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Agencies Release Volcker FAQ on Capital Treatment of CDOs Backed by TruPS
Practical Law Legal Update w-001-5034 (Approx. 4 pages)
Agencies Release Volcker FAQ on Capital Treatment of CDOs Backed by TruPS
by Practical Law Finance
| Published on 08 Mar 2016 • USA (National/Federal) |
A group of federal regulators have released a FAQ clarifying the capital treatment under the Volcker Rule of banking entity investments in CDOs backed by trust preferred securities (TruPS).
On March 4, 2016, the FDIC, Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System, the SEC and the CFTC (collectively, the agencies) updated their Volcker Rule FAQs to clarify the capital treatment of certain collateralized debt obligations (CDOs) backed by trust preferred securities (TruPS CDOs).
The Volcker Rule generally prohibits banking entities from acquiring or retaining interest in a hedge fund or private equity fund (collectively, covered funds), subject to a number of exceptions (12 U.S.C. § 1851).
In January 2014, as part of the rule making process, the agencies adopted a set of conforming exemptions, which provides an exemption from application of the Volcker Rule so that banking entities may retain an interest in (or continue to act as a sponsor of) a TruPS CDOs, if the following conditions are met:
- The issuer was established, and the interest issued, before May 29, 2010.
- The banking entity reasonably believes that the offering proceeds received by the issuer were invested primarily in TruPS and subordinated debt instruments issued prior to May, 19, 2010 by either:
- a depository institution holding company (defined as a bank holding company or a savings and loan holding company), which had total consolidated assets of less than $15 billion in the prior 12 month reporting period; or
- The banking entity acquired the interest on or before December 10, 2013.
(12 C.F.R. § 351.16, 12 C.F.R. § 44.16, 12 C.F.R. § 248.16, 17 C.F.R. § 255.16, 17 C.F.R. § 75.16) (collectively, TruPS exemption).
For more information on the TruPS exemption, see Legal Update, Volcker Rule Exemption Issued for Collateralized Debt Obligations Backed by Trust Preferred Securities.
A separate Volcker exemption allows a banking entity to hold investments in a covered fund, subject to certain limitations, for the purposes of either:
- Establishing the fund and providing it with sufficient equity to attract unaffiliated investors; or
- Making a de minimis investment.
One such limitation is that the aggregate amount of outstanding investments made pursuant to this exemption (including all related earnings) be deducted from the banking entity's tier 1 capital for purposes of applicable regulatory capital requirements (12 C.F.R. § 351.12, 12 C.F.R. 44.12, 12 C.F.R. § 248.12, 17 C.F.R. § 255.12, 17 C.F.R. § 75.12) (collectively, the capital exemption).
The FAQ clarifies that the requirements to deduct its investment in covered funds from its tier 1 capital calculation in reliance on the Volcker exemption found in the capital exemption does not apply to qualified TruPS CDOs held in accordance with the TruPS exemption because the TruPS exemption provides an independent Volcker Rule exemption.
For more information on the Volcker Rule see, Practice Note, Summary of the Dodd-Frank Act: The Volcker Rule.