On Aug. 20, the Federal Deposit Insurance Corp. (the FDIC) and the Office of the Comptroller of the Currency (the OCC) approved amendments to the Volcker Rule, which restricts banking entities’ ability to engage in proprietary trading and to invest in equity interests of private (“covered”) funds. The FDIC and the OCC, along with the Securities and Exchange Commission (the SEC), the Commodity Futures Trading Commission (the CFTC) and the Board of Governors of the Federal Reserve System (the Fed), are the federal agencies responsible for implementing the Volcker Rule and coordinated the amendments. The FDIC released the text of the amendments, which will be published in the Federal Register upon adoption by the Fed, the SEC and the CFTC. The effective date of the reforms that would be implemented by the amendments is Jan. 1, 2020. The Volcker Rule was initially adopted by the five agencies in 2013 to implement Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Noteworthy changes under the August 2019 amendments include the following:
- The amendments create a rebuttable presumption that a banking entity that, together with its affiliates, has “limited trading assets and liabilities,” is compliant with the proprietary trading and covered fund prohibitions, and has no obligation to observe the rule’s requirements on demonstrating compliance. “Limited trading assets and liabilities” generally means trading assets and liabilities of less than $1 billion, as determined by averaging the gross sum of trading assets and liabilities over the four prior quarters.
- The amendments clarify the definition of “trading account” for purposes of the proprietary trading restriction and provide some latitude in using the definition for banks not subject to risk-based capital rules.
- A trading account is, generally, (i) an account used for short-term sales, (ii) an account used to buy or sell financial instruments that are covered positions and trading positions, or (iii) an account used to buy or sell financial instruments if the banking entity is engaged in derivatives or swap activities.
- Under the amendments, a banking entity that does not calculate risk-based capital ratios may elect to apply prong (ii) in determining the scope of its trading account and, if it so elects, would not be required to apply prong (i).
- The rebuttable presumption that a less-than-60-day position in a financial instrument is deemed to be for a trading account is reversed, so that a 60-day or longer position is deemed not to be for a trading account.
- Foreign exchange forwards and swaps and cross-currency swaps; matched customer-driven swaps; and instruments that hedge mortgage servicing rights are excluded from the definition of “proprietary trading.”
- The Volcker Rule exempts from proprietary trading restrictions certain specified underwriting and “market making” activities.
- The amendments introduce a new safe harbor under which a bank is deemed to satisfy the conditions for permitted underwriting and market-making activities if it maintains certain specified internal controls and oversight.
- The definition of “trading desk,” which is used in the underwriting and market-making provisions, is narrowed such that a unit must have certain specific characteristics and perform certain activities (such as implementing a business strategy and engaging in coordinated trading activity) in order to be considered a trading desk.