In its first issuance since November 2015, the US financial regulators issued additional Volcker Rule guidance regarding investments in collateralized debt obligations (CDOs) backed by trust-preferred securities (TPs).

The Volcker Rule and its regulations generally prohibit banking entities and affiliates from engaging in proprietary trading or sponsoring or acquiring ownership interests in certain private funds (“covered funds”). In order to assist affected entities in complying with the rule, the agencies that issued the regulations have been issuing guidance periodically in the form of Frequently Asked Questions (FAQs) that appear on each of the agencies’ websites. In order to achieve consistency in interpretations, industry inquiries on Volcker Rule compliance are referred to a committee of representatives of the regulators that issued the rules, with one answer then being adopted by all the regulators. The March 4 issuance brings to 21 the total number of questions that they have addressed.

Under the final Volcker Rule regulations, subject to certain conditions, there is a special exemption from the rule for banking entities to retain an interest in, or act as a sponsor of, (including as trustee) an issuer of collateralized debt obligations backed by trust-preferred securities (“Qualifying TruPS CDOs”). One of the conditions is that the offering proceeds were invested in “Qualifying TruPS Collateral,” which is defined as any trust-preferred security or subordinated debt instrument issued prior to May 19, 2010, by a depository institution holding company that, for any reporting period within the 12 months immediately preceding the issuance of such instrument, had total consolidated assets of less than $15,000,000,000 or was issued prior to May 19, 2010, by a mutual holding company.

The Volcker Rule regulations require that the aggregate amount of permissible outstanding investments made by a banking entity in certain covered funds be deducted from the banking entity’s tier 1 (so-called “core”) capital. With respect to investments in Qualifying TruPS CDOs, in this FAQ, the agencies state that the tier 1 deduction requirement is not applicable. However, should the banking entity be acting as a market maker with respect to a Qualifying TruPS CDO that is a covered fund, then any investments made in reliance on the permissible market making exception are subject to the tier 1 deduction requirement. In addition, if the banking entity makes a permissible investment in a covered fund that is a TruPS CDO but not a Qualifying TruPS CDO, the tier 1 deduction requirement also is applicable.

Access the banking, securities and commodities regulators’ Frequently Asked Questions

Previous Regulation Tomorrow posts on the Volcker Rule’s Frequently Asked Questions:

  1. Agencies issue Volcker Rule guidance on exiting market-making and on prohibitions on certain transactions between a banking entity and a covered fund
  2. Agencies address questions on Volcker Rule compliance programs and CEO certifications
  3. Agencies clarify Volcker Rule applicability to banking entity ownership of excluded funds
  4. Agencies issue more Volcker Rule guidance on covered funds
  5. Agencies provide clarification on the “SOTUS” Volcker Rule exception
  6. Regulators issue additional Volcker Rule guidance
  7. Regulators clarify FOIA treatment for certain Volcker rule reports
  8. Regulators provide more Volcker guidance
  9. Volcker Rule FAQs updated by Federal Reserve Board and OCC
  10. Volcker Rule FAQs and examination guidelines released