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The Volcker-Wagen rolls on

Dodd-Frank Section 619 “Prohibitions on proprietary trading and certain relationships with hedge funds and private equity funds”, more snappily known as the “Volcker Rule”, has recently undergone some incremental developments. The FRB, OCC, FDIC, SEC and CFTC jointly issued a FAQs document addressing the following matters:

  • The reporting dates and date rules for trading metrics. For banking entities > $50bn, required metrics to be measured and recorded daily from 1 July 2014, reported monthly from 2 September 2014
  • Trading desk” definition with particular regard to multiple legal entities. Effectively the smallest organisational category that is managed and operated as an individual unit. If a trading desk covers multiple legal entities, it must report all trading metrics to each of the agencies with relevant jurisdiction
  • The application of the Volcker Rule during the conformance period, ending 21 July 2015. Good faith efforts intended to facilitate full conformance by the end of the period are expected. Accordingly, proprietary trading should be stopped or divested immediately, while tier 1 capital deductions for investments in covered funds may continue until the expiry of the conformance period
  • The scope of “servicing assets” in the loan securitisation exemption. May be any type of asset, but if securities, must be “permitted securities”- cash or “cash equivalents”
  • The status of newly created foreign funds. A fund created with the intention of being a foreign public fund will not be considered a “covered fund”
  • Covered fund name requirements. May not have “bank” in its name. May not share a name or part-name with a banking entity.

The FAQ is not definitive, and is expected to be updated and/or revised.

In a separate announcement the OCC issued a 24 page document detailing interim procedures to assess bank’s progress towards full Volcker compliance. The procedures are intended to emphasise attention on the rule’s key areas and to aid understanding among banks. They focus on the following aspects:

  • Identification of relevant activities
  • Assessment of progress towards compliance
  • Evaluation of plans for compliance re. covered fund securitisation, asset management and sponsorship activities
  • Assessment of progress in reporting trade metrics

Of the three “Glass-Steagall Lite” reforms currently underway (Volcker, ICB (Financial Services Act 2013) and Liikanen), the Volcker Rule imposes the least restrictions, but with the longest reach[1]. The Rule prohibits proprietary trading and investing in a covered fund; these prohibitions apply globally, irrespective of location. The Rule applies to all non-US banks that have a subsidiary organised under US law, or that have a branch or agency office located in the United States. While it is relatively easy for a non-US entity to limit its fund-offerings to non-US residents, it is considerably more difficult for the same entity to trade in US securities/instruments without the aid of US-based trading, clearing or settlement. Even if a bank’s activities fall under an exemption, that status requires monitoring, and each activity is subject to a series of “prudential backstops” that require continual assessment. Although extra-territorial enforcement will prove difficult, non-US firms should bear in mind that any application or notice filed with the FRB may result in a request for evidence of Volcker compliance.


[1] There is no current, or proposed, system of substitutive compliance between the various structural reforms. It is quite possible that may have to comply with all three, despite mutual inconsistency and incompatibility.

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