Proposed changes to Volcker Rule offer some welcome, but not all of the desired, relief for structured finance transactions

Key Takeaways

• Five U.S. federal financial regulators (the “Agencies”) recently proposed a number of changes to the previously adopted regulations (the “Existing Regulations”) implementing Section 13 of the Bank Holding Company Act of 1956 (the “BHCA”), commonly known as the “Volcker Rule.” This proposal would give banks involved in the structured finance space some relief with respect to special purpose vehicles (“SPVs”) from the Volcker Rule’s prohibition on the sponsorship or and investment in certain types of fund vehicles (“Covered Funds”), although certain aspects of the proposal would limit its usefulness.
• The proposal would modify the Existing Regulations’ loan securitization exception (the “LSE”) to permit an SPV to hold up to 5% of its assets in bonds or other asset classes, which would permit such SPVs to maintain a “bond bucket” in a manner consistent with industry practice.
• The proposal would also modify the “Super 23A” prohibition to permit banks to enter into swaps with SPVs that they sponsor and would permit banks to hold senior loans or debt securities in an SPV that pay a fixed or floating rate of interest, even if they also had voting rights with respect to the SPV.
• The proposal would add a new exception for “credit funds,” but would limit the exception to an SPV that (1) does not issue asset-backed securities and (2) limits its assets to securities that a bank may hold directly.
• The proposed exception for “customer facilitation vehicles” would require that all of an SPV’s ownership interests be owned by a single customer, which is inconsistent with the typical approach of “orphaning” such an SPV.

Read the full alert here.