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Alternative Market Briefing

Volcker to regulate fewer financial activities as weeks pass, EU follows suit

Friday, January 10, 2014

Bailey McCann, Opalesque New York:

Mere weeks after passage of the Volcker rule which was hailed as a victory by regulators, the regulators themselves and indeed some members of Congress appear to be opting out. A new exemption is being considered under the 'permitted activities' allowance, a loophole embedded in the rule designed to allow certain financial activities to continue even if they conflict with the rule. Permitted activities are prevalent throughout Dodd-Frank, and it seems regulators are prepared to allow for more.

At issue is a type of collateralized debt obligation that was backed by trust preferred securities (TruPs), the Volcker rule classifies these CDOs as hedge funds which are banned under the rule. However, banks and reinsurance companies have been issuing TruPs CDOs for their own activities and unwinding them was slated to create new writedowns prompting a suit from the American Bankers Association. Hedge funds entered the space looking to gobble up the newly written down and extra cheap CDOs, however, regulators are now considering an exception.

If the exception goes through, regulators will essentially allow bank's TruPs CDOs to be grandfathered in, thus avoiding the writedown at year-end. Bloomberg places the current market for these securities at just over $40bn. The exemption being considered would mean some relief for community banks, which are slated to feel ......................

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