The US federal banking regulators have finalized revisions to the proprietary trading and compliance program provisions of the Volcker Rule.  What do the revisions mean for structured finance products?

Not a whole lot. The revisions defer further action on the covered fund issues most relevant to securitizations and CLOs to a later rulemaking. In particular, the recent revisions contain no revisions to the definition of “covered fund” or the “Super 23A” prohibition but rather indicate that those items will be addressed in a future proposal.

By way of background, the May 2018 notice of proposed rulemaking had included extensive requests for industry comment on “all aspects” of certain elements of the covered fund rules, including most significantly the “covered fund” definition itself. Among other topics, the Agencies specifically requested comment on issues such as the Volcker Rule’s treatment of securitization activities, which had already been subject to several years of extensive commentary throughout the rulemaking process as well as other forms of formal and informal dialogue between and among market participants and the US federal banking regulators.

Industry groups including the Structured Finance Association and the LSTA, among others, have submitted comment letters and met with regulators regarding the effect of the Volcker Rule on the securitization and CLO markets.  The Structured Finance Association has requested, among other things, that regulators adopt a safe harbor exclusion from the “ownership interest” definition for ordinary debt instruments. The LSTA has also urged the agencies to modify the “loan securitization” exclusion to include traditional CLOs that have modest baskets for bonds or assets other than loans.

As the Agencies have not yet proposed regulatory language to address these issues, they decided to approve proposed changes to the prop trading rules while they continue to work on developing proposals to address covered fund issues.

This Legal Update describes the recent revisions to the Volcker Rule.