Volcker Rule - Interim Final Rule on TruPS, January 2014

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Gavel.png FINAL RULE: On December 10, 2013, the CFTC, FDIC, SEC, Federal Reserve, Office of the Comptroller of the Currency and Treasury Department released a joint final rule.
Timeline, TruPS Exemption to Volcker Rule
Interim Final Rule Published Comment deadline Effective Date
January 31, 2014 March 3, 2014 April 1, 2014
Dodd-Frank Timeline, Volcker Rule
Final Rule Released Effective Date Compliance Date
December 10, 2013 April 1, 2014 July 21, 2015

On January 14, 2014, Five U.S. regulatory agencies - the CFTC, FDIC, Federal Reserve, OCC, SEC and Treasury Department issued an interim final rule on the retention of collateralized debt obligations backed by trust-preferred securities ("TruPS"). Under the rule, banking entities will be allowed to retain interests in certain collateralized debt obligations (CDOs) backed primarily by trust preferred securities (TruPS) from the investment prohibitions of section 619 of the Dodd-Frank Act, commonly referred to as the Volcker Rule.

The effective date for the rule is April 1, 2014. Once the rule appears in the Federal Register, a 30-day public comment period will commence.


On December 10, 2013, the U.S. Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, the Office of the Comptroller of the Currency and the Commodity Futures Trading Commission (CFTC) released its final rules to implement Section 619 of the Dodd-Frank Act, the so-called "Volcker Rule," which will prohibit banking entities from engaging in proprietary trading of derivatives and limit the ownership or sponsorship of hedge funds and other private funds to three percent of Tier 1 capital.

The document details which entities will be subject to the prohibitions, and explains the types of financial transactions that will be exempt from the bans. The Dodd-Frank Act mandated that the rule become effective on July 21, 2012, followed by a two-year compliance transition. However, a delay in the release of the rule has pushed the effective date to April 1, 2014 and banking entities will have until July 21, 2015 to come into compliance - three years after the date mandated by Dodd-Frank. Banks with $50 billion or more in trading assets will be required to report certain metrics to regulators beginning in July 2014.<ref>Regulators release plan for Volcker Rule limits on bank trading. Washington Post. Retrieved on October 12, 2011.</ref><ref>Regulators Should Delay Volcker Rule, House Lawmakers Say. Bloomberg. Retrieved on December 23, 2011.</ref>

Among the provisions of the final rule is a mandate that banking entities divest and cease market making activities for "non-permitted" products, including collateralized debt obligations (CDOs) backed primarily by trust preferred securities (TruPS), a type of long-term hybrid debt and equity product used for internal funding by banks because of its favorable tax and accounting treatment. Many community banks and other market participants maintain that the issuance of TruPS using a pooled investment structure was the only practical way for community banking organizations to avail themselves of TruPS for regulatory capital purposes.

On December 23, 2013, the American Bankers Association said it would file a lawsuit challenging the Volcker Rule unless regulators agree to suspend portions that restrict certain collateralized debt obligations of trust-preferred securities ("TruPS"). At issue is whether banks will be required to dispose of such securities, and how quickly they must comply.<ref>ABA threatens to sue regulators over Volcker Rule. CNBC. Retrieved on December 30, 2013.</ref> The regulators responded that they would consider a change to the Volcker Rule to exempt TruPS, and that a determination would be made before January 17, 2014. The ABA then dropped their request that a judge block the rule's enforcement pending the decision. <ref>Volcker Rule Block Request Dropped by Bankers Group. Bloomberg. Retrieved on December 31, 2013.</ref> Also, on December 27, the regulators issued a "FAQ" on TruPS. The FAQ can be found in the "Related Documents" section below.

Interim Final Rule Summary[edit]

Under the interim final rule, the retention of an interest in or sponsorship of covered funds by banking entities is allowed if:

  • the TruPS CDO was established, and the interest was issued, before May 19, 2010;
  • the banking entity reasonably believes that the offering proceeds received by the TruPS CDO were invested primarily in Qualifying TruPS Collateral; and
  • the banking entity's interest in the TruPS CDO was acquired on or before December 10, 2013, the date the agencies issued final rules the Volcker Rule.

The federal banking agencies on Tuesday also released a non-exclusive list of issuers that meet the requirements of the interim final rule. It also clarifies that the TruPS CDO relief extends to activities of the banking entity as a sponsor or trustee for these securitizations and that banking entities may continue to act as market makers in TruPS CDOs.<ref>Agencies Approve Interim Final Rule Authorizing Retention of Interests in and Sponsorship of Collateralized Debt Obligations Backed Primarily by Bank-Issued Trust Preferred Securities. CFTC. Retrieved on January 16, 2014.</ref>

Related Documents: Federal Register Entry; TruPS FAQ[edit]


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