Securitization and Covered Funds

The regulations as written have had unintended consequences on the securitization market even though Dodd-Frank explicitly exempts securitization.


As many people know, the purpose of Dodd-Frank’s “Volcker Rule”, finalized in 2013, was to prohibit proprietary trading by regulated banks as well as to rein in banks investing in private equity firms and hedge funds. Unfortunately, the regulations as written have had unintended consequences on the securitization market.

The Structured Finance Association’s perspective is that some of these consequences are clearly unintentional, since Dodd-Frank explicitly exempts securitization from restriction under the Volcker Rule by stating that “[n]othing in this section shall be construed to limit or restrict the ability of a banking entity or nonbank financial company … to sell or securitize loans in a manner otherwise permitted by law.” (Section 619(g)(2)). Notwithstanding this clear statutory language, bank participation in the securitization industry, whether as sponsor, issuer or investor, continues to be hampered by the breadth of the definition of “covered funds” in the 2013 Final Rule.

Recognizing the need to fine tune some aspects of the initial regulations, over the past few years, the agencies mandated with Volcker Rule implementation have requested public input and issued a reproposal. In an effort to help ensure that the final rules accurately capture the language of the statute, the Structured Finance Association (formerly SFIG) has submitted several comment letters and held many meetings with relevant regulators. Most recently, staff and co-chairs of our Volcker Task Force met with the Federal Reserve, the OCC, FDIC, and SEC to discuss the securitization industry’s key concerns and recommendations, including modifications to the following:

Loan Securitization Exclusion

  • As noted above, the Volcker statute clearly allows loans to be securitized by a covered bank and not run afoul of the Volcker rule.
  • The current regulatory language, however, is written so narrowly as to exclude certain types of loans. For example, auto ABS issuers are currently not permitted to include auto leases in deals that are exempt from Volcker. Our view is that the final, amended regulations should permit issuers to hold leases and other assets that are not simply “loans”.

Definition of Ownership Interest

  • The Structured Finance Association believes that regulators should clarify that the safe harbor exclusion for any loan, debt security, or other form of bank financing that provide the debt holders with the right to receive stated interest and principal by a final maturity date.

The Structured Finance Association and its Volcker Task Force would welcome any changes made to the Volcker Rule that clearly address any obvious unintended consequences while still adhering to the wording and the intent of the statute.

The Structured Finance Association has done a great job in identifying and engaging with the relevant people at the various agencies that are involved with the Volcker Rule. As a result, we were able to have very productive meetings with the agencies during the Spring about the Volcker Rule. The representatives at the meetings seemed receptive to at least some of the Association’s key concerns, and several related questions were included in the banking agencies’ Notice of Proposed Rulemaking regarding potential changes to the Volcker Rule.

Carol Hitselberger, Partner/Co-head of Finance Practice, Mayer Brown LLP


Jennifer Wolfe

Director, ABS and Investor Policy

Alyssa Acevedo

Vice President, Policy Development