In facing Congressional and industry backlash related to the effect of the Volcker Rule on TruPS CDOs, federal regulators were expected to choose between two options. Door 1 was to provide an exemption for TruPS CDOs held by all institutions. Door 2 was to provide an exemption only for TruPS CDOs held by banks with less than $15 billion in assets, consistent with the Collins Amendment to Dodd-Frank.
The regulators chose neither door, instead opening Door 3: the regulators have exempted TruPS CDOs for all institutions, so long as the TruPS CDO primarily holds TruPS of banks with less than $15 billion in assets. It will likely take a few days for the full analysis to come in, but I would expect that this has the effect of exempting all TruPS CDOs, as the CDO structure was primarily used in conjunction with private offerings of TruPS by smaller financial institutions.
The Interim Final Rule, issued on January 14, 2014, adds a new Section __.16 to the Volcker Rule, effective on April 1, 2014 (the same effective date for the Volcker Rule generally). Section __.16 provides that the “covered funds” prohibition of the Volcker Rule do not apply to investments in a CDO if:
- the CDO was established prior to May 19, 2010 (the grandfather date for Tier 1 treatment for TruPS);
- the bank reasonably believes the offering proceeds of the CDO were used to invest primarily in TruPS issued by banks with less than $15 billion in assets (the Collins Amendment threshold); and
- the bank acquired the TruPS CDO on or before December 10, 2013 (the date the final Volcker Rule was approved by the regulators).
The banking regulators also published a non-exclusive list of TruPS CDOs that the regulators believe meet requirement #2 above related to investing primarily in banks with less than $15 billion in assets. Section __.16 also provides that Banks are entitled to rely on this list in assessing compliance with the requirements for exempting TruPS CDOs from the impact of the Volcker Rule. The non-exclusive list includes Alesco I through XVII, PreTSL I through XXVII, and Trapeza I through XIII, among others.
The regulators are soliciting comments on the Interim Final Rule, and, presumably could alter the rule prior to its effectiveness on April 1st. However, the Interim Final Rule would appear sufficient to both avoid the potential accounting impact as well as any mass sell off of TruPS CDOs.