With the first major alteration to the Volcker rule, community banks will receive sought-after relief from a prohibition on certain types of debt securities. On Tuesday night, five federal agencies approved an interim final rule that allows them to retain their interests in collateralized debt obligations backed by trust preferred securities.
A trust-preferred security, with characteristics of both debt and equity, is created when a bank issues debt to a trust it created, and then sells its right to receive interest and principal payments to third-party investors. A TruPS-backed CDO is created when an investment bank purchases multiple trust-preferred securities, packages those securities into a single security, and issues new debt instruments based on that security to investors.
