A relaxation to the Volcker rule, announced earlier this year, is yet to be implemented as regulators’ time was consumed by the pandemic fallout. But as CLO managers push for more flexibility in their documentation to manage their own recovery, some in the market believe RR10 could provide a model for CLOs to invest in bonds going forward.

“The CLO market tends to be driven by precedence — if one manager is able to get a new feature in, then pretty much everyone tries it,” says DWS Investment Management’s Allison Salas, a senior CLO investor who is open to managers holding bonds.

A source with first-hand knowledge of RR10 told Creditflux that the 10% secured bond bucket would replace the traditional second lien allowance permitted by traditional CLOs, citing data from Moody’s showing secured bonds have better recovery rates than second liens.

“To the extent that you can find secure paper pari passu to what you can find in leveraged loans, CLO investors should be indifferent to this amendment,” the source says.

In January, the Federal Reserve published a re-proposal to the covered funds definition of the Volcker rule that suggested changes to the definitions of ‘ownership interest’ and ‘loan securitisation’. If adopted in full, investing in CLO debt tranches would no longer be considered an ownership interest in the deal.

Sources say that following the Fed’s announcement, the overwhelming majority of CLO managers attempted to negotiate a bond bucket with their debt investors — but none were permitted to do so.

“I have tried to get springing, unsecured bond buckets,” says one CLO manager. “Every time, it’s been ‘stipped’ away by investors.”

With the response to the economic crisis wrought by covid-19 taking up all of the Fed’s bandwidth since the March sell-off, the final regulation remains unknown. RR10 has escaped this issue by not defining itself as a covered fund to begin with.