61974 Federal Register / Vol. 84, No. 220 / Thursday, November 14, 2019 / Rules and Regulations
1 12 U.S.C. 1851.
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 January 13, 2020;
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 January 13, 2020, 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) 452–
2081, 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) 551–5870, 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
VerDate Sep<11>2014 18:12 Nov 13, 2019 Jkt 250001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\14NOR2.SGM 14NOR2
khammond on DSKJM1Z7X2PROD with RULES2
1 12 U.S.C. 1851.
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 January 13, 2020;
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 January 13, 2020, 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) 452–
2081, 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) 551–5870, 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
VerDate Sep<11>2014 18:12 Nov 13, 2019 Jkt 250001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\14NOR2.SGM 14NOR2
khammond on DSKJM1Z7X2PROD with RULES2
61975Federal Register / Vol. 84, No. 220 / Thursday, November 14, 2019 / Rules and Regulations
2 Id.
3 12 U.S.C. 1851(d)(1).
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).
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.
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.
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.
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 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
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.
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
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
VerDate Sep<11>2014 18:12 Nov 13, 2019 Jkt 250001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\14NOR2.SGM 14NOR2
khammond on DSKJM1Z7X2PROD with RULES2
2 Id.
3 12 U.S.C. 1851(d)(1).
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).
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.
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.
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.
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 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
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.
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
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
VerDate Sep<11>2014 18:12 Nov 13, 2019 Jkt 250001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\14NOR2.SGM 14NOR2
khammond on DSKJM1Z7X2PROD with RULES2