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Hedge Fund Regulation: Banks Want CDO Exception To Volcker Rule

American-bankNew York (HedgeCo.Net) – The SEC and other federal regulars are reviewing whether or not certain CDOs backed by trust preferred securities should be subjected to new regulation under the final Volcker rules.

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.

“At stake are so-called collateralized debt obligations backed by trust preferred securities — or TruPS CDOs — which have hybrid characteristics of both debt and equity and can get a favorable tax treatment…. The regulators have to reply to the banks in court before 9 a.m. EST Monday [Dec. 30], but it was unclear whether the statement would alter the course of the lawsuit, in which the banks had asked for a stay of the relevant part of the rule,” Reuters says.

The SEC said it intends to address the matter no later than January 15, 2014.

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
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