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Home Dodd-Frank Who Knew that CLOs were Hedge Funds?

Who Knew that CLOs were Hedge Funds?

U.S. financial regulators found themselves on the receiving end of an outpouring of concern from lawmakers last Wednesday about the risks to the banking sector and debt markets from the treatment of collateralized loan obligations (“CLOs”) in the Volcker Rule final regulations.  Regulators and others have come to realize that treating CLOs as if they were hedge funds is a problem and we now understand from Governor Tarullo’s testimony that the treatment of CLOs is at the top of the list for the new interagency Volcker task force.  But what, if any, solutions regulators will offer — and whether they will be enough to allow the banking sector to continue to hold CLOs and reduce the risks facing debt markets — remains to be seen.  Given the risks and impracticality of banking entities divesting their interests in legacy CLOs and of legacy CLOs organized before the final Volcker Rule regulations were published on December 10, 2013 divesting their bond portfolios, regulators should offer solutions that allow the banking sector to retain interests in legacy CLOs which are backed, in part, by bonds.

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