NEW YORK, Jan 15 (IFR) - The Loan Syndications and Trading
Association (LSTA) urged US regulators on Wednesday to modify
the Volcker Rule concerning collateralized loan obligations
(CLOs) to prevent upheaval in the industry and potentially big
losses for US banks.
Elliot Ganz, the LSTA's executive vice president, told the
House Financial Services Committee that the definition of
"ownership interest" in the final Volcker Rule will have
significant unintended consequences for the CLO market,
including material losses for US banks and restrictions on the
availability of credit for US businesses.
Five US bank regulatory agencies on Tuesday approved a tweak
to the rule that would allow banks to keep interests in certain
funds backed by trust-preferred securities, but they did not
"We are disappointed that the agencies have addressed the
issue of CDOs of TruPs while not yet addressing the important
concerns relating to CLO notes," said Ganz.
"We are hopeful that the agencies will quickly take up our
request that they confirm in guidance that the ability of
holders of highly-rated AAA and AA rated debt securities to
remove or replace a manager for cause does not constitute an
Without that guidance, the CLO market could be disrupted
because banks could be forced to divest these securities within
the next 18 months, Ganz said.
According to the trade group, US banks hold approximately
USD70bn of CLOs but would be forced to divest or restructure
these notes over the next year and a half, possibly at a
significant loss, without clarification on the first "indicia of
"If the price of CLO debt securities were to drop by only
10%, banks holding CLO debt securities would face potential
cumulative losses of up to $7 billion, which losses would be
driven solely by imposition of the Final Rule," said Ganz.