the court’s decision has found broader application in the CLO market. For example, prior to the ruling there was a concern in the market as to whether or not an externally-advised credit fund could be a sponsor and hold the risk retention piece or if its external advisor had to be the entity to do so. That concern has largely abated, as market participants found support in the ruling that a plain reading of Section 941 of the Dodd-Frank Act does indeed allow for such funds to act as permissible retention holders. As a result, since the time of the DC Circuit Court Ruling, various private funds, business development companies and joint-venture entities have issued CLOs that likely would have been difficult (or impossible) prior to such time.
Originator route
Where a CLO manager is unable to qualify as a sponsor, they often use an originator structure to comply with the relevant retention rules. In most cases the relevant entity will not have been “involved in the original agreement which created the obligations” in connection with the collateral obligations that it proposes to originate for the CLO and therefore such entity will need to fall within part (b) of the definition of “originator” i.e. an entity that “purchases a third party’s exposures for its own account and then securitises them” . The key question in determining whether an entity can be classed as an “originator” in such circumstances hangs on the meaning of “for its own account” which unhelpfully is not a defined term. Given the lack of clarity, a consensus developed in the CLO market that the relevant entity would need to be exposed to the credit/market risk of the relevant collateral obligations being securitised for a certain period of time, this requirement became known as “seasoning”. Seasoning periods can vary from deal to deal, but are now typically in the region of 15 business days.
It was also accepted that the entity would also need to have substance. The concept of substance led to a lot of discussion but again a consensus developed that substance required the entity to have e.g. its own capital, various on-going lines of business (which could include providing the warehouse) and potentially earn fees: basically, it needed to look more like a permanent capital vehicle than a special purpose vehicle set up purely to purchase collateral obligations for on-sale to a CLO. This requirement for substance has now been formalised into the “sole purpose” test as discussed below.
The relevant regulatory technical standards also introduced the concept of multiple originators, which provided further flexibility for “originator” structures. If the relevant entity set up to act as originator is not providing 100% of the securitised exposures, there will be multiple originators in respect of the CLO. In this case, the entity can either (i) establish and contribute over 50% of the total securitised exposures which requires it to contribute over 50% of the total securitised exposures on an on-going basis for the life of the CLO or (ii) establish and manage the relevant CLO, in which case, there is technically no minimum percentage of securitised exposures that are required to be contributed by the originator/manager. Having said that, transactions which follow this approach often require at least 5% of the total securitised exposures to be contributed by the originator/manager.
The EU Securitisation Regulation
Since 2015, the regulatory landscape for European CLOs has been dominated by the EU Securitisation Regulation. Post Brexit and with the subsequent reclassification of the UK as a non-EU third country for EU Securitisation Regulation purposes, European CLOs now have to consider both the EU Securitisation Regulation and the UK securitisation regulation (the “securitisation regulations”).
The European Commission first published its proposals for the EU Securitisation Regulation in September 2015, together with a proposal for a regulation amending the CRR (the “CRR amendment regulation”). Anyone who thought that agreement on the proposed EU Securitisation Regulation was going to be a quick process was soon disappointed. It was only on 17 January 2018, after an arduous journey through the European legislative process, that the EU Securitisation Regulation finally came into effect.
A related piece of EU legislation which, until recently, remained conspicuous by its continued absence, was the draft regulatory technical standards relating to risk retention (the “draft retention RTS”) produced by the European Banking Authority (“EBA”) under Article 6(7) of the EU Securitisation Regulation in July 2018. This draft never came into effect (and so was not onshored into the UK regime) and to some extent was overtaken by the COVID-19 recovery amendments, especially as regards non-performing exposures securitisation. On 1st July 2021, the EBA issued a revised draft for consultation, running until 30th September 2021. This revised draft carries over a substantial amount of provisions from the draft retention RTS. Article 43(7) of both the EU Securitisation Regulation and the UK securitisation regulation provide that until regulatory technical standards under Article 6(7) apply, the current regulatory technical standards made in 2014 under the CRR shall continue to apply. The Draft Retention RTS contain a number of useful clarifications including Article 3(6) which provides additional criteria for the sole purpose test as discussed below.
CLOs are not capable of attaining simple, transparent and standardised (“STS”) status due to the active portfolio management nature of a CLO on a discretionary basis. However, a number of provisions relating to, inter alia, risk retention and due diligence were transferred across to chapters 1 and 2 of the EU Securitisation Regulation from the CRR by virtue of the CRR amendment regulation, so it is primarily these early chapters of the EU Securitisation Regulation which are of most significance for CLOs.
A look back
In 2009, European politicians were quick to introduce risk retention rules by including a new Article 122a into the EU capital requirements directive. These rules applied from 1 January 2011. Article 122a was subsequently superseded by Articles 405-410 of the EU Capital Requirements Regulation (“CRR”) from 1 January 2014, with similar rules being adopted in the regulations applying to alternative investment funds and insurance companies. The rules provided that any bank, investment firm, alternative investment fund or insurance company based in the European Union that invested in a securitisation position such as a CLO needed to be able to demonstrate that the originator, sponsor or original lender of the transaction was retaining 5% of the risk.
In the period following 2009, two routes emerged through which European CLOs looked to comply with the relevant EU retention requirements , the “sponsor” route and the “originator” route.
Retention requirements
Article 5 of the EU Securitisation Regulation, which retained the position under the CRR, continues to place an indirect requirement on “institutional investors” to ensure that the required retention is made by the originator, sponsor or original lender. In addition, Article 6 of the EU Securitisation Regulation introduced a new direct requirement on the originator, sponsor or original lender to retain on an ongoing basis a material net economic interest in a securitisation of not less than 5% (the “risk retention”).
Must the “sponsor” of a CLO established in the EU or sold to EU investors be an EU entity?
Before the EU Securitisation Regulation came into effect, the previous definition of sponsor (under Article 405 of the CRR) was limited to credit institutions and certain categories of investment firms regulated under the Markets in Financial Instruments Directive (“MiFID II”), which did not include CLO managers located outside the EU, nor many of the UK CLO managers which did not have the relevant MiFID II super-authorisations, and so, in order to be able to qualify to hold the risk retention, many turned to the definition of “originator” under the CRR and in many cases to limb (b) of that definition and looked to qualify as an entity that “purchases a third party’s exposures for its own account and then securitises them”. A seemingly welcome development towards the end of the trilogue was the broadening of the “sponsor” definition to encompass both a credit institution “whether located in the Union or not” and an investment firm, as defined in (but, on the face of it, not as regulated under) the CRR.
The current definition of “sponsor” raises the question of whether this permits non-EU sponsors, and therefore allows non-EU parties to hold the risk retention as a sponsor? On the face of it, this appears to be the case, although there are commentators who are uncomfortable about whether this really is the case. There was no official commentary issued explaining why this was done, nor what the legislators intended by it. Official interpretation or guidance on this point would be welcome but none has yet been provided.
The UK version of the “sponsor” definition is clearer as it explicitly covers investment firms as defined in paragraph 1A of Article 2 of the onshored MIFIR (meaning essentially, firms, the regular occupation or business of which is the provision of one or more investment services to third parties or the performance of one or more investment activities on a professional basis), whether or not located in the UK.
May an EU investor invest in a CLO position where the risk retention is held by a non-EU party?
As discussed, Article 6 of the EU Securitisation Regulation imposes a direct risk retention requirement on the originator, original lender and sponsor. If none of those entities is in the EU, then on first principles, and in the absence of any clear intention to create extra-territorial legislation, the direct obligation does not apply to them. The EBA’s summary of the feedback it received which accompanied the draft retention RTS also helpfully confirmed that it does not intend the direct retention obligation in Article 6 to apply to parties established outside the EU, and the indirect risk retention requirement imposed on EU investors where Article 5(1)(d) of the EU Securitisation Regulation applies could not be clearer that the risk retention holder may be a third country entity.
However, on 25 March 2021, the EBA, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority (the “ESAs”) published a joint opinion on the jurisdictional scope of the obligations of the non-EU parties to securitisations under the EU Securitisation Regulation. The joint opinion has caused consternation by taking the view that where one or more (but not all) of the originator, original lender and sponsor were established outside the EU, the risk retention must be held by one that was established within the EU. It is important to note that the ESAs are not directly empowered to amend the EU Securitisation Regulation or offer interpretative guidance on the meaning of the framework text in the EU Securitisation Regulation so the industry is very much in “wait and see mode” as to whether the Commission acts upon the joint opinion.
The CLO market can hope for a more common-sense announcement from the EU during 2021 pending the outcome of the EU’s Article 46 review, which should provide the basis for some decent clarificatory amendment to the level 1 text of the EU Securitisation Regulation itself, although the lead time for that would typically be many months and could easily not happen before 2023.
Transparency Requirements
Article 7 of the EU Securitisation Regulation requires the originator, sponsor and securitisation special purpose entity (“SSPE”) of a securitisation to make certain prescribed information available to the national regulators in their respective EU member states, to holders of positions in the securitisation, and, upon request, to potential investors. The information required to be made available includes:
- a transaction summary and certain transaction documents (to be made available before pricing)
- quarterly asset-level reports
- quarterly investor reports
- any inside information relating to the securitisation that the reporting entity is obliged to make public under the market abuse regulation
- information on “significant events”
The Commission finally responded to ESMA’s final report on 14 December 2018 requesting a number of amendments. On 31 January 2019, ESMA published its opinion in which it stated that it agreed, amongst other things, with the Commission’s proposed amendments and had performed a number of adjustments broadening the ability for reporting entities to use the “no data” option (see opposite), in the respective templates.
For CLOs, there was some relief, with ESMA increasing the tolerance thresholds for cases where the assets were fairly old and some of the data did not exist (so-called “legacy assets”) and where the data were stored in an old database and could not easily be retrieved (so-called “legacy IT systems”), thus allowing more use of the “no data” options. The final technical standards came into effect on 23 September 2020 on the basis of ESMA’s final opinion.
The question which has given rise to much recent confusion is whether EU investors may hold non-EU CLOs if they do not receive the transparency information in the prescribed format, and more than two years after the EU securitisationregulation became applicable on 1 January 2019, there is still no official answer to this question. Current interpretations and advice hang on how the ambiguous phrase “where applicable” is interpreted in Article 5(1)(e) of the EU Securitisation Regulation. This is problematic for EU investors wanting to buy into CLOs (particularly US CLOs) which are not structured to provide the transparency information.
Getting Technical
The transparency technical standards provide five types of “ND” (i.e. “no data”) answer:
ND1
the required information has not been collected because it was not required by the lending or underwriting criteria at the time of origination of the underlying exposure.
ND2
the required information has been collected at the time of origination of the underlying exposure but is not loaded into the reporting system of the reporting entity at the data cut-off date.
ND3
the required information has been collected at the time of origination of the underlying exposure but is loaded into a separate system from the reporting system of the reporting entity at the data
cut-off date.
ND4
the required information has been collected but it will only
be possible to make it available at a specified date falling after the data cut-off date.
ND5
the required information is not applicable to the item being reported.
May UK investors hold non-UK CLOs?
For UK investors wanting to buy US (or other non-UK) CLOs, the problem has diminished because as from 1 January 2021 the legislation which implements the EU Securitisation Regulation into UK law - The Securitisation (Amendment) (EU Exit) Regulations 2019 - has already improved the drafting in Article 5(1)(e), so that (e) applies in relation to originators, sponsors and SSPEs established in the UK, and a new sub-clause (f) applies to those established elsewhere, requiring “substantially” the same information, which contains some latitude and does not therefore require use of the specified reporting templates themselves. The market awaits guidance on what “substantially” means, and as it stands the only regime which is “substantially the same” as the UK’s is probably the EU’s so Article 5(1)(f), for all its good intentions, could restrict UK investments to just the UK and the EU, plus other issuances which are designed to comply with the UK or EU requirements.
Sole purpose prohibition
Another new feature introduced under the EU Securitisation Regulation was the “sole purpose” test. Article 6(1) of the EU Securitisation Regulation provides that an entity shall not be considered to be an originator where the entity has been established or operates for the ‘sole’ purpose of securitising exposures. This is reflective of the EBA opinion and report on securitisation risk retention, due diligence and disclosure published on 22 December 2014, where the EBA publicly aired its views on how the ‘originator’ structure was developing. The EBA expressed concern that certain securitisation transactions had been structured so as to meet the legal requirements of the CRR but did not always meet the ‘spirit’ of the CRR or align the interests of the originator, sponsor or original lender, as applicable, of the relevant securitisation with the interests of the investors. In particular, the EBA identified potential loopholes caused by what it considered the abuse of the broad ‘originator’ definition under the CRR. The EBA stated at the time that it was of the opinion that the ‘originator’ definition should in principle ensure that the entity claiming to be the “originator” should be of “real substance and holds actual economic capital on its assets for a minimum period of time”. The draft retention RTS also provide details around the ‘sole’ purpose requirement in Article 3(6).
The consequences of Brexit
With effect from 1 January 2021, businesses looking to use securitisation to fund activities have been faced with a challenging interplay of EU and UK regulation as the UK establishes its framework outside the EU. Activity within the European securitisation market transcends national European boundaries, and participants have had to evaluate the consequences, for existing issuances and new issuances, of the UK leaving the EU and becoming a “third country” from a European securitisation perspective. As noted above, with effect from 1 January 2021, regulation of the European securitisation market has been bifurcated into two sets of similar rules which are already divergent.
UK risk retention holders in EU CLOs
Article 6(1) of the EU Securitisation Regulation requires the risk retention holder to be the originator, sponsor or original lender, as defined in Article 2 of the EU Securitisation Regulation, are simply required to be “entities”, whether or not established in the EU (a point emphasised by Article 5(1)(b) of the EU Securitisation Regulation), and if a UK-based risk retention holder falls into one of these two categories, the requirements of Article 6(1) of the EU Securitisation Regulation should continue to be met. However, if a UK-based risk retention holder has been holding as sponsor, it needs to examine if it continues to fall within the definition of “sponsor” for the purposes of the EU Securitisation Regulation to make sure it can continue to fulfil this role on EU securitisations, and the definition of sponsor in the EU Securitisation Regulation is ambiguous as regards investment firms; the corresponding definition in the UK securitisation regulation has no equivalent ambiguity because of the amendment to it made by the Securitisation (Amendment) (EU Exit) Regulations 2019). This means that UK investment firms wishing to hold or continue holding the risk retention in European CLOs which are able to come within the definition of “originator” will find more certainty going down that route unless and until there is any official EU guidance on the point.
UK CLO asset managers for European CLO’s?
In the case of an issuance where the SSPE is an Irish DAC, a UK collateral manager should be able to provide the collateral management services, even though the UK is now a “third country” for MiFID II purposes, because Article 54(1) of MiFIR permits third country investment firms to provide collateral management services into the EU in accordance with relevant local law “until three years after the adoption by the Commission of a decision in relation to the relevant third country in accordance with Article 47”, and the Irish European Union (Markets in Financial Instruments) Regulations 2017, which implemented MIFID II into Irish law permit certain non-EU investment firms to provide collateral management services into the EU to Irish persons. There are some detailed requirements to be met (the collateral manager may not have a branch in Ireland and must be subject to authorisation and supervision in the UK) and there must be, as there are, appropriate co-operation arrangements in place between the Central Bank of Ireland and the UK Financial Conduct Authority for the exchange of information. Subject to this, a UK collateral manager may provide management services to any professional clients or eligible counterparties (as defined in MIFID II).
Is there any Brexit significance for CLO deal documentation governed by English law?
The absence of any UK/EU agreement on continuation of the 2012 Brussels (Recast) Regulation on jurisdiction and the recognition and enforcement of judgments means that, unless the EU agrees to the UK becoming a party to the 2007 Lugano Convention the position regarding the recognition and enforcement of UK judgments in the EU (if any CLO party is an EU entity) is governed by the 2005 Hague Convention. The generally held view is that the Hague Convention only applies if the jurisdiction clause is fully exclusive (i.e. as regards not only the debtor parties but also the investor-side, which may not always be the case in legacy documentation). Having said this, in practice there may be limited circumstances in which litigation on the deal documentation in non-English jurisdictions is likely to arise, save as regards the validity of any transfer of assets by an originator to an SSPE (in which event it is likely that the parties would have chosen the laws of the place where the asset is situated) and so, whilst Brexit does have some consequences for the status of English law judgments in the EU, these should not normally be significant nor necessarily preclude the continuing use of asymmetric clauses.
‘The consequences for the status of English law judgments in the EU should not normally be significant’
An uncontroversial point of detail is that the UK and EU now have separate bail-in regimes and so under Article 55 of the EU bank recovery and resolution directive and its UK-onshored equivalent, a contractual recognition of bail-in clause is likely to be required in mixed UK/EU securitisations. The wording of such a clause is quite standard and, as it merely restores the pre-Brexit status quo ante, its inclusion should be uncontroversial.