The Federal Reserve will grant banks two additional one-year extensions to come into compliance with Volcker Rule regulations that that apply to sponsorship interests in CLO products, according to a statement released Monday. The extensions will push the timeline for Volcker Rule compliance to 21 July, 2017.
The Volcker Rule prohibits banks from proprietary trading and acquiring ownership interests or sponsoring private equity and hedge funds. The regulation also affects banks’ holdings in CLOs – securitised vehicles that are largely backed by commercial loans.
Although securitised loans comprised of loans and related servicing assets are excluded from Volcker Rule regulations, many CLOs include debt securities that do not conform, according to the Fed. Banks must conform or divest interests and sponsorships of those CLOs by the end of the conformance period.
“A securitisation, including a CLO that holds some non-conforming non-loan assets, may be a covered fund under the rule,” according to the statement. “A banking entity must conform or divest its ownership interests in and sponsorship of these CLOs that are covered funds by the end of the conformance period.”
In order to be eligible for the extension, non-excluded CLOs need to have been in place as of the end of 2013.