Volcker Underwriting: It's Simple No Need to Overanalyze The agencies declined to adopt a proposed revision to the market risk capital rule that would have incorporated foreign market risk capital frameworks. The so-called with or through prohibition was subject to various exemptions, including one for transactions with the foreign operations of a US entity if no US-based personnel of the US entity were involved in the arrangement, negotiation or execution of the transaction (referred to as counterparty ANE). In addition, the agencies would expect that direct investments by directors and employees alongside covered funds would not be required to be counted as investments in covered funds or be subject to the condition that such persons provide services to the relevant fund. Notably, the agencies declined to adopt the much-criticized proposed accounting prong in lieu of the short-term intent prong, which would have provided that a trading account included any account used by a banking entity to purchase or sell one or more financial instruments recorded at fair value on a recurring basis under applicable accounting standards. PDF Final Volcker Rule 2.1 - Covered Funds - Davis Polk The OCC is seeking comment on a variety of topics, including about seeking input on streamlining and simplifying existing exclusions and exemptions and specific questions on whether the concept of the Market Maker Inventory (MMI) was a helpful approach to determining whether trading desk market-making activities were appropriate. Among the most notable amendments to the Volcker Rule are the following: Adding new exclusions from the definition of covered fund for credit funds, venture capital funds, family wealth management vehicles, and customer facilitation vehicles (subject to certain conditions and limitations); Modifying conditions to qualify for the existing exclusions from the term covered fund for foreign public funds, loan securitizations, public welfare investment funds, and small business investment companies; Permitting certain low-risk transactions (including short-term extensions of credit and acquisitions of assets in connection with payment, clearing, and settlement services) between a banking entity, on the one hand, and a covered fund for which the banking entity serves as investment adviser or sponsor, on the other hand; and. CFTC Final Volcker Rule Regulations. Internal controls and ongoing monitoring of trading desk compliance with its limits. CFTC Final Volcker Rule Preamble. The 2019 Final Rule adds an exclusion for customer-driven swaps and security-based swaps and matching trades if the following conditions are met: Matched transactions are entered into contemporaneously. The Volcker Rule is 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act . These banking entities must maintain an internal compliance program addressing, in addition to the 2013 Final Rules requirements: Written authorization procedures for limit breaches. FDIC, Fed, OCC and SEC Final Volcker Rule Preamble. The 2019 Final Rule expands this aspect of the liquidity risk management exclusion to include certain foreign exchange forwards and swaps (as defined in the Commodity Exchange Act) and cross-currency swaps, including physically settled and non-deliverable (cash-settled) cross-currency swaps. Before the 2008 financial crisis, banks engaged in speculative trading using their depositors accounts, which led to the collapse of several banks and loss of depositor funds. New exclusions. In particular: A foreign banking entitys US-based personnel were prohibited from arranging, negotiating or executing (referred to as own ANE) a transaction that was made in reliance on TOTUS. See, e.g., 12 C.F.R. A banking entity may not rely on the credit fund exclusion if: It guarantees the performance of the credit fund; or. The 2019 Final Rule also adopts the same amendments to align this exemption with the revised proprietary trading hedging exemption by eliminating the requirement that a risk-mitigating hedging transaction demonstrably reduce or otherwise significantly mitigate the relevant risks. 248.10(b) (any issuer that is excluded from the definition of an investment company pursuant to Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940, certain commodity pools, and, in some circumstances, certain foreign equivalents of such issuers). For more information on the Volcker Rule generally, see. While the Volcker Rule was designed to restrict investments in and sponsorship of hedge funds and private equity funds by Banking Entities, many other types of investment vehicles are captured by the Covered Fund definition. Despite the uncertainty, the RENTD requirement is present in the original statutory language and it plays a central role in achieving the broad regulatory objective of eliminating impermissible proprietary trading within financial institutions covered by the Volcker Rule. Next, we will do a quick refresher on central banks and monetary policy before we dive into specific examples such as the Federal Reserve (the Fed), European Central Bank (ECB), Bank of England, and Bank of Japan, and discuss these institutions and their policies in detail. CFTC and SEC all announced they were reviewing whether it would be appropriate to exempt a small subset of securities from the rule, on which they would rule by January 15, 2014, at the latest. 1 Note for Community Banks Volcker Rule Resources | Davis Polk The final Dodd-Frank Act was approved in December 2014 by the Federal Reserve, Federal Deposit Insurance Corporation, Securities and Exchange Commission, Office of Comptroller of Currency and the Commodity Futures Trading Commission. Four new exclusions from the covered funds definition, including exclusions for venture capital funds and credit funds, such that banking entities will be eligible to invest in and/or sponsor such funds; A clarification that a banking entitys investments made in parallel with investments made by a covered fund will not be counted against the banking entitys 3% investment limit in that covered fund, if applicable; Broadened versions of existing exclusions from the covered fund definition; Clarification of, and a safe harbor from, the definition of an ownership interest in a covered fund relating to certain debt interests; Codification of staff guidance regarding treatment of certain foreign funds as banking entities; and. The Volcker Rule contains exemptions for activities conducted by foreign banking entities solely outside the United States. Part 248 (Board version). In the Final Rule the Agencies permit certain common rights of creditors with respect to debt interests in a Covered Fund that allow for participation in the removal of an investment manager without triggering the ownership interest definition.12 The Final Rule also creates a safe harbor for certain senior loan and senior debt interests that lack specified equity-like features such that they are not captured by the ownership interest definition. The Volcker Rule was part of the Dodd-Frank Act enacted into law by the Obama administration in 2010 as a response to the Global Financial Crisis. The Volcker Rule has long excluded loan securitizations from the definition of covered fund, provided such issuers meet various eligibility criteria, such as issuing asset-backed securities and only holding loans and certain other permitted assets. Subject to several conditions, banking entities would not be required to treat direct investments alongside covered funds as an investment in a covered fund, so long as the banking entity has independent authority to make such investments. 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. 1 The Agencies are the Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, and the Securities and Exchange Commission. Comply with the so-called Super 23A transactions with affiliates provisions of the Volcker Rule with respect to the venture capital fund. The Agencies indicate that they expect, but do not explicitly require in the Final Rule, that such equity securities will not make up more than 5% of the assets of the fund. The Volcker Rule prohibits "banking entities" ("Banking Entities") 4 from engaging in "proprietary trading" ("Proprietary Trading") 5 and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with Covered Funds. When Paul Volcker, the former U.S. Federal Reserve chairman, in 2009 proposed banning many forms of short-term trading by federally insured banks to reduce risk to . Proprietary trading as defined in the Volcker Rule is permitted only under specific exemptions, including market-making activities ("Section 4 exemptions"). 138.85. RENTD: The heart of the Volcker Rule has been saved, RENTD: The heart of the Volcker Rule has been removed, An Article Titled RENTD: The heart of the Volcker Rule already exists in Saved items. Considering the complexity of these exemptions and the fact that substantially all trading assets and liabilities are held by the largest banking entities, the agencies decided only to require banking entities with significant trading assets and liabilities to implement exemption-specific compliance programs. PDF Final Rules to Implement the Volcker Rule - CFTC A third-party covered fund for this purpose is one that the banking entity does not sponsor, advise, or acquire or retain an ownership interest in pursuant to the asset management exemption or the asset-backed securities issuer exemption. Foreign Bank Cross-Border Trading under the Volcker Rule: the "Trading Foreign banking entities benefit from an exemption to the covered funds prohibition for covered fund investments and sponsorship that occurs solely outside of the US. The 2019 Final Rule codifies the agencies Volcker Rule FAQ No. In the Preamble to the 2013 Volcker Rule, the Agencies required Banking Entities to calculate as part of this 3% limit any direct investment made by the Banking Entity in parallel with investments made by a Covered Fund in which the Banking Entity held any ownership interests. New York, NY 10004, General/Media Inquiries info@sewkis.com The 2013 Final Rule permitted only hedging activities involving ownership interests in covered funds for hedging of certain employee compensation arrangements and did not include a broader hedging exemption to facilitate customer-facing activity. The foreign public fund exclusion, for non-U.S. funds that resemble U.S. registered investment companies, by, among other things, eliminating a requirement that fund interests be offered and sold to retail investors in the funds home jurisdiction and by easing requirements related to the portion of the funds interests that must be sold in public offerings; The loan securitization exclusion, which most notably has been modified to permit securitization vehicles relying on it to hold certain debt securities as a small portion of their assets; and. Finally, the Revised Volcker Rule permits a banking entity to enter into riskless principal transactions with a related covered fund, regardless of whether that covered fund is a securities affiliate as defined in Regulation W. Clarifies the Definition of Ownership Interest. Volcker Rule Relief for Foreign Banking Entities Commercial banks are allowed to offer various services such as hedging, market making, underwriting, and insurance services, as well as acting as agents, brokers, or custodians. The OCC is posting below information that may be helpful for banks for purposes of Volcker Rule compliance: Quarterly Report on Bank Trading and Derivatives Activities, Counterparty Risk Management Policy Group, Requests Under 716(f) of the Dodd-Frank Act, Third-Party Relationships: Interagency Guidance on Risk Management, Central Application Tracking System (CATS), Office of Thrift Supervision Archive Search, OCC Bulletin 2019-9, Volcker Rule: Notice of Proposed Rulemaking, Draft Instructions for Preparing and Submitting Quantitative Measurement Information, Order Extending Conformance Period for Legacy Covered Funds Until 2017, Order Extending Conformance Period for Legacy Covered Funds, NR 2013-186, Agencies Issue Final Rules Implementing the Volcker Rule, Fact Sheet: Final Rules to Implement the Volcker Rule, OCC Bulletin OCC 2014-9, Volcker Rule: Final Regulations, OCC Bulletin OCC 2014-27, Volcker Rule: Interim Examination Procedures, NR 2014-2, Agencies Approve Interim Final Rule Authorizing Retention of Interests in and Sponsorship of Collateralized Debt Obligations Backed Primarily by Bank-Issued Trust Preferred Securities, 2020 Final Rule Simplifying and Tailoring the Volcker Rule "Covered Funds" Provisions, Notice of Proposed Rulemaking to Simplify and Tailor the Volcker Rule "Covered Funds" Provisions, 2019 Final Rule Simplifying and Tailoring the Volcker Rule, 2019 Final Rule Implementing the Economic Growth, Regulatory Relief, and Consumer Protection Act, Notice of Proposed Rulemaking Implementing the Economic Growth, Regulatory Relief, and Consumer Protection Act, Request for Comment on Proposal to Simplify and Tailor the Volcker Rule, Notice Seeking Public Input on the Volcker Rule. To address consistency and compliance concerns and better align the treatment of foreign public funds with that of U.S. registered investment companies, the Revised Volcker Rule eliminates the home jurisdiction requirement and replaces the requirement that a fund be sold predominantly through public offerings with a requirement that a fund be offered and sold through at least one public offering. However, the relevant agency may subject a banking entity affiliate that is not a wholly owned subsidiary to consistent treatment if the agency determines it is necessary to prevent evasion, pursuant to notice and response procedures that are applicable to other aspects of the 2019 Final Rule. The agencies caution, however, that the exemption is meant only for customer-driven transactions. (The agencies specified an as-of date in anticipation of potential changes to reporting forms that materially change how trading assets and trading liabilities are reported.) Volcker Rule & Proprietary Trading - CFA Institute The 2013 Final Rule provided an exemption from the prohibition against proprietary trading for risk-mitigating hedging activities that are designed to reduce the specific risks to a banking entity in connection with, and related to, individual or aggregated positions, contracts, or other holdings. 2023 Thomson Reuters. Proprietary trading as defined in the Volcker Rule is permitted only under specific exemptions, including market-making activities (Section 4 exemptions). (202) 737-8833 For these banking entities, the 2019 Final Rule eliminates the requirements for: A separate internal compliance program for risk-mitigating hedging. In order to rely on the market-making exemption, a banking entity must meet a number of requirements, including: "Establishment and enforcement . This exclusion is meant to simplify compliance with the short-term intent prong and provide parity between banking entities subject to the short-term intent prong and those subject to the market risk capital prong. QFEF Guidance codified. Subsequent to the issuance of the Treasurys report, on August 2, 2017, the Office of the Comptroller of the Currency (OCC) issued a notice and request for comment on whether certain aspects of the regulation implementing the Volcker Rule should be revised to better accomplish the purposes of the statute, while decreasing the compliance burden on banking entities and fostering economic growth. There is no quantitative limit on the amount of equity securities (or rights to acquire equity securities) that may be held by a credit fund. Likewise, investment managers that are affiliated with banks will likely have greater flexibility to sponsor certain funds that were Covered Funds. FOR IMMEDIATE RELEASE2020-143. However, trading desks intending to take the underwriting exemption ("underwriting desks") must also estimate RENTD, which is defined differently . These changes are most favorable for banking entities without significant trading assets and liabilities. The Final Rule creates four new exclusions from the Covered Fund definition, including exclusions for venture capital funds and credit funds, plus two additional new exclusions. This course is designed to equip anyone who desires to begin a career in fixed income, equity, sales, trading, or other areas of finance with the fundamental knowledge of economics.