Here is the bottom line for the Volcker TruPS CDOs interim final rule issued by the U.S. regulators yesterday.
No Relief for CLOs: The rule does not help CLOs at all.
TruPS CDOs: For TRuPS CDOs we believe it will be very helpful.
Specifically, the interim final rule permits any banking entity, large or small, to retain an interest in, or to act as sponsor (including as trustee) of, an issuer that is backed by TruPS so long as:
- The TruPS CDO issuer was established before May 19, 2010;
- The banking entity reasonably believes that the offering proceeds received by the issuer were invested primarily in Qualifying TruPS Collateral; and
- The banking entity’s interest in the vehicle was acquired on or before December 10, 2013 (unless acquired pursuant to an M&A).
- The reasonable belief standard can be met by reference to a non-exclusive list of qualifying TruPS CDOs published by the U.S. regulators.
- The regulators stated that if a banking entity owns a TruPS CDO that the banking entity determines qualifies for the exemption in the interim final rule, the fact that the TruPS CDO is not on the regulators’ non-exclusive list does not preclude its eligibility for the exemption.
- The banking entity must reasonably believe that the TruPS CDO special purpose vehicle is invested “primarily” in Qualifying TruPs Collateral.
- The preamble to the interim final rule clarifies that “primary” is intended to cover those securitization vehicles that have invested a majority of their offering proceeds in Qualifying TruPS Collateral.
“Qualifying TruPS Collateral”
- The definition of Qualifying TruPs Collateral is designed to capture those TruPs grandfathered by the Dodd-Frank Collins Amendment.
- Specifically, Qualifying TruPs Collateral refers to a TruPS or sub debt instrument issued before May 19, 2010:
- by a depository institution holding company (including a bank holding company) that, as of the end of any reporting period within 12 months immediately preceding the issuance of such instrument, had total consolidated assets of less than $15 billion or
- by a mutual holding company (regardless of size).
- The interim final rule’s 12-month prior to issuance measurement period is slightly more generous than the Collins Amendment, which contains a year-end 2009 measurement date for the less than $15 billion asset threshold.
- The interim final rule’s measurement period also makes it slightly easier for a banking entity that owns a TruPS CDO not on the U.S. regulators’ non-exclusive list to figure out whether an instrument is a Qualifying TruPs Collateral. This is because the interim final rule’s measurement period avoids the additional step of having to look up the issuing depository institution holding company’s asset size as of year-end 2009.
December 10, 2013 or M&A
- The banking entity must have acquired the TruPS CDO either:
- on or before December 10, 2013 (the date on which the Volcker Rule final regulations were issued) or
- in connection with a merger with or acquisition of a banking entity that acquired the TruPS CDO on or before December 10, 2013.
Size of the Investor Is Irrelevant
- Any banking entity, large or small, can benefit from the interim final rule but they will have to check the regulators’ non-exclusive list or review the collateral in every single TruPS CDO to see if it meets the “invested primarily” test and the Qualifying TruPS Collateral test.
- Essentially it’s not the size of the investor in the TruPS CDO that counts but the size of banking organization that issued the underlying TruPS.
Definition of “Ownership Interest” Unchanged
- The interim final rule does not revise the definition of “ownership interest” in the Volcker Rule final regulations.
- So if an investment in a TruPS CDO does not qualify for the interim final rule’s exemption, in some circumstances, there still may be arguments under the ownership interest prong.
Sponsoring and Market Making
- The interim final rule also clarifies that the exemption relating to certain TruPS CDOs also extends to activities of a banking entity acting as a sponsor or trustee for these securitization vehicles.
- A banking entity may also act as a market maker in the exempt TruPS CDOs in accordance with the applicable provisions in the Volcker Rule final regulations.
- The U.S. regulators have previously stated in a December 27, 2013 statement that “the staffs of the agencies believe that, consistent with generally accepted accounting principles, any actions in January 2014 that occur before the issuance of December 31, 2013 financial reports, including the FR Y-9C and the Call Report, should be considered when preparing those financial reports.”
Federal Reserve, OCC, FDIC, SEC and CFTC, Interim final rule: Treatment of certain collateralized debt obligations backed primarily by trust preferred securities with regard to prohibitions and restrictions on certain interests in, and relationships with, hedge funds and private equity funds (Jan. 14, 2014) available here: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20140114b1.pdf
Federal Reserve, OCC, FDIC, Non-Exclusive List of TruPS CDOs that Are Not Covered Funds (Jan. 14, 2014) available here: http://fdic.gov/news/news/press/2014/pr14003b.pdf
Federal Reserve, OCC, FDIC and SEC, Statement regarding Treatment of Certain Collateralized Debt Obligations Backed by Trust Preferred Securities under the Rules implementing Section 619 of the Dodd-Frank Act (Dec. 27, 2013) available here: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20131227a1.pdf