SIFMA urges TOBs be exempt from regs implementing Volcker Rule

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CARLSBAD, CALIF. - Regulations implementing the Volcker Rule should be changed to provide exclusions for tender option bonds and other similar financing vehicles, the Securities Industry and Financial Markets Association told a federal regulator.

SIFMA filed a letter to the Office of the Comptroller of the Currency late last week in response to an OCC request on how the regulations implementing the Volcker Rule should be revised.

The rule, which restricts proprietary trading by banks, was named for former Federal Reserve Board chairman Paul Volcker and was part of the Dodd-Frank Act reforms passed in the aftermath of the 2007-2008 financial crisis. Most of the muni market was exempted from the Volcker Rule’s restrictions, but the tender option bond market was not.

In a traditional TOB program, the “sponsor” will deposit a fixed-rate bond or note into a trust, which will issue two new certificates — a floating rate certificate sold to a money market fund and a residual certificate which may be sold to a mutual fund or closed-end fund or held by a bank.

The floating rate certificate will have a tender option, supported by a liquidity facility to cover the purchase price of the unremarketed tender receipts. that shortens the maturity of the bond or note so it that it becomes eligible for purchase by a tax-exempt money market fund.

But because the Volcker Rule restricted banks and their affiliates from sponsoring a TOB program or owning a residual certificate issued by a TOB trust, those programs had to be restructured over the last couple of years.

The segment on TOBs was a relatively small portion of the SIFMA letter, which was nearly 60 pages and focused mainly on non-muni subjects.

“A banking entity is permitted to purchase and sell domestic government obligations — without limit or restriction — directly for its own balance sheet,” SIFMA wrote. “The implementing regulations, however, restrict the banking entity from engaging in the same activity, if conducted through a fund-like structure. Treating these TOBs and other similar financing vehicles as covered funds is inconsistent with the statute and ultimately results in higher financing costs for U.S. businesses.”

The dealer group said elsewhere in its letter that it does not believe that the activities prohibited by the Volcker Rule contributed to the economic woes a decade ago, and labeled Volcker “a solution in search of a problem.”

SIFMA said it looks forward to working on rule changes with the other federal agencies in charge of the Volcker Rule's implementation, which also include the Fed, Securities and Exchange Commission, Commodity Futures Trading Commission, and the Federal Deposit Insurance Corporation.

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