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Hedge Fund Regulation: Banks Get CDO Exception To Volcker Rule

New York (HedgeCo.Net) – The SEC and other federal regulars yesterday approved a rule allowing banking entities to hold on to certain CDOs.

Reuters reports that this would be the first “tweak” to the new legislation known as the “Volcker rule,” which prohibits banking entities (and their investments in hedge funds) from making risky bets that solely benefit the banks and not the investor. The legislation comes into effect April 1, 2014.

The American Bankers Association filed a lawsuit warning of heavy losses if banks are forced to sell certain complex CDOs, Reuters reports.

The new legislation allows banks that own certain collateralized debt obligations backed by trust preferred securities (TruPS CDOs) to forgo the investment prohibitions of section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the Volcker rule.

The Volcker Rule is a specific section of the Dodd–Frank Wall Act originally proposed by economist and former Federal Reserve Chairman Paul Volcker to restrict banks from making certain kinds of speculative investments that do not benefit their customers.

Volcker argued that such speculative activity played a key role in the financial crisis of 2007–2010. The rule is often referred to as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank’s own accounts, although a number of exceptions to this ban were included in the Dodd-Frank law.

Alex Akesson
Editor for HedgeCo.net
alex@hedgeco.net
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