Insight Volcker Rule Amended to Exempt Trust-Preferred CDOs

Effective January 14, 2014, federal banking regulators have amended the Volcker Rule to permit banks to continue to hold securities of collateralized debt obligations composed of trust-preferred securities (TruPS CDOs).

In concept, the Volcker Rule is intended to reduce systemic risk by prohibiting large banks from engaging in proprietary trading activities. In its initial form, the Volcker Rule would have required all banks to divest of many TruPS CDO securities by July 21, 2015. As a consequence, banks holding these securities would have to begin marking them to market, a fact which caused Zions Bank to announce a $387 million markdown on TRuPS CDO assets.

After immediate outcry from the industry and a lawsuit by the American Bankers Association, the regulators have rewritten the Volcker Rule to exempt securities of TruPS CDOs that (i) primarily hold TruPS of banks with less than $15 billion in assets, (ii) were issued before May 19, 2010, and (iii) were acquired on or before December 10, 2013.

Because TRuPS CDOs primarily invested in trust-preferred securities of smaller financial institutions, most commentators expect that the revised Volcker Rule will exempt essentially all TRuPS CDOs.

See here for the press release regarding the interim final rule. The press release includes a link to the full text of the interim final rule and a non-exclusive list of TRuPS CDOs that banking regulators believe primarily hold trust-preferred securities of banks with less than $15 billion in assets.

For more information, please contact our banking group or call 208.344.6000.