OCC Bulletin 2019-56| November 14, 2019
Volcker Rule: Final Rule
Chief Executive Officers of All National Banks, Federal Savings Associations, and Federal Branches and Agencies; Department and Division Heads; All Examining Personnel; and Other Interested Parties
On November 14, 2019, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, the U.S. Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, and the U.S. Securities and Exchange Commission (collectively, the agencies) published a final rule amending the regulations that implement section 13 of the Bank Holding Company (BHC) Act, commonly known as the Volcker rule. These amendments are intended to simplify the rule in a manner that is consistent with section 13 of the BHC Act. The effective date for the final rule is January 1, 2020, and the compliance date is January 1, 2021. A banking entity may voluntarily comply, in whole or in part, with the amendments adopted in the final rule prior to the compliance date.1
Note for Community Banks
Most community banks have total consolidated assets equal to $10 billion or less and total trading assets and liabilities equal to 5 percent or less of total consolidated assets. These community banks therefore meet conditions under the Economic Growth, Regulatory Relief, and Consumer Protection Act that exempt them from the Volcker rule. See 12 CFR 44.2(r)(2); OCC Bulletin 2019-32.
The final rule amends the definition of trading account, adopts new exclusions from the definition of proprietary trading, streamlines existing exclusions and exemptions, and tailors compliance program obligations for banking entities. Specifically, the final rule
- revises the definition of “trading account” by (a) eliminating the presumption that the purchase (or sale) of a financial instrument held for 60 days or fewer is within the short-term intent prong of the trading account, (b) establishing a presumption that the purchase (or sale) of a financial instrument held for 60 days or more is not within the short-term intent prong of the trading account, (c) providing that firms that are subject to the market risk rule prong are not subject to the short-term intent prong, and (d) allowing firms to opt into the market risk rule prong.
- revises the definition of “trading desk” by adopting a multi-factor definition based on the same criteria typically used to establish trading desks for other operational, management, and compliance purposes.
- revises the exclusion from the definition of proprietary trading for liquidity management and adopts new exclusions for (a) error trades and error-correcting trades, (b) customer-driven matched swap transactions, (c) mortgage servicing assets and mortgage servicing rights hedging activities, and (d) purchasing or selling financial instruments that would not be accounted for as trading assets or liabilities on applicable reporting forms.
- streamlines the proprietary trading and covered fund exemptions for underwriting and market-making related activities, risk-mitigating hedging activities, and activities conducted solely outside the United States.
- tailors compliance program obligations based on trading assets and liabilities and generally streamlines the compliance program obligations. The final rule eliminates the 2013 rule’s CEO attestation requirement for all banking entities except for banking entities with significant trading assets and liabilities. Banking entities without significant trading assets and liabilities will no longer be required to submit annual CEO attestations as of January 1, 2020.
- revises the metrics reporting obligation requirements to (a) apply only to banking entities that have significant trading assets and liabilities and (b) require metrics reporting on a quarterly schedule. The metrics amendments eliminate the following metrics: Inventory Aging, Stress Value-at-Risk, and Risk Factor Sensitivities. The amendments replace the Customer-Facing Trade Ratio metric with the new Transaction Volumes metric and replace the Inventory Turnover metric with the new Positions metric. In addition, the amendments require that metrics be reported in an XML format.
Section 13 of the BHC Act 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 (defined in the implementing regulations as “covered funds”). Authority for developing and adopting regulations to implement the prohibitions and restrictions of section 13 of the BHC Act is shared among the agencies. The agencies issued a final rule implementing section 13 of the BHC Act in December 2013 (the 2013 rule), and those provisions became effective on April 1, 2014.
The agencies published a notice of proposed rulemaking on July 17, 2018, that proposed amendments to the 2013 rule. These amendments sought to provide greater clarity and certainty about what activities are prohibited under the 2013 rule and to improve supervision and implementation of section 13 of the BHC Act.
The final rule adopts many of the proposed changes to the 2013 rule, with targeted adjustments based on comments received. Like the proposal, the final rule tailors compliance program obligations based on the level of trading activity of a banking entity, revises the definition of trading account, adopts new exclusions from the definition of proprietary trading, generally streamlines the proprietary trading and covered fund exemptions, and revises the rule’s metrics reporting requirements.
Please contact Tabitha Edgens, Counsel, or Mark O’Horo, Senior Attorney, Chief Counsel’s Office, at (202) 649-5490; or Roman Goldstein, Risk Specialist, Treasury and Market Risk Policy, at (202) 649-6360.
Jonathan V. Gould
Senior Deputy Comptroller and Chief Counsel
- “Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds”