The Federal Reserve’s two-year deadline extension for banks to conform their collateralized loan obligation to the Volcker Rule apparently will not port over to the new owners of the notes prior to July 2017, an industry trade group spokesman said Wednesday at a CLO conference in New York.
Elliot Ganz, a co-head of the government and policy advocacy arm of the Loan Syndications and Trading Association, said such a policy will only further complicate banks’ effort to divest of the securities that regulators are dead-set against banks holding.
Not only does it carve out any potential depository institution buyers from taking the notes, but will impact banks’ liquidity by making make the CLOs unattractive to other buyers in the secondary market as well, Ganz said.
“The problem is the dealer will not take it into inventory because it’s going to cost him 100% capital. Maybe even, believe it not, more than 100% capital,” said Ganz, who headed a panel discussion today on the Volcker Rule at the Information Management Network’s third annual conference on CLOs and leveraged loans at the New York Marriott Marquis.
“So they’re just not going to willy-nilly take that into inventory,” said Ganz. “The market’s going to be slowed down much more” without the portability of the extension.
Earlier this month, the Fed granted banks a two-year extension beyond the original July 2015 conformance date to bring their CLO holdings in line with Volcker Rule restrictions against proprietary trading. Among the triggers that cause CLOs to become “covered funds” under the rule are bond securities within the notes as well as investor rights to terminate CLO managers that the Fed and other regulators deemed to be an ownership stake in the CLO.
The two-year extension was designed to give banks breathing room and not flood the market with distressed-price CLO trades from more than $70 billion of ineligible CLO holdings on banks’ books.
But since the Fed issued its change, Ganz said LSTA members were asking if the extension was only for ownership, or for the issuance, of CLOs.
“We reached out to Fed, Can you confirm our understanding that it’s the issuance?’” Ganz said. “The Fed said, No, we can’t confirm that. We have a difference view. We think it’s on the ownership of CLOs.’”
Ganz, who called the realization “incredibly disturbing,” said the LSTA still hopes to change the Federal Reserve’s interpretation because the formal extension won’t take place until August. “There’s just a statement that they will extend the conformance period, so hopefully we get another bite at the apple and try to persuade them this is a very bad idea.”