The Final Volcker Rule: Impact on Securitizations

On December 10, 2013, five U.S. financial regulators (the Agencies) adopted a final rule implementing the Volcker Rule (the Final Rule). The text of the Final Rule and its accompanying lengthy preamble (collectively, the Adopting Release) are available here. Two years ago the Agencies released a proposed rule to implement the Volcker Rule (the Proposed Rule).

Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) required the Agencies to adopt a rule implementing the so called Volcker Rule provision in Section 619 prohibiting banking entities from engaging in “proprietary trading” and making investments and conducting certain other activities with “private equity funds and hedge funds,” but specifically stated that nothing in Section 619 should be construed to limit or restrict the ability of a banking entity to securitize loans. The Final Rule does not impose restrictions on most traditional consumer asset-backed securities (ABS) transactions and includes specific exclusions for certain securitizations, but it will nonetheless have a significant impact on certain active segments of the securitization market, particularly collateralized loan obligations (CLOs), asset-backed commercial paper (ABCP) conduits and insurance-linked securities (ILS), and on certain legacy transactions. Although sponsors will be able to structure new securitizations of many types of financial assets to take advantage of the exclusions under the Volcker Rule, certain existing securitizations will be considered covered funds under the Final Rule, and banks will generally not be able to hold ownership interests in those securitizations after the extended conformance period ends on July 21, 2015, subject to any further extension.