Additional Volcker Rule Guidance Addresses Some Low-Hanging Fruit


When the Volcker Rule was issued by the bank regulators in conjunction with the Securities and Exchange Commission and the Commodity Futures Trading Commission (collectively, the Agencies) last December (the Final Rule), it left many questions unanswered. Consequently, banking organizations and various trade groups have sought clarification of a broad range of issues. Recently, the Agencies issued FAQs to provide guidance on six issues. Unfortunately, none of these was of great moment and instead merely confirmed the expectations of those who have monitored developments since the issuance of the Final Rule.

A synopsis of these six FAQs follows:

  1. Banking entities with $50 billion in trading assets and liabilities as of June 30, 2014, are required to keep track of and report various trading metrics. In this FAQ, the Agencies have clarified that banking entities must begin to measure and record the required metrics on a daily basis starting July 1, 2014, and file reports within 30 days of the end of each month, except where the relevant agency has established a different regime in writing. As reporting is not required on Saturdays, Sundays, and federal holidays, daily metrics recorded during the month of July must be reported September 2, 2014 (since August 30-31 is a weekend, and Monday, September 1, is Labor Day). This reporting regime will change as of January 2015, when the Final Rule requires reporting within 10 days of the end of each month.
  1. The Final Rule defines “trading desk” as the smallest discrete unit of organization of a banking entity that purchases or sells financial instruments for the trading account of the banking entity or any of its affiliates. The Preamble, however, explains that a trading desk may span more than one legal entity (meaning that employees may be working on behalf of multiple affiliated legal entities), that trades and positions managed by the desk may be booked in different affiliated entities, and the recordkeeping must identify all positions in the trading desk’s exposure and the entities in which such positions are held. Appendix A to the Final Rule requires reporting to the Agencies regarding various quantitative measurements of covered trading activities. This FAQ clarifies that such measurements should be calculated at the level of the entire desk and need not be performed separately for each subset of positions booked at the various banking entities comprising the trading desk.
  1. This particular FAQ is not very illuminating. After issuance of the Final Rule, the Federal Reserve Board (the Board) extended the time for a banking entity to conform all of its proprietary trading activities and covered fund activities and investments to applicable requirements until no later than July 21, 2015. The Board indicated, however, that it expected each such entity to make a good-faith effort in the interim to bring its activities into compliance. Consequently, a banking entity should not expand activities and make investments during the conformance period with the expectation that additional time to conform those activities or investments will be granted. Additionally, if the entity has stand-alone proprietary trading operations, it should promptly terminate or divest those operations. By way of example, this FAQ uses the requirement of deducting investments in covered funds from Tier 1 capital. This deduction is not, strictly speaking, required to be taken until July 21, 2015, but each affected banking entity must make good-faith efforts during the conformance period so as to be able to meet that compliance deadline.
  1. The Final Rule’s definition of “covered funds” excludes loan securitizations. Such securitizations may include, in addition to loans, assets designed to assure the servicing or timely distribution of proceeds to holders of the securities and rights or other assets related or incidental to purchasing or otherwise acquiring and holding the loans. The FAQ explains that any servicing asset that is itself a security must be a permitted security under the Final Rule, which includes “cash equivalents and securities received in lieu of debts previously contracted.” The Agencies further state that “cash equivalents” must be high quality, highly liquid, short-term investments with a maturity corresponding to the securitization’s anticipated or potential need for funds, as well as in a currency corresponding to the underlying loans or the asset-backed securities.
  1. Excluded from the definition of “covered fund” under the Final Rule is any issuer that is a registered investment company, a business development company, or a foreign public fund. The exclusion extends to an entity formed and operated under a written plan to be a seeding vehicle and become one of the first two of those entities. This raises the question whether a comparable written plan seeding vehicle exclusion applies to the third type of entity. The FAQ indicates that it does apply. Any such written plan is expected to document the following four items: a banking entity's determination that the seeding vehicle will become a foreign public fund; the period of time during which the vehicle will operate as a seeding vehicle; the banking entity’s plan to market the vehicle to third-party investors and convert it into a foreign public fund within the time period specified in the Final Rule; and the banking entity's plan to operate the seeding vehicle in a manner consistent with the investment strategy, including leverage, of the issuer upon becoming a foreign public fund.
  1. A covered fund organized and offered by a banking entity may not, under the Final Rule, share the same name or a variation of the same name with the banking entity or any of its affiliates. The Agencies elaborate on this topic in the FAQ. The name of a covered fund must be sufficiently distinct from the name of the banking entity that the covered fund’s use of the name would not likely lead to customer confusion regarding the relationship between the banking entity and the covered fund. For example, a covered fund would generally be considered to share the same name or a variation of the same name with a banking entity if the name of the fund features the same root word, initials, or a logo, trademark, or other corporate symbol that is also used by, or that clearly references a connection with, the banking entity or any of its affiliates.

Additional background on the Volcker Rule can be found in our previous alerts on the issuance of the Final Rule, the issuance of an interim final rule exempting collateralized debt obligations backed by trust-preferred securities from the Final Rule’s broad restrictions, and the Board’s extension of the compliance period for collateralized loan obligations.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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