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URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3Af5e82821ff204bf9

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

Conformed to Federal Register version
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
I.

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

V.

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
1

12 U.S.C. 1851.

2

Id.

3

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

4

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

5

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

6

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.

7

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).
8

See 83 FR 33437, 40–42.

9

See 83 FR 33442–46.

10

See 83 FR 33453–54.

11

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
12

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.
13

See 83 FR 33446–51.

14

See 83 FR 33454–62.

15

See 83 FR 33464–67.

16

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

17

See 83 FR 33451–52.

18

See 83 FR 33452–53.

19

See 83 FR 33482–83

20

See 83 FR 33483–86.

21

See 83 FR 33471–82.

22

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
23

See 83 FR 33487–89; 33490–94.

24

See 83 FR 33489.

25

See 83 FR 33490.

26

See 83 FR 33454.

27

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

28

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

29

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

30

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

31

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
32

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.
33

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

34

See ABA.

35

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

36

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

37

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

38

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

39

See Public Citizen.

40

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
41
42

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
43

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

44

See 2013 rule §__.2(c).

45

See final rule §__.2(r).

46

Public Law 115–174 (May 24, 2018).

47

See 84 FR 35008.

48

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
49

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.
50

Id.

51

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.
52

See, e.g., Capital One et al.; Credit Suisse; EBF; and Investment Adviser Association
(IAA).
53

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

54

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).
55

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
56

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.
57

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.
58

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

59

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).
60

Id., FAQ 16.

61

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
62

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.
63

See Bank Policy Institute (BPI).

64

See EFAMA.

65

See, e.g., ABA and FSF.

66

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

67

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

68

See BB&T.

69

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.
70

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

71

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

72

Id.

73

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

74

See Capital One et al.

75

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

76

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
77

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

78

See, e.g., Economic Growth, Regulatory Relief, and Consumer Protection Act § 203
(excluding community banks from the definition of “banking entity”).
79

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
80

Proposed rule §__.2(ff).

81

Proposed rule §__.2(v).

82

Proposed rule §__.2(t).

83

Proposed rule §__.20(h).

84

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
85

See final rule § __.2(s), (u), (ee).

86

See, e.g., BB&T Corporation; CFA; CCMR; and State Street Corporation (State
Street).
87

See State Street.

88

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
89

See Occupy the SEC.

90

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

91

See Data Boiler Technologies.

92

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
93

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).
94

See final rule § __.2(s)(2)-(3).

95

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.
96

Id.

97

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

98

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

99

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 mortga

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3Af5e82821ff204bf9. Public record. Not legal advice.