The Federal Reserve Board asked for comment on a proposed rule to simplify and tailor compliance requirements relating to the Volcker rule. By statute, the Volcker rule generally prohibits banking entities from engaging in proprietary trading and from owning or controlling hedge funds or private equity funds.
Since regulations implementing the Volcker rule were finalized in December 2013 by five federal agencies, experience has shown that the complexity of the rule has created compliance uncertainty for firms subject to the rule. The proposed changes are intended to streamline the rule by eliminating or modifying requirements that are not necessary to effectively implement the statute, without diminishing the safety and soundness of banking entities.
The proposed changes were jointly developed by all five agencies responsible for administration of the Volcker rule — the Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission. Specifically, the proposed changes would:
- Tailor the rule’s compliance requirements based on the size of a firm’s trading assets and liabilities, with the most stringent requirements applied to firms with the most trading activity;
- Provide more clarity by revising the definition of “trading account” in the rule, in part by relying on commonly used accounting definitions;
- Clarify that firms that trade within appropriately developed internal risk limits are engaged in permissible market making or underwriting activity;
- Streamline the criteria that apply when a banking entity seeks to rely on the hedging exemption from the proprietary trading prohibition;
- Limit the impact of the Volcker rule on the foreign activity of foreign banks; and
- Simplify the trading activity information that banking entities are required to provide to the agencies.
The recently enacted Economic Growth, Regulatory Reform, and Consumer Protection Act made several changes to the statutory Volcker rule provisions. Among other things, the Act exempted community banks–firms with less than $10 billion in total consolidated assets and with total trading assets and liabilities that are not more than five percent of total consolidated assets–from the Volcker rule restrictions. Formal implementation of the Volcker rule-related changes contained in the Act will occur in a separate rulemaking by the agencies.