The Financial Stability Board (FSB) has published a consultation on the impact of the G20 regulatory reforms on securitization. Here, John McGrath and Aaron Scott, partners at global law firm Dechert, summarize its findings.

Key Takeaways

• Funds have overtaken banks as the largest issuers of securitizations in the U.S. and Europe.
• The Financial Stability Board will concentrate on funds in its securitization regulatory review.
• CLO risk retention and leveraged loan criteria are identified as areas of risk.
• Specific areas for reform in EU securitization rules have been highlighted.

LONDON, Oct. 31, 2024 /PRNewswire/ — The Financial Stability Board (FSB) has published a consultation report on the impact of the G20 regulatory reforms on securitization. ¹ The report finds that these reforms have shifted securitization issuance from banks to non-bank financial intermediaries (NBFIs) in Australia, Europe, and the U.S. since 2011.

For the FSB, the growing role of NBFIs in securitization is a double-edged sword. Transferring risk outside the banking sector could diversify and strengthen the financing ecosystem if managed prudently. However, the FSB questions whether NBFIs can handle securitization risks given their funding structures and ability to withstand losses during stress events. It acknowledges that the diverse nature of these entities and their regulatory and funding frameworks suggests there is no one-size-fits-all answer. The FSB plans to continue its work on NBFI resilience and apply these principles to the securitization sector.²

Likely impact on CLO market of an increased focus on funds

The FSB’s analysis of the CLO market shows the likely impact of an increased focus on funds.

First, NBFIs are seen as responsible for increased complexity and opacity in both the leveraged loan and CLO markets. In particular, the FSB finds that weaker underwriting standards in the leveraged loan market may lead to higher defaults on loans held by CLOs, which will ultimately lead to lower CLO recovery rates. To address this, the FSB encourages the adoption of the recently published IOSCO good practices for leveraged loans and CLOs.³ 

Second, CLO managers’ preference for “light balance sheets” has led to the creation of risk retention vehicles to attract third-party investors. The FSB’s main concerns are that this practice may:

1. Not fully align with the goals of risk retention regulation, as the vehicle often isn’t part of the CLO manager’s corporate group, thereby shifting risk to parties not originally envisioned.
2. Complicate authorities’ efforts to determine who is exposed to risk retention-related losses.
3. Result in leveraged risk retention vehicles subject to high asset volatility, especially where the retained risk consists of first-loss tranches.
4. Lead to concentration risk given the niche nature of these vehicles.

The FSB does not propose any specific remedy for this issue. In this context, it is noteworthy that the FSB finds no material adverse effects from the lack of retention in U.S. open-market CLOs. It may be that the larger concerns are opacity and concentration risk.

Critique of regulatory regime for securitization in Europe

Another focus of the report is the regulatory regime for securitization in Europe. In Europe, some FSB stakeholders attribute a perceived decline in issuance to the implementation of the securitization regulatory regime, which has increased costs for issuers and investors. Although the FSB says there is no empirical evidence to support this claim, it highlights several issues with the European regulatory regime:

1. Burdensome due diligence and disclosure requirements.
2. Overly restrictive Simple, Transparent and Standardized (“STS”) securitization regime.
3. Adverse treatment of securitizations under the capital framework for insurers.
4. Bank capital calibration for securitization exposures, which is viewed as overly prudent and exhibiting too high a degree of non-neutrality.

Fund industry organizations such as AIMA have been vocal lobbyists for changes to the EU disclosure regime and for an expansion of the STS label to CLOs. It may be that with the increased focus on funds there is now an opportunity to reset these parts of the framework.

Next steps

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The FSB plans to publish its final report by the end of the year. Proposals adopted following the consultation will likely shape the next round of G20 securitization reform.

Dechert & Private Credit

Dechert has advised private credit clients for over 30 years, helping them to innovate and thrive as the industry has grown into a complex and diverse US$1.7 trillion market. We create value on the full spectrum of strategies and sub-strategies, including asset-based, distressed debt, permanent capital, direct lending, subordinated debt, specialty financing, special situations and venture debt. With more than 80% of Private Debt Investor’s top 100 private credit firms as clients, we offer market-leading fund formation, financing, regulatory, M&A and tax expertise across the U.S., Europe, the Middle East and Asia.

Footnotes

1. See “Evaluation of the Effects of the G20 Financial Regulatory Reforms on Securitisation: Consultation report“. The current regulatory approach to securitization is largely based on the G20 reform agenda set by, among others, the FSB, International Organization of Securities Commissions (IOSCO) and the Basel Committee on Banking Supervision (BCBS).
2. See “Enhancing the Resilience of Non-Bank Financial Intermediation: Progress report“. 
3. See “Leveraged Loans and CLOs Good Practices for Consideration“. 

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The Mint earns coveted industry recognition for the world’s first double-sided colour circulation coin for the Central Bank of the Bahamas and its environmentally responsible bronze plating process

OTTAWA, ON, Oct. 31, 2024 /PRNewswire/ — The Royal Canadian Mint is delighted to have won two prestigious Excellence in Currency awards at the International Association of Currency Affairs’ (IACA) 2024 Coin Conference in Lisbon, Portugal. The Mint was first recognized alongside the Central Bank of The Bahamas with the Best New Commemorative or Test Circulating Coin award for a world-first circulation coin featuring high-resolution colour on both the obverse and reverse of a coin marking the central bank’s 50^th anniversary. As well, the Mint’s new, environmentally responsible process for plating bronze-coloured circulation coins earned the Best new coin product, process or manufacturing innovation award.

“The Royal Canadian Mint is dedicated to advancing the art and science of coin manufacturing, not just for Canada and Canadians, but also for the benefit of the global currency industry,” said Marie Lemay, President and CEO of the Royal Canadian Mint. “To be recognized in two award categories by IACA is a tremendous peer endorsement of our pursuit of innovation, which delivers great value for circulation coin users around the world and helps us find more caring and sustainable ways to produce our industry-leading products.”

The 2024-dated 25-cent circulation coin celebrates the 50^th anniversary of the Central Bank of The Bahamas. It was produced in collaboration with the Royal Canadian Mint, that applied its proprietary colour pad-printing technology to both sides of this ground-breaking coin.  The obverse features the Coat of Arms of The Bahamas together with the words “Commonwealth of The Bahamas” which forms a crown around the Coat of Arms. Elements of the Coat of Arms are painted blue, white, pink, and green, highlighting the blue marlin, flamingo, and conch shell. On the reverse is a rendering of a native sloop, infused with red, white, and brown paint, in sea painted blue, near an island, accompanied by the inscriptions “THE CENTRAL BANK OF THE BAHAMAS“, “50th ANNIVERSARY 1974-2024”. In addition to entering general circulation on June 3, 2024, this coin was also made available to collectors in custom packaging.

The Mint also developed and successfully scaled up a new electroplating process that is transforming the manufacturing of bronze plated circulation products by eliminating the use of cyanide required in traditional plating as well as harsh chemicals needed to treat waste water to municipal standards, and improving employee health and safety. The Mint’s new chemistry safely and reliably produces plated materials for both bronze mono-colour coins, as well as bi- or tri-metallic coins typically used for higher denominations.

The Excellence in Currency Awards were introduced by IACA in 2007 to promote and recognise excellence in currency issue, production, processing, management and distribution. The Mint is proud to have been recognized through several previous awards, most recently:

• The Best New Circulating Coin or Coin Series for its bi-metallic $2 circulation coin featuring a world-first black nickel-plated outer ring issued in honour of the late Queen Elizabeth II (2023);
• The Best New Commemorative or Test Circulating Coin for the Barbados $1 Glow-in-the-Dark Flying Fish circulation coin (2022);
• The Best Currency Initiative Implemented in Response to the Covid-19 Pandemic (Other Organization) special award for the Recognition Medal honouring Canada’s front-line workers and community difference makers (2021);
• Our tri-metal token technology, under the Best new coin product, feature or distribution innovation category (2019)
• our Canada 150 commemorative circulation coin program in the Best New Communications Program category (2017); and
• joint recognition with the Reserve Bank of New Zealand for New Zealand’s 50-cent Anzac 100^th anniversary coloured circulation coin, in the Best New Commemorative or Test Circulating Coin category (2015).

Images of the Central Bank of the Bahamas circulation coin can be found here.

About the Royal Canadian Mint
The Royal Canadian Mint is the Crown corporation responsible for the minting and distribution of Canada’s circulation coins. The Mint is one of the largest and most versatile mints in the world, producing award-winning collector coins, market-leading bullion products, as well as Canada’s prestigious military and civilian honours. As an established London and COMEX Good Delivery refiner, the Mint also offers a full spectrum of best-in-class gold and silver refining services. As an organization that strives to take better care of the environment, to cultivate safe and inclusive workplaces and to make a positive impact on the communities where it operates, the Mint integrates environmental, social and governance practices in every aspect of its operations. 

For more information on the Mint, its products and services, visit www.mint.ca. Follow the Mint on LinkedIn, Facebook and Instagram.

About IACA
Working hand in hand with the public and private sector, IACA’s goal is to provide an international exchange for consultation and collaboration on matters of interest to stakeholders in the cash payments cycle and to give back to the industry through the benefits provided from our various project work, programs and information resources. Member companies include all stakeholders in the cash payments cycle, including: central banks; currency issuing authorities; ministries of finance; state and commerical printworks; state and commercial mints; cash management companies; currency industry suppliers and cash handling suppliers.

For more information, please contact:
Alex Reeves
Senior Manager, Public Affairs
(613) 884-6370
[email protected]

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Investment enables ContraForce’s mission to transform how managed security services are delivered.

MCKINNEY, Texas, Oct. 31, 2024 /PRNewswire/ — ContraForce, the security service delivery platform company, today announced the closing of a $3.25 million seed funding round, co-led by GALLOS Ventures and DataTribe. The funding round enables ContraForce’s mission to automate security operations and expand the security services opportunity for managed service providers.

Founded in McKinney, Texas in 2021, ContraForce has developed a groundbreaking security service delivery platform that allows service providers to grow their monthly recurring revenue, improve their margins and deliver better client outcomes. The company saw annual recurring revenue grow 400 percent over the past 12 months and has established a growing customer base and distribution partners around the world.

The ContraForce platform employs proprietary AI and automation that streamlines the time and security expertise service providers require to manage security incident and event management and endpoint detection and response tools including Microsoft Sentinel, Microsoft Defender, Splunk Enterprise Security, IBM QRadar SIEM, Crowdstrike Falcon XDR and SentinelOne Singularity XDR. ContraForce was recognized by Microsoft Intelligent Security Association as their 2024 Security ISV of the year. ContraForce was also recently honored as an SC Awards winner for Most Promising Early-Stage Startup and selected as a SINET16 Innovator. Using the ContraForce platform, service providers can onboard clients within a few minutes and easily manage all their clients and security tools simultaneously in a single dashboard.

A recent McKinsey and Company report highlighted the massive opportunity in cybersecurity managed services, with a total available market of $400-500 billion and current solutions only penetrating 5-10% of the market. The main obstacle to deeper penetration is the shortage of qualified cybersecurity personnel, underscoring the urgent need for automated solutions like those offered by ContraForce. ContraForce enables service providers to add a new line of business by allowing them to immediately launch managed detection and response and managed security operation center (SOC) services.

The oversubscribed investment round, which included participation from angels and strategic partners, brings a total of $5.25 million in investment to ContraForce, which will use the capital to accelerate the release of new product features and invest in sales and marketing in preparation for a future Series A round.

William Kilmer, General Partner at GALLOS Ventures, stated, “GALLOS specializes in investing in and building great security companies. We’re continuously seeking solutions that address real security challenges, particularly in security operations. ContraForce tackles one of the biggest problems in today’s market by automating the majority of incident investigation and remediation workflows while keeping critical decisions in the hands of security analyst teams.”

Kilmer added, “As a former CEO of a managed security services provider (MSSP), I see tremendous potential for ContraForce to scale the managed security services market in a highly efficient manner.”

Stan Golubchik, Chief Executive Officer and Co-founder of ContraForce, commented, “ContraForce’s goal is to help service providers automate and simplify the delivery of scalable security services. This investment from GALLOS not only provides us with the capital to achieve that, but also brings in a partner who understands how to build and grow security businesses on a global scale.”

ContraForce was originally founded with an investment from DataTribe, the Maryland-based cybersecurity foundry that has invested in successful cybersecurity startups, including Dragos, Blackcloak, and Strider Technologies. Maurice Boissiere, Partner at DataTribe, added, “We think ContraForce is helping to protect the vulnerable small and mid-sized enterprise sector and are pleased with the progress they are seeing with managed service providers and MSSPs toward this. I’m looking forward to working with WIll Kilmer given his venture and operations experience in this space.”

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As part of the investment round, William Kilmer, GALLOS General Partner, has joined ContraForce’s board of directors.

About ContraForce:

ContraForce transforms how managed security services are delivered by allowing service providers to jumpstart a new line of business, improve their margins and deliver better client outcomes. The ContraForce Security Service Delivery Platform decouples security services from the underlying software used to provide them and employs proprietary AI and automation to improve service delivery efficiency. As a result, service providers around the world rely on the ContraForce Spark workbench to deploy or improve their own managed security service offerings or participate in the ContraForce Storm commercial program to have qualified providers deliver security services on their behalf. ContraForce is a member of the Microsoft Intelligent Security Association and is the 2024 Microsoft Security ISV of the year.

About GALLOS:

GALLOS Technologies is a venture studio and investor that builds and invests in cutting-edge security technology companies. Leveraging decades of nation-state-level security, intelligence, and defense experience, GALLOS brings a unique perspective on the technologies that companies and governments should deploy to mitigate global threats. GALLOS combines this insight with expertise in building and scaling successful ventures to create optimal outcomes for portfolio companies and investors.

About DataTribe:

DataTribe is a cybersecurity foundry that leverages deep experience and expertise to build and launch successful product companies. With a team comprising Silicon Valley and Intelligence Community founders, investors, and experienced entrepreneurs, DataTribe provides the knowledge and resources necessary to build thriving startups in the cybersecurity space.

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