September 16, 2019

September 16, 2019

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FDIC Approves Amendments to the Volcker Rule

On August 20, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) approved their version of a set of amendments intended to simplify some of the requirements of the regulations implementing Section 13 of the Bank Holding Company Act of 1956 (the “Volcker Rule”), which was enacted as Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Volcker Rule generally prohibits banking entities from engaging in proprietary trading and from owning or controlling hedge funds or private equity funds subject to numerous qualifications and exemptions set forth in the Volcker Rule regulations, which are identical sets of rules adopted by each of the Volcker Rule regulators (the FDIC, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve), the Commodity Futures Trading Commission (CFTC), and the Securities and Exchange Commission). These final amendments incorporate the responses of the Volcker Rule regulators to the numerous comments they received when they initially proposed a set of amendments in 2018.

As summarized by the FDIC, the final rule will:

  • base compliance under the Volcker Rule on the size of a banking entity’s trading assets and liabilities. Banking entities with total consolidated trading assets and liabilities of at least $20 billion would be subject to a six-pillar compliance program, annual CEO attestation, and metrics requirements. Banking entities with total consolidated trading assets and liabilities between $1 billion and $20 billion would be subject to a simplified compliance program. Banking entities with total consolidated trading assets and liabilities of less than $1 billion would be subject to a presumption of compliance. The final rule also simplifies the trading activity information that banking entities are required to provide to the relevant government agencies;
  • no longer subject a banking entity to the short-term intent prong if the banking entity is already subject to the market risk capital prong;
  • eliminate the rebuttable presumption that financial instruments held for fewer than 60 days are within the short-term intent prong and replace it with a new rebuttable presumption that financial instruments held for 60 days or longer are not within the short-term intent prong;
  • revise the definition of “trading desk” to provide for consistent treatment across different regulatory regimes, including the market risk capital prong;
  • allow for a banking entity, under certain conditions, to elect to be subject to the market risk capital prong as an alternative to the short-term intent prong, even if the banking entity is not already subject to the market risk capital prong;
  • modify the liquidity management exclusion from the definition of “proprietary trading” to allow for banking entities to use a wider range of financial instruments to manage liquidity. In addition, new exclusions will be added 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 and liabilities” under the applicable reporting form;
  • add a presumption of compliance with the reasonably expected near-term demand requirement for trading within certain internal limits for underwriting and market making-related activities; but banking entities will now be 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;
  • streamline the criteria that applies when a banking entity seeks to rely on the hedging exemption of the proprietary trading prohibition; and
  • limit the impact of the Volcker Rule on the foreign activities of foreign banking organizations.

The OCC has already taken identical action to amend their regulations and the Federal Reserve, CFTC and SEC are expected to do so imminently. The amendments will have an effective date of January 1, 2020, and a compliance date of January 1, 2021. However, a banking entity may voluntarily comply, in whole or in part, with the changes to the rule prior to January 1, 2021.

A copy of the FDIC’s press release is available here.

 

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About this Author

Kevin M. Foley, Finance Lawyer, Katten Llaw Firm
Partner

Kevin M. Foley has extensive experience in commodities law and advises a wide range of clients, both in the United States and abroad, on compliance with the Commodity Exchange Act and the rules of the Commodity Futures Trading Commission (CFTC) affecting traditional exchange-traded products, as well as the over-the-counter markets involving swaps and other derivative instruments. His clients include futures commission merchants, derivatives clearing organizations, designated contract markets, foreign boards of trade and an industry trade association.

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312-902-5372
Guy Dempsey Jr., Bank Regulations Legal Specialist, Katten Muchin
Partner

Guy C. Dempsey Jr. concentrates his practice on derivatives and structured products and on bank regulation. He advises clients on derivatives transactions of all types across all asset classes, as well as on the corporate governance, regulatory, collateral, compliance, insolvency and litigation issues associated with such products.

Much of Guy’s work involves helping bank and non-bank clients analyze the details and impact of the Dodd-Frank Act. He maintains deep knowledge of the banking laws and regulations relating to capital markets activities.

212-940-8593
Associate

Adam Haft is an associate in the Financial Services practice.

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