The Structured Finance Industry Group outlined the helpful exemptions key to securitization under the final Volcker Rule.  

The Volcker Rule includes significant restrictions on bank activities with “covered funds.”  Excluded from Volcker’s final definition of covered funds are foreign public funds, wholly owned subsidiaries, loan securitizations, qualifying asset-backed commercial paper conduits, and qualifying covered bonds. 

In a memo to its members on the final regulations, the SFIG explained that “as a result of these express exclusions from the definition of covered fund, the so-called ‘Super 23A’ problem that existed in the proposed rule has been fixed in the final rule for excluded entities.”

Super 23A prohibits covered transactions between a covered fund and a banking entity that acts as sponsor, investment advisor or manager for a covered fund, even if the covered fund met the conditions in the special loan securitization or foreign fund categories.

“This would have had the effect of prohibiting banks from engaging in any lending or similar transactions with loan securitization issuers (such as interest rate derivatives, servicing advance facilities and liquidity facilities) that were sponsored or advised by such bank or its affiliates even though the bank could own the issuer,” said SFIG in the memo. “The final rule corrects this glitch by exempting loan securitizations and various other types of transactions and issuers from the definition of covered fund itself.”

Exempting wholly owned subsidiaries from the definition of covered fund means that any securitization issuer that issues only debt not constituting an “ownership interest” to third parties will not be subject to any Volcker rule restrictions.

“Among other benefits, this effectively closes the huge gap that had existed in the proposed rule with respect to intermediate SPEs that did not hold loans and thus could not rely on the loan securitization exemption,” explained the SFIG.

ABCP issuers are exempt from the covered fund definition if they meet certain conditions.  

Non-US funds also catch a break under the final regulations. Funds sponsored by foreign banks which are not controlled by U.S. banking entities are entirely exempt from everything Volcker, including Super 23A.

The Securities Industry and Financial Markets Association (SIFMA) also released a statement yesterday on the final regulations. The securities trade group said it remained concerned that an “overly restrictive Volcker Rule will inflict serious harm” on the U.S. economy.  

“It is imperative that the final Volcker Rule does not unnecessarily restrict market making or a firm's ability to hedge risks in the effort to clearly define prohibited proprietary trading activities,” said SIFMA.


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