A two-year extension to the deadline for banks to comply with prohibitions against holding certain collateralized loan obligations does nothing to clear up uncertainty in this market, according to research published today by Wells Fargo. Moreover, it could slow the complicated process of making existing CLOs compliant with the Volcker Rule.
The Volcker Rule prohibits banks from having an “ownership interest” in securitizations of any assets other than loans. The problem is two-fold: most existing CLOs are backed by bonds as well as loans, and senior CLO securities typically give holders the right to fire the investment manager for cause, which could be construed as an ownership interest. This has prompted concerns that banks could be forced to sell of billions of dollars in CLO holdings.