OREANDA-NEWS. The U.S. Federal Reserve board's extension of the period that banking entities have to comply with the covered funds section of the Volcker Rule until July 2017 provides some breathing room for the sponsored \$20 billion non-proprietary tender option bond (TOB) market, according to Fitch Ratings. Approximately 50% of this segment of the TOB market is utilized by municipal closed-end funds (CEFs).

Fitch estimates that municipal CEFs utilize TOBs for an average of 31% of their total leverage needs given low borrowing costs (average 0.6%) and easy funding flexibility. CEFs issued approximately \$10.1 billion in TOB floaters across 156 municipal funds in the sector as of Jan. 31, 2015, according to Fitch data. That number is up from \$7.0 billion since May 2010 when the Volcker rule was first introduced. Fund managers have been re-leveraging since the financial crisis in anticipation that an alternative funding structure would come to market before the July 2015 deadline.

To be sure, several funds have already issued what they believe are Volcker-compliant TOB structures using third-party sponsors instead of banks and CEF managers have been lining up to follow suit. The July 2017 extension affords the time needed to complete these restructurings given the large number of TOB deals outstanding and the limited capacity of market participants available to change the structure in a timely fashion.

Fitch is also monitoring the continued availability of bank liquidity and remarketing facilities in the TOB market as several banks have already exited the business due to higher capital costs from Basel III and reduced staffing levels at their municipal structuring departments. It remains to be seen whether or not banks still actively involved in the business will continue to participate at current levels.