Volcker CLO Extension Provides Incentive to Amend, Barclays SaysLauren Coleman-Lochner
The Federal Reserve’s decision to give banks two more years to comply with Volcker Rule stipulations for collateralized loan obligations offers “greater incentive” to make changes to the funds, according to Barclays Plc.
In order for banks to continue investing in the senior-most CLO portions, managers of the funds would need to amend them to remove their ability to buy bonds in order to fulfill the requirements of the rule, analysts Jeffrey Meli and Bradley Rogoff wrote in a report today.
Many AAA rated tranches typically held by banks would “fail the ownership interest test,” the analysts said, because the holders can help choose or remove fund managers. More than 90 percent of the AAA rated funds might be be non-compliant, the analysts said.
Now that the Federal Reserve has given banks extra time to comply, managers will have “greater incentive to amend,” the analysts wrote.
The Fed this week said it will issue two one-year extensions so banks can adjust their CLO holdings to conform to the trading restrictions adopted in December. Banks had complained that the new requirements would force sales leading to millions of dollars in losses.
Collateralized loan obligations are a type of collateralized debt obligation that pools high-yield, high-risk loans and slices them into securities of varying risk and return.
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