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Top Story:  Interim Final Rule on CDOs Follows Volcker Rule Release


By Chrisalyn Santos
Public Affairs Operations

Five federal agencies recently issued an interim final rule that allows banking entities to retain interests in certain collateralized debt obligations backed primarily by trust-preferred securities (TruPS CDOs). The rule exempts community banks from the investment prohibitions of section 619 of the Dodd–Frank Wall Street Reform and Consumer Protection Act (the “Volcker rule”).

Comptroller Curry, pictured with Attorney Ursula Pfeil, signs the final rules implementing the Volcker Rule.

Along with the OCC, the Commodity Futures Trading Commission, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Securities and Exchange Commission issued this interim final rule on January 14. The rule permits banking entities to retain an interest or sponsorship of covered funds provided the following qualifications are met:

  • The TruPS CDO was established, and the interest was issued, before May 19, 2010.
  • The banking entity reasonably believes that the offering proceeds received by the TruPS CDO were invested primarily in Qualifying TruPS Collateral.
  • The banking entity’s interest in the TruPS CDO was acquired on or before December 10, 2013, the day the agencies issued final rules implementing section 619 of the Dodd–Frank Act.

The agencies will accept comment on the interim final rule for 30 days following publication of the interim final rule in the Federal Register on January 31.

For more information regarding this final rule, see OCC News Release NR 2014-2, “Agencies Approve Interim Final Rule Authorizing Retention of Interests in and Sponsorship of Collateralized Debt Obligations Backed Primarily by Bank-Issued Trust Preferred Securities”—or view the rule on the OCC’s Web site.

Volcker Rule issued

The final rule the agencies issued on January 14 regarding TruPS CDOs followed final rules the agencies released last month to implement the “Volcker Rule.”

The final rules implementing the Volcker Rule were issued on December 10, 2013. They prohibit insured depository institutions and companies affiliated with insured depository institutions (“banking entities”) from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments, for their own account. The rules also impose limits on banking entities’ investments in, and other relationships with, hedge funds or private equity funds.

The rules include exemptions for certain activities, including market making, underwriting, hedging, trading in government obligations, insurance company activities, and organizing and offering hedge funds or private equity funds. They also clarify that certain other activities are not prohibited, including acting as agent, broker, or custodian.

The final rules implementing the Volcker Rule are the result of two years of collaborative work by the agencies. Comptroller Thomas J. Curry believes the final regulations strike the right balance. “They prohibit banking entities from engaging in impermissible proprietary trading and limit their ability to invest in hedge funds or private equity funds,” he said. “The regulations make our financial system safer, while preserving market liquidity and continuing to allow banks to provide important customer services.”

The compliance requirements under the final rules vary based on the size of the banking entity and the scope of activities conducted. Banking organizations covered by section 619 (the Volcker Rule) will be required to fully conform their activities and investments by July 21, 2015. The final rules reduce the burden on smaller, less-complex institutions by limiting their compliance and reporting requirements. A banking entity that does not engage in covered trading activities will not need to establish a compliance program.

For more information on the Volcker Rule, see OCC News Release NR 2013-186 “Agencies Issue Final Rules Implementing the Volcker Rule.”

Last Updated: 08/23/2016