Volcker Rule Federal Register Version January 31, 2014

Transcription

1 Volcker Rule Federal Register Version January 31, 2014 I. Background 5538 II. Notice of Proposed Rulemaking: Summary of General Comments 5539 III. Overview of Final Rule 5541 A. General Approach and Summary of Final Rule 5541 B. Proprietary Trading Restrictions 5542 C. Restrictions on Covered Fund Activities and Investments 5543 D. Metrics Reporting Requirement 5544 E. Compliance Program Requirement 5545 IV. Final Rule 5545 A. Subpart B Proprietary Trading Restrictions Section.3: Prohibition on Proprietary Trading and Related Definitions 5545 a. Definition of Trading Account 5546 b. Rebuttable Presumption for the Short-Term Trading Account 5549 c. Definition of Financial Instrument 5551 d. Proprietary Trading Exclusions Repurchase and Reverse Repurchase Arrangements and Securities Lending Liquidity Management Activities Transactions of Derivatives Clearing Organizations and Clearing Agencies 4. Excluded Clearing-Related Activities of Clearinghouse Members Satisfying an Existing Delivery Obligation 5557 I

2 6. Transactions of Derivatives Clearing Organizations and Clearing Agencies Acting Solely as Agent, Broker, or Custodian Purchases or Sales Through a Deferred Compensation or Similar Plan Collecting a Debt Previously Contracted Other Requested Exclusions Section.4(a): Underwriting Exemption 5559 a. Introduction 5559 b. Overview Proposed Underwriting Exemption Comments on Proposed Underwriting Exemption Final Underwriting Exemption 5560 c. Detailed Explanation of the Underwriting Exemption Acting as an Underwriter for a Distribution of Securities 5561 a. Proposed Requirements That the Purchase or Sale be Effected Solely in Connection With a Distribution of Securities for Which the Banking Entity Acts as an Underwriter and That the Covered Financial Position be a Security 5561 i. Proposed Definition of Distribution 5561 ii. Proposed Definition of Underwriter 5562 iii. Proposed Requirement That the Covered Financial Position Be a Security b. Comments on the Proposed Requirements That the Trade Be Effected Solely in Connection With a Distribution for Which the Banking Entity Is Acting as an Underwriter and That the Covered Financial Position be a Security i. Definition of Distribution 5562 ii. Definition of Underwriter 5563 II

3 iii. Solely in Connection With Standard 5564 c. Final Requirement That the Banking Entity Act as an Underwriter for a Distribution of Securities and the Trading Desk s Underwriting Position Be Related to Such Distribution 5564 i. Definition of Underwriting Position 5564 ii. Definition of Trading Desk 5565 iii. Definition of Distribution 5565 iv. Definition of Underwriter 5566 v. Activities Conducted in Connection With a Distribution Near Term Customer Demand Requirement 5568 a. Proposed Near Term Customer Demand Requirement b. Comments Regarding the Proposed Near Term Customer Demand Requirement c. Final Near Term Customer Demand Requirement Compliance Program Requirement 5572 a. Proposed Compliance Program Requirement 5572 b. Comments on the Proposed Compliance Program Requirement Compensation Requirement 5573 a. Proposed Compensation Requirement 5573 b. Comments on the Proposed Compensation Requirement 5573 c. Final Compensation Requirement Registration Requirement 5574 a. Proposed Registration Requirement 5574 b. Comments on Proposed Registration Requirement 5574 III

4 c. Final Registration Requirement Source of Revenue Requirement 5575 a. Proposed Source of Revenue Requirement 5575 b. Comments on the Proposed Source of Revenue Requirement c. Final Rule s Approach To Assessing Source of Revenue Section.4(b): Market-Making Exemption 5576 a. Introduction 5576 b. Overview Proposed Market-Making Exemption Comments on the Proposed Market-Making Exemption 5576 a. Comments on the Overall Scope of the Proposed Exemption b. Comments Regarding the Potential Market Impact of the Proposed Exemption Final Market-Making Exemption 5580 c. Detailed Explanation of the Market-Making Exemption Requirement To Routinely Stand Ready to Purchase and Sell 5585 a. Proposed Requirement To Hold Self Out 5585 b. Comments on the Proposed Requirement To Hold Self Out 5585 i. The Proposed Indicia 5587 ii. Treatment of Block Positioning Activity 5588 iii. Treatment of Anticipatory Market Making 5588 iv. High-Frequency Trading 5589 c. Final Requirement To Routinely Stand Ready To Purchase and Sell 5589 IV

5 i. Definition of Trading Desk 5590 ii. Definitions of Financial Exposure and Market-Maker Inventory 5592 iii. Routinely Standing Ready To Buy and Sell Near Term Customer Demand Requirement 5597 a. Proposed Near Term Customer Demand Requirement b. Comments Regarding the Proposed Near Term Customer Demand Requirement i. The Proposed Guidance for Determining Compliance With the Near Term Customer Demand Requirement ii. Potential Inventory Restrictions and Difference Across Asset Classes iii. Predicting Near Term Customer Demand 5600 iv. Potential Definitions of Client, Customer, or Counterparty v. Interdealer Treading and Trading for Price Discovery or To Test Market Depth vi. Inventory Management 5602 vii. Acting as an Authorized Participant or Market Maker in Exchange-Traded Funds viii. Arbitrage or Other Activities That Promote Price Transparency and Liquidity ix. Primary Dealer Activities 5604 x. New or Bespoke Products or Customized Hedging Activities 5604 c. Final Near Term Customer Demand Requirement 5605 i. Definition of Client, Customer, and Counterparty ii. Impact of the Liquidity, Maturity, and Depth of the Market on the Analysis iii. Demonstrable Analysis of Certain Factors 5609 V

6 iv. Relationship to Required Limits Compliance Program Requirement 5612 a. Proposed Compliance Program Requirement 5612 b. Comments on the Proposed Compliance Program Requirement 5612 c. Final Compliance Program Requirement Market Making-Related Hedging 5616 a. Proposed Treatment of Market Making-Related Hedging b. Comments on the Proposed Treatment of Market Making-Related Hedging c. Treatment of Market Making-Related Hedging in the Final Rule Compensation Requirement 5618 a. Proposed Compensation Requirement 5618 b. Comments Regarding the Proposed Compensation Requirement Registration Requirement 5619 a. Proposed Registration Requirement 5619 b. Comments on the Proposed Registration Requirement 5619 c. Final Registration Requirement Source of Revenue Analysis 5621 a. Proposed Source of Revenue Requirement 5621 b. Comments Regarding the Proposed Source of Revenue Requirement i. Potential Restrictions on Inventory, Increased Costs for Customers, and Other Changes to Market-Making Services VI

7 ii. Certain Price Appreciation-Related Profits Are an Inevitable or Important Component of Market Making iii. Concerns Regarding the Workability of the Proposed Standard in Certain Markets or Asset Classes iv. Suggest Modifications to the Proposed Requirement v. General Support for the Proposed Requirement or for Placing Greater Restrictions on a Market Maker s Sources of Revenue c. Final Rule s Approach to Assessing Revenues Appendix B of the Proposed Rule 5624 a. Proposed Appendix B Requirement 5624 b. Comments on Proposed Appendix B 5625 c. Determination To Not Adopt Proposed Appendix B Use of Quantitative measurements Section.5: Permitted Risk-Mitigating Hedging Activities 5627 a. Summary of Proposal s Approach to Implementing the Hedging Exemption 5627 b. Manner of Evaluating Compliance With the Hedging Exemption 5627 c. Comments on the Proposed Rule and Approach to Implementing the Hedging Exemption 5628 d. Final Rule Compliance Program Requirement Hedging of Specific Risks and Demonstrable Reduction of Risk Compensation Documentation Requirement Section.6(a)-(b): Permitted Trading in Certain Government and Municipal Obligations 5639 VII

8 a. Permitted Trading in U.S. Government Obligations 5639 b. Permitted Trading in Foreign Government Obligations 5641 c. Permitted Trading in Municipal Securities 5644 d. Determination to Not Exempt Proprietary Trading in Multilateral Development Bank Obligations Section.6(c): Permitted Trading on Behalf of Customers 5647 a. Proposed Exemption for Trading on Behalf of Customers 5647 b. Comments on Proposed Rule 5647 c. Final Exemption for Trading on Behalf of Customers Section.6(d): Permitted Trading by a Regulated Insurance Company Section.6(e): Permitted Trading Activities of a Foreign Banking Entity 5652 a. Foreign Banking Entities Eligible for the Exemption 5652 b. Permitted Trading Activities of a Foreign Banking Entity Section.7: Limitations on Permitted Trading Activities 5658 a. Scope of Material Conflict of Interest Proposed Rule Comments on the Proposed Limitation on Material Conflicts of Interest 5660 a. Disclosure 5661 b. Information Barriers Final Rule 5662 b. Definition of High-Risk Asset and High-Risk Trading Strategy Proposed Rule Comments on Proposed Limitations on High-Risk Assets and Trading Strategies Final Rule 5665 VIII

9 c. Limitations on Permitted Activities That Pose a Threat to Safety and Soundness of the Banking Entity or the Financial Stability of the United States 5666 B. Subpart C Covered Fund Activities and Investments Section.10: Prohibition on Acquisition or Retention of Ownership Interests in, and Certain Relationships With, a Covered Fund 5666 a. Prohibition Regarding Covered Fund Activities and Investments 5667 b. Covered Fund Definition Foreign Covered Funds Commodity Pools Entities Regulated Under the Investment Company Act 5675 c. Entities Excluded From Definition of Covered Fund Foreign Public Funds Wholly-Owned Subsidiaries Joint Ventures Acquisition Vehicles Foreign Pension or Retirement Funds Insurance Company Separate Accounts Bank Owned Life Insurance Separate Accounts Exclusion for Loan Securitizations and Definition of Loan 5684 a. Definition of Loan 5684 b. Loan Securitizations 5685 i. Loans 5688 ii. Contractual Rights or Assets 5689 iii. Derivatives 5690 iv. SUBIs and Collateral Certificates 5692 IX

10 v. Impermissible Assets Asset-Backed Commercial Paper Conduits Covered Bonds Certain Permissible Public Welfare and Similar Funds Registered Investment Companies and Excluded Entities Other Excluded Entities 5699 d. Entities Not Specifically Excluded From the Definition of Covered Fund Financial Market Utilities Cash Collateral Pools Pass-through REITS Municipal Securities Tender Option Bond Transactions Venture Capital Funds Credit Funds Employee Securities Companies 5705 e. Definition of Ownership Interest 5705 f. Definition of Resident of the United States 5710 g. Definition of Sponsor Section.11: Activities Permitted in Connection With Organizing and Offering a Covered Fund 5714 a. Scope of Exemption Fiduciary Services Compliance With Investment Limitations Compliance With Section 13(f) of the BHC Act No Guarantees or Insurance of Fund Performance Limitation on Name Sharing With a Covered Fund 5717 X

11 6. Limitation on Ownership by Directors and Employees Disclosure Requirements 5719 b. Organizing and Offering an Issuing Entity of Asset-Backed Securities 5720 c. Underwriting and Market Making for a Covered Fund Section.12: Permitted Investment in a Covered Fund 5723 a. Proposed Rule 5723 b. Duration of Seeding Period for New Covered Funds 5723 c. Limitations on Investments in a Single Covered Fund ( Per-Fund Limitation ) d. Limitation on Aggregate Permitted Investments in all Covered Funds ( Aggregate Funds Limitation ) e. Capital Treatment of an Investment in a Covered Fund 5730 f. Attribution of Ownership Interests to a Banking Entity 5731 g. Calculation of Tier 1 Capital 5734 h. Extension of Time to Divest Ownership Interest in a Single Fund Section.13: Other Permitted Cover Fund Activities 5736 a. Permitted Risk-Mitigating Hedging Activities 5736 b. Permitted Covered Fund Activities and Investments Outside of the United States Foreign Banking Entities Eligible for the Exemption Activities or Investments Solely Outside of the United States Offered for Sale or Sold to a Resident of the United States Definition of Resident of the United States 5743 c. Permitted Covered Fund Interests and Activities by a Regulated Insurance Company Section.14: Limitations on Relationships With a Covered Fund 5744 XI

12 a. Scope of Application 5744 b. Transactions That Would Be a Covered Transaction 5745 c. Certain Transactions and Relationships Permitted Permitted Investments and Ownerships Interests Prime Brokerage Transactions 5746 d. Restrictions on Transactions With Any Permitted Covered Fund Section.15: Other Limitations on Permitted Covered Fund Activities 5748 C. Subpart D and Appendices A and B Compliance Program, Reporting, and Violations Section.20: Compliance Program Mandate 5749 a. Program Requirement 5749 b. Compliance Program Elements 5751 c. Simplified Programs for Less Active Banking Entities 5752 d. Threshold for Application of Enhanced Minimum Standards Appendix B: Enhanced Minimum Standards for Compliance Programs 5755 a. Proprietary Trading Activities 5756 b. Covered Fund Activities or Investments 5757 c. Enterprise-Wide Programs 5758 d. Responsibility and Accountability 5758 e. Independent Testing 5759 f. Training 5759 g. Recordkeeping Section.20(d) and Appendix A: Reporting and Recordkeeping Requirements Applicable to Trading Activities a. Approach to Reporting and Recordkeeping Requirements Under the Proposal XII

13 b. General Comments on the Proposed Metrics 5762 c. Approach of the Final Rule 5764 d. Proposed Quantitative Measurements and Comments on Specific Metrics 4. Section.21: Termination of Activities or Investments; Authorities for Violations V. Administrative Law Matters 5774 A. Use of Plain Language 5774 B. Paperwork Reduction Act Analysis 5774 C. Regulatory Flexibility Act Analysis 5778 D. OCC Unfunded Mandates Reform Act of 1995 Determination 5779 TEXT OF THE FINAL COMMON RULE 5779 PART [ ] PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND RELATIONSHIPS WITH COVERED FUNDS SUBPART A Authority and Definitions Authority, purpose, scope, and relationship to other authorities Definitions SUBPART B Proprietary Trading Prohibition on proprietary trading Permitted underwriting and market making-related activities Permitted risk-mitigating hedging activities Other permitted proprietary trading activities Limitations on permitted proprietary trading activities [Reserved] [Reserved] 5787 XIII

14 SUBPART C Covered Fund Activities and Investments Prohibition on acquiring or retaining an ownership interest in and having certain relationships with a covered fund..11 Permitted organizing and offering, underwriting, and market making with respect to a covered fund Permitted investment in a covered fund Other permitted covered fund activities and investments Limitations on relationships with a covered fund Other limitations on permitted covered fund activities and investments [Reserved] [Reserved] [Reserved] [Reserved] 5796 SUBPART D Compliance Program Requirement; Violations Program for compliance; reporting Termination of activities or investments; penalties for violations APPENDIX A to Part Reporting and Recordkeeping Requirements for Covered Trading Activities 5797 I. Purpose 5797 II. Definitions 5798 III. Reporting and Recordkeeping of Quantitative Measurements 5798 A. Scope of Required Reporting 5798 B. Frequency of Required Calculation and Reporting 5798 C. Recordkeeping 5798 IV. Quantitative Measurements 5798 A. Risk-Management Measurements 5798 XIV

15 1. Risk and Position Limits and Usage Risk Factor Sensitivities Value-at-Risk and Stress Value-at-Risk 5799 B. Source-of-Revenue Measurements Comprehensive Profit and Loss Attribution 5799 C. Customer-Facing Activity Measurements Inventory Turnover Inventory Aging Customer-Facing Trade Ratio Trade Count Based and Value Based 5800 Appendix B to Part Enhanced Minimum Standards for Compliance Programs 5800 I. Overview 5800 II. Enhanced Compliance Program 5800 III. Responsibility and Accountability for the Compliance Program 5803 IV. Independent Testing 5803 V. Training 5803 VI. Recordkeeping 5804 OCC: PART 44 PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND RELATIONSHIPS WITH COVERED FUNDS Authority, purpose, scope, and relationship to other authorities FED: PART 248 PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND RELATIONSHIPS WITH COVERED FUNDS (REGULATION VV) Authority, purpose, scope, and relationship to other authorities XV

16 FDIC: PART 351 PROPRIETARY TRADING AND CERTAIN INTERESTS IN RELATIONSHIPS WITH COVERED FUNDS Authority, purpose, scope, and relationship to other authorities SEC: PART 255 PROPRIETARY TRADING AND CERTAIN INTERESTS IN RELATIONSHIPS WITH COVERED FUNDS Authority, purpose, scope, and relationship to other authorities XVI

17 5536 Federal Register / Vol. 79, No. 21 / Friday, January 31, 2014 / Rules and Regulations DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 44 [Docket No. OCC ] RIN 1557 AD44 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 12 CFR Part 248 [Docket No. R 1432] RIN 7100 AD82 FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 351 RIN 3064 AD85 SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 255 [Release No. BHCA 1; File No. S ] RIN 3235 AL07 Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds AGENCY: Office of the Comptroller of the Currency, Treasury ( OCC ); Board of Governors of the Federal Reserve System ( Board ); Federal Deposit Insurance Corporation ( FDIC ); and Securities and Exchange Commission ( SEC ). ACTION: Final rule. SUMMARY: The OCC, Board, FDIC, and SEC (individually, an Agency, and collectively, the Agencies ) are adopting a rule that would implement section 13 of the BHC Act, which was added by section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank Act ). Section 13 contains certain prohibitions and restrictions on the ability of a banking entity and nonbank financial company supervised by the Board to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund. DATES: The final rule is effective April 1, FOR FURTHER INFORMATION CONTACT: OCC: Ursula Pfeil, Counsel, or Deborah Katz, Assistant Director, Legislative and Regulatory Activities Division, (202) ; Ted Dowd, Assistant Director, or Roman Goldstein, Senior Attorney, Securities and Corporate Practices Division, (202) ; Kurt Wilhelm, Director for Financial Markets Group, (202) ; Stephanie Boccio, Technical Expert for Credit and Market Risk Group, (202) , Office of the Comptroller of the Currency, 250 E Street SW., Washington, DC Board: Christopher M. Paridon, Counsel, (202) , or Anna M. Harrington, Senior Attorney, Legal Division, (202) ; Mark E. Van Der Weide, Deputy Director, Division of Bank Supervision and Regulation, (202) ; or Sean D. Campbell, Deputy Associate Director, Division of Research and Statistics, (202) , Board of Governors of the Federal Reserve System, 20th and C Streets NW., Washington, DC FDIC: Bobby R. Bean, Associate Director, bbean@fdic.gov, or Karl R. Reitz, Chief, Capital Markets Strategies Section, kreitz@fdic.gov, Capital Markets Branch, Division of Risk Management Supervision, (202) ; Michael B. Phillips, Counsel, mphillips@fdic.gov, or Gregory S. Feder, Counsel, gfeder@fdic.gov, Legal Division, Federal Deposit Insurance Corporation, th Street NW., Washington, DC SEC: Josephine J. Tao, Assistant Director, Angela R. Moudy, Branch Chief, John Guidroz, Branch Chief, Jennifer Palmer or Lisa Skrzycki, Attorney Advisors, Office of Trading Practices, Catherine McGuire, Counsel, Division of Trading and Markets, (202) ; W. Danforth Townley, Attorney Fellow, Jane H. Kim, Brian McLaughlin Johnson or Marian Fowler, Senior Counsels, Division of Investment Management, (202) ; David Beaning, Special Counsel, Office of Structured Finance, Division of Corporation Finance, (202) ; John Cross, Office of Municipal Securities, (202) ; or Adam Yonce, Assistant Director, or Matthew Kozora, Financial Economist, Division of Economic and Risk Analysis, (202) , U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC SUPPLEMENTARY INFORMATION: Table of Contents I. Background II. Notice of Proposed Rulemaking III. Overview of Final Rule A. General Approach and Summary of Final Rule B. Proprietary Trading Restrictions C. Restrictions on Covered Fund Activities and Investments VerDate Mar<15> :39 Jan 31, 2014 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\31JAR2.SGM 31JAR2 D. Metrics Reporting Requirement E. Compliance Program Requirement IV. Final Rule A. Subpart B Proprietary Trading Restrictions 1. Section ll.3: Prohibition on Proprietary Trading and Related Definitions a. Definition of Trading Account b. Rebuttable Presumption for the Short- Term Trading Account c. Definition of Financial Instrument d. Proprietary Trading Exclusions 1. Repurchase and Reverse Repurchase Arrangements and Securities Lending 2. Liquidity Management Activities 3. Transactions of Derivatives Clearing Organizations and Clearing Agencies 4. Excluded Clearing-Related Activities of Clearinghouse Members 5. Satisfying an Existing Delivery Obligation 6. Satisfying an Obligation in Connection With a Judicial, Administrative, Self- Regulatory Organization, or Arbitration Proceeding 7. Acting Solely as Agent, Broker, or Custodian 8. Purchases or Sales Through a Deferred Compensation or Similar Plan 9. Collecting a Debt Previously Contracted 10. Other Requested Exclusions 2. Section ll.4(a): Underwriting Exemption a. Introduction b. Overview 1. Proposed Underwriting Exemption 2. Comments on Proposed Underwriting Exemption 3. Final Underwriting Exemption c. Detailed Explanation of the Underwriting Exemption 1. Acting as an Underwriter for a Distribution of Securities a. Proposed Requirements That the Purchase or Sale Be Effected Solely in Connection With a Distribution of Securities for Which the Banking Entity Acts as an Underwriter and That the Covered Financial Position be a Security i. Proposed Definition of Distribution ii. Proposed Definition of Underwriter iii. Proposed Requirement That the Covered Financial Position Be a Security b. Comments on the Proposed Requirements That the Trade Be Effected Solely in Connection With a Distribution for Which the Banking Entity Is Acting as an Underwriter and That the Covered Financial Position Be a Security i. Definition of Distribution ii. Definition of Underwriter iii. Solely in Connection With Standard c. Final Requirement That the Banking Entity Act as an Underwriter for a Distribution of Securities and the Trading Desk s Underwriting Position Be Related to Such Distribution i. Definition of Underwriting Position ii. Definition of Trading Desk iii. Definition of Distribution iv. Definition of Underwriter v. Activities Conducted in Connection With a Distribution 2. Near Term Customer Demand Requirement

18 Federal Register / Vol. 79, No. 21 / Friday, January 31, 2014 / Rules and Regulations 5537 a. Proposed Near Term Customer Demand Requirement b. Comments Regarding the Proposed Near Term Customer Demand Requirement c. Final Near Term Customer Demand Requirement 3. Compliance Program Requirement a. Proposed Compliance Program Requirement b. Comments on the Proposed Compliance Program Requirement c. Final Compliance Program Requirement 4. Compensation Requirement a. Proposed Compensation Requirement b. Comments on the Proposed Compensation Requirement c. Final Compensation Requirement 5. Registration Requirement a. Proposed Registration Requirement b. Comments on Proposed Registration Requirement c. Final Registration Requirement 6. Source of Revenue Requirement a. Proposed Source of Revenue Requirement b. Comments on the Proposed Source of Revenue Requirement c. Final Rule s Approach to Assessing Source of Revenue 3. Section ll.4(b): Market-Making Exemption a. Introduction b. Overview 1. Proposed Market-Making Exemption 2. Comments on the Proposed Market- Making Exemption a. Comments on the Overall Scope of the Proposed Exemption b. Comments Regarding the Potential Market Impact of the Proposed Exemption 3. Final Market-Making Exemption c. Detailed Explanation of the Market- Making Exemption 1. Requirement to Routinely Stand Ready To Purchase And Sell a. Proposed Requirement To Hold Self Out b. Comments on the Proposed Requirement To Hold Self Out i. The Proposed Indicia ii. Treatment of Block Positioning Activity iii. Treatment of Anticipatory Market Making iv. High-Frequency Trading c. Final Requirement To Routinely Stand Ready To Purchase And Sell i. Definition of Trading Desk ii. Definitions of Financial Exposure and Market-Maker Inventory iii. Routinely Standing Ready To Buy and Sell 2. Near Term Customer Demand Requirement a. Proposed Near Term Customer Demand Requirement b. Comments Regarding the Proposed Near Term Customer Demand Requirement i. The Proposed Guidance for Determining Compliance With the Near Term Customer Demand Requirement ii. Potential Inventory Restrictions and Differences Across Asset Classes iii. Predicting Near Term Customer Demand iv. Potential Definitions of Client, Customer, or Counterparty v. Interdealer Trading and Trading for Price Discovery or To Test Market Depth vi. Inventory Management vii. Acting as an Authorized Participant or Market Maker in Exchange-Traded Funds viii. Arbitrage or Other Activities That Promote Price Transparency and Liquidity ix. Primary Dealer Activities x. New or Bespoke Products or Customized Hedging Contracts c. Final Near Term Customer Demand Requirement i. Definition of Client, Customer, and Counterparty ii. Impact of the Liquidity, Maturity, and Depth of the Market on the Analysis iii. Demonstrable Analysis of Certain Factors iv. Relationship to Required Limits 3. Compliance Program Requirement a. Proposed Compliance Program Requirement b. Comments on the Proposed Compliance Program Requirement c. Final Compliance Program Requirement 4. Market Making-Related Hedging a. Proposed Treatment of Market Making- Related Hedging b. Comments on the Proposed Treatment of Market Making-Related Hedging c. Treatment of Market Making-Related Hedging in the Final Rule 5. Compensation Requirement a. Proposed Compensation Requirement b. Comments Regarding the Proposed Compensation Requirement c. Final Compensation Requirement 6. Registration Requirement a. Proposed Registration Requirement b. Comments on the Proposed Registration Requirement c. Final Registration Requirement 7. Source of Revenue Analysis a. Proposed Source of Revenue Requirement b. Comments Regarding the Proposed Source of Revenue Requirement i. Potential Restrictions on Inventory, Increased Costs for customers, and Other Changes To Market-Making Services ii. Certain Price Appreciation-Related Profits Are an Inevitable or Important Component of Market Making iii. Concerns Regarding the Workability of the Proposed Standard in Certain Markets or Asset Classes iv. Suggested Modifications to the Proposed Requirement v. General Support for the Proposed Requirement or for Placing Greater Restrictions on a Market Maker s Sources of Revenue c. Final Rule s Approach To Assessing Revenues 8. Appendix B of the Proposed Rule a. Proposed Appendix B Requirement b. Comments on Proposed Appendix B c. Determination To Not Adopt Proposed Appendix B 9. Use of Quantitative Measurements 4. Section ll.5: Permitted Risk- Mitigating Hedging Activities a. Summary of Proposal s Approach to Implementing the Hedging Exemption VerDate Mar<15> :39 Jan 31, 2014 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\31JAR2.SGM 31JAR2 b. Manner of Evaluating Compliance With the Hedging Exemption c. Comments on the Proposed Rule and Approach to Implementing the Hedging Exemption d. Final Rule 1. Compliance Program Requirement 2. Hedging of Specific Risks and Demonstrable Reduction Of Risk 3. Compensation 4. Documentation Requirement 5. Section ll.6(a) (b): Permitted Trading in Certain Government and Municipal Obligations a. Permitted Trading in U.S. Government Obligations b. Permitted Trading in Foreign Government Obligations c. Permitted Trading in Municipal Securities d. Determination To Not Exempt Proprietary Trading in Multilateral Development Bank Obligations 6. Section ll.6(c): Permitted Trading on Behalf of Customers a. Proposed Exemption for Trading on Behalf of Customers b. Comments on the Proposed Rule c. Final Exemption for Trading on Behalf of Customers 7. Section ll.6(d): Permitted Trading by a Regulated Insurance Company 8. Section ll.6(e): Permitted Trading Activities of a Foreign Banking Entity a. Foreign Banking Entities Eligible for the Exemption b. Permitted Trading Activities of a Foreign Banking Entity 9. Section ll.7: Limitations on Permitted Trading Activities a. Scope of Material Conflict of Interest 1. Proposed Rule 2. Comments on the Proposed Limitation on Material Conflicts of Interest a. Disclosure b. Information Barriers 3. Final Rule b. Definition of High-Risk Asset and High-Risk Trading Strategy 1. Proposed Rule 2. Comments on Proposed Limitations on High-Risk Assets and Trading Strategies 3. Final Rule c. Limitations on Permitted Activities That Pose a Threat to Safety and Soundness of the Banking Entity or the Financial Stability of the United States B. Subpart C Covered Fund Activities and Investments 1. Section ll.10: Prohibition on Acquisition or Retention of Ownership Interests in, and Certain Relationships With, a Covered Fund a. Prohibition Regarding Covered Fund Activities and Investments b. Covered Fund Definition 1. Foreign Covered Funds 2. Commodity Pools 3. Entities Regulated Under the Investment Company Act c. Entities Excluded From Definition of Covered Fund 1. Foreign Public Funds 2. Wholly-Owned Subsidiaries 3. Joint Ventures 4. Acquisition Vehicles

19 5538 Federal Register / Vol. 79, No. 21 / Friday, January 31, 2014 / Rules and Regulations 5. Foreign Pension or Retirement Funds 6. Insurance Company Separate Accounts 7. Bank Owned Life Insurance Separate Accounts 8. Exclusion for Loan Securitizations and Definition of Loan a. Definition of Loan b. Loan Securitizations i. Loans ii. Contractual Rights Or Assets iii. Derivatives iv. SUBIs and Collateral Certificates v. Impermissible Assets 9. Asset-Backed Commercial Paper Conduits 10. Covered Bonds 11. Certain Permissible Public Welfare and Similar Funds 12. Registered Investment Companies and Excluded Entities 13. Other Excluded Entities d. Entities Not Specifically Excluded From the Definition of Covered Fund 1. Financial Market Utilities 2. Cash Collateral Pools 3. Pass-Through REITS 4. Municipal Securities Tender Option Bond Transactions 5. Venture Capital Funds 6. Credit Funds 7. Employee Securities Companies e. Definition of Ownership Interest f. Definition of Resident of the United States g. Definition of Sponsor 2. Section ll.11: Activities Permitted in Connection With Organizing and Offering a Covered Fund a. Scope of Exemption 1. Fiduciary Services 2. Compliance With Investment Limitations 3. Compliance With Section 13(f) of the BHC Act 4. No Guarantees or Insurance of Fund Performance 5. Limitation on Name Sharing With a Covered Fund 6. Limitation on Ownership By Directors and Employees 7. Disclosure Requirements b. Organizing and Offering an Issuing Entity of Asset-Backed Securities c. Underwriting and Market Making for a Covered Fund 3. Section ll.12: Permitted Investment in a Covered Fund a. Proposed Rule b. Duration of Seeding Period for New Covered Funds c. Limitations on Investments in a Single Covered Fund ( Per-Fund Limitation ) d. Limitation on Aggregate Permitted Investments in All Covered funds ( Aggregate Funds Limitation ) e. Capital Treatment of an Investment in a Covered Fund f. Attribution of Ownership Interests to a Banking Entity g. Calculation of Tier 1 Capital h. Extension of Time to Divest Ownership Interest in a Single Fund 4. Section ll.13: Other Permitted Covered Fund Activities a. Permitted Risk-Mitigating Hedging Activities b. Permitted Covered Fund Activities and Investments Outside of the United States 1. Foreign Banking Entities Eligible for the Exemption 2. Activities or Investments Solely Outside of the United States 3. Offered for Sale or Sold to a Resident of the United States 4. Definition of Resident of the United States c. Permitted Covered Fund Interests and Activities by a Regulated Insurance Company 5. Section ll.14: Limitations on Relationships With a Covered Fund a. Scope of Application b. Transactions That Would Be a Covered Transaction c. Certain Transactions and Relationships Permitted 1. Permitted Investments and Ownerships Interests 2. Prime Brokerage Transactions d. Restrictions on Transactions With Any Permitted Covered Fund 6. Section ll.15: Other Limitations on Permitted Covered Fund Activities C. Subpart D and Appendices A and B Compliance Program, Reporting, and Violations 1. Section ll.20: Compliance Program Mandate a. Program Requirement b. Compliance Program Elements c. Simplified Programs for Less Active Banking Entities d. Threshold for Application of Enhanced Minimum Standards 2. Appendix B: Enhanced Minimum Standards for Compliance Programs a. Proprietary Trading Activities b. Covered Fund Activities or Investments c. Enterprise-Wide Programs d. Responsibility and Accountability e. Independent Testing f. Training g. Recordkeeping 3. Section ll.20(d) and Appendix A: Reporting and Recordkeeping Requirements Applicable to Trading Activities a. Approach to Reporting and Recordkeeping Requirements Under the Proposal b. General Comments on the Proposed Metrics c. Approach of the Final Rule d. Proposed Quantitative Measurements and Comments on Specific Metrics 4. Section ll.21: Termination of Activities or Investments; Authorities for Violations V. Administrative Law Matters A. Use of Plain Language B. Paperwork Reduction Act Analysis C. Regulatory Flexibility Act Analysis D. OCC Unfunded Mandates Reform Act of 1995 Determination I. Background The Dodd-Frank Act was enacted on July 21, Section 619 of the Dodd- 1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law , 124 Stat (2010). VerDate Mar<15> :39 Jan 31, 2014 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\31JAR2.SGM 31JAR2 Frank Act added a new section 13 to the Bank Holding Company Act of 1956 ( BHC Act ) (codified at 12 U.S.C. 1851) that generally prohibits any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund ( covered fund ), subject to certain exemptions. 2 New section 13 of the BHC Act also provides that a nonbank financial company designated by the Financial Stability Oversight Council ( FSOC ) for supervision by the Board (while not a banking entity under section 13 of the BHC Act) would be subject to additional capital requirements, quantitative limits, or other restrictions if the company engages in certain proprietary trading or covered fund activities. 3 Section 13 of the BHC Act generally prohibits banking entities from engaging as principal in proprietary trading for the purpose of selling financial instruments in the near term or otherwise with the intent to resell in order to profit from short-term price movements. 4 Section 13(d)(1) expressly exempts from this prohibition, subject to conditions, certain activities, including: Trading in U.S. government, agency and municipal obligations; Underwriting and market makingrelated activities; Risk-mitigating hedging activities; Trading on behalf of customers; Trading for the general account of insurance companies; and Foreign trading by non-u.s. banking entities. 5 Section 13 of the BHC Act also generally prohibits banking entities from acquiring or retaining an ownership interest in, or sponsoring, a hedge fund or private equity fund. Section 13 contains several exemptions that permit banking entities to make limited investments in hedge funds and private equity funds, subject to a number of restrictions designed to ensure that banking entities do not rescue investors in these funds from loss and are not themselves exposed to 2 See 12 U.S.C See 12 U.S.C. 1851(a)(2) and (f)(4). The Agencies note that two of the three companies currently designated by FSOC for supervision by the Board are affiliated with insured depository institutions, and are therefore currently banking entities for purposes of section 13 of the BHC Act. The Agencies are continuing to review whether the remaining company engages in any activity subject to section 13 of the BHC Act and what, if any, requirements apply under section See 12 U.S.C. 1851(a)(1)(A) and (B). 5 See id. at 1851(d)(1).

20 Federal Register / Vol. 79, No. 21 / Friday, January 31, 2014 / Rules and Regulations 5539 significant losses from investments or other relationships with these funds. Section 13 of the BHC Act does not prohibit a nonbank financial company supervised by the Board from engaging in proprietary trading, or from having the types of ownership interests in or relationships with a covered fund that a banking entity is prohibited or restricted from having under section 13 of the BHC Act. However, section 13 of the BHC Act provides that these activities be subject to additional capital charges, quantitative limits, or other restrictions. 6 II. Notice of Proposed Rulemaking: Summary of General Comments Authority for developing and adopting regulations to implement the prohibitions and restrictions of section 13 of the BHC Act is divided among the Board, the Federal Deposit Insurance Corporation ( FDIC ), the Office of the Comptroller of the Currency ( OCC ), the Securities and Exchange Commission ( SEC ), and the Commodity Futures Trading Commission ( CFTC ). 7 As required by section 13(b)(2) of the BHC Act, the Board, OCC, FDIC, and SEC in October 2011 invited the public to comment on proposed rules implementing that section s requirements. 8 The period for filing public comments on this proposal was extended for an additional 30 days, until February 13, In January 2012, the CFTC requested comment on a proposal for the same common rule to implement section 13 with respect to those entities for which it is the primary financial regulatory agency and invited public comment on its proposed implementing rule through April 16, 6 See 12 U.S.C. 1851(a)(2) and (d)(4). 7 See 12 U.S.C. 1851(b)(2). Under section 13(b)(2)(B) of the BHC Act, rules implementing section 13 s prohibitions and restrictions must be issued by: (i) The appropriate Federal banking agencies (i.e., the Board, the OCC, and the FDIC), jointly, with respect to insured depository institutions; (ii) the Board, with respect to any company that controls an insured depository institution, or that is treated as a bank holding company for purposes of section 8 of the International Banking Act, any nonbank financial company supervised by the Board, and any subsidiary of any of the foregoing (other than a subsidiary for which an appropriate Federal banking agency, the SEC, or the CFTC is the primary financial regulatory agency); (iii) the CFTC with respect to any entity for which it is the primary financial regulatory agency, as defined in section 2 of the Dodd-Frank Act; and (iv) the SEC with respect to any entity for which it is the primary financial regulatory agency, as defined in section 2 of the Dodd-Frank Act. See id. 8 See 76 FR (Nov. 7, 2011) ( Joint Proposal ). 9 See 77 FR 23 (Jan. 23, 2012) (extending the comment period to February 13, 2012) The statute requires the Agencies, in developing and issuing implementing rules, to consult and coordinate with each other, as appropriate, for the purposes of assuring, to the extent possible, that such rules are comparable and provide for consistent application and implementation of the applicable provisions of section 13 of the BHC Act. 11 The proposed rules invited comment on a multi-faceted regulatory framework to implement section 13 consistent with the statutory language. In addition, the Agencies invited comments on the potential economic impacts of the proposed rule and posed a number of questions seeking information on the costs and benefits associated with each aspect of the proposal, as well as on any significant alternatives that would minimize the burdens or amplify the benefits of the proposal in a manner consistent with the statute. The Agencies also encouraged commenters to provide quantitative information and data about the impact of the proposal on entities subject to section 13, as well as on their clients, customers, and counterparties, specific markets or asset classes, and any other entities potentially affected by the proposed rule, including non-financial small and mid-size businesses. The Agencies received over 18,000 comments addressing a wide variety of aspects of the proposal, including definitions used by the proposal and the exemptions for market making-related activities, risk-mitigating hedging activities, covered fund activities and investments, the use of quantitative metrics, and the reporting proposals. The vast majority of these comments were from individuals using a version of a short form letter to express support for the proposed rule. More than 600 comment letters were unique comment letters, including from members of Congress, domestic and foreign banking entities and other financial services firms, trade groups representing banking, insurance, and the broader financial services industry, U.S. state and foreign governments, consumer and public interest groups, and individuals. To improve understanding of the issues raised by commenters, the Agencies met with a number of these commenters to discuss issues relating to the proposed rule, and summaries of these meetings 10 See 77 FR 8332 (Feb. 14, 2012) ( CFTC Proposal ). 11 See 12 U.S.C. 1851(b)(2)(B)(ii). The Secretary of the Treasury, as Chairperson of the FSOC, is responsible for coordinating the Agencies rulemakings under section 13 of the BHC Act. See id. VerDate Mar<15> :39 Jan 31, 2014 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\31JAR2.SGM 31JAR2 are available on each of the Agency s public Web sites. 12 The CFTC staff also hosted a public roundtable on the proposed rule. 13 Many of the commenters generally expressed support for the broader goals of the proposed rule. At the same time, many commenters expressed concerns about various aspects of the proposed rule. Many of these commenters requested that one or more aspects of the proposed rule be modified in some manner in order to reflect their viewpoints and to better accommodate the scope of activities that they argued were encompassed within section 13 of the BHC Act. The comments addressed all major sections of the proposed rule. Section 13 of the BHC Act also required the FSOC to conduct a study ( FSOC study ) and make recommendations to the Agencies by January 21, 2011 on the implementation of section 13 of the BHC Act. The FSOC study was issued on January 18, The FSOC study included a detailed discussion of key issues related to implementation of section 13 and recommended that the Agencies consider taking a number of specified actions in issuing rules under section 13 of the BHC Act. 14 The FSOC study also recommended that the Agencies adopt a four-part implementation and supervisory framework for identifying and preventing prohibited proprietary trading, which included a programmatic compliance regime requirement for banking entities, analysis and reporting of quantitative metrics by banking entities, supervisory review and oversight by the Agencies, and 12 See D=OCC (OCC); reserve.gov/newsevents/reform_systemic.htm (Board); federal/2011/11comad85.html (FDIC); (SEC); and DoddFrankAct/Rulemakings/DF_28_VolckerRule/ index.htm (CFTC). 13 See Commodity Futures Trading Commission, CFTC Staff to Host a Public Roundtable to Discuss the Proposed Volcker Rule (May 24, 2012), available at PressReleases/pr ; transcript available at newsroom/documents/file/transcript pdf. 14 See Financial Stability Oversight Counsel, Study and Recommendations on Prohibitions on Proprietary Trading and Certain Relationships with Hedge Funds and Private Equity Funds (Jan. 18, 2011), available at initiatives/documents/volcker%20sec%20619% 20study%20final%201%2018%2011%20rg.pdf. ( FSOC study ). See 12 U.S.C. 1851(b)(1). Prior to publishing its study, FSOC requested public comment on a number of issues to assist in conducting its study. See 75 FR 61,758 (Oct. 6, 2010). Approximately 8,000 comments were received from the public, including from members of Congress, trade associations, individual banking entities, consumer groups, and individuals.

21 5540 Federal Register / Vol. 79, No. 21 / Friday, January 31, 2014 / Rules and Regulations enforcement procedures for violations. 15 The Agencies carefully considered the FSOC study and its recommendations. In formulating this final rule, the Agencies carefully reviewed all comments submitted in connection with the rulemaking and considered the suggestions and issues they raise in light of the statutory restrictions and provisions as well as the FSOC study. The Agencies have sought to reasonably respond to all of the significant issues commenters raised. The Agencies believe they have succeeded in doing so notwithstanding the complexities involved. The Agencies also carefully considered different options suggested by commenters in light of potential costs and benefits in order to effectively implement section 13 of the BHC Act. The Agencies made numerous changes to the final rule in response to the issues and information provided by commenters. These modifications to the rule and explanations that address comments are described in more detail in the section-by-section description of the final rule. To enhance uniformity in both rules that implement section 13 and administration of the requirements of that section, the Agencies have been regularly consulting with each other in the development of this final rule. Some commenters requested that the Agencies repropose the rule and/or delay adoption pending the collection of additional information. 16 As described in part above, the Agencies have provided many and various types of opportunities for commenters to provide input on implementation of section 13 of the BHC Act and have collected substantial information in the process. In addition to the official comment process described above, members of the public submitted comment letters in advance of the official comment period for the proposed rules and met with staff of the Agencies to explain issues of concern; the public also provided substantial comment in response to a request for comment from the FSOC regarding its findings and recommendations for implementing section The Agencies provided a detailed proposal and posed numerous 15 See FSOC study at See, e.g., SIFMA et al. (Prop. Trading) (Feb. 2012); ABA (Keating); Chamber (Nov. 2011); Chamber (Nov. 2013); Members of Congress (Dec. 2011); IIAC; Real Estate Roundtable; Ass n. of German Banks; Allen & Overy (Clearing); JPMC; Goldman (Prop. Trading); BNY Mellon et al.; State Street (Feb. 2012); ICI Global; Chamber (Feb. 2012); Société Générale; HSBC; Western Asset Mgmt.; Abbott Labs et al. (Feb. 2012); PUC Texas; Columbia Mgmt.; ICI (Feb. 2012); IIB/EBF; British Bankers Ass n.; ISDA (Feb. 2012); Comm. on Capital Markets Regulation; Ralph Saul (Apr. 2012); BPC. 17 See 75 FR 61,758 (Oct. 6, 2010). questions in the preamble to the proposal to solicit and explore alternative approaches in many areas. In addition, the Agencies have continued to receive comment letters after the extended comment period deadline, which the Agencies have considered. Thus, the Agencies believe interested parties have had ample opportunity to review the proposed rules, as well as the comments made by others, and to provide views on the proposal, other comment letters, and data to inform our consideration of the final rules. In addition, the Agencies have been mindful of the importance of providing certainty to banking entities and financial markets and of providing sufficient time for banking entities to understand the requirements of the final rule and to design, test, and implement compliance and reporting systems. The further substantial delay that would necessarily be entailed by reproposing the rule would extend the uncertainty that banking entities would face, which could prove disruptive to banking entities and the financial markets. The Agencies note, as discussed more fully below, that the final rule incorporates a number of modifications designed to address the issues raised by commenters in a manner consistent with the statute. The preamble below also discusses many of the issues raised by commenters and explains the Agencies response to those comments. To achieve the purpose of the statute, without imposing unnecessary costs, the final rule builds on the multi-faceted approach in the proposal, which includes development and implementation of a compliance program at each banking entity engaged in trading activities or that makes investments subject to section 13 of the BHC Act; the collection and evaluation of data regarding these activities as an indicator of areas meriting additional attention by the banking entity and the relevant agency; appropriate limits on trading, hedging, investment and other activities; and supervision by the Agencies. To allow banking entities sufficient time to develop appropriate systems, the Agencies have provided for a phased-in schedule for the collection of data, limited data reporting requirements only to banking entities that engage in significant trading activity, and agreed to review the merits of the data collected and revise the data collection as appropriate over the next 21 months. Importantly, as explained in detail below, the Agencies have also reduced the compliance burden for banking entities with total assets of less than $10 billion. The final rule also eliminates compliance burden for firms VerDate Mar<15> :39 Jan 31, 2014 Jkt PO Frm Fmt 4701 Sfmt 4700 E:\FR\FM\31JAR2.SGM 31JAR2 that do not engage in covered activities or investments beyond investing in U.S. government obligations, agency guaranteed obligations, or municipal obligations. Moreover, the Agencies believe the data that will be collected in connection with the final rule, as well as the compliance efforts made by banking entities and the supervisory experience that will be gained by the Agencies in reviewing trading and investment activity under the final rule, will provide valuable insights into the effectiveness of the final rule in achieving the purpose of section 13 of the BHC Act. The Agencies remain committed to implementing the final rule, and revisiting and revising the rule as appropriate, in a manner designed to ensure that the final rule faithfully implements the requirements and purposes of the statute. 18 Finally, the Board has determined, in accordance with section 13 of the BHC Act, to provide banking entities with additional time to conform their activities and investments to the statute and the final rule. The restrictions and prohibitions of section 13 of the BHC Act became effective on July 21, The statute provided banking entities a period of two years to conform their activities and investments to the requirement of the statute, until July 21, Section 13 also permits the Board to extend this conformance period, one year at a time, for a total of no more than three additional years. 20 Pursuant to this authority and in connection with this rulemaking, the Board has in a separate action extended the conformance period for an additional year until July 21, The Board will continue to monitor developments to determine whether additional extensions of the conformance period are in the public interest, consistent with the statute. Accordingly, the Agencies do not believe that a reproposal or further delay is necessary or appropriate. Commenters have differing views on the overall economic impacts of section 13 of the BHC Act. 18 If any provision of this rule, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application. 19 See 12 U.S.C. 1851(c)(1). 20 See 12 U.S.C. 1851(c)(2); See also, A Conformance Period for Entities Engaged in Prohibited Proprietary Trading or Private Equity Fund or Hedge Fund Activities, 76 FR 8265 (Feb. 14, 2011) (citing 156 Cong. Rec. S5898 (daily ed. July 15, 2010) (statement of Sen. Merkley)). 21 See, Board Order Approving Extension of Conformance Period, available at bcreg b1.pdf.