Though the long-awaited Volcker Rule appears to have minimal direct impact on money funds and the money markets, there are a coupe areas where funds may be impacted. Citi's Vikram Rai wrote yesterday in a "Short Duration Strategy" Alert, an update entitled, "Final Volcker Rule Largely Positive for ABCP But Snags Some Conduits." He says, "Under the proposed Volcker rule, ABCP conduits would not have been covered by the loan securitization exclusion and would have been deemed covered funds. The Agencies have determined in the final rule to exclude from the definition of a covered fund an ABCP conduit that is a "qualifying asset-backed commercial paper conduit"." We excerpt from his piece below, and also quote from the ICI's Comment on the Volcker Rule.
Rai explains, "A qualifying ABCP conduit needs to meet the following requirements: The conduit must hold only a) Loans or other assets that would be permissible in a loan securitization and; b) Asset-backed securities that are supported solely by assets permissible for a loan securitization and are acquired by the conduit as part of an initial issuance directly from the issuer or directly from an underwriter. The conduits must issue only asset-backed securities, comprising of a residual and securities with a term of 397 days or less."
He adds, "A "regulated liquidity provider," must provide a legally binding commitment to provide full and unconditional liquidity coverage with respect to all the outstanding short term asset-backed securities issued by the qualifying asset-backed commercial paper conduit in the event that funds are required to redeem the maturing securities."
Citi adds, "Given that the exclusion is not available to ABCP conduits that lack full liquidity coverage, partially supported ABCP conduits will need to be restructured to conform to the requirements of qualifying ABCP conduits. While this affects a large portion of currently outstanding ABCP conduits, the process of converting a partially supported program into a fully-supported one is not overly complicated and typically requires that the liquidity coverage not remain limited to funding only performing loans, receivables or asset-backed securities."
Finally, Rai writes, "Thus, we expect the ABCP market to be able to adapt to this requirement and given that the uncertainties around the impact of the Volcker rule have cleared up, we have a more positive outlook on the future of this market."
ICI's Paul Stevens comments, "At more than 900 pages, it will take some time to understand the full scope and impact of the final Volcker Rule. Among the many concerns ICI has voiced about the Rule, the most important was the need for regulators to make clear that the Rule does not affect the organization or activities of U.S. registered investment companies (RICs) because of the negative impact that could have on investors."
He continues, "Our initial review indicates that regulators appear to have heard our concerns. While we continue to examine the details, we appreciate the effort the agencies have made to tailor the final Rule's definition of covered funds to exclude both U.S. RICs and regulated non-US retail funds. We believe this is what Congress intended."
Finally, Stevens adds, "More broadly, we remain concerned about a yet-unknowable outcome: the impact this rule will have on capital markets. Mutual funds and their counterparts around the world depend on liquid markets in which to trade efficiently on behalf of their shareholders. We will be watching this aspect of the Volcker Rule carefully and will communicate with regulators and Congress about any adverse effects on registered funds and their shareholders. We further urge regulators to continue to work together, as they did in the development stage, as the Rule moves into the implementation and enforcement phases in the months and years ahead."
