CLO Ownership Rule in Volcker Should Be Reconsidered, LSTA Says

The Loan Syndications and Trading Association is asking regulators to confirm by Jan. 15 that collateralized loan obligations with the right to fire a manager won’t trigger “ownership interest” under the Volcker Rule.

The LSTA said today it sent a second letter to federal regulators requesting the confirmation. The New York-based industry group announced Dec. 24 its first letter, saying the right to remove a manager in breach of obligations should not be viewed as ownership.

The provision under the Volcker Rule, which is part of the sweeping financial overhaul mandated by the Dodd-Frank Act, could force banks to divest their CLO holdings and disrupt the market, according to the LSTA. Regulators are also considering whether collateralized debt obligations backed by trust preferred securities should be subjected to limitations under the rule.

“The issues facing holders of CDO TruPS’ are nearly identical to those faced by holders of CLO notes,” Bram Smith, Executive Director of the LSTA, said in today’s statement. “Neither asset class should be considered as having ownership interest.”

CLOs are a type of collateralized debt obligation that pool high-yield, high-risk loans and slice them into securities of varying risk and return.

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