The Volcker Rule’s treatment of asset-backed commercial paper conduits (ABCP) will motivate sponsors of these conduits to provide full unconditional liquidity coverage and remove an important regulatory risk from the sector, Fitch Ratings says.

The final rule released this week prohibits banks from acquiring or sponsoring “covered funds,” and ABCP conduits, which issue short-term debt backed by assets such as trade receivables, consumer debt receivables, or auto and equipment loans and leases, would normally be classified as covered funds. In order to be exempt from the definition of a covered fund, these conduits must be fully supported by a bank. That means the bank must agree to step in and repay maturing commercial paper issued by the conduit in the event of losses in the underlying assets.

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