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Volcker 2.0: Proposed changes to the Volcker rule

Published in the-Federal Register July 17, 2018, the comment period for the proposed changes to the Volcker Rule is now open until September 17, 2018.  Below is a summary of those changes.


On January 14, 2014, Congress approved the revised final Volcker regulations that largely went into effect on July 21, 2015.  The Volcker Rule, as it is commonly referred to, is Section 13 of the Bank Holding Company Act (the “Act”).  Section 13 of the Act requires that the five prudential regulators collaborate on one common set of requirements for the Volcker Rule.  The five prudential regulators are; the Federal Reserve (“Fed”), the OCC, the FDIC, the CFTC and the SEC (the “Agencies”).  The Volcker Rule restricts certain banking entities and nonbank financial companies from engaging in proprietary trading and certain interests in, or relationships with, specific types of funds (i.e. hedge funds or private equity funds). This month, led by the Fed, a proposed amendment to the Volcker Rule was agreed upon by the Agencies and submitted currently for public comment.  The final step will be to present a final version to Congress for formal approval. 

Overview of the Proposal

The Agencies acknowledge concerns that some parts of the 2013 final rule[1] may be unclear and potentially difficult to implement in practice. Based on experience since the adoption of the 2013 final rule, specifically the collection of nearly four years of quantitative data as required under Appendix A of the 2013 final rule, the Agencies have identified opportunities, consistent with the statute, for improving the rule. Most notably, further tailoring the Volcker Rule’s application based on the activities and risks of banking entities globally.

The proposed amendment is intended to provide banking entities with clarity about what activities are prohibited and to improve supervision and implementation of the Volcker Rule.

While the Volcker Rule addresses certain risks related to proprietary trading and covered fund activities of banking entities, the Agencies note that the nature and business of banking entities involve other inherent risks, such as credit risk and general market risk. To that end, the Agencies have various tools, such as the regulatory capital rules of the Federal banking agencies and the comprehensive capital analysis and review framework of the Fed, to require banking entities to manage the risks associated with their activities. The Agencies believe that the proposed changes to the 2013 final rule are consistent with keeping the banking industry safe and sound while providing banking entities the ability to implement the appropriate risk management policies in line with the risks associated with the activities in which banking entities are permitted to engage under section 13.

The Agencies also note that the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCP Act”), which was enacted on May 24, 2018, amends section 13 of the BHC Act by narrowing the definition of banking entity and revising the statutory provisions related to the naming of covered funds. The Agencies plan to address these statutory amendments through a separate rulemaking process; no changes have been included in the proposed amendment that would implement the amendments in the EGRRCP Act. The EGRRCP Act amendments took effect upon enactment, however, and in the interim period since enactment and before adoption, the Agencies will not enforce the 2013 final rule in a manner inconsistent with the amendments to section 13 of the BHC Act with respect to institutions excluded by the statute and with respect to the naming restrictions for covered funds.

Proposed Changes by Sub-Type:

Authority, Scope, Purpose & Relationship


The creation of categories to direct specific levels of compliance efforts based on the size of the banking entity or nonbank financial institution global trading assets and liabilities3; SIGNIFICANT (≥$10B), MODERATE (<$10B & ≥$1B) & LIMITED (<$1B)

The proposed rule creates a Banking Entity Categorization that is meant to tailor the Volcker Rule’s compliance program to the size of the trading operations and thereby the risks associated with their activities.  The proposal creates the following categories and defines each of the parameters:

SIGNIFICANT:  This category is reserved for banking entities with combined global trading assets and liabilities[1] greater than or equal to ten billion US dollars. 

MODERATE:  This second category is reserved for banking entities with combined global trading assets and liabilities3 greater than or equal to one billion but less than ten billion US dollars. 

LIMITED:  The last category is reserved for banking entities with combined global trading assets and liabilities3 less than one billion US dollars.  Further, for banking entities in this category, there is presumption of compliance and there is no obligation to demonstrate compliance.  However, discovery of non-compliance would change the category to “MODERATE” and the regulatory agency may apply the more stringent requirements upon the non-compliant banking entity.

Changes to the Prohibition of Proprietary Trading

In the 2013 final rule, the Agencies created three prongs to define a “trading account.” The three original prongs where the Short-Term Intent prong – trading for the purpose of short-term holding periods, the Market Risk Capital prong, and the Dealer prong – covering activities of a registered Dealer, Swap Dealer or Security-based Swap Dealer. The proposed changes eliminate the Short-Term Intent prong and with it, the rebuttable presumption.

The Short-term Intent prong is replaced with the Accounting prong and a presumption of compliance with the prohibition on proprietary trading for desks not subject to the Market Risk Capital or Dealer prong.


Change to the metric used to flag trading as potentially proprietary trading activity from the length of the holding period to the total profit & losses (“P&L”) made from trading activities.  This change removes the “rebuttable presumption” and replaces it with the presumption of compliance provided the P&L doesn’t exceed $25MM over a rolling trailing 90 day period.

The Accounting prong and the presumption of compliance is based on the aggregate absolute value of the profits & losses (“P&L”) not exceeding $25 million for all financial instruments recorded at Fair Market Value (“FMV”).  The financial instruments measured in the calculation are all buys and sells of assets and liabilities that are recorded as “Trading” or “Available-for-Sale” securities as defined by and accounted for under US GAAP.  Specifically, compliance is presumed provided the sum of the absolute values of the daily P&Ls for the trailing 90 calendar days does not exceed $25 million.  If that threshold is exceeded then the desk must demonstrate that is not involved in proprietary trading.


With respect to the Market Risk Capital prong of the prohibition of proprietary trading prong, Foreign Banking Organizations will be permitted to use their local capital requirements provide those requirements at least meet the standards set by the Basel committee.

The second prong, the Market Risk Capital prong, has a slight modification that allows Foreign Banking Organizations to apply local regulatory requirements in place of the US requirements provided the local requirements are at least consistent with the Basel Committee on Banking Supervision market capital framework.  The third prong, the Dealer prong, remains almost unchanged.

In addition to the changes to the prongs listed above, the proposed changes impact the original “exclusions” and “exemptions” for underwriting and market making activities previously included in the 2013 final rule. 

Exclusion Changes

1. The expansion of the financial instruments included in the liquidity management exclusion to include FX forwards, swaps, and physically-settled cross-currency swaps, and

2. The addition of a new exclusion to account for “transactions” that are made to correct errors. Transactions with the intent to reverse a trade or correct an error is permitted.  For example if a swap transaction was intended to be booked for 2 years but was rather booked for 2 ½ years, a counter swap transactions would be allowed to be booked that effectively shortens the original swap trade and the net of both transactions is the effective 2 year term.

Exemption Changes

1. Establishment of the presumption that trading within internally set risk limits satisfies the requirements provided the risk limits set are done so to comply with the reasonably expected near-term demands of the market (aka RENTD),

2. Changing the scope of the exemptions’ compliance program requirements to only be applicable to banking entities categorized as SIGNIFICANT, exempting MODERATE and LIMITED banking entities,

3. Modification of the exemption for permitted risk-mitigating hedging activities to reduce the restrictions on eligible activities that qualify as permitted. 
   a. For MODERATE and LIMITED banking entities the requirements are removed except the requirement that hedging activities must reduce or mitigate one or more identifiable risks.
   b. For SIGNIFICANT banking entities the proposal maintains most of the original 2013 final rule requirements however, it (1) softens the language to make the effects of the hedging less stringent, (2) reduces required documentation for hedging across desks with pre-approved instruments and pre-set limits.

4. Modifies & removes certain trading outside the US (“TOTUS”) requirements:
   a. the prohibition against the purchases or sales being conducted with or through a US entity,
   b. the prohibition against provision of financing for transactions by any US branch or entity, and
   c. that no US personnel be involved in arranging, negotiating or executing the transaction.

Instead, the revised rule focuses on principal risk and actions remaining outside the United States.


1. Expansion of financial instruments (i.e. FX forwards, etc. per statutory definition list)

2. Use of transactions to correct previously booked trades/transactions


1. Elimination of RENTD metric.  The ability to use internally set risk limits, provided they’re established in accordance with the Volcker Rule, to presume that trading within those limits signals compliance with the proprietary trading restrictions.

2. Relaxing the compliance program requirements for MODERATE and LIMITED categories.

3. Risk-mitigating hedging standards

MODERATE and LIMITED: eliminated except the effective requirements

SIGNIFICANT: no change except softening language and relaxing documentation reqs.

4. Modifies and removes certain TOTUS requirements (significant change for FBOs)

Changes to the Prohibition of Covered Fund Activities and Investment

There are no proposed changes to the covered fund definition but the proposal asks for comments on several topics such as whether to adopt a characteristics-based definition of covered funds and whether to revisit the conditions of several exclusions from the covered fund definition. The requirement to count interests in third- party covered funds acquired through market making and underwriting exemptions is proposed to be removed.


The Agencies are seeking comments related to the prohibition of transactions involving covered fund activities and investments.  However they have proposed to allow covered transactions involving 3rd parties and allowing covered funds to be used for risk-mitigating hedging.

The proposal plans to restore the exemption from the 2011 proposed rule, allowing a banking entity to hold a covered fund interest as a risk-mitigating hedge when acting on behalf of a customer to facilitate that customer’s exposure to the fund. They are also seeking comments on the Super 23A prohibition, and asking whether the exemptions of regular 23A should be incorporated.

Changes to the Compliance Program Requirements

The Agencies are looking to simplify compliance of the Volcker rule and allow for more efficient data collection and compliance from its members. The proposal would streamline the metrics reporting and recordkeeping requirements by tailoring the requirements based on a banking entity’s size and level of trading activity, completely removing particular metrics based on experience working with the data, and adding a limited set of new metrics. The proposal also would allow certain firms additional time to report metrics to the Agencies.


The proposed changes would allow SIGNIFICANT firms to integrate their Volcker compliance programs (“6 Pillar program”) into their existing framework. MODERATE firms will implement a simplified version and LIMITED firms will not be required to proactively demonstrate compliance and will enjoy a presumption of compliance.  But they are still required to maintain a compliance program.

The proposal would require banking entities categorized as SIGNIFICANT to implement a six-pillar compliance program.  The proposed rule will eliminate Appendix B of the 2013 final rule and allow SIGNIFICANT firms to incorporate their compliance programs into the existing framework, eliminating the requirement for separate compliance programs.  The six pillars of the compliance program are the following:

1. Written policies and procedures,
2. A system of internal controls,
3. An appropriate management framework or governance program,
4. Independent testing,
5. Specialized training, and
6. Recordkeeping requirements.

Banking entities categorized as MODERATE will be required to implement a simplified compliance program by incorporating the Volcker Rule compliance requirements into the firm’s existing policies and procedures. LIMITED banking entities will benefit from the new presumption of compliance with no obligation to demonstrate compliance on an ongoing basis. However, if an Agency discovers that a LIMITED banking entity was or is non-compliant with the requirements, the banking entity would be treated as a MODERATE category and be required to adhere to the relevant level of compliance requirements. 


With the elimination of Appendix B, the only element that survives is the CEO attestation requirement but only for the SIGNIFICANT and MODERATE firms.

With the previously stated elimination of Appendix B of the 2013 final rule, the CEO attestation requirement would not be eliminated entirely.  The CEO attestation requirement would be required to be submitted by both SIGNIFICANT and MODERATE sized banking entities.

Potential Impact for Banking Entities and Nonbank Financial Companies

The impact of the proposed rule changes does not change the core goal of the Volcker rule which was to effectively eliminate proprietary trading by banking entities and nonbank financial companies (excluding certain governmental securities of course) but rather to reduce the complexity of the rule and make it easier to comply with the requirements.  The changes open up the ability for these institutions to more efficiently make markets and hedge investments in an environment that is less costly and onerous. 

Conclusion and next steps

The Agencies have provided for a 60 day comment period which began July 17, 2018, the date the proposed changes were published into the Federal Register.  Comments must be received on or before September 17, 2018.  In preparation for the final release, in scope banking entities and nonbank financial companies should assess the rule changes as noted herein and, assuming the proposed rule changes are largely unchanged, be prepared to consider the following items:

1. Quantify the global trading assets and liabilities to determine which Category your firm will fall under;
2. Assess the strategy for each Volcker Unit and the businesses overall to determine what changes, if any, are needed to enhance the desk’s operational efficiency and performance;
3. Review the third party covered funds transactions;
4. Develop the new P&L tracking and monitoring process for the newly created Accounting prong;
5. Update the suite of metrics, including the elimination of some (e.g. RENTD);
6. Adjust the compliance programs to tailor to the new requirements based on Categorization;
7. Assess the impact on the ability to rely on the Basel requirements outside the US;
8. Assess the impact for changes in certain TOTUS activities;
9. Revise Volcker Rule policies and procedures based on rule changes’ impact; and
10. Develop a training program which communicates the changes to the rules (e.g. trading requirements, reporting, hedging, ownership/sponsorship of covered funds, etc.).

The impact of these proposed changes have diverse effect on the firms subject to the rules.  Smaller firms will see lower costs and a less intrusive compliance program associated with the reduced compliance requirements while the midsized and larger firms will find the changes significantly enhance their ability to transaction and manage their risks.  While the proposed rule change does not eliminate the core mandate of the Volcker Rule, it does increase slightly the risk of non-compliance (e.g. less monitoring may allow increased bad actors to take advantage, etc.) however, the changes allow firms to operate more effectively and efficiently.  The intent is to restore a little bit of the liquidity to the markets that was taken away by the original rule. There are those that say that Volcker 2.0 brings the markets closer to more sensible balance.


[1] For the determination of the trading assets and liabilities, the calculation should be excluding obligations of or guarantees by the US government and should include all global trading assets and liabilities.

[1] The final rule signed January 2014 is referred to as the “2013 final rule.”

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