“A Federal Reserve announcement on Monday that would relax Volcker Rule conformance periods still leaves banks holding collateralized loan obligation (CLO) debt in a quandary.
“The Federal Reserve intends to give banks until July 2017, a two-year extension, to divest or restructure their CLO debt falling under Volcker’s “ownership interest” umbrella. Such debt typically back CLOs that own securities other than loans and contain contractual language enabling bondholders to remove CLO managers for cause.
“Regulators, including the Federal Deposit Insurance Corporation, Securities Exchange Commission, Office of the Comptroller of the Currency, and Commodity Futures Trading Commission, agreed to grant a similar delay, according to Monday’s Fed announcement.
“But this regulatory decision fails to resolve some key issues that determine whether banks will eventually be forced to sell or legally modify CLO “ownership interest” debt under Volcker. Such concerns include whether replacing CLO managers would be treated as a senior creditor right outside of “ownership interest” rules. Regulators also did not address industry attempts to exempt from the rule CLOs issued before Volcker.”
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