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DEPARTMENT OF TREASURY

Office of the Comptroller of the Currency

12 CFR Part 44

Docket No. OCC-2018-0010

RIN 1557-AE27

FEDERAL RESERVE SYSTEM

12 CFR Part 248

Docket No. R-1608

RIN 7100-AF 06

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 351

RIN 3064-AE67

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 75

RIN 3038-AE72

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 255

Release no. BHCA-7; File no. S7-14-18

RIN 3235-AM10

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); Securities and Exchange Commission (SEC); and Commodity Futures Trading

Commission (CFTC).

ACTION: Final rule.

SUMMARY: The OCC, Board, FDIC, SEC, and CFTC are adopting amendments to the

regulations implementing section 13 of the Bank Holding Company Act. Section 13

contains certain 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. These final

amendments are intended to provide banking entities with clarity about what activities are

prohibited and to improve supervision and implementation of section 13.

DATES: Effective date: The effective date for amendatory instructions 1 through 14

(OCC), 16 through 29 (Board), 31 through 44 (FDIC), and 46 through 58 (CFTC) is

January 1, 2020; the effective date for amendatory instructions 60 through 73 (SEC) is

[INSERT DATE 60 DAYS AFTER PUBLICATION IN FEDERAL REGISTER]; and the

effective date for the addition of appendices Z at amendatory instructions 15 (OCC), 30

(Board), and 45 (FDIC) is January 1, 2020, through December 31, 2020, except for

amendatory instruction 74 (SEC), which is effective [INSERT DATE 60 DAYS AFTER

PUBLICATION IN FEDERAL REGISTER], through December 31, 2020.

Compliance date: Banking entities must comply with the final amendments by January 1,

2021. Until the compliance date, banking entities must continue to comply with the 2013

rule (as set forth in appendices Z to 12 CFR parts 44, 248, and 351 and 17 CFR parts 75

and 255). Alternatively, a banking entity may voluntarily comply, in whole or in part,

with the amendments adopted in this release prior to the compliance date, subject to the

agencies’ completion of necessary technological changes.

FOR FURTHER INFORMATION CONTACT:

OCC: Roman Goldstein, Risk Specialist, Treasury and Market Risk Policy, (202)

649-6360; Tabitha Edgens, Counsel; Mark O’Horo, Senior Attorney, Chief Counsel’s

Office, (202) 649-5490; for persons who are deaf or hearing impaired, TTY, (202) 649-

5597, Office of the Comptroller of the Currency, 400 7th Street, SW., Washington, DC

20219.

Board: Flora Ahn, Special Counsel, (202) 452-2317, Gregory Frischmann, Senior

Counsel, (202) 452-2803, Kirin Walsh, Attorney, (202) 452-3058, or Sarah Podrygula,

Attorney, (202) 912-4658, Legal Division, Cecily Boggs, Senior Financial Institution

Policy Analyst, (202) 530-6209, David Lynch, Deputy Associate Director, (202) 4522081, David McArthur, Senior Economist, (202) 452-2985, Division of Supervision and

Regulation; Board of Governors of the Federal Reserve System, 20th and C Streets, NW.,

Washington, DC 20551.

FDIC: Bobby R. Bean, Associate Director, bbean@fdic.gov, Michael E. Spencer,

Chief, Capital Markets Strategies, michspencer@fdic.gov, Andrew D. Carayiannis, Senior

Policy Analyst, acarayiannis@fdic.gov, or Brian Cox, Senior Policy Analyst,

brcox@fdic.gov, Capital Markets Branch, (202) 898-6888; Michael B. Phillips, Counsel,

mphillips@fdic.gov, Benjamin J. Klein, Counsel, bklein@fdic.gov, or Annmarie H. Boyd,

Counsel, aboyd@fdic.gov, Legal Division, Federal Deposit Insurance Corporation, 550

17th Street, NW., Washington, DC 20429.

SEC: Andrew R. Bernstein, Senior Special Counsel, Sam Litz, Attorney-Adviser,

Aaron Washington, Special Counsel, or Carol McGee, Assistant Director, at (202) 5515870, Office of Derivatives Policy and Trading Practices, Division of Trading and

Markets, and Matthew Cook, Senior Counsel, Benjamin Tecmire, Senior Counsel, and

Jennifer Songer, Branch Chief at (202) 551-6787 or IArules@sec.gov, Division of

Investment Management, U.S. Securities and Exchange Commission, 100 F Street NE,

Washington, DC 20549.

CFTC: Cantrell Dumas, Special Counsel, (202) 418-5043, cdumas@cftc.gov;

Jeffrey Hasterok, Data and Risk Analyst, (646) 746-9736, jhasterok@cftc.gov, Division of

Swap Dealer and Intermediary Oversight; Mark Fajfar, Assistant General Counsel, (202)

418-6636, mfajfar@cftc.gov, Office of the General Counsel; Stephen Kane, Research

Economist, (202) 418-5911, skane@cftc.gov, Office of the Chief Economist; Commodity

Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,

Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

Background

II.

Notice of Proposed Rulemaking

III.

Overview of the Final Rule and Modifications from the Proposal

A. The Final Rule

B. Agency Coordination and Other Comments

IV.

Section by Section Summary of the Final Rule

A. Subpart A—Authority and Definitions

B. Subpart B—Proprietary Trading Restrictions

C. Subpart C—Covered Fund Activities and Investments

D. Subpart D—Compliance Program Requirement; Violations

E. Subpart E—Metrics

Administrative Law Matters

A. Use of Plain Language

B. Paperwork Reduction Act

C. Regulatory Flexibility Act Analysis

D. Riegle Community Development and Regulatory Improvement Act

E. OCC Unfunded Mandates Reform Act Determination

F. SEC Economic Analysis

G. Congressional Review Act

I. Background

Section 13 of the Bank Holding Company Act of 1956 (BHC Act),1 also known as

the Volcker Rule, 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). 2 The statute

expressly exempts from these prohibitions various activities, including among other

things:

•

Trading in U.S. government, agency, and municipal obligations;

•

Underwriting and market making-related 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. 3

In addition, section 13 of the BHC Act contains several exemptions that permit banking

entities to engage in certain activities with respect to covered funds, subject to certain

12 U.S.C. 1851.

Id.

12 U.S.C. 1851(d)(1).

restrictions designed to ensure that banking entities do not rescue investors in those funds

from loss, and do not guarantee nor expose themselves to significant losses due to

investments in or other relationships with these funds. 4

Authority under section 13 for developing and adopting regulations to implement

the prohibitions and restrictions of section 13 of the BHC Act is shared among the Board,

the FDIC, the OCC, the SEC, and the CFTC (individually, an agency, and collectively, the

agencies). 5 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. 6

Since the adoption of the 2013 rule, the agencies have gained several years of

experience implementing the 2013 rule, and banking entities have had more than five

years of becoming familiar and complying with the 2013 rule. The agencies have received

various communications from the public and other sources since adoption of the 2013 rule

and over the course of the 2013 rule’s implementation. Staffs of the agencies also have

held numerous meetings with banking entities and other market participants to discuss the

2013 rule and its implementation. In addition, the data collected in connection with the

2013 rule, compliance efforts by banking entities, and the agencies’ experiences in

reviewing trading, investment, and other activity under the 2013 rule have provided

valuable insights into the effectiveness of the 2013 rule. Together, these experiences have

highlighted areas in which the 2013 rule may have resulted in ambiguity, overbroad

E.g., 12 U.S.C. 1851(d)(1)(G).

12 U.S.C. 1851(b)(2).

Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and

Relationships with, Hedge Funds and Private Equity Funds; Final Rule, 79 FR 5535

(Jan. 31, 2014).

application, or unduly complex compliance routines or may otherwise not have been as

effective or efficient in achieving its purpose as intended or expected.

II. Notice of Proposed Rulemaking

Based on their experience implementing the 2013 rule, the agencies published a

notice of proposed rulemaking (the proposed rule or proposal) 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 the effective allocation of compliance resources where possible. 7

The agencies sought to address a number of targeted areas for revision in the

proposal. First, the agencies proposed further tailoring to make the scale of compliance

activity required by the 2013 rule commensurate with a banking entity’s size and level of

trading activity. In particular, the agencies proposed to establish three categories of

banking entities based on the firms’ level of trading activity – those with significant

trading assets and liabilities, those with moderate trading assets and liabilities, and those

with limited trading assets and liabilities. 8 The agencies also invited comments on

whether certain definitions, including “banking entity” 9 and “trading desk,” 10 and

“covered fund” 11 should be modified.

Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain

Interests in, and Relationships With, Hedge Funds and Private Equity Funds, 83 FR 33432

(July 17, 2018).

See 83 FR 33437, 40–42.

See 83 FR 33442–46.

See 83 FR 33453–54.

See 83 FR 33471-82.

The agencies also proposed making several changes to subpart B of the 2013 rule,

which implements the statutory prohibition on proprietary trading and the various

statutory exemptions to this prohibition. The agencies proposed revisions to the trading

account definition, 12 including replacing the short-term intent prong of the trading account

definition in the 2013 rule with a new prong based on the accounting treatment of a

position (the accounting prong) and, with respect to trading activity subject only to the

accounting prong, establishing a presumption of compliance with the prohibition on

proprietary trading, based on the absolute value of a trading desk’s profit and loss. 13

Under the proposed accounting prong, the trading account would have encompassed

financial instruments recorded at fair value on a recurring basis under applicable

accounting standards.

In addition, the proposal would have modified several of the exemptions and

exclusions from the prohibition on proprietary trading in subpart B to clarify how banking

entities may qualify for those exemptions and exclusions, as well as to reduce associated

compliance burdens. For example, the agencies proposed revising the 2013 rule’s

exemptions for underwriting and market making-related activities, 14 the exemption for

risk-mitigating hedging activities, 15 the exemption for trading by a foreign banking entity

that occurs solely outside of the United States, 16 and the liquidity management

The definition of “trading account” is a threshold definition that determines whether

the purchase or sale of a financial instrument by a banking entity is subject to the

restrictions and requirements of section 13 of the BHC Act and the 2013 rule.

See 83 FR 33446–51.

See 83 FR 33454–62.

See 83 FR 33464–67.

See 83 FR 33467–70.

exclusion. 17 In addition, the agencies proposed establishing an exclusion for transactions

to correct trading errors. 18

The agencies also proposed certain modifications to the prohibitions in subpart C

on banking entities directly or indirectly acquiring or retaining an ownership interest in, or

having certain relationships with, a covered fund. For example, the proposed rule would

have modified provisions related to the underwriting or market making of ownership

interests in covered funds 19 and the exemption for certain permitted covered fund

activities and investments outside of the United States. The proposal also would have

expanded a banking entity’s ability to engage in hedging activities involving an ownership

interest in a covered fund. 20 In addition, the agencies requested comment regarding

tailoring the definition of “covered fund,” including potential additional exclusions, 21 and

revising the provisions limiting banking entities’ relationships with covered funds. 22

To enhance compliance efficiencies, the agencies proposed tailoring the

compliance requirements based on new compliance tiers. The proposed rule would have

applied the six-pillar compliance program, and a CEO attestation requirement largely

consistent with the 2013 rule, to firms with significant trading assets and liabilities and

eliminated the enhanced minimum standards for compliance programs in Appendix B of

See 83 FR 33451–52.

See 83 FR 33452–53.

See 83 FR 33482–83

See 83 FR 33483–86.

See 83 FR 33471–82.

See 83 FR 33486–87.

the 2013 rule. 23 Firms with moderate trading assets and liabilities would have been

required to adhere to a simplified compliance program, with a CEO attestation

requirement,24 and firms with limited trading assets and liabilities would have had a

presumption of compliance with the rule. 25 The proposal also included a reservation of

authority specifying that the agencies could impose additional requirements on banking

entities with limited or moderate trading assets and liabilities if warranted. 26 The proposal

would have revised the metrics reporting and recordkeeping requirements by, for example,

applying those requirements based on a banking entity’s size and level of trading activity,

eliminating some metrics, and adding a limited set of new metrics to enhance compliance

efficiencies. 27 In addition, the agencies requested comment on whether some or all of the

reported quantitative measurements should be made publically available.

The agencies invited comment on all aspects of the proposal, including specific

proposed revisions and questions posed by the agencies. The agencies received over 75

unique comments from banking entities and industry groups, public interest groups, and

other organizations and individuals. In addition, the agencies received approximately

3,700 comments from individuals using a version of a short form letter to express

opposition to the proposed rule. For the reasons discussed below, the agencies are now

adopting a final rule that incorporates a number of modifications.

III. Overview of the Final Rule and Modifications from the Proposal

See 83 FR 33487–89; 33490–94.

See 83 FR 33489.

See 83 FR 33490.

See 83 FR 33454.

See 83 FR 33494–514.

A. The Final Rule

Similar to the proposal, the final rule includes a risk-based approach to revising the

2013 rule that relies on a set of clearly articulated standards for both prohibited and

permitted activities and investments. The final rule is intended to further tailor and

simplify the rule to allow banking entities to more efficiently provide financial services in

a manner that is consistent with the requirements of section 13 of the BHC Act.

The comments the agencies received from banking entities and financial services

industry trade groups were generally supportive of the proposal, with the exception of the

proposed accounting prong, and provided recommendations for further targeted changes.

The agencies also received a few comments in opposition to the proposal from various

organizations and individuals. 28 As described further below, the agencies have adopted

many of the proposed changes to the 2013 rule, with certain targeted adjustments based on

comments received. Furthermore, the agencies intend to issue an additional notice of

proposed rulemaking that would propose additional, specific changes to the restrictions on

covered fund investments and activities and other issues related to the treatment of

investment funds under the regulations implementing section 13 of the BHC Act.

The final rule includes the same general three-tiered approach to tailoring the

compliance program requirements as the proposal. However, based on comments

received, the agencies have modified the threshold for banking entities in the “significant”

compliance category from $10 billion in gross trading assets and liabilities to $20 billion

See, e.g., Senators Merkley et al.; Elise J. Bean (Bean); National Association of

Federally-Insured Credit Unions (NAFCU); Better Markets, Inc. (Better Markets);

Americans for Financial Reform (AFR); Volcker Alliance; Occupy the SEC; and Volcker

2.0 Form Letter.

in gross trading assets and liabilities. The final rule also includes modifications to the

calculation of trading assets and liabilities for purposes of determining which compliance

tier a banking entity falls into by excluding certain financial instruments that banking

entities are permitted to trade without limit under section 13. Additionally, the final rule

aligns the methodologies for calculating the “limited” and “significant” compliance

thresholds for foreign banking organizations by basing both thresholds on the trading

assets and liabilities of the firm’s U.S. operations. 29

The final rule also includes many of the proposed changes to the proprietary

trading restrictions, with certain changes based on comments received. One such change

is that the final rule does not include the proposed accounting prong in the trading account

definition. Instead, the final rule retains a modified version of the short-term intent prong

and replaces the 2013 rule’s rebuttable presumption that financial instruments held for

fewer than 60 days are within the short-term intent prong of the trading account with a

rebuttable presumption that financial instruments held for 60 days or longer are not within

the short-term intent prong of the trading account. The final rule also provides that a

banking entity that is subject to the market risk capital rule prong of the trading account

definition is not also subject to the short-term intent prong, and a banking entity that is not

subject to the market risk capital rule prong may elect to apply the market risk capital rule

prong (as an alternative to the short-term intent prong). Additionally, the final rule

modifies the liquidity management exclusion from the proprietary trading restrictions to

Under the proposal, the “limited” compliance threshold would have been based on the

trading assets and liabilities of a foreign banking organization’s worldwide operations

whereas the “significant” compliance threshold would have been based on the trading

assets and liabilities of a foreign banking organization’s U.S. operations.

permit banking entities to use a broader range of financial instruments to manage liquidity,

and it adds new exclusions for error trades, certain customer-driven swaps, hedges of

mortgage servicing rights, and purchases or sales of instruments that do not meet the

definition of trading assets or liabilities. Furthermore, the final rule revises the trading

desk definition to provide more flexibility to banking entities to align the definition with

other trading desk definitions in existing or planned compliance programs. This modified

definition also will provide for consistent treatment across different regulatory regimes.

The final rule also includes the proposed changes to the exemptions from the

prohibitions in section 13 of the BHC Act for underwriting and market making-related

activities, risk-mitigating hedging, and trading by foreign banking entities solely outside

the United States. The final rule also includes the proposed changes to the covered funds

provisions for which specific rule text was proposed, including with respect to permitted

underwriting and market making and risk-mitigating hedging with respect to a covered

fund, as well as investment in or sponsorship of covered funds by foreign banking entities

solely outside the United States and the exemption for prime brokerage transactions. With

respect to the exemptions for underwriting and market making-related activities, the final

rule adopts the presumption of compliance with the reasonably expected near-term

demand requirement for trading within certain internal limits, but instead of requiring

banking entities to promptly report limit breaches or increases to the agencies, banking

entities are required to maintain and make available upon request records of any such

breaches or increases and follow certain internal escalation and approval procedures in

order to remain qualified for the presumption of compliance.

With respect to the compliance program requirements, the final rule includes the

changes from the proposal to eliminate the enhanced compliance requirements in

Appendix B of the 2013 rule and to tailor the compliance program requirements based on

the size of the banking entity’s trading activity. However, different from the proposal, the

final rule only applies the CEO attestation requirement to firms with significant trading

assets and liabilities. Also, in response to comments, the final rule includes modifications

to the metrics collection requirements to, among other things, eliminate certain metrics

and reduce the compliance burden associated with the requirement.

For the OCC, Board, FDIC, and CFTC, the final amendments will be effective on

January 1, 2020. For the SEC, the final amendments will be effective on [INSERT DATE

60 DAYS AFTER PULBLICATION IN FEDERAL REGISTER]. In order to give

banking entities a sufficient amount of time to comply with the changes adopted, banking

entities will not be required to comply with the final amendments until January 1, 2021.

During that time, the 2013 rule will remain in effect as codified in appendix Z, which is a

temporary appendix that will expire on the compliance date. However, banking entities

may voluntarily comply, in whole or in part, with the amendments adopted in this release

prior to the compliance date, subject to the agencies’ completion of necessary technical

changes. In particular, the agencies need to complete certain technological programming

in order to accept metrics compliant with the final amendments. The agencies will

conduct a test run with banking entities of the revised metrics submission format. A

banking entity seeking to switch to the revised metrics prior to January 1, 2021, must first

successfully test submission of the revised metrics in the new XML format. Accordingly,

banking entities should work with each appropriate agency to determine how and when to

voluntarily comply with the metrics requirements under the final rules and to notify such

agencies of their intent to comply, prior to the January 1, 2021, compliance date.

B. Interagency Coordination and Other Comments

Section 13(b)(2)(B)(ii) of the BHC Act directs the agencies to “consult and

coordinate” in developing and issuing the implementing regulations “for the purpose of

assuring, to the extent possible, that such regulations are comparable and provide for

consistent application and implementation of the applicable provisions of [section 13 of

the BHC Act] to avoid providing advantages or imposing disadvantages to the companies

affected . . . .”30 The agencies recognize that coordinating with each other to the greatest

extent practicable with respect to regulatory interpretations, examinations, supervision,

and sharing of information is important to maintaining consistent oversight, promoting

compliance with section 13 of the BHC Act and implementing regulations, and to

fostering a level playing field for affected market participants. The agencies further

recognize that coordinating these activities helps to avoid unnecessary duplication of

oversight, reduces costs for banking entities, and provides for more efficient regulation.

In the proposal, the agencies requested comment on interagency coordination

regarding the Volcker Rule in general and asked several specific questions relating to

transparency, efficiency, and safety and soundness. 31 Numerous commenters, including

banking entities and industry groups, suggested that the agencies more effectively

coordinate Volcker Rule related supervision, examinations, and enforcement, in order to

12 U.S.C. 1851(b)(2)(B)(ii).

83 FR 33436.

improve efficiency and predictability in supervision and oversight. 32 For example, several

commenters suggested that Volcker Rule related supervision should be conducted solely

by a bank’s prudential onsite examiner, 33 and that the two market regulators be required to

consult and coordinate with the prudential onsite examiner. 34 Several commenters

encouraged the agencies to memorialize coordination and information sharing between the

agencies by entering into a formal written agreement, such as an interagency

Memorandum of Understanding. 35

Several comment letters from public interest organizations suggested that the

agencies have not provided sufficient transparency when implementing and enforcing the

Volcker Rule, and urged the agencies to make public certain information related to

enforcement actions, metrics, and covered funds activities. 36 In addition, several

commenters, including a member of Congress, argued that the agencies have not

adequately explained or provided evidence to support the current rulemaking. 37

The agencies agree with commenters that interagency coordination plays an

important role in the effective implementation and enforcement of the Volcker Rule, and

acknowledge the benefits of providing transparency in proposing and adopting rules to

See, e.g., American Bankers Association (ABA); Institute of International Bankers

(IIB); BB&T; Committee on Capital Markets Regulation (CCMR); Japanese Bankers

Association (JBA); and the CFA Institute (CFA). Commenters also recommended

designating to one agency the task of interpreting the implementing regulations and

issuing guidance to smaller banking entities. See, e.g., Credit Suisse and Lori Nuckolls.

See, e.g., ABA; Arvest Bank (Arvest); Credit Suisse; and Financial Services Forum

(FSF).

See ABA.

See, e.g., ABA; BB&T; CCMR; and FSF.

See, e.g., AFR; Public Citizen; Volcker Alliance; and CFA.

See, e.g., CAP; Merkley; and Public Citizen.

implement section 13 of the BHC Act. Accordingly, the agencies have endeavored to

provide specificity and clarity in the final rule to avoid conflicting interpretations or

uncertainty. The final rule also includes notice and response procedures that provide a

greater degree of certainty about the process by which the agencies will make certain

determinations under the final rule. The agencies continue to recognize the benefits of

consistent application of the rules implementing section 13 of the BHC Act and intend to

continue to consult with each other when formulating guidance on the final rule that

would be shared with the public generally. That said, the agencies also are mindful of the

need to strike an appropriate balance between public disclosure and the protection of

sensitive, confidential information, and the agencies are generally restricted from

disclosing sensitive, confidential business and supervisory information on a firm-specific

basis.

Several commenters provided general comments regarding the proposal and the

current rulemaking. For example, several public interest commenters suggested that the

proposed rule did not provide a sufficient financial disincentive against proprietary trading

and encouraged the agencies to adopt certain limitations on compensation arrangements. 38

A commenter also suggested possible penalties for rule violations and encouraged the

agencies to elaborate on the consequences of significant violations of the rule. 39 Other

commenters recommended that the agencies impose strong penalties on banking entities

that break the law. 40 The agencies believe that the appropriate consequences for a

See, e.g., Public Citizen and CAP.

See Public Citizen.

See Volcker 2.0 Form Letter.

violation of the rule will likely depend on the specific facts and circumstances in

individual cases, as well as each agency’s statutory authority under section 13, and

therefore are not amending the rule to provide for specific penalties or financial

disincentives for violations. Finally, several commenters suggested that the proposed rule

is too complex and may provide too much deference to a banking entity’s internal

procedures and models (for example, in provisions related to underwriting, market

making, and hedging), and that the proposed revisions would make the rule less

effective. 41 As discussed further below, the agencies believe that the particular changes

adopted in the final rule are meaningfully simpler and streamlined compared to the 2013

rule, and are appropriate for the reasons described in greater detail below.

IV. Section by Section Summary of the Final Rule

A. Subpart A—Authority and Definitions

1. Section __.2: Definitions

a. Banking Entity

Section 13(a)(1)(A) of the BHC Act prohibits a banking entity from engaging in

proprietary trading or acquiring or retaining an ownership interest, or sponsoring, a

covered fund, unless the activity is otherwise permissible under section 13. 42 Therefore,

the definition of the term “banking entity” defines the scope of entities subject to

restrictions under the rule. Section 13(h)(1) of the BHC Act defines the term “banking

entity” to include (i) any insured depository institution (as defined by statute); (ii) any

See, e.g., Systemic Risk Council and Oonagh McDonald.

12 U.S.C. 1851(a)(1)(A). A banking entity may engage in an activity that is

permissible under section 13 of the BHC Act only to the extent permitted by any other

provision of Federal and State law, and subject to other applicable restrictions. See 12

U.S.C. 1851(d)(1).

company that controls an insured depository institution; (iii) any company that is treated

as a bank holding company for purposes of section 8 of the International Banking Act of

1978; and (iv) any affiliate or subsidiary of any such entity. 43 The regulations

implementing this provision are consistent with the statute and also exclude covered funds

that are not themselves banking entities, certain portfolio companies, and the FDIC acting

in its corporate capacity as conservator or receiver. 44

In addition, the agencies note that, consistent with the statute, for purposes of this

definition, the term “insured depository institution” does not include certain institutions

that function solely in a trust or fiduciary capacity, and certain community banks and their

affiliates. 45 Section 203 of the Economic Growth, Regulatory Relief, and Consumer

Protection Act (EGRRCPA) amended the definition of “banking entity” in the Volcker

Rule to exclude certain community banks from the definition of insured depository

institution, the general result of which was to exclude community banks and their affiliates

and subsidiaries from the scope of the Volcker Rule. 46 On July 22, 2019, the agencies

adopted a final rule amending the definition of “insured depository institution,” in a

manner consistent with EGRRCPA. 47

The proposed rule did not propose specific rule text to amend the definition of

“banking entity,” but invited comment on a number of specific issues. 48 The agencies

12 U.S.C. 1851(h)(1).

See 2013 rule §__.2(c).

See final rule §__.2(r).

Public Law 115–174 (May 24, 2018).

See 84 FR 35008.

See 83 FR 33442-446.

received several comments about the “banking entity” definition, many of which asked

that the agencies revise this definition to exclude specific types of entities.

Several commenters expressed concern about the treatment of certain funds that

are excluded from the definition of “covered fund” in the 2013 rule, including registered

investment companies (RICs), foreign public funds (FPFs), and, with respect to a foreign

banking entity, certain foreign funds offered and sold outside of the United States (foreign

excluded funds). 49 In particular, these commenters noted that when a banking entity

invests in such funds, or has certain corporate governance rights or other control rights

with respect to such funds, the funds could meet the definition of “banking entity” for

purposes of the Volcker Rule. 50 Concerns about certain funds’ potential status as banking

entities arise, in part, because of the interaction between the statute’s and the 2013 rule’s

definitions of the terms “banking entity” and “covered fund.” Sponsors of RICs, FPFs,

and foreign excluded funds have noted that the treatment of such funds as “banking

entities” would disrupt bona fide asset management activities (including fund investment

strategies that may include proprietary trading or investing in covered funds), which these

sponsors argued would be inconsistent with section 13 of the BHC Act. 51 Commenters

also noted that treatment of RICs, FPFs, and foreign excluded funds as “banking entities”

would put such banking entity-affiliated funds at a competitive disadvantage compared to

funds not affiliated with a banking entity, and therefore not subject to restrictions under

See, e.g., ABA; American Investment Council (AIC); Bundesverband Investment

(BVI); Canadian Bankers Association (CBA); European Banking Federation (EBF);

Federated Investors II; Financial Services Agency and Bank of Japan (FSA/Bank of

Japan); European Fund and Asset Management Association (EFAMA); and IIB.

Id.

See, e.g., IIB and Securities Industry and Financial Markets Association (SIFMA).

section 13 of the BHC Act.52 In general, commenters also asserted that the treatment of

RICs, FPFs, and foreign excluded funds as banking entities would not further the policy

objectives of section 13 of the BHC Act. 53

Several commenters suggested that the agencies exclude from the definition of

“banking entity” foreign excluded funds. 54 These commenters generally noted that failing

to exclude such funds from the definition of “banking entity” in the 2013 rule has the

unintended consequence of imposing proprietary trading restrictions and compliance

obligations on foreign excluded funds that are in some ways more burdensome than the

requirements that would apply under the 2013 rule to covered funds. Another commenter

expressed opposition to carving out foreign excluded funds from the definition of banking

entity. 55 The staffs of the agencies continue to consider ways in which the regulations

may be amended in a manner consistent with the statutory definition of “banking entity,”

or other appropriate actions that may be taken, to address any unintended consequences of

section 13 of the BHC Act and the 2013 rule. The agencies intend to issue a separate

proposed rulemaking that specifically addresses the fund structures under the rule,

including the treatment of foreign excluded funds.

See, e.g., Capital One et al.; Credit Suisse; EBF; and Investment Adviser Association

(IAA).

See, e.g., ABA; EBF; and Investment Company Institute (ICI).

Id. In addition to the requests from commenters for the agencies to exclude foreign

excluded funds from the “banking entity” definition, commenters also asked the agencies

to adopt other amendments to address the treatment of such funds, including by providing

a presumption of compliance for such funds (CBA; EBF; and IIB), to permit a banking

entity to elect to treat a foreign excluded fund as a covered fund (CBA; EBF; and IIB),

and to permanently extend the temporary relief currently provided to foreign excluded

funds (IIB).

See Data Boiler Technologies, LLC (Data Boiler).

To provide additional time to complete this rulemaking, the Federal banking

agencies released a policy statement on July 17, 2019, in response to concerns about the

treatment of foreign excluded funds. This policy statement provides that the Federal

banking agencies would not propose to take action during the two-year period ending on

July 21, 2021, against a foreign banking entity based on attribution of the activities and

investments of a qualifying foreign excluded fund to the foreign banking entity, 56 or

against a qualifying foreign excluded fund as a banking entity, in each case where the

foreign banking entity’s acquisition or retention of any ownership interest in, or

sponsorship of, the qualifying foreign excluded fund would meet the requirements for

permitted covered fund activities and investments solely outside the United States, as

provided in section 13(d)(1)(I) of the BHC Act and §__.13(b) of the 2013 rule, as if the

qualifying foreign excluded fund were a covered fund. 57

Several commenters expressed concern with the treatment of RICs and FPFs,

which are subject to significant regulatory requirements in the United States and foreign

jurisdictions, respectively. These commenters encouraged the agencies to consider

excluding such entities from the definition of “banking entity.” 58 In the past, the staffs of

Foreign banking entity was defined for purposes of the policy statement to mean a

banking entity that is not, and is not controlled directly or indirectly by, a banking entity

that is located in or organized under the laws of the United States or any State.

See Board of Governors of the Federal Reserve System, Federal Deposit Insurance

Corporation, and Office of the Comptroller of the Currency, “Statement regarding

Treatment of Certain Foreign Funds under the Rules Implementing Section 13 of the

Bank Holding Company Act” (July 17, 2019). This policy statement continued the

position of the Federal banking agencies that was released on July 21, 2017, and the

position that the agencies expressed in the proposal. See 83 FR 33444.

See, e.g., CCMR; IAA; ICI; and Capital One et al. One commenter also expressed

support for a narrower exclusion for RICs and FPFs that would apply only during a nontime-limited seeding period. JP Morgan Asset Management.

the agencies issued several FAQs to address the treatment of RICs and FPFs. 59 One of

these staff FAQs provides guidance about the treatment of RICs and FPFs during the

period in which the banking entity is testing the fund’s investment strategy, establishing a

track record of the fund’s performance for marketing purposes, and attempting to

distribute the fund’s shares (the so-called seeding period).60 Another FAQ stated that

staffs of the agencies would not view the activities and investments of an FPF that meets

certain eligibility requirements in the 2013 rule as being attributed to the banking entity

for purposes of section 13 of the BHC Act or the 2013 rule, where the banking entity

(i) does not own, control, or hold with the power to vote 25 percent or more of any class of

voting shares of the FPF (after the seeding period), and (ii) provides investment advisory,

commodity trading advisory, administrative, and other services to the fund in compliance

with applicable limitations in the relevant foreign jurisdiction. Similarly, this FAQ stated

that the staffs of the agencies would not view the FPF to be a banking entity for purposes

of section 13 of the BHC Act and the 2013 rule solely by virtue of its relationship with the

sponsoring banking entity, where these same conditions are met. 61

As noted above, the agencies intend to issue a separate proposal addressing and

requesting comment on the covered fund provisions and other fund-related issues. The

See https://www.occ.treas.gov/topics/capitalmarkets/financial-markets/tradingvolcker-rule/volcker-rule-implementation-faqs.html (OCC);

https://www.federalreserve.gov/bankinforeg/volcker-rule/faq.htm (Board);

https://www.fdic.gov/regulations/reform/volcker/faq.html (FDIC);

https://www.sec.gov/divisions/marketreg/faq-volcker-rulesection13.htm (SEC);

https://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_28_VolckerRule/in

dex.htm (CFTC).

Id., FAQ 16.

Id., FAQ 14.

final rule does not modify or revoke any previously issued staff FAQs or guidance related

to RICs, FPFs, and foreign excluded funds. 62

Apart from these topics, the agencies received numerous other comments about the

treatment of entities as “banking entities” under section 13 of the BHC Act. In general,

these commenters requested that the agencies provide additional exclusions from the

definition of “banking entity” for various types of entities. One commenter suggested

that, as an alternative to excluding certain entities from the banking entity definition, the

agencies could exempt the activities of these entities from the proprietary trading and

covered fund prohibitions. 63

One commenter recommended that the agencies provide a general exemption from

the banking entity definition for investment funds, except in circumstances where the

investment fund is determined to have been organized to permit the banking entity sponsor

to engage in impermissible proprietary trading. 64 Some commenters encouraged the

agencies to exclude employee securities companies from the definition of “banking

entity.” 65 One commenter argued that despite a banking entity’s role as a general partner

in employee securities companies, treating such entities as “banking entities” does not

further the policy goals of section 13 of the BHC Act. 66 Several commenters encouraged

The FAQs represent the views of staff of the agencies. They are not rules, regulations,

or statements of the agencies. Furthermore, the agencies have neither approved nor

disapproved their content. The FAQs, like all staff guidance, have no legal force or

effect: they do not alter or amend applicable law, and they create no new or additional

obligations for any person.

See Bank Policy Institute (BPI).

See EFAMA.

See, e.g., ABA and FSF.

See ABA.

the agencies to exclude from the definition of “banking entity” any non-consolidated

subsidiaries not operated or managed by a banking entity, on the basis that such entities

were never intended to be subject to section 13 of the BHC Act. 67 Another commenter

said the agencies should exclude from the definition of “banking entity” all employee

compensation plans, regardless of whether such plans are qualified or non-qualified. 68

Other commenters suggested that the agencies should exclude subsidiaries of foreign

banking entities that do not engage in trading activities in the United States, or otherwise

limit application to foreign subsidiaries of foreign banking groups.69 Other commenters

requested modification of the definition of “banking entity” to exclude parent companies

and affiliates of industrial loan companies, noting that such companies are generally not

subject to other restrictions on their activities under the BHC Act. 70

One commenter encouraged the agencies to exclude international banks from the

definition of “banking entity” if they have limited U.S. trading assets and liabilities. 71

This commenter also encouraged the agencies to exclude certain non-U.S. commercial

See, e.g., ABA; BPI; SIFMA; JBA.

See BB&T.

See JBA. This commenter suggested that in the absence of an exclusion for such

entities, simplified compliance program requirements should apply to foreign subsidiaries

of foreign banking entities that do not engage in trading activities in the United States.

The agencies believe that several of the other changes in this final rule will provide relief

to foreign banking entities that engage in no trading activities in the United States,

including simplifications to the exemption for foreign banking entities engaged in trading

outside of the United States, and more tailored compliance program requirements. See

also FSA/Bank of Japan; IIB.

See, e.g., EnerBank USA (EnerBank); Marketplace Lending Association; National

Association of Industrial Bankers.

See IIB. This commenter also proposed modifying the manner in which “banking

entity” status is determined by disaggregating separate, independent corporate groups.

companies that are comparable to U.S. merchant banking portfolio companies. 72 This

commenter argued that excluding these entities would not pose material risks to the

financial stability of the United States.

Some commenters suggested that the agencies should clarify the standards for

what constitutes “control” in the context of determining whether an entity is an “affiliate”

or “subsidiary” for purposes of the definition of “banking entity” in the Volcker Rule. 73

One commenter suggested that the definition of “banking entity” should include only a

company in which a banking entity owns, controls, or has the power to vote 25 percent or

more of a class of voting securities of the company. 74

The definition of “banking entity” in section 13 of the BHC Act uses the definition

of control in section 2 of the BHC Act. 75 Under the BHC Act, “control” is defined by a

three-pronged test. A company has control over another company if the first company (i)

directly or indirectly or acting through one or more other persons owns, controls, or has

power to vote 25 percent or more of any class of voting securities of the other company;

(ii) controls in any manner the election of a majority of the directors of the other company;

or (iii) directly or indirectly exercises a controlling influence over the management or

policies of the other company. 76 The Board recently issued a proposed rulemaking that

would clarify the standards for evaluating whether one company exercises a controlling

Id.

See, e.g., EnerBank and Capital One et al. See 12 U.S.C. 1841(a)(2)(C).

See Capital One et al.

12 U.S.C. 1841(a)(2); 12 CFR 225.2(e).

Id.

influence over another company for purposes of the BHC Act. 77

The final rule does not amend the definition of banking entity. Commenters raised

important considerations with respect to the consequences of the current “banking entity”

definition under section 13 of the BHC Act and the 2013 rule. The agencies believe that

other amendments to the requirements of the regulations implementing the Volcker Rule

may address some of the issues raised by commenters. Certain concerns raised by

commenters may need to be addressed through amendments to section 13 of the BHC

Act. 78 In addition, as noted above, the agencies intend to revisit the fund-related

provisions of the Volcker Rule in a separate rulemaking.

b. Limited, Moderate, and Significant Trading Assets and

Liabilities

The proposal would have established three categories of banking entities based on

their level of trading activity, as measured by the average gross trading assets and

liabilities of the banking entity and its subsidiaries and affiliates (excluding obligations of

or guaranteed by the United States or any agency of the United States) over the previous

four consecutive quarters. 79 These categories would have been used to calibrate

compliance requirements for banking entities, with the most stringent compliance

See “Control and Divestiture Proceedings,” 84 FR 21,634-666 (May 14, 2019).

See, e.g., Economic Growth, Regulatory Relief, and Consumer Protection Act § 203

(excluding community banks from the definition of “banking entity”).

See proposed rule §__.2(t), (v), (ff). Under the proposal, a foreign banking entity’s

trading assets and liabilities would have been calculated based on worldwide trading

assets and liabilities with respect to the $1 billion threshold between limited and

moderate trading assets and liabilities, but based on the trading assets and liabilities only

of its combined U.S. operations with respect to the $10 billion threshold between

moderate and significant trading assets and liabilities. See proposed rule §__.2(t)(1),

(ff)(2)-(3).

requirements applicable to those with the greatest level of trading activities.

The first category would have included firms with “significant” trading assets and

liabilities, defined as those banking entities that have consolidated trading assets and

liabilities equal to or exceeding $10 billion. 80 The second category would have included

firms with “moderate” trading assets and liabilities, which would have included those

banking entities that have consolidated trading assets and liabilities of $1 billion or more,

but with less than $10 billion in consolidated trading assets and liabilities. 81 The final

category would have included firms with “limited” trading assets and liabilities, defined as

those banking entities that have less than $1 billion in consolidated trading assets and

liabilities. 82 The proposal would have also provided the agencies with a reservation of

authority to require a banking entity with limited or moderate trading assets and liabilities

to apply the compliance program requirements of a higher compliance tier if an agency

determined that the size or complexity of the banking entity’s trading or investment

activities, or the risk of evasion of the requirements of the rule, warranted such

treatment.83 The proposal also solicited comment as to whether there should be further

tailoring of the thresholds for a banking entity that is an affiliate of another banking entity

with significant trading assets and liabilities, if that entity generally operates on a basis

that is separate and independent from its affiliates and parent companies. 84

Commenters provided feedback on multiple aspects of the tiered compliance

Proposed rule §__.2(ff).

Proposed rule §__.2(v).

Proposed rule §__.2(t).

Proposed rule §__.20(h).

See 83 FR at 33442 (question 7).

framework, including the level of the proposed thresholds between the categories ($1

billion and $10 billion in trading assets and liabilities), the manner in which “trading

assets and liabilities” should be measured, and alternative approaches that commenters

believed would be preferable to the proposed three-tiered compliance framework. As

described further below, after consideration of the comments received, the agencies are

adopting a three-tiered compliance framework that is consistent with the proposal, with

targeted adjustments to further tailor compliance program requirements based on the level

of a firm’s trading activities, and in light of concerns raised by commenters. 85 The

agencies believe that this approach will increase compliance efficiencies for all banking

entities relative to the 2013 rule and the proposal, and will further reduce compliance costs

for firms that have little or no activity subject to the prohibitions and restrictions of section

13 of the BHC Act.

Several commenters expressed support for the proposed three-tiered compliance

framework in the proposal. 86 One commenter noted that the 2013 rule’s compliance

regime, which imposes significant compliance obligations on all banking entities with $50

billion or more in total consolidated assets, does not appropriately tailor compliance

obligations to the scope of activities covered under the regulation, particularly for firms

engaged in limited trading activities. 87 Other commenters expressed general opposition to

the proposed three-tiered compliance program. 88 Another commenter expressed concern

See final rule § __.2(s), (u), (ee).

See, e.g., BB&T Corporation; CFA; CCMR; and State Street Corporation (State

Street).

See State Street.

See, e.g., Bean; Data Boiler Technologies; and Occupy the SEC.

in particular that banking entities with “limited” trading assets and liabilities would have

been presumed compliant with the requirements of section 13 of the BHC Act under the

proposed rule. 89 Some commenters also suggested that the agencies adopt a two-tiered

compliance program, bifurcating banking entities into those with and without significant

trading assets and liabilities. 90 One commenter expressed opposition to tailoring

compliance requirements for banking entities that operate separately and independently

from their affiliates, by calculating trading assets and liabilities for such entities

independent of the activities of affiliates. 91 The agencies believe that the three-tiered

framework set forth in the proposal, subject to the additional amendments described

below, appropriately differentiates among banking entities for the purposes of tailoring

compliance requirements. Specifically, the agencies believe that the significant

differences in business models and activities among banking entities that would have

significant trading assets and liabilities, moderate trading assets and liabilities, and limited

trading assets and liabilities, as described below, support having a three-tiered compliance

framework.

A few commenters recommended that the agencies raise the proposed $1 billion

threshold between banking entities with limited and moderate trading assets and

liabilities. 92 These commenters suggested that raising this threshold to $5 billion in

trading assets and liabilities would be consistent with the objective of the proposal to have

the most streamlined requirements imposed on banking entities with a relatively small

See Occupy the SEC.

See, e.g., ABA; Capital One et al.; and KeyCorp and KeyBank (KeyCorp).

See Data Boiler Technologies.

See, e.g., ABA; Capital One et al.; and BPI.

amount of trading activities. Other commenters recommended that the threshold between

banking entities with limited and moderate trading activities was appropriate or should be

set at a lower level. 93 The agencies believe that the compliance obligations applicable to

banking entities with limited trading assets and liabilities are most appropriately reserved

for banking entities below the $1 billion threshold set forth in the proposal. Such banking

entities tend to have simpler business models and do not have large trading operations that

would warrant the expanded compliance obligations applicable to banking entities with

moderate and significant trading assets and liabilities. As discussed further below, these

banking entities also hold a relatively small amount of the trading assets and liabilities in

the U.S. banking system. Therefore, the final rule adopts the threshold from the proposed

rule for determining whether a banking entity has limited trading assets and liabilities. 94

Several commenters recommended that the agencies modify the threshold for

“significant” trading assets and liabilities. 95 Generally, these commenters expressed

support for raising the threshold from $10 billion in trading assets and liabilities to $20

billion in trading assets and liabilities. 96 These commenters noted that this change would

have minimal impact on the number of banking entities that would remain categorized as

having significant trading assets and liabilities. 97 Several commenters also noted that

See, e.g., Data Boiler (encouraging the agencies to lower the threshold to $500 million

in trading assets and liabilities) and B&F Capital Markets (B&F) (expressing support for

the proposed $1 billion threshold).

See final rule § __.2(s)(2)-(3).

See, e.g., ABA; Bank of New York Mellon Corporation, Northern Trust Corporation,

and State Street Corporation (Custody Banks); New England Council; Capital One et al.;

SIFMA; State Street; and BPI.

Id.

increasing the threshold from $10 billion to $20 billion would provide additional certainty

to banking entities that are near or approaching the $10 billion threshold, because market

events or unusual customer demands could cause such banking entities to exceed

(permanently or on a short-term basis) the $10 billion trading assets and liabilities

threshold. 98 The final rule adopts the change recommended by several commenters to

raise the threshold from $10 billion to $20 billion for calculating whether a banking entity

has significant trading assets and liabilities. 99

The agencies estimate that, under the final rule with the increased threshold from

$10 billion to $20 billion described above, banking entities classified as having significant

trading assets and liabilities would hold approximately 93 percent of the trading assets and

liabilities in the U.S. banking system. The agencies also estimate that banking entities

with significant trading assets and liabilities and those with moderate trading assets and

liabilities in combination would hold approximately 99 percent of the trading assets and

liabilities in the U.S. banking system. Therefore, both of these thresholds will tailor the

compliance obligations under the final rule for all firms by virtue of imposing greater

compliance obligations on those banking entities with the most substantial levels of

trading activities.

One commenter suggested that the agencies index the compliance tier thresholds to

inflation. 100 At present, the agencies do not believe that the additional complexity

associated with inflation-indexing the thresholds in the final rule is necessary in light of

See, e.g., ABA; Capital One et al.; and SIFMA.

See final rule § __.2(ee)(1)(i).

100

See Capital One et al.

the other changes to the thresholds and calculation methodologies described below,

including the increase in the threshold for firms with significant trading assets and

liabilities from $10 billion to $20 billion, and the modifications to the calculation of

trading assets and liabilities adopted in the final rule. 101

Commenters recommended that the regulations incorporate a number of changes to

the methodology used in the proposed rule to classify firms into different compliance tiers.

Some commenters recommended that the agencies apply a consistent methodology to

foreign banking entities to classify such firms as having significant trading assets and

liabilities, moderate trading assets and liabilities, or limited trading assets and liabilities. 102

For purposes of classifying the banking entity as having significant trading assets and

liabilities, the proposal would have included only the trading assets and liabilities of the

combined U.S. operations of a foreign banking entity, but used the banking entity’s

worldwide trading assets and liabilities for purposes of classifying the firm as having

either limited trading assets and liabilities or moderate trading assets and liabilities. 103

Commenters recommended that the agencies apply a consistent standard for classifying a

foreign banking entity as having significant trading assets and liabilities, moderate trading

assets and liabilities, or limited trading assets and liabilities, and that the most appropriate

measure would look only at the combined U.S. operations of such a banking entity. 104

These commenters noted that classifying foreign banking entities based on their global

trading activities could have the result of imposing extensive compliance obligations on

101

See, e.g., final rule § __.2(ee)(1)(i).

102

See, e.g., IIB and JBA.

103

See proposed rule § __.2(t)(1), (ff)(2)-(3).

104

See, e.g., IIB and JBA.

the non-U.S. trading activities of a banking entity with minimal U.S. trading activities. 105

The final rule adopts a consistent methodology for calculating the trading assets

and liabilities of foreign banking entities across all categories, taking into account only the

trading assets and liabilities of such banking entities’ combined U.S. operations. 106 The

agencies believe this approach is appropriate, particularly for foreign firms with little or

no U.S. trading activity but substantial worldwide trading operations. The agencies

further believe that the trading activities of foreign banking entities that occur outside of

the United States and are booked into such foreign banking entities (or into their foreign

affiliates), pose substantially less risk to the U.S. financial system than trading activities

booked into a U.S. banking entity, including a U.S. banking entity that is an affiliate of a

foreign banking entity. This approach is also appropriate in light of provisions in section

13 of the BHC Act that provide foreign banking entities with significant flexibility to

conduct trading and covered fund activities outside of the United States.107

One commenter expressed concern that the regulations did not give banking

entities sufficient guidance as to how to calculate their trading assets and liabilities, and

asked that the regulations expressly permit a banking entity to rely on home jurisdiction

accounting standards when calculating trading assets and liabilities. 108 In light of the

changes to the methodology for calculating trading assets and liabilities noted above, in

particular using combined U.S. trading assets and liabilities for establishing the

appropriate compliance tier for foreign banking entities, the agencies believe that further

105

Id.

106

See final rule § __.2(s)(3), (ee)(3).

107

See Section 13(d)(1)(H), (I) (12 U.S.C. 1851(d)(1)(H), (I)).

108

See JBA.

clarifications to the standards for calculating “trading assets and liabilities” are not

necessary for banking entities to have sufficient information available as to the manner in

which to calculate trading assets and liabilities.

A few commenters suggested that the threshold for “significant trading assets and

liabilities” should be determined based on the relative size of the banking entity’s total

trading assets and liabilities as compared to other metrics, such as total consolidated assets

or capital, thereby establishing a banking entity’s compliance requirements based on the

significance of trading activities to the banking entity. 109 Some commenters suggested

that the use of trading assets and liabilities alone as a metric to classify banking entities for

determining compliance obligations was inappropriate. 110 The agencies believe that a

banking entity’s trading assets and liabilities, as calculated under the methodology

described in the final rule, is an appropriate metric to use in establishing compliance

requirements for banking entities. Imposing compliance obligations on a banking entity

based on the relative significance of trading activities to the firm could have the result of

imposing fewer compliance obligations on a larger banking entity with identical trading

activities to a smaller counterpart, simply because of that entity’s larger size.

Several commenters recommended that the regulations exclude particular types of

trading assets and liabilities for purposes of determining whether a banking entity has

significant trading assets and liabilities, moderate trading assets and liabilities, or limited

trading assets and liabilities. In particular, some commenters encouraged the agencies to

exclude all government obligations and other assets and liabilities that are not subject to

109

See, e.g., ABA; Capital One et al.

110

See, e.g., Data Boiler and John Hoffman.

the prohibition on proprietary trading under section 13 of the BHC Act and the

regulations. 111 The final rule modifies the methodology for calculating a firm’s trading

assets and liabilities to exclude all financial instruments that are obligations of, or

guaranteed by, the United States, or that are obligations, participations, or other

instruments of or guaranteed by an agency of the United States or a government-sponsored

enterprise as described in the regulations. 112 As commenters noted, banking entities are

permitted to engage in trading activities in these products under section 13 of the BHC Act

and the implementing regulations, and therefore the exclusion of such instruments for the

final rule will result in a more appropriately tailored standard than under the proposal.

The agencies also believe that the calculation of trading assets and liabilities, subject to

these modifications, should continue to be relatively simple for banking entities and the

agencies, without requiring the imposition of additional reporting requirements.

A few commenters recommended that certain de minimis risk portfolios, such as

matched derivatives holdings and loan-related swaps, be excluded from the calculation of

trading assets and liabilities. 113 Another commenter recommended the calculation of

trading assets and liabilities should exclude insurance assets. 114 Another commenter

proposed that the trading assets and liabilities of non-consolidated affiliates be excluded,

because tracking the trading assets and liabilities of such subsidiaries on an ongoing basis

may present significant practical burdens. 115 As discussed herein, the final rule makes

111

See, e.g., BMO Financial Group (BMO); Capital One et al.; and KeyCorp.

112

See final rule § __.2(s)(2), (3); see also final rule § __.6(a)(1), (2)

113

See, e.g., ABA; Arvest; and BOK Financial (BOK).

114

See Insurance Coalition.

115

See JBA.

several amendments to the methodology for calculating trading assets and liabilities, for

example by excluding securities issued or guaranteed by certain government-sponsored

enterprises, and by calculating trading assets and liabilities for foreign banking entities

based only on the combined U.S. operations of such banking entities. 116 The agencies

believe that the revisions in the final rule should simplify the manner in which a banking

entity calculates its trading assets and liabilities. However, the final rule does not adopt

the changes recommended by a few commenters to exclude trading assets and liabilities

associated with particular business activities or business lines, other than the express

modifications noted above, or to exclude the trading assets and liabilities of certain types

of subsidiaries. Rather, the final rule adopts an approach that is intended to be

straightforward and consistent and allow banking entities greater ability to leverage

regulatory reports that banking entities are already required to prepare under existing law,

such as the Form Y9-C and the Call Report.117

Some commenters noted that the regulations should clarify the manner in which a

banking entity should calculate trading assets and liabilities, and make clear whether it

would be appropriate to rely on regulatory reporting forms such as the Board’s

Consolidated Financial Statements for Holding Companies, Form FR Y-9C or call report

information, or other regulatory reporting forms. 118 Other commenters recommended that

the agencies clarify whether the calculation of “trading assets and liabilities” should

116

See final rule § __.2(s)(2)-(3), (ee)(2)-(3).

117

Compliance obligations are determined on a consolidated basis under the final rule.

For that reason, where a banking entity has an unconsolidated subsidiary, the banking

entity would not need to examine additional financial reports to determine its compliance

obligations.

118

See, e.g., Bank of Oklahoma; KeyCorp; BPI; and Capital One et al Banks.

include only positions that would be within the scope of the “trading account” definition,

or should otherwise exclude certain types of instruments. 119 The agencies support banking

entities relying on current regulatory reporting forms to the extent possible to determine

their compliance obligations under the final rule. As discussed above, the calculation of

significant trading assets and liabilities, moderate trading assets and liabilities, and limited

trading assets and liabilities is based on a four-quarter average, and therefore would not

require daily or more frequent monitoring of trading assets and liabilities. 120

A few commenters encouraged the agencies to include transition periods for a

banking entity that moves to a higher compliance tier, to allow the banking entity time to

comply with the different expectations under the compliance tier. 121 Some commenters

said that the regulations should permit a banking entity to breach a threshold for a higher

compliance category without needing to comply with the heightened compliance

requirements applicable to banking entities with that level of trading assets and liabilities,

provided the banking entity’s trading assets and liabilities drop below the relevant

threshold within a limited period of time. 122 The final rule does not adopt transition

periods or cure periods as recommended by commenters. The calculation of a banking

entity’s trading assets and liabilities is calculated based on a 4-quarter average, which

should provide banking entities with ample notice to come into compliance with the

requirements of the final rule when crossing from having limited to moderate trading

119

See, e.g., BMO and Capital One et al.

120

See final rule § __.2(s)(1)(i), (ee)(1)(i).

121

See, e.g., ABA; BPI; Custody Banks; Capital One et al.; and State Street.

122

See State Street.

assets and liabilities, or from moderate to significant trading assets and liabilities. 123

One commenter recommended that the agencies provide for notice and response

procedures prior to exercising the reservation of authority to require a banking entity to

apply the requirements of a higher compliance program tier, and, if a banking entity is

determined to be required to apply increased compliance program requirements, it should

be given a two-year conformance period to come into compliance with such

requirements. 124 After considering this comment, the agencies believe that the notice and

response procedures provided in the proposal for rebutting the presumption of compliance

for banking entities with limited trading assets and liabilities would also be appropriate

with respect to an agency exercising this reservation of authority. However, the agencies

believe that providing an automatic two-year conformance period would be inappropriate,

especially in instances where the agency has concerns regarding evasion of the

requirements of the final rule. Therefore, the agencies are adopting the reservation of

authority with a modification to require that the agencies exercise such authority in

accordance with the notice and response procedures in section __.20(i) of the final rule. 125

To the extent that an agency exercises this authority to require a banking entity to apply

increased compliance program requirements, an appropriate conformance period shall be

determined through the notice and response procedures.

B. Subpart B—Proprietary Trading Restrictions

123

A banking entity approaching a compliance threshold is encouraged to contact its

primary financial regulatory agency to discuss the steps the banking entity should take to

satisfy its compliance obligations under the new threshold.

124

See BPI.

125

See final rule § __.20(i).

Section 13(a)(1)(A) of the BHC Act prohibits a banking entity from engaging in

proprietary trading unless otherwise permitted in section 13. Section 13(h)(4) of the BHC

Act defines proprietary trading, in relevant part, as engaging as principal for the trading

account of the banking entity in any transaction to purchase or sell, or otherwise acquire or

dispose of, a security, derivative, contract of sale of a commodity for future delivery, or

other financial instrument that the agencies include by rule. Section 13(h)(6) of the BHC

Act defines “trading account” to mean any account used for acquiring or taking positions

in the securities and instruments described in section 13(h)(4) principally for the purpose

of selling in the near term (or otherwise with the intent to resell in order to profit from

short-term price movements), and any such other accounts as the agencies, by rule

determine. 126 Section 3 of the implementing regulations defines “proprietary trading,”

“trading account,” and several related definitions.

1. Section __.3: Prohibition on Proprietary Trading and Related

Definitions

a. Trading Account

The 2013 rule’s definition of trading account includes three prongs and a

rebuttable presumption. The short-term intent prong includes within the definition of

trading account the purchase or sale of one or more financial instruments principally for

the purpose of (A) short-term resale, (B) benefitting from actual or expected short-term

price movements, (C) realizing short-term arbitrage profits, or (D) hedging one or more

positions resulting from the purchases or sales of financial instruments for the foregoing

126

12 U.S.C. 1851(h)(6).

purposes. 127 Under the 2013 rule’s rebuttable presumption, the purchase (or sale) of a

financial instrument by a banking entity is presumed to be for the trading account under

the short-term intent prong if the banking entity holds the financial instrument for fewer

than sixty days or substantially transfers the risk of the financial instrument within sixty

days of the purchase (or sale). A banking entity could rebut the presumption by

demonstrating, based on all relevant facts and circumstances, that the banking entity did

not purchase (or sell) the financial instrument principally for any of the purposes described

in the short-term intent prong.128

The market risk capital rule prong (market risk capital prong) includes within the

definition of trading account the purchase or sale of one or more financial instruments that

are both covered positions and trading positions under the market risk capital rule (or

hedges of other covered positions under the market risk capital rule), if the banking entity,

or any affiliate of the banking entity, is an insured depository institution, bank holding

company, or savings and loan holding company, and calculates risk-based capital ratios

under the market risk capital rule. 129

Finally, the dealer prong includes within the definition of trading account any

purchase or sale of one or more financial instruments for any purpose if the banking entity

(A) is licensed or registered, or is required to be licensed or registered, to engage in the

business of a dealer, swap dealer, or security-based swap dealer, to the extent the

instrument is purchased or sold in connection with the activities that require the banking

127

See 2013 rule § __.3(b)(1)(i).

128

See 2013 rule § __.3(b)(2).

129

See 2013 rule § __.3(b)(1)(ii).

entity to be licensed or registered as such; or (B) is engaged in the business of a dealer,

swap dealer, or security-based swap dealer outside of the United States, to the extent the

instrument is purchased or sold in connection with the activities of such business. 130

The proposal would have replaced the 2013 rule’s short-term intent prong with a

new third prong based on the accounting treatment of a position (the accounting prong).

The proposal also would have added a presumption of compliance with the proposed

rule’s prohibition on proprietary trading for trading desks whose activities are not covered

by the market risk capital prong or the dealer prong if the activities did not exceed a

specified quantitative threshold. The proposal would have retained a modified version of

the market risk capital prong and would have retained the dealer prong unchanged from

the 2013 rule. As described in detail below, the final rule retains the three-pronged

definition of trading account from the 2013 rule and does not adopt the proposed

accounting prong or presumption of compliance with the proprietary trading prohibition.

Rather, the final rule makes targeted changes to the definition of trading account.

Among other changes, the final rule eliminates the 2013 rule’s rebuttable

presumption and replaces it with a rebuttable presumption that financial instruments held

for sixty days or more are not included in the trading account under the short-term intent

130

See 2013 rule § __.3(b)(1)(iii). An insured depository institution may be registered as

a swap dealer, but only the swap dealing activities that require it to be so registered are

covered by the dealer trading account. If an insured depository institution purchases or

sells a financial instrument in connection with activities of the insured depository

institution that do not trigger registration as a swap dealer, such as lending, deposittaking, the hedging of business risks, or other end-user activity, the financial instrument

is included in the trading account only if the instrument falls within the definition of

trading account under at least one of the other prongs. See 79 FR at 5549.

prong. 131 The agencies believe that the market risk capital prong, which expressly

includes certain short-term trading activities, is an appropriate interpretation of the

statutory definition of trading account for all firms subject to the market risk capital

rule. 132 Therefore, the final rule provides that banking entities that are subject to the

market risk capital prong are not subject to the short-term intent prong. 133 However, the

final rule provides that banking entities that are subject to the short-term intent prong may

elect to apply the market risk capital prong instead of the short-term intent prong. 134

These changes are designed to simplify and tailor the trading account definition in a

manner that is consistent with section 13 of the BHC Act and applicable safety and

soundness standards.

i. Accounting Prong

The proposed accounting prong would have provided that “trading account” meant

any account used by a banking entity to purchase or sell one or more financial instruments

that is recorded at fair value on a recurring basis under applicable accounting standards. 135

Such instruments generally include, but are not limited to, derivatives, trading securities,

and available-for-sale securities. The proposed inclusion of this prong in the definition of

131

See final rule § __.3(b)(4).

132

See 12 U.S.C. § 1851(h)(6); see also Instructions for Preparation of Consolidated

Financial Statements for Holding Companies, Trading Assets and Liabilities, Schedule

HC-D, available at https://www.federalreserve.gov/reportforms/forms/FR_Y9C20190731_i.pdf, and Instructions for Preparation of Consolidated Reports of Condition

and Income, Schedule RC-D, available at

https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_FFIEC041_201803_i.pdf.

133

See final rule § __.3(b)(2)(i).

134

See final rule § __.3(b)(2)(ii).

135

See proposed rule § __.3(b)(3); 83 FR at 33447-48.

“trading account” was intended to provide greater certainty and clarity to banking entities

than the short-term intent prong in the 2013 rule about which transactions would be

included in the trading account, because banking entities could more readily determine

which positions are recorded at fair value on their balance sheets. 136

Many commenters strongly opposed replacing the short-term intent prong with the

accounting prong. 137 These commenters asserted that the accounting prong could

inappropriately scope in, among other things: over $400 billion in available-for-sale debt

securities; 138 certain long term investments; 139 static hedging of long term investments; 140

traditional asset-liability management activities; 141 derivative transactions entered into for

any purpose and duration; 142 long-term holdings of commercial mortgage-backed

securities; 143 seed capital investments; 144 investments that are expressly permitted under

the covered fund provisions; 145 investments in connection with employee

136

See 83 FR at 33447-48.

137

See, e.g., BOK; New York Community Bank (NYCB); IAA; ABA; KeyCorp;

International Swaps and Derivatives Association (ISDA); Mortgage Bankers Association

(MBA); Commercial Real Estate Finance Council (CREFC), Mortgage Bankers

Association, and the Real Estate Roundtable (Real Estate Associations); State Street;

Chatham Financial et al. (Chatham); Capital One et al.; BPI; FSF; Goldman Sachs;

SIFMA; Center for Capital Markets Competitiveness (CCMC); IIB; Credit Suisse; EBF;

and Arvest.

138

See, e.g., BPI and SIFMA.

139

See, e.g., Capital One et al.; BPI; SIFMA; and CCMR.

140

See, e.g., BPI and ISDA.

141

See, e.g., KeyCorp; BPI; Capital One et al.; FSF; and Goldman Sachs.

142

See e.g., ISDA and BPI.

143

See MBA.

144

See, e.g., ICI; Capital One et al.; Credit Suisse; FSF; and SIFMA.

145

See, e.g., Capital One et al. and BPI.

compensation; 146 bank holding company-permissible investments in enterprises engaging

in activities that are part of the business of banking or incidental thereto, as well as other

investments made pursuant to the BHC Act; 147 and financial holding company merchant

banking investments. 148 Some commenters argued that the accounting prong was

inconsistent with the statute;149 would lead to increased regulatory burden and

uncertainty; 150 could encourage banking entities not to elect to account for financial

instruments at fair value, thereby reducing transparency into banking entities’ financial

reporting and frustrating risk management practices that are based on the fair value

option; 151 could result in disparate treatment of the same activity between two banking

entities where one banking entity elects the fair value option and the other does not;152

would have a disproportionately negative impact on midsize and regional banks; 153 could

negatively impact the securitization industry if liquidity for asset-backed securities is

impeded; 154 could inappropriately scope in investment advisers’ use of seed capital to

develop products, services, or strategies for asset management clients; 155 could lead to

146

See, e.g., Capital One et al. and BPI.

147

See Capital One et al.

148

See Capital One et al.

149

See, e.g., Capital One et al; CCMC; IAA; ABA; ISDA; Credit Suisse; CREFC; BPI;

FSF; Goldman Sachs; and SIFMA.

150

See, e.g., CCMC; JBA; Structured Finance Industry Group (SFIG); IIB; American

Action Forum; ABA; BPI; ISDA; and SIFMA.

151

See, e.g., BPI and IIB.

152

See BPI.

153

See, e.g., BOK; ABA; and NYCB.

154

See SFIG.

155

See IAA.

increased burden for international banks by requiring them to apply both local accounting

standards and U.S. generally accepted accounting principles (GAAP) to non-U.S.

positions, one for regular accounting purposes and one specifically for assessing

compliance with the regulations implementing section 13 of the BHC Act; 156 that the

exclusions and exemptions from the prohibition on proprietary trading in the 2013 rule are

ill-suited with respect to positions captured by the accounting prong; 157 and that fair

valuation of assets and liabilities under applicable accounting standards is not indicative of

short-term trading intent. 158

Some commenters expressed a preference for the 2013 rule’s short-term intent

prong over the accounting prong. 159 Other commenters suggested revisions to the

accounting prong if adopted, such as excluding from the definition of trading account any

financial instrument for which financial institutions record the change in value in other

comprehensive income; 160 expressly excluding available-for-sale portfolios from the

accounting prong; 161 and clarifying that non-U.S. banking entities are permitted to use

accounting standards adopted by individual banking entities other than International

Financial Reporting Standards and GAAP. 162 One commenter expressed concern that a

156

See IIB.

157

See, e.g., SIFMA; BPI; CCMR; FSF; and BB&T.

158

See, e.g., Capital One et al.; ABA; BPI; FSF; SIFMA; and Credit Suisse.

159

See, e.g., Chatham; BPI; SIFMA; IIB; Credit Suisse; and Arvest.

160

See BOK.

161

See BOK.

162

See JBA.

banking entity could circumvent the prohibition on proprietary trading by recording

financial instruments at amortized cost instead of fair value. 163

Some commenters supported adopting the accounting prong. 164 One commenter

urged the agencies to retain the short-term intent prong and to adopt the accounting prong

as an additional test without any presumption of compliance. 165 Another commenter

argued that the accounting prong should be implemented as a new presumption within the

short-term trading prong. 166 This commenter urged the agencies to revise the accounting

prong by codifying language from the applicable accounting standards and coupling this

with preamble language indicating that the agencies intend to interpret the accounting

prong in a manner that is consistent with GAAP and international accounting codifications

and guidance, thereby allowing the agencies to definitively interpret the text rather than

accounting authorities, who might not consider the regulations implementing section 13 of

the BHC Act when making further changes to accounting standards. 167

After considering all comments received, 168 the agencies are not adopting the

accounting prong in the final rule. The agencies agree with commenters’ concerns that the

accounting prong would have inappropriately scoped in many financial instruments and

activities that section 13 of the BHC Act was not intended to capture, including some

163

See Volcker Alliance.

164

See, e.g., Public Citizen; CAP; Better Markets; and AFR.

165

See CAP.

166

See Better Markets.

167

See Better Markets.

168

See, e.g., BOK; NYCB; IAA; ABA; KeyCorp; ISDA; MBA; Real Estate

Associations; State Street; Chatham; Capital One et al.; BPI; FSF; Goldman Sachs;

SIFMA; CCMC; IIB; Credit Suisse; EBF; CREFC; and Arvest.

long-term investments. In addition, the accounting prong would have inappropriately

scoped in entire categories of financial instruments, regardless of the banking entity’s

purpose for buying or selling the instrument, such as all derivatives and equity securities

with a readily determinable fair value. Furthermore, the accounting prong would have

captured certain seeding activity that would otherwise be permitted under subpart C of the

regulations implementing section 13 of the BHC Act. As noted in the preamble to the

proposed rule, the impetus behind replacing the short-term intent prong with the

accounting prong was to address the uncertain application of the short-term intent prong to

certain trades. 169 As discussed in detail below, the agencies have modified the short-term

intent prong to provide more clarity. The agencies have also provided further clarity to

the trading account definition in the final rule by adding additional exclusions from the

“proprietary trading” definition. The agencies are adopting these clarifying measures as a

more tailored approach to address the difficulties that have arisen under the existing shortterm intent prong.

ii. Presumption of Compliance with the Prohibition on

Proprietary Trading

Under the accounting prong, the proposal would have added a presumption of

compliance with the proprietary trading prohibition based on an objective, quantitative

measure of a trading desk’s activities. 170 Under this proposed presumption of compliance,

the activities of a trading desk of a banking entity that are not covered by the market risk

capital prong or the dealer prong—i.e., the activities that would be within the trading

169

See 83 FR at 33448.

170

See proposed rule § __.3(c); 83 FR at 33449-51.

account under the proposed accounting prong—would have been presumed to comply

with the proposed rule’s prohibition on proprietary trading if the activities did not exceed

a specified quantitative threshold. The trading desk would have remained subject to the

prohibition on proprietary trading and, unless the desk engaged in a material level of

trading activity (or the presumption of compliance was rebutted), the desk would not have

been required to comply with the more extensive requirements that would otherwise apply

under the proposal to demonstrate compliance. The agencies proposed to use the absolute

value of the trading desk’s profit and loss on a 90-calendar-day rolling basis as the

relevant quantitative measure for this threshold.

Two commenters supported adopting the presumption of compliance with the

prohibition on proprietary trading. 171 Several commenters opposed adopting this

presumption of compliance. 172 Some of these commenters argued that the presumption of

compliance could allow banks to evade the restrictions on proprietary trading by splitting

trades over multiple trading desks. 173 One of these commenters suggested that the

presumption of compliance for trading desk activities that would have been within the

trading account under the accounting prong in the proposed rule could invite proprietary

trading within the $25 million threshold. 174 Another commenter had several concerns

with this proposal, including that not all businesses calculate daily profits and losses, and

that even businesses that do not sell a single position within a 90-day period might exceed

171

See, e.g., New England Council and CFA.

172

See, e.g., Volcker Alliance; Public Citizen; CAP; Bean; Feng; AFR; and Better

Markets.

173

See, e.g., Volcker Alliance; Public Citizen; CAP; and Bean.

174

See Public Citizen.

$25 million in unrealized gains and losses. 175 Two commenters asserted there is no

statutory basis to permit a de minimis amount of proprietary trading. 176 Other commenters

asserted that the presumption could increase regulatory burden. 177 Several commenters

argued that, if the presumption is adopted, the threshold should be increased, 178 or the

method of calculating profit and loss should be modified. 179 Many commenters stated that

the proposed trading desk-level presumption of compliance did not adequately address the

overbreadth of the accounting prong. 180

After considering the comments, the agencies have decided not to adopt a trading

desk-level presumption of compliance with the prohibition on proprietary trading. As

discussed in the preamble to the proposal, this presumption of compliance would have

been available only for a trading desk’s activities that would have been within the trading

account under the proposed accounting prong, and not for a trading desk that is subject to

the market risk capital prong or the dealer prong of the trading account definition. This

presumption of compliance was intended to address the potential impact of the accounting

prong, which the proposal recognized would have been a significant change from the 2013

rule. In particular, the proposal noted that the proposed trading desk-level presumption of

compliance with the prohibition on proprietary trading was intended to allow banking

entities to conduct ordinary banking activities without having to assess every individual

175

See IIB.

176

See, e.g., Bean and CAP.

177

See, e.g., BOK; BPI; IIB; and JBA.

178

See, e.g., BOK; BPI; IIB; and Capital One et al.

179

See, e.g., CFA.

180

See, e.g., Capital One et al.; BPI; FSF; and SIFMA.

trade for compliance with subpart B of the implementing regulations and the proposed

accounting prong. 181 Since the agencies are not adopting the accounting prong and are

adopting additional clarifying revisions to the short-term intent prong, the agencies have

determined it is not necessary to adopt the presumption of compliance.

iii. Short-term intent prong

The 2013 rule’s short-term intent prong included within the definition of trading

account the purchase or sale of one or more financial instruments principally for the

purpose of (A) short-term resale, (B) benefitting from actual or expected short-term price

movements, (C) realizing short-term arbitrage profits, or (D) hedging one or more

positions resulting from the purchases or sales of financial instruments for the foregoing

purposes. 182 Under the 2013 rule’s rebuttable presumption, the purchase (or sale) of a

financial instrument by a banking entity was presumed to be for the trading account under

the short-term intent prong if the banking entity held the financial instrument for fewer

than sixty days or substantially transferred the risk of the financial instrument within sixty

days of the purchase (or sale). A banking entity could rebut the presumption by

demonstrating, based on all relevant facts and circumstances, that the banking entity did

not purchase (or sell) the financial instrument principally for any of the purposes described

in the short-term intent prong.183

181

See 83 FR at 33449.

182

See 2013 rule § __.3(b)(1)(i).

183

See 2013 rule § __.3(b(2).

Several commenters stated that, for banking entities that are subject to the market

risk capital prong, the short-term intent prong is redundant. 184 In addition, several

commenters stated that the final rule should eliminate the short-term intent prong

altogether, as proposed.185 Other commenters stated that, consistent with the statutory

definition of trading account, the agencies should not eliminate the short-term intent

prong. 186 One commenter suggested re-adopting the short-term intent prong but defining

the term “short-term” differently based on asset class. 187 Several commenters supported

retaining the short-term intent prong with modifications, such as eliminating or reversing

the rebuttable presumption or aligning the short-term intent prong more closely with the

market risk capital prong. 188 The agencies agree that there is substantial overlap between

the short-term intent prong and the market risk capital prong and have revised the

definition of trading account accordingly.

Under the final rule, the definition of trading account includes any account that is

used by a banking entity to purchase or sell one or more financial instruments principally

for the purpose of short-term resale, benefitting from actual or expected short-term price

movements, realizing short-term arbitrage profits, or hedging one or more of the positions

resulting from the purchases or sales of financial instruments for the foregoing

184

See, e.g., Capital One et al.; BPI; FSF; KeyCorp; and SIFMA.

185

See, e.g., JBA; Credit Suisse; CREFC; and SIFMA.

186

See AFR and Bean.

187

See Occupy the SEC.

188

See, e.g., SIFMA; BPI; State Street; Chatham; FSF; CCMR; ABA; KeyCorp; Capital

One et al.; Arvest; and IIB.

purposes. 189 The agencies believe that it is necessary to include a prong other than the

market risk capital prong or the dealer prong to define “trading account” for banking

entities that are subject to the final rule but are not subject to the market risk capital prong.

The agencies believe that requiring banking entities that are not subject to the market risk

capital rule to apply the market risk capital prong in order to identify the scope of

positions subject to the Volcker Rule’s proprietary trading provisions could be unduly

complex and burdensome for banking entities with smaller and less active trading

activities. The final rule allows a banking entity not subject to the market risk capital

prong to define its trading account by reference to either the short-term intent prong or the

market risk capital prong because both tests are consistent with the statutory definition of

trading account; this flexible approach for banking entities with less trading activities is

appropriate for various reasons, including because these banking entities are already

familiar with the short-term intent prong. 190

Under the final rule, the regulatory short-term intent prong applies only to a

banking entity that is not subject to the market risk capital prong and that has not elected

to apply the market risk capital prong to determine the scope of the banking entity’s

trading account.191 For purposes of the final rule, a banking entity is subject to the market

risk capital prong if it, or any affiliate with which the banking entity is consolidated for

regulatory reporting purposes, calculates risk-based capital ratios under the market risk

189

See final rule § __.3(b)(1)(i).

190

See 12 U.S.C. 1851(h)(6).

191

See final rule § __.3(b)(2)(i), (ii).

capital rule. 192 Applying the short-term intent prong only to banking entities whose

trading account is not covered by the market risk capital prong will simplify application of

the rule. No longer applying the short-term intent prong to banking entities that are

subject to the market risk capital prong is appropriate because the scope of activities

captured by the short-term intent prong is substantially similar to the scope of activities

captured by the market risk capital prong. Indeed, the preamble to the 2013 rule noted

that the definition of trading position in the market risk capital rule largely parallels the

statutory definition of trading account, 193 which in turn mirrors the language in the shortterm intent prong. Accordingly, the agencies believe that a banking entity should be

subject either to the short-term intent prong or to the market risk capital prong, but not

both. 194

The final rule allows a banking entity that is not subject to the market risk capital

prong to elect to apply the market risk capital prong in place of the short-term intent

prong. 195 The final rule includes this option to provide parity between smaller banking

entities that are not subject to the market risk capital rule and larger banking entities with

active trading businesses that are subject to the market risk capital prong. 196 Under the

192

See 12 CFR part 3, subpart F; part 217, subpart F; part 324, subpart F.

193

See 79 FR at 5548.

194

A number of commenters suggested that, due to the overlap between the market risk

capital prong and the short-term intent prong, banking entities that are subject to the

market risk capital prong should not also be subject to the short-term intent prong. See,

e.g., Capital One et al.; BPI; FSF; Goldman Sachs; CREFC; and SIFMA.

195

196

See final rule § __.3(b)(2)(ii).

Several commenters recommended defining the trading account solely by reference to

the dealer prong and market risk capital prong for banking entities subject to the market

risk capital rule. See, e.g., Capital One et al.; BPI; FSF; Goldman Sachs; CREFC; and

final rule, a banking entity that is not subject to the market risk capital rule may choose to

define its trading account as if the banking entity were subject to the market risk capital

prong. If a banking entity opts into the market risk capital prong, the banking entity’s

trading account would include all accounts used by the banking entity to purchase or sell

one or more financial instruments that would be covered positions and trading positions

under the market risk capital rule if the banking entity were subject to the market risk

capital rule. Banking entities that do not make this election will continue to apply the

short-term intent prong.

Under the final rule, an election to apply the market risk capital prong must be

consistent among a banking entity and all of its wholly owned subsidiaries. 197 This

consistency requirement is intended to facilitate banking entities’ compliance with the

proprietary trading prohibition by subjecting wholly owned legal entities within a firm to

the same definition. Requiring a consistent definition of “trading account” is particularly

important to simplify compliance because a trading desk may book trades into different

legal entities within an organization, and having a consistent definition of “trading

account” among these entities should help ensure that each banking entity can identify

relevant trading activity and meet its compliance obligations under the final rule. This

requirement is also expected to facilitate the agencies’ supervision of compliance with the

SIFMA. One commenter suggested that banking entities that are not subject to the

market risk capital rule and subject to a third prong should be allowed to elect to be

treated as a banking entity subject to the market risk capital rule for purposes of the

regulations implementing section 13 of the BHC Act. This approach would maintain

parity between banking entities that are subject to the market risk capital rule and those

that are not. See SIFMA.

197

See final rule § __.3(b)(3).

final rule. This consistency requirement would apply only to a banking entity and its

wholly owned subsidiaries. In the case of minority-owned subsidiaries or other

subsidiaries that the banking entity does not functionally control, it may be impractical for

one banking entity within the organization to ensure that all affiliates will make a

consistent election. However, the relevant primary financial regulatory agency may

subject a banking entity that is not a wholly owned subsidiary to the consistency

requirement if the agency determines it is necessary to prevent evasion of the rule’s

requirements. When exercising this authority, the relevant primary financial regulatory

agency will follow the same notice and response procedures used elsewhere in the final

rule.

iv. 60-day Rebuttable Presumption

The proposal would have eliminated the 2013 rule’s 60-day rebuttable

presumption. Many commenters supported the proposed rule’s elimination of this

rebuttable presumption. 198 Some commenters urged the agencies to establish a

presumption that positions held for more than 60 days are not proprietary trading. 199

Some commenters suggested that the agencies should presume, for banking entities not

subject to the market risk capital rule, that financial instruments held for longer than 60

days, or that have an original maturity or remaining maturity upon acquisition of fewer

than 60 days to their stated maturities, are not for the banking entity’s trading account. 200

One commenter suggested that any third prong to the definition of trading account that

198

See, e.g., State Street; Chatham; BPI; FSF; CCMR; and CFA.

199

See, e.g., ABA; KeyCorp; Capital One et al.; State Street; and Arvest.

200

See, e.g., ABA; Arvest; BPI; SIFMA; and IIB.

applies to banking entities that are not subject to the market risk capital rule should have a

rebuttable presumption that any position held by the banking entity as principal for 60

days or more is not for the trading account, as well as a reasonable challenge procedure

through which a banking entity would be provided an opportunity to demonstrate to its

primary financial regulatory agency that positions held for fewer than 60 days do not

constitute proprietary trading. 201 Several commenters asked that the agencies—if they do

not eliminate the presumption—provide guidance on the rebuttal process, 202 or make

certain revisions to the presumption, such as revising the “substantial transfer of risk”

language; 203 exempting financial instruments close to maturity; 204 and excluding hedging

activity. 205 Some commenters argued, in contrast, that the 60-day rebuttable period was

under-inclusive. 206 One commenter argued that any position purchased or sold within 180

days should be automatically included within the definition of trading account, or, in the

alternative, that the presumption should be extended from 60 to 180 days, and the agencies

should mandate ongoing monitoring and disclosure of all components, excluded or not, of

the banking entities’ reported trading account assets. 207 This commenter also argued that

there should not be a presumption that certain positions are not within the trading account;

that documentation requirements for rebutting the presumption should be clearly specified

201

See SIFMA.

202

See, e.g., ABA; Arvest; BPI; SIFMA; State Street; and FSF.

203

See, e.g., ABA and Arvest.

204

Id.

205

See Capital One et al.

206

See AFR and Occupy the SEC.

207

See Occupy the SEC.

and the criteria more restrictive; that all arbitrage positions should be presumed to be

trading positions; and that the definition of “short-term” should vary by asset class.

Another commenter generally opposed eliminating the 60-day rebuttable presumption. 208

After considering all comments received, the agencies are eliminating the 60-day

rebuttable presumption from the 2013 rule and establishing a new rebuttable presumption

that financial instruments held for sixty days or more are not within the short-term intent

prong. Since the 2013 rule came into effect, the agencies have found that the rebuttable

presumption has captured many activities that should not be included in the definition of

proprietary trading, 209 which, under the statute, only covers buying and selling financial

instruments principally for the purpose of selling in the near term (or otherwise with the

intent to resell in order to profit from short-term price movements). 210 Several

commenters supported eliminating the 2013 rule’s rebuttable presumption for this reason

or due to difficulties in rebutting the presumption. 211 Given the type of activities that have

triggered the 2013 rule’s rebuttable presumption but that are not undertaken principally for

the purpose of selling in the near-term, 212 the agencies have concluded that it is not

208

See Bean.

209

For example, asset-liability, liquidity management activities, transactions to correct

error trades and loan-related swaps. See Part IV.B.2.b.i-iii.

210

12 U.S.C. 1851(h)(4) and (6).

211

See, e.g., State Street; Chatham; BPI; FSF; CCMR; and CFA.

212

Such activities include a foreign branch of a U.S. banking entity purchasing a foreign

sovereign debt obligation with remaining maturity of fewer than 60 days in order to meet

foreign regulatory requirements. Similarly, error correcting trades and matched derivative

transactions, discussed infra may have triggered the 2013 rule’s rebuttable presumption

but are not undertaken principally for the purpose of selling in the near term (or otherwise

with the intent to resell in order to profit from short-term price movements).

appropriate to continue to presume short-term trading intent from holding a financial

instrument for fewer than 60 days.

However, the agencies recognize the utility for both the agencies and the subject

banking entities of an objective time-based standard. 213 The final rule contains a new

rebuttable presumption: The purchase or sale of a financial instrument presumptively lacks

short-term trading intent if the banking entity holds the financial instrument for 60 days or

longer and does not transfer substantially all of the risk of the financial instrument within

60 days of the purchase (or sale). 214 The agencies agree with commenters that a banking

entity subject to the short-term intent prong that holds an instrument for at least 60 days

should receive the benefit of a presumption that the trade was not entered into for the

purpose of selling in the near term or otherwise with the intent to resell in order to profit

from short-term price movements. Replacing the 2013 rule’s rebuttable presumption with

a rebuttable presumption that financial instruments held for sixty days or longer are not

within the short-term intent prong will provide clarity for banking entities with respect to

such positions, without imposing the burden associated with the 2013 rule’s rebuttable

presumption.

In light of the revision to the 60-day rebuttable presumption, the agencies do not

believe it is necessary to provide a formal challenge procedure with respect to financial

instruments that are purchased or sold within 60 days. Under the final rule, such activity

is no longer presumptively within a banking entity’s trading account.

213

See 79 FR at 5550; see also ABA; KeyCorp; Capital One et al.; State Street; Arvest;

and SIFMA.

214

See final rule § __.3(b)(4).

As in the 2013 rule, the final rule’s presumption only applies to the short-term

intent prong and does not apply to the market risk capital or dealer prongs

v. Market Risk Capital Prong Modification

The proposal would have revised the market risk capital prong to apply to the

activities of foreign banking organizations (FBOs) to take into account the different

market risk frameworks FBOs may have in their home countries. 215 Specifically, the

proposal included within the market risk capital prong an alternative definition that

permitted a banking entity that is not, and is not controlled directly or indirectly by a

banking entity that is, located in or organized under the laws of the United States or any

State, to include any account used by the banking entity to purchase or sell one or more

financial instruments that are subject to risk-based capital requirements under a market

risk framework established by the home-country supervisor that is consistent with the

market risk framework published by the Basel Committee on Banking Supervision (Basel

Committee), as amended from time to time.

One commenter asserted that, under some foreign regulatory market risk capital

frameworks, this expansion would capture positions that are not held for short-term

trading. 216 This commenter advocated adopting a flexible approach where foreign banking

entities could exclude a position subject to a foreign jurisdiction’s market risk capital

215

See proposed rule § __. 3(b)(1)(ii); 83 FR at 33447.

216

See IIB.

framework from the trading account by demonstrating that the position was not acquired

for short-term purposes or otherwise should not be treated as a trading account position. 217

After considering the comments on this issue, 218 the agencies have decided not to

modify the market risk capital prong to incorporate foreign market risk capital

frameworks. The agencies believe that relying on the short-term intent prong, market risk

capital prong, and dealer prong will ensure consistent treatment of U.S. and foreign

banking entities. Foreign banking entities that are not subject to the market risk capital

rule may continue to use the short-term intent prong to define their trading accounts.

However, a banking entity, including a foreign banking entity, may elect to apply the

market risk capital prong in determining the scope of its trading account. As discussed

above, a banking entity that uses the market risk capital prong to determine the scope of its

trading account is not also subject to the short-term intent prong. This approach will

provide appropriate parity between U.S. and foreign banking entities and will also

maintain consistency with the statutory trading account definition. 219

Accordingly, the final rule retains a market risk capital prong that is substantially

similar to that in the 2013 rule. The final rule’s market risk capital prong includes within

the definition of trading account any account that is used by a banking entity to purchase

or sell one or more financial instruments that are both covered positions and trading

217

See id.

218

See IIB (noting that the scope of some foreign supervisory market risk capital

frameworks may capture positions that are not held solely for short-term purposes and

thus should be out of scope for purposes of the final rule).

219

In the course of developing the final rule, the agencies have considered the prudential

actions of foreign regulators in this area and the resulting effects on U.S. and non-U.S.

financial institutions and the relevant markets in which they participate.

positions under the market risk capital rule (or hedges of other covered positions under the

market risk capital rule), if the banking entity, or any affiliate that is consolidated with the

banking entity for regulatory reporting purposes, calculates risk-based capital ratios under

the market risk capital rule. 220

In addition, the final rule includes a transition period for banking entities as they

become subject to the market risk capital prong. 221 Under the final rule, if a banking

entity is subject to the short-term intent prong and then becomes subject to the market risk

capital prong, the banking entity may continue to apply the short-term intent prong instead

of the market risk capital prong for one year from the date on which it becomes, or

becomes consolidated for regulatory reporting purposes with, a banking entity that

calculates risk-based capital ratios under the market risk capital rule. The agencies are

adopting this transition period to provide banking entities a reasonable period to update

compliance programs.

220

See final rule § __.3(b)(1)(ii). The final rule’s market risk capital prong has,

however, been modified as compared to the 2013 rule to account for a banking entity that

is not consolidated with an affiliate (for regulatory reporting purposes) that calculates

risk-based capital ratios under the market risk capital rule. For example, the trading

positions of a broker-dealer that is not consolidated with its parent bank holding company

will not be included in the holding company’s trading positions in the holding company’s

Form FR Y-9C. In such an instance, even though the broker-dealer is affiliated with an

entity that calculates risk-based capital ratios under the market risk capital rule, it would

not be subject to the market capital risk prong due to the fact that the broker-dealer is not

consolidated with the affiliate for regulatory reporting purposes. As a result, the brokerdealer would be subject to the amended short-term intent prong and the dealer prong

(with respect to instruments purchased or sold in connection with the activities that

require the broker-dealer to be licensed or registered as such). It may, however, be able

to elect to use the market risk capital prong (as an alternative to the short-term intent

prong) by following the procedures described above.

221

Unlike the Volcker Rule compliance program requirements, which are based on

average gross trading assets and liabilities over the prior four quarters, the thresholds in

the market risk capital rule are based on the most recent quarter.

The market risk capital rule includes a position that is reported as a covered

position for regulatory reporting purposes on applicable reporting forms. 222 Certain

banking entities that may be subject to, or elect to apply, the market risk capital prong may

not report positions on applicable regulatory reporting forms as trading assets or trading

liabilities. Therefore, the final rule amends the definition of “market risk capital rule

covered position and trading position” to clarify that this definition includes any position

that meets the criteria to be a covered position and a trading position, without regard to

whether the financial instrument is reported as a covered position or trading position on

any applicable regulatory reporting forms. The final rule also modifies the definition of

“market risk capital rule” to update a cross-reference to the Board’s capital rules and to

clarify what the applicable market risk capital rule would be for a firm electing to apply

the market risk capital prong. 223

vi. Dealer Prong

The proposal did not propose revisions to the dealer prong. However, several

commenters requested that the agencies clarify that not all purchases and sales of financial

instruments by a dealer are captured by the dealer prong. 224 Specifically, these

commenters requested that the agencies clarify that the dealer prong does not capture

purchases or sales made by a dealer in a non-dealing capacity, including financial

instruments purchased for long-term investment purposes. 225 Among other things, those

222

See 12 CFR 3.202; 12 CFR 217.202; 12 CFR 324.202 (defining “covered position”).

223

See 12 CFR part 217.

224

See, e.g., BPI; FSF; and SIFMA.

225

See e.g., BPI; FSF; and SIFMA.

commenters noted that without such modifications, the dealer prong may require a

position-by-position analysis to confirm whether a long-term investment is part of the

trading account. Another commenter requested that the agencies revise the dealer prong to

ensure that derivatives activities remain in the trading account without regard to potential

SEC and CFTC actions on the de minimis thresholds or other registration requirements,

and that such derivatives activities do not benefit from any presumption of compliance. 226

The final rule retains the 2013 rule’s dealer prong without any substantive change. 227

The final rule’s dealer prong includes within the definition of trading account any

account that the banking entity uses to purchase or sell one or more financial instruments

for any purpose if the banking entity (A) is licensed or registered, or is required to be

licensed or registered, to engage in the business of a dealer, swap dealer, or security-based

swap dealer, to the extent the instrument is purchased or sold in connection with the

activities that require the banking entity to be licensed or registered as such; or (B) is

engaged in the business of a dealer, swap dealer, or security-based swap dealer outside of

the United States, to the extent the instrument is purchased or sold in connection with the

activities of such business. 228 In response to commenters and consistent with the 2013

226

See Better Markets.

227

In response to the commenter, the agencies clarify that banking entities that are

licensed or registered (or required to be licensed or registered) as dealers, swap dealers,

or security-based swap dealers analyze the types of activities that would be captured by

the dealer prong without regard to the de minimis thresholds for swap dealer or securitybased swap dealer registration. However, regardless of whether a banking entity is so

licensed or registered, the banking entity is also required to determine whether a purchase

or sale of a financial instrument would be captured by either the short-term intent prong

or the market risk capital prong, as applicable.

228

See final rule § __.3(b)(1)(iii).

rule, the agencies reaffirm that a banking entity may be licensed or registered as a dealer,

but only the types of activities that require it to be so licensed or registered are covered by

the dealer prong. Thus, if a banking entity purchases or sells a financial instrument in

connection with activities that are not the types of activities that would trigger registration

as a dealer, the purchase or sale of the financial instrument is not covered by the dealer

prong. However, it may be included in the trading account under the short-term intent

prong or the market risk capital prong, as applicable. 229 Moreover, in response to

commenters’ concerns that the existing rule may require dealers to conduct a position-byposition analysis of their trading activities to determine whether a position is captured by

the dealer prong, the agencies believe that the changes being adopted today, particularly

the exclusions for financial instruments that are not trading assets or liabilities, 230 should

help alleviate those concerns by narrowing the range of transactions covered by the rule.

b. Proprietary Trading Exclusions

Section __.3 of the 2013 rule generally prohibits a banking entity from engaging in

proprietary trading. In addition to defining the scope of trading activity subject to the

prohibition on proprietary trading, the 2013 rule also provides several exclusions from the

definition of proprietary trading. Based on experience implementing the 2013 rule, the

agencies proposed modifying the exclusion for liquidity management and adopting new

exclusions for transactions made to correct errors and for certain offsetting swap

transactions. In addition, the agencies requested comment regarding whether any

additional exclusions should be added, for example, to address certain derivatives entered

229

See final rule § __.3(b)(1)(i), (ii).

230

See infra section IV.B.1.b.v.

into in connection with a customer lending transaction. The agencies are adopting the

liquidity management exclusion as proposed, with a modification to encompass nondeliverable cross-currency swaps, and additional exclusions for the following activities: (i)

trading activity to correct trades made in error, (ii) loan-related and other customer

accommodation swaps, (iii) matched derivative transactions, (iv) hedges of mortgage

servicing rights where trading in the underlying mortgage servicing rights is not prohibited

by the rule; and (v) financial instruments that do not meet the definition of trading assets

or trading liabilities under applicable reporting forms.

i. Liquidity Management Exclusion Amendments

The 2013 rule excludes from the definition of proprietary trading the purchase or

sale of securities for the purpose of liquidity management in accordance with a

documented liquidity management plan. 231 This exclusion contains several requirements.

First, the liquidity management exclusion is limited by its terms to securities and requires

that transactions be conducted pursuant to a liquidity management plan that specifically

contemplates and authorizes the particular securities to be used for liquidity management

purposes; describes the amounts, types, and risks of securities that are consistent with the

banking entity’s liquidity management plan; and the liquidity circumstances in which the

particular securities may or must be used. Second, any purchase or sale of securities

contemplated and authorized by the plan must be principally for the purpose of managing

the liquidity of the banking entity, and not for the purpose of short-term resale, benefitting

from actual or expected short-term price movements, realizing short-term arbitrage profits,

231

See 2013 rule § __.3(d)(3).

or hedging a position taken for such short-term purposes. Third, the plan must require that

any securities purchased or sold for liquidity management purposes be highly liquid and

limited to instruments the market, credit, and other risks of which the banking entity does

not reasonably expect to give rise to appreciable profits or losses as a result of short-term

price movements. Fourth, the plan must limit any securities purchased or sold for

liquidity management purposes to an amount that is consistent with the banking entity’s

near-term funding needs, including deviations from normal operations of the banking

entity or any affiliate thereof, as estimated and documented pursuant to methods specified

in the plan. Fifth, the banking entity must incorporate into its compliance program

internal controls, analysis, and independent testing designed to ensure that activities

undertaken for liquidity management purposes are conducted in accordance with the

requirements of the 2013 rule and the banking entity’s liquidity management plan.

Finally, the plan must be consistent with the supervisory requirements, guidance, and

expectations regarding liquidity management of the agency responsible for regulating the

banking entity. The 2013 rule established these requirements to provide some safeguards

to ensure that the liquidity management exclusion is not misused for the purpose of

impermissible proprietary trading. 232 While some safeguards around a banking entity’s

liquidity management are appropriate, the restrictions under the 2013 rule have limited the

ability of banking entities to engage in certain types of bona fide liquidity management

activities.

The proposal would have amended the exclusion for liquidity management

activities to allow banking entities to use foreign exchange forwards and foreign exchange

232

See 79 FR at 5555.

swaps, each as defined in the Commodity Exchange Act, 233 and physically settled crosscurrency swaps (i.e., cross-currency swaps that involve an actual exchange of the

underlying currencies) as part of their liquidity management activities. 234 Foreign

exchange forwards, foreign exchange swaps, and physically settled cross-currency swaps

are often used by trading desks of foreign branches and subsidiaries of a U.S. banking

entity to manage liquidity in foreign jurisdictions. 235 The proposal would have provided

that a banking entity could use foreign exchange forwards, foreign exchange swaps, and

physically settled cross-currency swaps for liquidity management purposes provided that

the use of such financial instruments was in accordance with a documented liquidity

management plan. 236

Many commenters supported the proposed expansion of activities covered by the

liquidity management exclusion. 237 However, some commenters expressed the view that

the expansion did not go far enough and should be expanded to include other types of

financial instruments. 238 One commenter asserted that expanding the scope of the

liquidity management exclusion would streamline compliance for banking entities without

introducing additional safety and soundness concerns or the risk of impermissible

233

See 7 U.S.C. 1a(24) and 1a(25).

234

See proposed rule § __.3(e)(3).

235

See 83 FR at 33451-52

236

See id.

237

See, e.g., ISDA; Goldman Sachs; ABA; SIFMA; IIB; BPI; GFMCA; CFA; New

England Council, CCMC; Capital One et al., FSF; and State Street.

238

See, e.g., ISDA; ABA; FSF; New England Council; CCMC; Capital One et al.;

Goldman Sachs; SIFMA; IIB; Credit Suisse; and State Street.

proprietary trading. 239 Some commenters said that non-deliverable currency derivatives

should also qualify for the exclusion, because there are some currencies for which

physically settled cross-currency swaps are not available. 240 Additionally, other

commenters argued that given the role of derivatives in liquidity risk management, the

agencies should expand the exclusion further to cover all derivatives, including interest

rate swaps. 241 Certain commenters suggested that the agencies should further expand the

liquidity management exclusion to include all financial instruments that would be

convenient and useful for managing liquidity and asset-liability mismatch risks of the

organization. 242

Several commenters claimed that the eligibility criteria of the liquidity

management exclusion are opaque and confusing, and suggested modifying, clarifying, or

eliminating some or all of the requirements. 243 For example, several commenters argued

that the requirement to maintain a documented liquidity management plan with certain

enumerated elements is unnecessarily prescriptive. 244 Some commenters stated that

banking entities do not rely on the exclusion due to the number and limiting nature of the

requirements. 245 Some commenters argued that the agencies should be promoting, rather

239

See ISDA.

240

See, e.g., Global Financial Markets Association (GFMA) (noting that certain nondeliverable financial instruments are also used for liquidity management purposes);

SIFMA; State Street; JBA; ABA; BPI; IIB; and Credit Suisse.

241

See, e.g., FSF; Capital One et al.; IIB; and JBA.

242

See, e.g., IIB and State Street.

243

See, e.g., Capital One et al.; BPI; JBA; SIFMA; CCMC; and FSF.

244

See, e.g., ISDA; KeyCorp; IIB; CCMC; SIFMA; and Goldman Sachs.

245

See, e.g., FSF and Credit Suisse.

than restricting, appropriate liquidity management and structural interest rate risk

management activities, and that the retention of these requirements is not consistent with

the removal of the prescriptive requirements of Appendix B in the 2013 rule. 246 Other

commenters argued that the agencies should eliminate the compliance-related

requirements and permit banking entities to design and manage their liquidity

management function according to their existing internal compliance frameworks. 247 In

addition, a commenter recommended clarifying whether treasury functions within banking

entities may manage global liquidity through the newly added financial instruments. 248

In contrast, other commenters did not support the proposed expansion of the

liquidity management exclusion. 249 One commenter asserted that the proposed rule fails

to demonstrate the need for providing banks greater opportunity to use foreign currency

transactions to manage their liquidity needs when those needs are already being met via

the securities markets. 250 Another commenter argued that the proposed change would

create concern for the currency markets by making it easier for trading desks to trade these

instruments for speculative purposes under the guise of legitimate liquidity

management. 251 One commenter argued that the proposal would encourage banking

entities to exclude impermissible trades as liquidity management and engage in

speculative currency trading. As a result, it would increase banks’ risk-taking and moral

246

See, e.g., SIFMA and Goldman Sachs.

247

See, e.g., BPI; IIB; and FSF.

248

See ABA.

249

See, e.g., Volcker Alliance; Data Boiler; NAFCU; Public Citizen; CAP; Occupy the

SEC; and Merkley.

250

See Bean.

251

See Volcker Alliance.

hazard, reducing the effectiveness of regulatory oversight. 252 In addition, some

commenters suggested that the agencies did not provide sufficient justification to support

the proposed changes to the exclusion. 253

After reviewing the comments received, the agencies are adopting the liquidity

management exclusion substantially as proposed, but with a modification to permit the use

of non-deliverable cross-currency swaps. The agencies recognize the various types of

financial instruments that can be used by a banking entity for liquidity management as

noted by commenters. However, the agencies continue to believe, as stated in the

proposal, that the purpose of the expansion is to streamline compliance for banking

entities operating in foreign jurisdictions. 254 Thus, the final rule expands the liquidity

management exclusion to permit the purchase or sale of foreign exchange forwards (as

that term is defined in section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)),

foreign exchange swaps (as that term is defined in section 1a(25) of the Commodity

Exchange Act (7 U.S.C. 1a(25)), and cross-currency swaps 255 entered into by a banking

252

See Data Boiler.

253

See, e.g., Public Citizen and Bean.

254

See 83 FR at 33451-52.

255

As proposed, the final rule defines a cross-currency swap as a swap in which one

party exchanges with another party principal and interest rate payments in one currency

for principal and interest rate payments in another currency, and the exchange of

principal occurs on the date the swap is entered into, with a reversal of the exchange of

principal at a later date that is agreed upon for when the swap is entered. This definition

is consistent with regulations pertaining to margin and capital requirements for covered

swap entities, swap dealers, and major swap participants. See 12 CFR 45__.2; 12 CFR

237.2; 12 CFR 349.2; 17 CFR 23.151.

entity for the purpose of liquidity management in accordance with a documented liquidity

management plan. 256

In response to commenters’ concerns that physically settled cross-currency swaps

are not available for some currencies (e.g., due to currency controls), the exclusion also

encompasses non-deliverable cross-currency swaps. For currencies where physically

settled cross-currency swaps are not available, a banking entity may have had to engage in

procedures such as using spot transactions or holding currency at foreign custodians,

which could be inefficient. Allowing banking entities to use non-deliverable crosscurrency swaps can provide greater flexibility in conducting liquidity management in

these situations. Even though physically settled cross-currency swaps are available in

many currencies, the agencies believe it is appropriate to allow non-deliverable crosscurrency swaps to be used for liquidity management in all currencies. Requiring physical

settlement for some cross-currency swaps but not others would make the exclusion more

difficult for banking entities to use and for the agencies to monitor, particularly if currency

controls change, causing the list of currencies for which physical settlement is permitted to

change. These administrative hurdles would negate many of the benefits of allowing the

use of non-deliverable cross-currency swaps.

Regarding the assertion that banking entities could meet their liquidity needs in the

securities markets, the agencies have found that, to the contrary, foreign exchange

forwards, foreign exchange swaps, and cross-currency swaps are often used by trading

desks to manage liquidity both in the United States and in foreign jurisdictions. As

foreign branches and subsidiaries of U.S. banking entities often have liquidity

256

See final rule § __.3(d)(3).

requirements mandated by foreign jurisdictions, U.S. banking entities often use foreign

exchange products to address currency risk arising from holding this liquidity in foreign

currencies. Thus, these foreign exchange products are important for liquidity management

and should be included in the expansion of the liquidity management exclusion.

The agencies believe that adding foreign exchange forwards, foreign exchange

swaps, and cross-currency swaps to the exclusion addresses the primary liquidity

management needs for foreign entities, and therefore are declining to expand the exclusion

to other products as suggested by some commenters. While some commenters asserted

that further expanding the liquidity management exclusion would streamline compliance

without introducing additional safety and soundness or proprietary trading concerns, the

agencies believe that the range of financial instruments that will qualify for the exclusion

under the final rule will be sufficient for managing banking entities’ liquidity risks.

The final rule permits a banking entity to purchase or sell foreign exchange

forwards, foreign exchange swaps, and cross-currency swaps to the same extent that a

banking entity may purchase or sell securities under the liquidity management exclusion

in the 2013 rule, and the conditions that apply for securities transactions also apply to

transactions in foreign exchange forwards, foreign exchange swaps, and cross-currency

swaps. 257

The agencies acknowledge that, as stated in the proposal, cross-currency swaps

generally are more flexible in their terms, may have longer durations, and may be used to

achieve a greater variety of potential outcomes, as compared to foreign exchange forwards

257

See § __.3(e)(3)(i)-(vi) of the final rule.

and foreign exchange swaps. 258 However, the agencies believe that the requirement to

conduct liquidity management in accordance with a documented liquidity management

plan appropriately limits the use of cross-currency swaps to activities conducted for

liquidity management purposes, and therefore banking entities’ use of these swaps should

not adversely affect currency markets, as one commenter warned. Under the plan, the

purpose of the transactions must be liquidity management. The timing of purchases and

sales, the types and duration of positions taken and the incentives provided to managers of

these purchases and sales must all indicate that managing liquidity, and not taking shortterm profits (or limiting short-term losses), is the purpose of these activities. Thus, to be

in compliance with the plan, cross-currency swaps must be used principally for the

purpose of managing the liquidity of the banking entity, and not for the purpose of shortterm resale, benefitting from actual or expected short-term price movements, realizing

short-term arbitrage profits, or hedging a position taken for such short-term purposes. 259

Regarding the assertion from some commenters that the compliance-related

requirements for the liquidity management exclusion are opaque or unnecessarily

prescriptive, the agencies believe it is important to retain these requirements in order to

provide clarity in administration of the rule and to protect against potential misuse of the

liquidity management exclusion for proprietary trading. As noted above, the documented

liquidity management plan, required under the 2013 rule and retained in the final rule, 260 is

a key element in assuring that liquidity management is the purpose of the relevant

258

See 83 FR at 33452.

259

See § __.3(d)(3)(ii) of the final rule.

260

See § __.3(d)(3).

transactions. The agencies do not believe that the final rule will stand as an obstacle to or

otherwise impair the ability of banking entities to manage their liquidity risks. Although

other changes to the 2013 rule in the final rule, such as the elimination of Appendix B,

reflect efforts to tailor compliance obligations, the agencies believe it is important to be

explicit in maintaining targeted compliance requirements for specific provisions of the

final rule, such as the liquidity management exclusion.

The agencies believe that the six required elements of the liquidity management

plan help to mitigate commenters’ concerns that the proposal would have encouraged

banking entities to exclude impermissible trades as liquidity management or increase risktaking. Under the liquidity management plan required by the final rule, the exclusion does

not apply to activities undertaken with the stated purpose or effect of hedging aggregate

risks incurred by the banking entity or its affiliates related to asset-liability mismatches or

other general market risks to which the entity or affiliates may be exposed. Further, the

exclusion does not apply to any trading activities that expose banking entities to

substantial risk from fluctuations in market values, unrelated to the management of nearterm funding needs, regardless of the stated purpose of the activities. 261

This final rule also includes a change to one of the liquidity management

exclusion’s requirements. The 2013 rule requires that activity conducted under the

liquidity management exclusion be consistent with applicable “supervisory requirements,

guidance, and expectations.” 262 Consistent with changes elsewhere in the final rule and

with the Federal banking agencies’ Interagency Statement Clarifying the Role of

261

See 79 FR at 5555.

262

See 2013 rule § __.3(d)(3)(vi).

Supervisory Guidance, 263 the agencies are removing references to guidance and

expectations from the regulatory text of the liquidity management exclusion. In addition,

the final rule includes conforming changes that reflect the addition of foreign exchange

forwards, foreign exchange swaps, and cross-currency swaps as permissible contracts in

conjunction with the other criteria under the exclusion. 264

ii. Transactions to Correct Bona Fide Trade Errors

The proposal included an exclusion from the definition of proprietary trading for

trading errors and subsequent correcting transactions. 265 As discussed in the proposal, the

exclusion was intended to address situations in which a banking entity erroneously

executes a purchase or sale of a financial instrument in the course of conducting a

permitted or excluded activity. For example, a trading error may occur when a banking

entity is acting solely in its capacity as an agent, broker, or custodian pursuant to §

__.3(d)(7) of the 2013 rule, such as by trading the wrong financial instrument, buying or

selling an incorrect amount of a financial instrument, or purchasing rather than selling a

financial instrument (or vice versa). To correct such errors, a banking entity may need to

engage in a subsequent transaction as principal to fulfill its obligation to deliver the

customer’s desired financial instrument position and to eliminate any principal exposure

that the banking entity acquired in the course of its effort to deliver on the customer’s

263

Interagency Statement Clarifying the Role of Supervisory Guidance (Sept. 11, 2018;

https://www.occ.gov/news-issuances/news-releases/2018/nr-ia-2018-97a.pdf,

https://www.fdic.gov/news/news/financial/2018/fil18049.html,

https://www.federalreserve.gov/supervisionreg/srletters/sr1805.htm). The final rule

similarly removes references to “guidance” from subparts A and C.

264

The term “financial instruments” is substituted for the term “securities” when

referring to what contracts are permitted under the exclusion.

265

See 83 FR at 33452-53.

original request. As the proposal noted, banking entities have expressed concern that,

however, under the 2013 rule, the initial trading error and any corrective transactions

could, depending on the facts and circumstances involved, fall within the proprietary

trading definition if the transaction is covered by any of the prongs of the trading account

definition and is not otherwise excluded pursuant to a different provision of the rule.

To address this concern, the agencies proposed a new exclusion from the definition

of proprietary trading for trading errors and subsequent correcting transactions. The

proposal noted that the availability of this exclusion would depend on the facts and

circumstances of the transactions, such as whether the banking entity made reasonable

efforts to prevent errors from occurring, or identified and corrected trading errors in a

timely and appropriate manner. The proposed exclusion required that banking entities,

once they identified purchases or sales made in error, transfer the financial instrument to a

separately managed trade error account for disposition. The proposal would have required

that this separately managed trade error account be monitored and managed by personnel

independent from the traders responsible for the error, and that banking entities monitor

and manage trade error corrections and trade error accounts.

The majority of commenters generally supported the proposed exclusion for trade

errors.266 Some commenters noted that, consistent with operational risk management

practices, bona fide trade error activity is separately managed and classified as an

operational loss when there is a loss event or a “near miss” when error activity results in a

266

See, e.g., ABA; BB&T; Capital One et al.; BPI; FSF; CFA; and JBA.

gain. 267 Many commenters urged the agencies not to mandate a separately managed trade

error account, but to permit banking entities to resolve trading errors in accordance with

internal policies and procedures to avoid duplicative resolution systems and unnecessary

regulatory costs. 268 One commenter argued that error trades are clearly outside the scope

of activities meant to be prohibited by the statute, so it should not be necessary to include

any additional documentation or administrative requirements related to them. 269 One

comment letter requested that the agencies clarify that the exclusion covers both presettlement trade errors (where the error is identified and corrected prior to being settled in

the client’s account and is settled in a separately managed trade error account) and postsettlement trade errors (where the trade error is settled in and posted directly to the client’s

account).270

One commenter supported providing an exclusion for bona fide error trades, but

suggested certain changes to the proposed exclusion. 271 This commenter expressed

concern that the proposed exclusion did not provide sufficient protections to ensure that

banking entities correct errors in a timely and comprehensive manner and do not use the

exclusion to facilitate directional exposures. To this end, the commenter recommended

requiring banking entities to establish reasonably designed controls, including periodic

exception reports containing certain specified fields. These reports, the commenter

argued, should be provided to independent personnel in the second line-of-defense,

267

See, e.g., ABA; BB&T; BPI; Capital One et al.; and FSF.

268

See, e.g., ABA; Credit Suisse; FSF; JBA; and SIFMA.

269

See SIFMA.

270

See Capital One et al.

271

See Better Markets.

including compliance and risk personnel, and escalated internally in accordance with the

banking entity’s internal policies and procedures. The commenter also recommended

requiring periodic error trade testing and audits conducted by the second line-of-defense.

One commenter argued against a blanket exclusion for error trades, and urged the

agencies to require any profit from error trades be forfeited to the U.S. Treasury, thereby

removing any incentive for a banking entity to erroneously classify intentional financial

positions as error trades. 272 Another commenter argued that the proposal did not

adequately explain or provide sufficient data to justify the necessity of providing an

exclusion for error trades, and that the exclusion could be used to evade the prohibition on

proprietary trading. 273

After weighing the comments received, the agencies are excluding from the

definition of “proprietary trading” any purchase or sale of one or more financial

instruments that was made in error by a banking entity in the course of conducting a

permitted or excluded activity or is a subsequent transaction to correct such an error. 274

The agencies do not believe bona fide trading errors and correcting transactions are

proprietary trading. Under the 2013 rule, trading errors and subsequent transactions to

correct such errors could trigger the short-term intent prong’s 60-day rebuttable

presumption and thus could be considered to be presumptively within the trading account.

In addition, trading errors and correcting transactions could be within the definition of

proprietary trading under the market risk prong or dealer prong. While the final rule

272

See Public Citizen.

273

See CAP.

274

Final rule § __.3(d)(10).

eliminates the 2013 rule’s 60-day rebuttable presumption, 275 the agencies believe it is

useful and appropriate to clarify in the final rule that trading errors and subsequent

correcting transactions are not proprietary trading because banking entities do not enter

into these transactions principally for the purpose of selling in the near-term (or otherwise

with the intent to resell in order to profit from short-term price movements). 276 Rather, the

principal purpose of a trading error correction is to remedy a mistake made in the ordinary

course of the banking entity’s permissible activities. 277 Accordingly, the agencies are

adopting this exclusion to provide clarity regarding bona fide trading errors and

subsequent correcting transactions.

Consistent with feedback from several commenters, 278 the exclusion in the final

rule does not require banking entities to transfer erroneously purchased (or sold) financial

instruments to a separately managed trade error account for disposition. The agencies

agree that this requirement could have resulted in duplicative resolution systems and

imposed undue regulatory costs, which are not appropriate in light of the narrow class of

bona fide trading errors that fall within the exclusion. As with all exclusions and

permitted trading activities, the agencies intend to monitor use of this exclusion for

evasion. For example, the magnitude or frequency of errors could indicate that the trading

activity is inconsistent with this exclusion.

275

See final rule § __.3(b)(4).

276

See 12 U.S.C. 1851(h)(6).

277

See, e.g., BPI and FSF.

278

See, e.g., ABA; Credit Suisse; FSF; JBA; and SIFMA.

The agencies have considered comments suggesting that the agencies should

impose on banking entities certain reporting, auditing, and testing requirements

specifically related to trade error transactions. 279 As noted above, the agencies believe

mandating requirements such as these could lead to undue costs for banking entities,

which are not appropriate in light of the narrow class of bona fide trading errors that fall

within the exclusion. Such bona fide trade errors and subsequent correcting transactions

do not fall within the statutory definition of “proprietary trading” because they lack the

requisite short-term intent. Accordingly, the agencies do not find it necessary to impose

additional requirements with respect to such activities. Further, the agencies do not agree

that any profits resulting from trade error transactions should be remitted to the U.S.

Treasury.

iii. Matched Derivative Transactions

The proposal requested comment on the treatment of loan-related swaps between a

banking entity and customers that have received loans from the banking entity. 280 The

proposal explained that, in a loan-related swap transaction, a banking entity enters into a

swap with a customer in connection with the customer’s loan and contemporaneously

offsets the swap with a third party. The swap with the customer is directly related to the

terms of the customer’s loan. 281 In one typical type of loan-related swap, a banking entity

seeks to make a floating-rate loan to a customer that could have the benefit to the banking

entity of reducing the banking entity’s interest rate risk, but the customer would prefer to

279

See Better Markets.

280

See 83 FR at 33462-64.

281

See id. at 33462.

have the economics of a fixed-rate loan. 282 To achieve a result that addresses these

divergent preferences, the banking entity makes a floating-rate loan to the customer and

contemporaneously or nearly contemporaneously enters into a floating rate to fixed rate

interest rate swap with the same customer and an offsetting swap with another

counterparty. 283 As a result, the customer receives economic treatment similar to a fixedrate loan. 284 The banking entity has entered into the preferred floating rate loan, provided

the customer with the customer’s preferred fixed rate economics though the interest rate

swap with the customer and offset its market risk exposure from the customer-facing

interest rate swap through a swap with another counterparty. 285

Loan-related swaps have presented a compliance challenge particularly for smaller

non-dealer banking entities. 286 These banking entities may enter into loan-related swaps

infrequently, and the decision to do so tends to be situational and dependent on changes in

market conditions as well as on the interaction of a number of factors specific to the

banking entity, such as the nature of the customer relationship. 287

The proposal sought comment on whether loan-related swaps should be excluded

from the definition of proprietary trading, exempted from the prohibition on proprietary

282

Id.

283

Id.

284

Id.

285

Id. In this example, the banking entity retains the counterparty risk from both swaps.

However, depending on the type of swap and the particular transaction, the banking

entity may be able to manage the counterparty risk, for example, by clearing the

transaction at a clearing agency or derivatives clearing organization acting as a central

counterparty, as applicable.

286

Id.

287

Id. at 33463.

trading, or permitted under the exemption for market making-related activities. 288 The

proposal also asked whether other types of swaps, such as end-user customer-driven swaps

that are used by a customer to hedge commercial risk should be treated the same way as

loan-related swaps. 289 The proposal also requested comment as to whether it is

appropriate to permit loan-related swaps to be conducted pursuant to the exemption for

market making-related activities where the frequency with which a banking entity

executes such swaps is minimal but the banking entity remains prepared to execute such

swaps when a customer makes an appropriate request. 290

Most commenters supported allowing loan-related swaps, either by adopting an

exclusion from the definition of proprietary trading, 291 creating a new exemption for loanrelated swaps, 292 or clarifying that banking entities could enter into loan-related swaps

under existing exemptions. 293 The majority of these commenters supported explicitly

excluding loan-related swaps from the definition of proprietary trading. 294 These

commenters noted that loan-related swap transactions generally do not fall within the

statutory definition of trading account and that these transactions are important risk-

288

Id.

289

Id. at 33464.

290

Id. at 33463.

291

See, e.g., BOK; ABA; Covington & Burling LLP (Covington); JBA; Chatham; Credit

Suisse; BPI; SIFMA; IIB, Covington; Arvest; IIB; KeyCorp; and Capital One et al.

292

See, e.g., Covington and BPI.

293

See, e.g., Covington; BPI; SIFMA; Credit Suisse; and BB&T.

294

See, e.g., BOK; ABA; Covington; JBA; Chatham; Credit Suisse; BPI; SIFMA; IIB,

Covington; Arvest; IIB; KeyCorp; and Capital One et al.

mitigating activities. 295 Commenters stated that providing an exclusion or permitted

activity exemption for loan-related swaps would prevent section 13 of the BHC Act from

having an unintended chilling effect on an important and prudent lending-related

activity. 296 Commenters also stated that these types of swap transactions are important

tools that facilitate bank customers’ ability to manage their risks. 297 One commenter

opposed providing an exclusion for loan-related swaps, arguing that these activities

instead should be conducted under the risk-mitigating hedging exemption. 298

Two commenters requested that the agencies adopt a permitted activity exemption

for loan-related swaps or revise the existing exemption for market making-related

activities if the agencies do not explicitly exclude loan-related swaps from the definition

of proprietary trading. 299 In addition, two commenters suggested that the exemption for

riskless principal transactions in § __.6(c)(2) of the 2013 rule could cover loan-related

swaps. 300 These commenters and two others suggested that excluding loan-related swaps

from the definition of proprietary trading would be more effective than adopting a new

permitted activity exemption or relying on an existing permitted activity exemption. 301

295

See, e.g., BOK; ABA; Covington; JBA; Chatham; Arvest; and IIB.

296

See, e.g., Covington and Credit Suisse.

297

See, e.g., Arvest and BOK.

298

See Data Boiler.

299

See, e.g., Covington and BPI.

300

See, e.g., SIFMA and Credit Suisse.

301

See, e.g., Covington; BPI; SIFMA; and Credit Suisse.

Two commenters argued that banking entities should be allowed to engage in loanrelated swaps using the exemption for market making-related activities. 302 Several other

commenters asserted that the market-making exemption is a poor fit for loan-related

swaps and that the market-making exemption’s requirements were unduly burdensome

with respect to this activity, particularly for smaller banking entities. 303

Several commenters supported excluding additional derivatives activities from the

definition of proprietary trading, such as customer-driven matched-book trades that enable

customers to hedge commercial risk regardless of whether the swaps are related to a

loan. 304 Commenters noted that such customer-driven matched-book trades do not expose

banking entities to risk other than counterparty credit risk. 305 Moreover, these trades

reduce risks to the bank’s customer and thus also reduce the risk of the banking entity’s

loans to that customer. 306

Three commenters requested that the exclusion be expanded to cover instances

where a banking entity enters into a loan-related swap with a customer but does not offset

that swap with a third party. 307

One commenter urged the agencies to adopt a definition of loan-related swaps that

is substantially similar to the definition adopted by the CFTC for swaps executed in

302

See, e.g., BB&T and Credit Suisse (Credit Suisse noted, however, that an exclusion

would be preferable to using the market-making exemption).

303

See, e.g., IIB; Covington; SIFMA; Capital One et al.; BPI; and B&F.

304

See, e.g., BOK; JBA; ABA; Capital One et al.; and KeyCorp.

305

See, e.g., BOK and ABA.

306

See, e.g., BOK.

307

See, e.g., ABA; Arvest; and IIB.

connection with originating loans to customers, and to include in the definition, the

derivatives transaction entered into with a dealer to offset the risk of the customer-facing

swap. 308 Another commenter opposed using the CFTC’s definition, noting that the

CFTC’s definition would not address commodity-based matched-book derivative

transactions. 309 One commenter recommended defining “customer-facing loan-related

swap” to mean any swap with a customer or affiliate thereof in which the rate, asset,

liability, or other notional item underlying the swap with the customer or affiliate thereof

is, or is directly related to, a financial term of a loan or other credit facility with the

customer or affiliate thereof (including, without limitation, the loan or other credit

facility’s duration, rate of interest, currency or currencies, or principal amount). 310 The

same commenter stated that the exclusion should not include a timing requirement with

respect to the offsetting swap or, if a timing condition is included, the banking entity

should be required to enter into the offsetting swap “contemporaneously or substantially

contemporaneously” with the customer-facing loan-related swap. 311

After considering the comments received, the agencies are excluding from the

definition of “proprietary trading” entering into a customer-driven swap or a customerdriven security-based swap and a matched swap or security-based swap if: (i) the

transactions are entered into contemporaneously; (ii) the banking entity retains no more

308

See Chatham.

309

See BOK.

310

See Covington.

311

See id.

than minimal price risk 312; and (iii) the banking entity is not a registered dealer, swap

dealer, or security-based swap dealer. 313 The agencies are adopting this exclusion to

provide greater certainty for non-dealer banking entities that engage in these customerdriven matched-book swap transactions.

Under the 2013 rule, these customer-driven matched swap transactions could

trigger the short-term intent prong’s rebuttable presumption and thus would be

presumptively within the trading account. Although the agencies are eliminating the 2013

rule’s rebuttable presumption, 314 the agencies believe that it is nevertheless useful and

appropriate to clarify in the final rule that these customer-driven matched swap

transactions are not proprietary trading because banking entities do not enter into these

transactions principally for the purpose of selling in the near-term (or otherwise with the

intent to resell in order to profit from short-term price movements). 315 For this reason, the

agencies are providing an exclusion for these activities from the proprietary trading

definition rather than requiring them to be conducted pursuant to the risk-mitigating

hedging exemption, as one commenter suggested.

The agencies believe that adopting this exclusion will reduce costs for non-dealer

banking entities and avoid disrupting a common and traditional banking service provided

to small and medium-sized businesses. This exclusion will provide a greater degree of

312

Price risk is the risk of loss on a fair-value position that could result from movements

in market prices.

313

Final rule § __.3(d)(11).

314

See final rule § __.3(b)(4).

315

See 12 U.S.C. 1851(h)(6).

certainty that these customer-driven matched swap transactions are outside the scope of

the final rule.

Consistent with feedback received from commenters, 316 the exclusion in the final

rule is not limited to loan-related swaps. 317 Thus, the exclusion in the final rule could

apply to a swap with a customer in connection with the customer’s end-user activity

(provided that all the terms of the exclusion are met). For example, a corn farmer is a

customer of a non-dealer banking entity. To manage its risk with respect to the price of

corn, the corn farmer enters into a swap on corn prices with the banking entity. The

banking entity contemporaneously enters into a corn-price swap with another counterparty

to offset the price risk of the swap with the corn farmer. The swap with the corn farmer

and the offsetting swap with the counterparty have matching terms such that the banking

entity retains no more than minimal price risk. The agencies have determined that it is

appropriate to exclude these types of transactions from the definition of proprietary

trading because, like matched loan-related swaps discussed above, banking entities do not

enter into these customer-driven transactions principally for the purpose of selling in the

316

317

See, e.g., BOK; JBA; ABA; Capital One et al.; and KeyCorp.

As a result, the agencies are not adopting a definition of “loan-related swap”

substantially similar to th

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