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Representative Jeb Hensarling, a Republican of Texas and chairman of the House Financial Services Committee, is expected to propose a bill that could open up a huge loophole in the rule. The proposed change could allow banks to create and own securities with many types of investments that are barred under the Volcker Rule, which is intended to prohibit speculative trading by banks while letting them both make markets for customers and hedge other investments….
The proposed legislation, notable for its brevity, provides that nothing in the Volcker Rule “shall be construed to require the divestiture of any collateralized debt obligations backed by trust-preferred securities issued before December 10, 2013.”
The wording appears to indicate that new collateralized debt obligations could be created that banks could hold and trade, as long as they contained at least one TruPS security issued before Dec. 10. Most of the assets in the collateralized debt obligation could be other securities.