USA Law and Practice Contributed by: Bjorn Bjerke, Corey Reis and Joshua Kopel, A&O Shearman
The Volcker Rule The Volcker Rule prohibits banks from holding an “ownership interest” in, or sponsoring enti - ties that are, “covered funds” for purposes of the Volcker Rule. Ownership interest is a broad term that captures, among others, any security with equity-like returns or voting rights (including the right to replace the investment manager, which is typically a right of the senior-most class of investors in the event of such manager’s default). Consequently, in order to be attractive to banks, securitisation entities tended to avoid becoming a “covered fund” under the Volcker Rule. This may change based on amendments to the rule (effective since 1 October 2020), which clarify that a right to remove an investment manager for “cause” (as defined in the rule) is not an owner - ship interest. The covered fund definition only captures entities that would have to register under the Investment Company Act, but for the exemp - tion set forth in Section 3(c)(7) or 3(c)(1), or that are commodity pools for which the commodity pool operator has claimed an exemption from registration and record-keeping requirements pursuant to Section 4.7 of the CEA, or that are “substantially similar” commodity pools. Conse - quently, the traditional means of addressing the Volcker Rule have been to avoid relying on any of these exemptions. If that strategy is not avail - able, there are a number of potential exclusions from the covered fund definition in the Volcker Rule itself, of which the “loan securitisation” exemption is most important in the securitisa - tion context. While “loans” is a broad term for the purposes of that exclusion, there are significant limitations on an SPE’s ability to hold derivatives (other than for the purposes of hedging interest and currency risk) and securities (other than for certain short-
term cash-management purposes). However, the recent October amendments to the Volcker Rule allow for a small bond basket, thereby removing one of the restrictions that have prevented CLO managers from engaging in a bond/loan arbi - trage that was popular prior to the promulgation of the Volcker Rule. 4.12 Participation of Government- Sponsored Entities Ginnie, Mae, Fannie, Mae and Freddie, Mac are the principal agencies and GSEs engaged in the securitisation of mortgages. Ginnie, Mae does not itself issue MBSs, but instead provides a guarantee, backed by the full faith and credit of the US government, of securitisations by par - ticipating institutions of government-insured mortgages. Fannie, Mae and Freddie, Mac are GSEs char - tered by Congress for the purpose of provid - ing a stable source of liquidity for the purchase and refinancing of homes and multi-family rental housing. These GSEs purchase loans that sat - isfy their origination criteria and issue securities backed by pools of such loans that are guaran - teed by the relevant GSE. In addition, the GSEs issue some risk transfer securitisations that are not guaranteed. The GSEs traditionally used separate, but similar, platforms to issue their pass-through securities. Starting on 3 June 2019, they have transitioned to a single security and single securitisation platform initiative referred to as Uniform Mort - gage-Backed Securities (UMBS). The agency securitisation model and the related guarantees allow investors to focus primarily on the pay - ment characteristics of the underlying pools of mortgages rather than the credit risk. In turn, this has allowed for the emergence of a highly liquid “to-be-arranged (TBA) market”, where pools of
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