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From Banking and Finance Law Daily, April 7, 2014

Banking entities to get two additional years to conform CLOs

By John M. Pachkowski, J.D.

The Federal Reserve Board, exercising its authority under section 13 of the Bank Holding Company Act (BHC Act), will be extending the conformance period for banking entities to conform their ownership interests in and sponsorship of certain collateralized loan obligations (CLOs) to meet the requirements of the Volcker Rule and its implementing regulations.

Under the BHC Act section 13, the Fed may, by rule or order, extend the conformance period for not more than one year at a time, for a total of not more than three years, if in its judgment, an extension is consistent with the purposes of section 13 and would not be detrimental to the public interest. Following approval of the Volcker Rule’s implementing regulations, the Fed extended the conformance period until July 21, 2015.

In its announcement and statement, the Fed noted that it will provide two additional one-year extensions, which together would extend the period until July 21, 2017, to conform their ownership interests in and sponsorship of CLOs. These latest extensions will only apply to CLOs in place as of Dec. 31, 2013, that do not qualify for the exclusion in the final rule for loan securitizations.

Divestiture concerns. The Fed is taking this action in light of concerns expressed by a number of banking entities, trade associations, and members of Congress that the Volcker Rule’s implementing regulations would require divestiture by banking entities of ownership interests in CLO vehicles that did not meet the loan securitization exemption for covered funds since the vehicles contained non-conforming non-loan assets (see Banking and Finance Law Daily, Jan. 8, 2014; Banking and Finance Law Daily, March 11, 2014).

Investment limits and capital. During the conformance period, banking entities will not have to include ownership interests in CLOs to determine its investment limits under the final rule nor be required to deduct CLO investments from tier 1 capital as required by the Volcker Rule’s implementing regulations.

Interagency consultation. In taking this action, the Fed consulted with staffs of the other agencies charged with enforcing the requirements of BHC Act section 13, including the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Securities and Exchange Commission, and Commodity Futures Trading Commission. In turn, the agencies plan to administer their oversight of banking entities under their respective jurisdictions in accordance with the Fed’s conformance rule, including any extension of the conformance period applicable to CLOs.

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