Navigating the CLO landscape

On March 14, 2025, the Joint Committee of the European Supervisory Authorities (ESAs) proposed revisions to the European Union (EU) Securitisation Regulation (SECR).

The key aspect of these revisions is to establish a consistent regulatory framework for the EU Collateralised Loan Obligation (CLO) segment.

Francisco Jimenez and the KPMG Financial Instruments team delve deeper into the topic in the article below.

EU CLO market before reform

Previously, the European CLO market operated under a fragmented regulatory regime. Ambiguities around terms like “sponsor” and “material net economic interest” meant only regulated banks could serve as eligible sponsors. The revised SECR now recognises CLO managers as eligible sponsors lowering limiters and project CLO issuance to exceed €30 billion annually by 2026.

Francisco Jimenez

Principal, KPMG Financial Instruments Lead

KPMG in Ireland

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Key regulatory updates

Refining risk retention

New guidelines clarified critical terminology such as ‘predominant’ source of revenues. Under the new system, more than 50% of an originator’s income must come from non-securitisation-related activities. This rule applies only to new deals, not retroactively.
Jurisdictional clarity for cross-border transactions

The revised SECR is only applicable if at least one party—originator, sponsor, or investor is EU based. This reduces risk of unintentionally triggering EU obligations.
Streamlined due diligence

The reforms introduced a risk-based approach to due diligence offering originators and sponsors an option to tailor deal documentation in line with its complexity. Tasks such as portfolio analysis or data checks can be outsourced to qualified third parties.
Enhancing the STS (Simple, Transparent Standardised) framework

The STS framework now extends to include non-bank entities as ‘sponsors’, and sole purpose test ensures that originators aren’t created solely to securitise assets.

Market and fair value implications

Expectation of higher CLO bid ask spreads

The slowdown in CLO issuance potentially reduces liquidity creating an expectation of higher spreads even though market size is projected to increase. Heightened risk visibility and limited market liquidity cause investors to demand higher returns to compensate for increased uncertainty which is evidenced by higher bid ask spreads.
Reduced market depth and observability of inputs

Market activity is expected to slow due to uncertainty around the new regulations which may reduce volumes and reference price availability. Limited observability increases reliance on internal pricing models. As a result, some CLOs may shift from Level 2 to Level 3 classes due to heavier use of unobservable inputs.
Pricing discrepancies

Lower trading activity may widen bid-ask spreads and cause pricing discrepancies, especially for pre-regulation deals not yet closed. Regulatory uncertainty could increase required returns and drive temporary divergence from fair value, as vendors use varying inputs that reflect shifting market sentiment.
Restructuring delays

Adapting to new rules lead to compliance burdens and uncertainties potentially slowing restructuring or refinancing activities by the CLO managers. Additional concerns may arise with managers who might be uncertain whether to follow old or new rules for deal resets, increasing the risk of regulatory missteps and further delays.
Cash drags and deal delays

The new framework, while beneficial in the long run, may cause short-term inefficiencies. Investors could experience ‘induced cash drags’ as CLO managers cope to adapting new regulatory guidelines. This gap is likely to cause delay in new issuances, resulting in investors holding undeployed capital. This may force CLO managers to restructure deals, leading to extended holding periods for loans and higher funding costs, creating liquidity strain.

How KPMG can help

In response to the evolving dynamics of the CLO market, KPMG provides valuable support to clients by offering comprehensive due diligence services, including both qualitative and quantitative analysis focused on the deal and its immediate operating environment.

We assist in classifying securities within the fair value hierarchy, including analysis of unobservable inputs and their significance tests.

We monitor market conditions and regulatory updates, using proprietary and top tier third-party data for accurate pricing.

The KFI team is readily available and eager to engage with you to identify the right solution for your business. We look forward to hearing from you.