As expected, federal regulators announced Thursday that they are delaying implementation of the Volcker Rule's prohibition on banks owning collateralized loan obligations, giving institutions an additional two years to comply.
In fact, regulators went even further than expected, delaying implementation of bank ownership of private equity and hedge funds as well.
Under the rule — named after former Fed Reserve Board Chairman Paul Volcker, who proposed it — banks are forbidden from proprietary trading and investing in so-called “covered funds.” This category was originally expected to include just private equity and hedge funds, but the way covered funds were defined in the final rule applies to the senior tranches of certain CLOs as well.
While regulators left the proprietary trading implementation date alone, they extended for one year, until July 21, 2016, the effective date governing investment in legacy covered funds. The agencies further signaled their intent to delay the effective date of that part of the rule again until July 21, 2017.
Regulators also clarified that the delay only covers funds already owned by banks prior to Dec. 31, 2013, and not funds issued before that date. According to a statement issued by the Loan Syndications and Trading Association Friday, this means banks cannot make markets in these CLOs without attracting prohibitive capital charges.
Banks were originally slated to comply with the rule by July 21, 2014, but the Dodd-Frank Act allows regulators to extend that deadline by one-year increments for a maximum of three years.
The regulators — the Fed, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., the Securities and Exchange Commission and the Commodity Futures trading Commission — struggled to finalize the Volcker Rule by last year amid disagreements and technical challenges.
—Allison Bisbey contributed to this report.