The Federal Reserve Board has proposed rulemaking that would 1) tailor the requirements of the regulation, implementing the Volcker Rule, to focus on entities with large trading operations; and 2) streamline and simplify regulatory requirements by eliminating or adjusting certain requirements and focus on quantitative, bright-line rules where possible to provide clarity regarding prohibited and permissible activities. There will be a 60 day comment period.
The proposed amendments to regulations implementing Volcker Rule restrictions on the ability of banking entities to engage in proprietary trading and have relationships with a hedge fund or private equity fund were developed jointly with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. Specifically, the proposal would, among other changes:
- create categories of banking entities based on the size of their trading assets and liabilities that would be used to tailor certain requirements of the rule;
- clarify restrictions related to certain proprietary trading activities, revise and define terms relevant to proprietary trading activity, and reduce and tailor the criteria that apply when a banking entity seeks to rely on exemptions from the proprietary trading prohibitions;
- clarify the prohibitions on a banking entity’s ability to acquire an ownership interest in, and maintain certain relationships with, a hedge fund or private equity fund; and
- tailor compliance programs and amend the CEO attestation requirement.
After five years of experience in applying the Volcker Rule, Federal Reserve Board Chair Jerome Powell views the proposal as a way to tailor requirements so firms that do modest amounts of trading will face fewer demands. “The proposal will address some of the uncertainty and complexity that now make it difficult for firms to know how best to comply, and for supervisors to know that they are in compliance,” according to Powell.
Similarly, Fed Vice Chair Randal K. Quarles emphasized that categorization of three tiers of firms based on trading activity levels in the proposal will align compliance requirements with the level of trading activity. “By focusing the application of the rule on those firms with the highest levels of activity covered by the statue, and by clarifying and simplifying the compliance regime, we can promote safety and soundness while reducing unnecessary burdens,” Quarles said.
“Rather than requiring banking institutions to undertake specific quantitative analyses prescribed by the regulators, the proposed revisions would require banking institutions to establish internal risk limits to achieve the principle of not exceeding the reasonably expected near-term demands of customers, subject to supervisory review,” Fed Governor Lael Brainard added.
Two information collections were issued with the proposal—Information Schedules and a Quantitative Measurements Daily Schedule.
The recently enacted Economic Growth, Regulatory Reform, and Consumer Protection Act made several changes to the statutory Volcker Rule provisions. Among other things, the Act exempted community banks—firms with less than $10 billion in total consolidated assets and with total trading assets and liabilities that are not more than five percent of total consolidated assets—from the Volcker Rule restrictions. Formal implementation of the Volcker Rule-related changes contained in the Act will occur in a separate rulemaking by the agencies.
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