The US federal banking and functional regulators ("Agencies")1 have finalized revisions to the proprietary trading and compliance program provisions of the Volcker Rule (the "2019 Revisions").2 The 2019 Revisions implement some, though not all, of the changes that had been proposed by the Agencies in a May 2018 notice of proposed rulemaking ("2018 Proposal").3
Subject to the statutory constraints, the 2019 Revisions are intended to (i) establish a more risk-based approach to Volcker Rule compliance, (ii) make the implementation of the regulation more efficient and less burdensome by reducing its complexity and (iii) update the existing regulations to reflect the experiences of the industry and the regulators. While the 2019 Revisions address many of the implementation and compliance issues raised by the proprietary trading and compliance program sections of the current regulation and some issues related to covered funds, the Agencies have indicated that they intend to issue a notice of proposed rulemaking at a later date to address additional significant changes that they are considering for covered funds.4
The 2019 Revisions become effective on January 1, 2020, and compliance will be required on January 1, 2021, although there is an option for early adoption after the effective date.
I. Tailored Compliance Requirements
The 2019 Revisions tailor the application of the Volcker Rule by creating categories of banking entities based on their levels of trading activity. Specifically, banking entities are divided into the following categories:
- Entities with "significant trading assets and liabilities," meaning consolidated gross trading assets and liabilities of at least $20 billion (excluding obligations of or guaranteed by the United States, any agency of the United States or any US government-sponsored enterprise), which is an increase from the $10 billion threshold set forth in the 2018 Proposal;
- Entities with "moderate trading assets and liabilities," meaning consolidated gross trading assets and liabilities of less than $20 billion, but greater than or equal to $1 billion; and
- Entities with "limited trading assets and liabilities," meaning consolidated gross trading assets and liabilities of less than $1 billion.5
Non-US banking entities determine their level of trading assets and liabilities by reference to the aggregate assets of their combined US operations ("CUSO"). This is a change from the 2018 Proposal, which would have required non-US banking entities to use aggregate assets of their worldwide operations to determine if they had limited trading assets and liabilities.
Therefore, under the 2019 Revisions, non-US banking groups will be subject to the most onerous Volcker Rule compliance obligations only if CUSO trading assets and liabilities equal or exceed $20 billion. Non-US banking groups with CUSO trading assets and liabilities that equal or exceed $1 billion but are less than $20 billion will be in the moderate trading assets and liabilities category. Non-US banking groups with CUSO trading assets and liabilities of less than $1 billion will be in the limited trading assets and liabilities category.
Banking entities with significant trading assets and liabilities are required to have a comprehensive six-pillar Volcker Rule compliance program similar to that required by the current regulation. Banking entities with moderate trading assets and liabilities are subject to reduced compliance obligations tailored to their trading activities. Banking entities with limited trading assets and liabilities are presumed to be in compliance with the Volcker Rule unless an Agency determines that they were engaged in a prohibited activity and overcomes the presumption of compliance. The Agencies also have the authority under _.20(h) to apply additional requirements to a banking entity with moderate or limited trading assets and liabilities by making an individualized determination following notice and response procedures.
While the stratification of banking entities is based solely on the banking entity's trading assets and liabilities, the applicable level of compliance program obligations resulting from that trading measure apply equally to covered fund activities. Therefore, banking entities with "significant" trading operations will be subject to the most onerous compliance program requirements not only with respect to their trading activities, but also with respect to their covered fund activities. Likewise, banking entities with only "moderate" or "limited" trading activities are eligible for reduced compliance obligations with respect to both their trading and covered fund activities.
The implications of the stratification of banking entities into categories based on their trading assets and liabilities is discussed in more detail below in Part IV.
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