Increasingly, we receive questions from prospective investors in covered bonds on whether an investment is prohibited or limited under the Volcker Rule, which was adopted by the various agencies under section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The answer is relevant to US bank investors in covered bonds as Volcker Rule restrictions apply directly to US banks, including US branches and agencies of foreign banks. However, the answer may also be relevant to other investors in covered bonds, particularly in dollardenominated covered bonds, because the answer will affect the secondary market liquidity in the bonds.

The best response to this market concern is for issuers of covered bonds to develop a practice of expressly stating in their prospectuses whether an investment in their covered bonds is restricted under the Volcker Rule. Until including such a statement becomes a widespread practice, an analysis of the status of the issuer under the Investment Company Act of 1940, as amended (Investment Company Act) and the terms of the covered bonds will be necessary.

Originally published in International Financial Law Review on July 20, 2015.