Bankers aim for new post-Volcker collateralised loan obligations Bankers worried that the Volcker rule will make it more difficult for them to hold certain types of securitisations are working on fresh versions of the products that can avoid the new regulation. Under the final version of the Volcker rule released last week, banks will only be allowed to own and trade collateralised loan obligations that contain leveraged loans. CLOs pool together leveraged loans made to companies but sometimes include bonds and other securities to generate more returns. Under some interpretations of the rule, however, they would be prohibited from owning CLOs that contain bonds, prompting bankers to consider new ways to structure the popular deals. Sales of CLOs have surged this year to the highest level since before the financial crisis as investors, including banks, seek out the higher yielding products. Already, CLOs have evolved from their original, pre-crisis versions to new types of structures known as "CLO 2.0s." The latest versions of the securitisations typically have more protections for wary investors than their older versions. Data from Thomson Reuters LPC show that 37 per cent of "CLO 1.0" and 40 per cent of "CLO 2.0" deals have no bond holdings. But that still leaves the vast majority of deals potentially affected by the incoming Volcker rule - forcing banks to consider new forms of the deals that would only include leveraged loans. "The problem is that existing CLOs have bonds in them," said one senior banker at a large bank. "You probably will see "CLOs 3.0" emerge, which have no bonds." The other option on the table is for banks to simply offload their holdings of CLOs that fall under the Volcker ban, though that could force them to take some losses. "Banks may choose to sell current holdings, presumably at a discount, which would present an opportunity for other senior CLO investors," Bjarni Torfason, an analyst at Deutsche Bank, wrote in a note. Another option would be to work . . . to bring those CLOs into conformance with the Volcker rule. Sales of CLOs have totalled about $75bn this year, according to data from S&P Capital IQ - the highest since the $89bn sold in 2007 just before the crisis. While many market participants expect CLO sales to continue to be strong next year, others fear another set of incoming rules will derail sales by making the products more expensive to issue. So-called "risk retention" rules would force banks and CLO managers to hold on to slices of their deals. Bank ownership of non-exempt CLOs is an "open question," Brad Rogoff, global head of credit strategy at Barclays, said in a note. "New vehicles will likely seek to avoid issues altogether by eliminating high-yield [bond] buckets and may seek to compensate by pushing for more flexibility to invest in [riskier] second-lien loans," he added.