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Fed gives banks extra time on Volcker compliance
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Fed gives banks extra time on Volcker compliance

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Fed gives banks extra time on Volcker compliance

The Federal Reserve granted a fresh concession to banks that are subject to the Volcker rule on Monday, giving them two more years to offload their holdings in collateralized loan obligations to comply with the measure.

The Volcker rule, aimed at banning proprietary trading, would have forced banks to divest their CLO investments, resulting in billions of dollars in losses.

Some industry groups wanted regulators to go further by providing a broad exemption for ownership interests in CLOs.

"We are disappointed that the agencies involved did not use their rule-making authority to provide broad relief from the Volcker rule to legacy CLOs," said Kenneth Bentsen, president of the Securities Industry and Financial Markets Association, or Sifma. "Sifma strongly believes that regulators should have addressed the problem in a comprehensive, co-ordinated, and conclusive manner yet the statement released today seems to suggest the agencies have taken a different approach."

US lawmakers had also pushed regulators to provide relief to banks on CLOs. The Fed's move came a day before its top legal adviser, general counsel Scott Alvarez, and other senior lawyers for regulatory agencies are set to testify on Tuesday before the House financial services committee.

Regulators had hoped to resolve the CLO issue before that hearing. Jeb Hensarling, committee chairman, has been critical of the Volcker rule and other Dodd-Frank legislative mandates, arguing they hurt Main Street more than help it.

The Fed said it would extend the Volcker compliance date for CLOs to July 21 2017 and only CLOs held as of December 31 2013 would be eligible. CLOs typically bundle together leveraged loans made to companies but sometimes include bonds and other securities.

Banks had hoped regulators would go even further and establish a grandfather clause that exempted CLOs bought by a certain date. They said CLOs should get the same treatment as a grandfather exemption extended to banks holding complex products known as collateralized debt obligations backed by trust preferred securities, or TruPS CDOs.

Many small banks complained they could face $600m in losses because of the Volcker rule, which forced them to sell their TruPS CDO holdings. The American Bankers Association recently dropped a lawsuit against regulators on the TruPS CDO issue.

Despite the Volcker rule, March saw the highest sales of CLOs since May 2007, according to data from S&P Capital IQ. About $10.80bn of the bundled corporate loans were sold last month - topping the $10.74bn priced in March last year and very nearly eclipsing the $10.82bn issued in May 2007.

For the last few months, bankers have been building "Volcker-friendly" CLOs that only include loans in the underlying collateral pool, and tweaking the documentation on older deals to make them Volcker compliant.


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