Wells' Fargo Securities' Garret Sloan wrote last week, "The recently finalized Volcker Rule has raised a number of questions along with the answers it has provided. Many have been wondering aloud what constitutes a "covered fund" under the current Volcker definition. This question has immediate and real world implications for certain products popular amongst money market investors. First, there is the question of the Tender-Option Bond (TOB) programs that currently exist at banks allowing investors to borrow and create a leveraged position in municipal debt. TOBs utilize short-term borrowings to fund the purchase of longer-term municipal debt. The largest buyers of TOB floater paper are municipal money market funds. Currently, the tax-exempt money market space is just over $250 billion and of that, tender-option bonds comprise somewhere between $55-$70 billion. The exact number is difficult to establish because of the different ways in which the data are presented. Nevertheless, the Volcker Rule as currently interpreted would curb banks from participating in Tender-Option bond programs. The language of the rule specifically notes that tender option bonds should be treated no differently than the resecuritization of other debt instruments. The rule further notes that tender option bond vehicles are more in the nature of other types of bond repackaging securitizations. As such, banking entities currently providing credit enhancement, liquidity support or other similar services to the TOB market are likely to be curtailed unless an exclusion from the definition of a covered fund is found. We have not seen one as of yet, but we will cross our fingers. Muni funds with a hankering for short-term debt will be looking for a place to park cash and with less inventory, we could see much more downward pressure on the traditional municipal VRDN market. One long-term positive could be the interest generated amongst municipal issuers to return to the more traditional VRDN market, which could increase supply. However, that is not a short-term fix for a problem that could be in place by mid-year 2014."

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