On August 20, 2019, the Federal Deposit Insurance Corporation (FDIC) and the Comptroller of the Currency (OCC) became the first two of the five agencies required to approve final amendments to the Volcker Rule that were proposed last year. Our blog post on the proposal may be accessed here.
Highlights of the final rule include the following:
- The proposal posited three levels of compliance depending upon the dollar level of consolidated trading assets and liabilities: significant, moderate and limited. The concept was retained in the final rule, but the dollar threshold for the “significant” category was raised to 20 billion dollars from the proposed 10 billion dollars.
- The method for calculating those assets and liabilities was revised to exclude certain financial instruments, such as US government obligations. In addition, non-US banks with US banking operations will need to look only to their combined US operations in calculating their assets and liabilities compliance threshold; this is a change from the proposal, which required a different calculation for the “limited” compliance category.
- The requirement that the banking entity’s Chief Executive Officer attest as to the banking entity’s compliance with its Volcker Rule obligations has been narrowed to a CEO attestation only for those banking entities with significant consolidated trading assets and liabilities as defined in the final rule.
- One of the most controversial proposals would have eliminated the rebuttable presumption that a banking entity’s purchase or sale of a financial instrument is for its trading account if the banking entity holds the instrument for fewer than 60 days or substantially transfers the risk of the position within 60 days, and replaced it with a test based on the accounting treatment of the purchase or sale. In the final rule, the accounting test is dropped. A rebuttable presumption is retained, but the presumption will change to the purchase or sale of a financial instrument is presumed not to be for the trading account if the banking entity holds the financial instrument for 60 days or longer and does not transfer substantially all of the risk with 60 days of the purchase or sale.
- With respect to the Solely Outside the United States (SOTUS) exemption, which is of great interest to the non-US banks with US banking operations, changes included elimination of the prohibition that no financing for the banking entity’s purchase or sale could be provided by any US branch or affiliate of the banking entity.
- Regarding permissable underwriting and market-making activities, banking entities will no longer be required to report changes in internal limits or breaches, but must have certain internal procedures for addressing those situations and must maintain records of these events that would be available for regulators to review.
- Regarding covered funds, only those portions of the proposal that offered actual language were finalized, such as elimination of the SOTUS financing prohibition for non-US banks investing or sponsoring a covered fund outside the United States. The regulators said that they will be issuing another proposal in the fall focusing on additional proposed changes to the covered funds portion of the Volcker Rule.
The final rule has an effective date of January 1, 2020, with a compliance date of January 1, 2021.
The Federal Reserve Board, Securities & Exchange Commission and Commodity Futures Trading Commission also need to approve the final rule. As of the time of posting this blog, there was no public information on when that might occur, but it likely should be in the short term.