Is the Caymans about to stop being an acceptable jurisdiction of incorporation for an SSPE under the EU SR? If so, it could mean that issues with Caymans issuers (for example, many US CLOs) may not be accessible to certain EU investors, and potentially open up a divergence between the UK and EU regimes.
Article 4 of the EU SR version forbids SSPEs being established in a country listed as “high-risk” and having “strategic deficiencies in its regime on anti-money laundering and counter terrorist financing” in accordance with Article 9 of the EU Money Laundering Directive. On 7 January 2022 (published on the EC website on 10th January) the European Commission issued a Commission Delegated Regulation which provisionally added the Caymans to its list of jurisdictions having strategic deficiencies. This is not yet in force: it is open to objection from EU member states for a period of one month, subject to which it will be published in the OJEU (likely in January or February or March 2022) and come into effect 20 days later.
Post-Brexit, Article 4 of the UK SR version no longer refers to the EU blacklist, but rather the FATF list of countries listed as “high-risk and non-cooperative”. In February 2021, the Caymans had been added to the FATF “grey list” of “jurisdictions under increased monitoring” - and the EU likewise put the Caymans on its own grey list. The FATF said at the time that the Caymans had agreed an action plan to work on these, and in November 2021 the FATF issued a report on the Caymans where it concluded that the Caymans had addressed most of its requirements and should be uprated from “partially” to “largely” compliant, although it would “remain in enhanced follow-up”. So for the time being, the Caymans is on a FATF list of jurisdictions having “strategic deficiencies” but not on the FATF black list: this only has Iran and North Korea; and it seems unlikely at present that it would go onto the FATF black list.
For new issues, it would be easy enough to choose another jurisdiction than the Caymans: the BVI, Bermuda or even Jersey to name a few. The big question is whether EU investors of existing Caymans issuer securitisations would need to divest themselves of their holdings if this occurs. There are a number of considerations but probably the most satisfactory position is to look at the date when the investor acquired the exposure given this is the point at which investors are required to due diligence a securitisation investment under the EU SR, and national competent authorities, which are responsible for enforcement, may well find this attractive, as it would avoid penalising innocent investors (the ESMA Q&A are silent on the point) who invested based on the status of the relevant list in effect at that time. Some EU investors with UK affiliates (e.g. where a US parent has EU and UK subsidiaries available) may prefer to invest via those, because the UK SR Article 4 seems unlikely to be engaged - it refers directly to the FATF black list.
Given the ramifications of this, and bearing in mind the more positive tone of the November FATF report, we can probably expect lobbying against this in the coming weeks, and it is certainly remains possible that the EC’s Commission Delegated Regulation will yet not be gazetted in the OJEU. This may be a long shot, on the basis that the EC is likely to have engaged in pre-consultation with Member States on this before issuing it.