As noted in the Board Order extending the conformance period under section 13 of the BHC Act, each banking entity must conform its proprietary trading activities and covered fund activities and investments to the prohibitions and requirements of section 13 and the final rule by no later than the end of the conformance period. Appendix A of the final rule provides that certain of the metrics required to be reported by banking entities under the final rule should include the limits set out in 44.4 and 44.5 of the final rule. The https:// ensures that you are connecting to The preamble to the final rule explains that a trading desk may span more than one legal entity and thus employees may be working on behalf of multiple affiliated legal entities. 18736 (June 5, 1992). The staffs of the Agencies believe that banking entities subject to Appendix B as of the end of the conformance period should submit the first CEO attestation required under Appendix B after the end of the conformance period but no later than March 31, 2016. http://www.treasurydirect.gov/instit/marketables/strips/strips.htm, https://www.occ.gov/topics/capital-markets/financial-markets/trading/volcker-rule-implementation/volcker-rule-implementation-faqs.html#metrics, https://www.occ.gov/topics/capital-markets/financial-markets/trading/volcker-rule-implementation/volcker-rule-implementation-faqs.html#foreign, https://www.occ.gov/topics/capital-markets/financial-markets/trading/volcker-rule-implementation/volcker-rule-implementation-faqs.html#ceoattestation, http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20141218a1.pdf. A banking entity that reports metrics under Appendix A prior to the end of the conformance period need not report the limits required by 44.4(a)(2)(iii),44.4(b)(2)(iii), and 44.5(b)(1)(i) until the end of the conformance period. It protects depositors from the types of speculative investments that led to the 2008 financial crisis. The 2013 Rule exempts from the prohibition on proprietary trading certain risk-mitigating hedging activities that are designed to reduce the specific risks to a banking entity in connection with or related to individual or aggregated positions, contracts, or other holdings. Answer: The staffs of the Agencies encourage banking entities subject to Appendix A to evaluate exemptions available under the FOIA for their reported metrics information and to request confidential treatment as appropriate. Volcker Rule Implementation Frequently Asked Questions | OCC This is also reflected in the preamble discussion of the marketing restriction and the structure of the final rule as discussed below. Banking entities will have a one-year grace period, until January 1, 2021, to fully comply with the final rules amendments, but may also voluntarily comply, in whole or in part, with the amendments prior to such compliance date. The metrics amendments eliminate the following metrics: Inventory Aging, Stress Value-at-Risk, and Risk Factor Sensitivities. See 12 CFR 44.16(b). 2 See 12 CFR 44.14(a)(2) and (c). operations. at 5678 (stating "the Agencies' view that the foreign public fund exclusion is designed to treat foreign public funds consistently with similar U.S. funds and to limit the extraterritorial application of section 13 of the BHC Act, including by permitting U.S. banking entities and their foreign affiliates to carry on traditional asset management businesses outside of the United States"). The FDIC publishes regular updates on news and activities. Under the proposal, the agencies would have reserved authority to determine, on a case-by-case basis, that any purchase or sale of one or more financial instruments by a banking entity either is or is not for the trading account of the banking entity (including by considering the impact of the activity on the safety and soundness of the banking entity or the financial stability of the United States, the risk characteristics of the particular activity, or any other relevant factor). From an obligation to report to an . The final rule is broadly similar to the proposed rule from January. 1 5 U.S.C. 5 . Consistent with Section 13(d)(1)(I) of the BHC Act, the marketing restriction in the final rule provides that "no ownership interest in the covered fund is offered for sale or sold to a resident of the United States." The Volcker rule limits two main types of activities by large institutional banks. In the final rule, however, the agencies determined to adopt only those covered fund-related provisions for which specific rule text was proposed (and, in each case, substantially as proposed). It also won't let them own, invest in, or sponsor hedge funds, private equity funds, or other trading operations for their own use. The regulations have been developed by five federal financial regulatory agencies, including the Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit . Objective factors are factual criteria that can be used to reliably identify whether an issuer or a particular type of issuer is a covered fund.3 As an example, an objective factor would include whether the securities of the issuer were offered in transactions registered under the Securities Act.4 Objective factors would not be considered part of a reasonably designed compliance program if the banking entity designed or used such objective factors to evade section 13 and the final rule. The CEO attestation under Appendix B of the final rule is an annual requirement. Under the final rule, banking entities with significant trading assets and liabilities must submit certain quantitative measurements on a quarterly basis and in accordance with the XML schema posted on the OCC's "Volcker Rule Implementation" web page. The Volcker Rule generally prohibits banking entities from engaging in proprietary trading or investing in or sponsoring hedge funds or private equity funds. Infrastructures, Payments System Policy Advisory Committee, Finance and Economics Discussion Series (FEDS), International Finance Discussion Papers (IFDP), Estimated Dynamic Optimization (EDO) Model, Aggregate Reserves of Depository Institutions and the http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210b1.pdf. The proposal requested comment on whether the agencies should exclude from the definition of proprietary trading loan-related swaps between a banking entity and customers that have received loans from the banking entity, which have presented a compliance challenge particularly for smaller non-dealer banking entities that enter into loan-related swaps infrequently. In addition, banking entities that are subject to the market risk capital prong will not be subject to the short-term intent prong (although such banking entities may elect to apply the market risk capital rule prong as an alternative to the short-term intent prong under certain conditions). This means that metrics for the month of July 2015 must be reported within 30 days of the end of the month, or August 31, 2015. Are the quantitative measurements that a banking entity reports under Appendix A of the final rule protected by the Freedom of Information Act ("FOIA")? As an initial matter, the entity seeking to rely on the exclusion must be a joint venture. at 5677. The Volcker Rule generally restricts banking entities from engaging in proprietary trading and from owning, sponsoring, or having certain relationships with a hedge fund or private equity fund. The final rule, however, does not include this proposed reservation of authority. 4 See 12 CFR 44.12(a)(2) (describing seeding periods for a covered fund that is not issuing asset-backed securities). This banking entity would be required to provide its first CEO attestation to the relevant Agency by April 30, 2017. This exclusion in the final rule is not limited to loan-related swaps, and thus could apply to a swap with a customer in connection with the customers end-user activity. Answer:Appendix B of the final rule provides that, based on a review by the CEO of the banking entity, the CEO of the banking entity must, annually, attest in writing to the relevant Agency that the banking entity has in place processes to establish, maintain, enforce, review, test and modify the compliance program established under Appendix B and 44.20 of the final rule in a manner reasonably designed to achieve compliance with section 13 of the BHC Act and the final rule.1. FED Publishes Draft Form and Guidance for Reporting Under Volcker Rule 2 See 51 Fed. These and other corporate governance structures abroad therefore have raised questions regarding whether foreign public funds that are sponsored and distributed outside the United States and in accordance with foreign laws are banking entities by virtue of their relationships with a banking entity. Reg. Additionally, the final rule prohibits a covered fund from using the word "bank" in its name. Volcker Rule | Wex | US Law | LII / Legal Information Institute Instead, the final rule replaces the rebuttable presumption in the 2013 Rule (under which a purchase or sale of a financial instrument is presumed to be for the trading account if the banking entity holds the financial instrument for fewer than 60 days or substantially transfers the risk of the financial instrument within 60 days of purchase or sale) with a rebuttable presumption that financial instruments held for 60 days or more are not included in the banking entitys trading account under the short-term intent prong. Like the proposal, the final rule tailors compliance program obligations based on the level of trading activity of a banking entity, revises the definition of trading account, adopts new exclusions from the definition of proprietary trading, generally streamlines the proprietary trading and covered fund exemptions, and revises the rules metrics reporting requirements. The final rule also amends the 2013 Rule so that only a banking entity with $10 billion or more of consolidated gross trading assets and liabilities would be required to have a comprehensive internal compliance program to rely on the underwriting and market-making exemptions. 1 See Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, 79 Fed. encrypted and transmitted securely. Notably, the final rule entirely eliminates the enhanced compliance program requirements, which are currently applicable to banking entities with over $50 billion in total consolidated assets or significant trading assets and liabilities. These requirements in section 44.12 of the final rule do not apply to Qualifying TruPS CDOs held in accordance with section 44.16(a) of the final rules because section 44.16(a) provides an additional and independent exemption for Qualifying TruPS CDOs.8 If, however, a banking entity acts as a market maker with respect to interests in a Qualifying TruPS CDO that is a covered fund, then section 44.11(c) of the final rule makes the capital deduction provision in section 44.12 applicable to those interests.9 Moreover, if a banking entity relies on section 44.12 to hold an interest in a TruPS CDO that is a covered fund but is not a Qualifying TruPS CDO, the banking entity would be required to comply with all the limits and restrictions in section 44.12, including the requirement to deduct its investment from its tier 1 capital for purposes of determining compliance with applicable regulatory capital requirements. The final rule does, however, add a one-year transition period for banking entities that later become subject to the market risk capital prong, and clarifies that whether a financial instrument is a market risk capital rule covered position and trading position for purposes of the market risk capital prong is determined without regard to whether the financial instrument is reported as a covered position or trading position on any applicable regulatory reporting forms. The rules require that if a single trading desk books positions in different affiliated legal entities, it must have records that identify all positions included in the trading desk's financial exposure and the legal entities where such positions are held. 3 31 CFR 356.31(d); see also http://www.treasurydirect.gov/instit/marketables/strips/strips.htm. 4 Id. The effective date for the final rule is January 1, 2020, and the compliance date is January 1, 2021. Section 44.20(d)(2) provides that the threshold for reporting quantitative measurements under 44.20(d)(1) is $50 billion beginning on June 30, 2014. 3 The joint venture exclusion is subject to conditions, as noted above. The implementing rule also excludes from the definition of covered fund an issuer that has elected to be regulated as a business development company pursuant to section 54(a) of the Investment Company Act and has not withdrawn that election ("SEC-regulated BDC"), or that is formed and operated pursuant to a written plan to become a business development company as described in 12 CFR 44.20(e)(3) of subpart D and that complies with the requirements of section 61 of the Investment Company Act of 1940. changes for banks, and get the details on upcoming 4 A floating-rate loan does not become a new covered transaction whenever the interest rate changes as a result of an increase or decrease in the index rate. Notwithstanding this prohibition, section 44.14(a)(2) provides that a banking entity may enter into any prime brokerage transaction1 with any covered fund in which a covered fund managed, sponsored, or advised by such banking entity (or an affiliate) has taken an ownership interest, so long as the conditions enumerated in the final rule are satisfied.2 One of the conditions requires a written CEO certification annually.3. 1 See 12 USC 1851(a)(1)(B); see also 12 CFR 44.10(a). 6 . Answer: A banking entity must conform its activities and investments to the prohibitions and restrictions of the final rule implementing section 13 of the Bank Holding Company Act no later than the end of the conformance period.1 During this conformance period, some banking entities are nonetheless required to report certain quantitative measurements to the appropriate Agency under Appendix A of the final rule.2 Appendix A provides that Risk and Position Limits and Usage should include the limits set out in 44.4 and 44.5 of the final rule and explains that a number of metrics such as Risk Factor Sensitivities, Value-at-Risk, and Stress Value-at-Risk relate to a trading desk's risk and position limits and are useful in evaluating and setting these limits in the broader context of the trading desk's overall activities, particularly for the market-making-related activities under 44.4(b) and the risk-mitigating hedging activities under 44.5.3. By referring to characteristics common to publicly distributed foreign funds rather than requiring that foreign public funds organize themselves identically to U.S. mutual funds or other types of U.S. regulated investment companies, the final rule recognized that foreign jurisdictions have established their own frameworks governing the details for the operation and distribution of foreign public funds. Section 44.12 of the final rule further provides that, for purposes of complying with the covered fund investment limits, a U.S. registered investment company, SEC-regulated business development company, or foreign public fund will not be considered to be an affiliate of the banking entity so long as the banking entity: (i) does not own, control, or hold with the power to vote 25 percent or more of the voting shares of the fund; and (ii) provides investment advisory, commodity trading advisory, administrative, and other services to the fund in compliance with the limitations under applicable regulation, order, or other authority. 2020 Final Rule Simplifying and Tailoring the Volcker Rule "Covered Funds" Provisions. The final rule requires a banking entity at or above the $50 billion threshold to report metrics data for each calendar month within 30 days of the end of the month unless the OCC notifies the banking entity in writing that it must report on a different basis. 29085, 2908889 (Aug. 14, 1986) (OCC interpretive ruling citing Memorandum from Walter T. Eccard, Assistant General Counsel for Banking and Finance, Department of the Treasury, to Jordan Luke, Deputy Chief Counsel (Policy), OCC (May 29, 1986)); accord FFIEC, Report of Condition and Income, Glossary, at A-14b (Dec. 2014) ("Even after the interest or principal portions of U.S. Treasury STRIPS have been separately traded, they remain obligations of the U.S. tailors compliance program obligations based on trading assets and liabilities and generally streamlines the compliance program obligations. When must the first annual CEO attestation required under Appendix B be provided to the relevant Agency? See 12 CFR 44.10(d)(7). The final rule's exemption for market making-related activity requires a banking entity to establish, implement, maintain, and enforce a reasonably designed compliance program for a trading desk engaged in market making-related activity that includes, among other things, strong internal controls and independent testing.1 For purposes of meeting the final rule's exemption for market making,2 a reasonably designed compliance program for a trading desk engaged in market making-related activity may include objective factors on which the trading desk may reasonably rely to determine whether a security is issued by a covered fund. Under the Department of the Treasury's Separate Trading of Registered Interest and Principal of Securities program, eligible Treasury securities are authorized to be separated into principal and interest components and transferred separately.1 These separate principal and interest components are also referred to as "STRIPS." To comply with the requirement to record and report quantitative measurements in 44.20(d) and Appendix A, when must a banking entity with $50 billion or greater in trading assets and liabilities begin to measure and record the required metrics? The Volcker rule generally prohibits banking entities from engaging in proprietary trading or investing in or sponsoring hedge funds or private equity funds. See also 12 CFR 44.16(c) ("Notwithstanding paragraph (a)(3) of this section, a banking entity may act as a market maker with respect to the interests of an issuer described in paragraph (a) of this section in accordance with the applicable provisions of [12 CFR] 44.4 and 44.11."). Understanding the 2019 Revisions to the Volcker Rule For these measurements, the initial metrics report for the month of July may provide data for only a 30-day calculation period. As noted above, the agencies noted that they continue to consider covered fund-related provisions other than those for which specific rule text was proposed, which they intend to address in a separately issued future proposal. However, if the reporting deadline occurs on a Saturday, Sunday, or federal holiday, then a banking entity may report the data on the next business day following the reporting deadline. Banks that have total consolidated assets equal to $10 billion or less and total trading assets and liabilities equal to 5 percent or less of total consolidated assets are generally exempt from the Volcker rule. 5730. Volcker Rule: Quantitative Measurements | OCC 3 See 12 CFR 44.10(c)(12), 12 CFR 44.12(a)(2)(i)(B), 12 CFR 44.12(e), and 12 CFR 44.20(e). Section 13(f) of the BHC Act provides that no banking entity that serves, directly or indirectly, as the investment manager, investment adviser, or sponsor to a hedge fund or private equity fund (covered fund), or that organizes and offers a covered fund pursuant to section 13(d)(1)(G), and no affiliate of such entity, may enter into a transaction with the fund, or with any other covered fund that is controlled by such fund, that would be a covered transaction as defined in section 23A of the Federal Reserve Act (12 USC 371c) (covered transaction), as if such banking entity and the affiliate thereof were a member bank and the covered fund were an affiliate thereof.1 Section 44.14 of the final rule implements this statutory restriction.2, The statute gave banking entities a conformance period until July 21, 2014, to comply with the requirements of the Volcker Rule, and the Board extended this period by one year at the time of issuance of the final rule until July 21, 2015.3 As a general matter, on or after July 21, 2015, a banking entity may not enter into a covered transaction with a covered fund where the banking entity serves as investment manager, investment adviser, or sponsor to the covered fund or relies on the exemption in section 13(d)(1)(G). November 30, 2020, Chief Executive Officers of All National Banks and Federal Savings Associations, Federal Branches and Agencies of Foreign Banks; Department and Division Heads; All Examining Personnel; and Other Interested Parties. Federal Reserve Board - Reporting Forms Permitted securities under this section include cash equivalents and securities received in lieu of debts previously contracted as set forth in 44.10(c)(8)(iii). Under the final rule, servicing assets may be any type of asset. In the event that a banking entity terminates a market-making business that it conducted as a Volcker Rule-permitted activity,1 a situation could occur where the banking entity holds residual positions from its prior market-making activity. For instance, must a banking entity deduct its investment in a covered fund from its tier 1 capital prior to the end of the conformance period? Section __.13(b)(3) of the final rule provides that an ownership interest in a covered fund is not offered for sale or sold to a resident of the United States for purposes of the marketing restriction if it is sold or has been sold pursuant to an offering that does not target residents of the United States. FED published draft the reporting form (FR VV-1) and instructions in connection with the Volcker rule amendments that were finalized in November 2019. The final rule also clarifies that if the banking entity or an affiliate sponsors or serves as the investment manager or adviser to a covered fund, then the banking entity or affiliate will be deemed for purposes of the marketing restriction to participate in any offer or sale of ownership interests in the covered fund. A bank that does not have (and is not controlled by a company that has) more than $10 billion in total consolidated assets and does not have (and is not controlled by a company that has) total trading assets and liabilities of 5 percent or more of total consolidated assets is excluded from the Volcker Rule. However, if the reporting deadline occurs on a Saturday, Sunday, or federal See 12 CFR 44.11(a)(b). The final rule excludes foreign public funds from the definition of covered fund.1 To qualify for this exclusion, these funds must, among other conditions, be authorized to offer and sell ownership interests to retail investors in the foreign public fund's home jurisdiction and must sell ownership interests predominantly in public offerings outside of the United States.2 The Agencies stated that this exclusion was "designed to prevent . Banks are prohibited from engaging in proprietary trading activities and from owning interest in covered funds,. This allows the CEO time to review the design and operation of the entity's compliance program after the program is fully implemented to ensure it is reasonably designed to achieve compliance with section 13 and the final rule. See 79 Fed. What about legacy covered funds? Good-faith efforts include evaluating the extent to which the banking entity is engaged in activities and investments that are covered by section 13 and the final rule, as well as developing and implementing a conformance plan that is appropriately specific about how the banking entity will fully conform all of its covered activities and investments by the end of the conformance period. The compliance date for this final rule is January 1, 2021. Reg. Answer: Section 44.10(c)(12) of the final rule explicitly excludes an issuer that is registered as an investment company under section 8 of the Investment Company Act of 1940 (15 U.S.C.
