The new regime and when it starts
The so-called “Volcker Rule,” generally prohibits banking entities (essentially banks with US federal deposit insurance, non-US banks with banking operations in the United States, and affiliates of both) from proprietary trading and investing in private equity funds. Recently revised compliance program requirements become fully effective January 1, 2021. The applicable regulation can be found here.
Which banking entities are subject to the Volcker Rule compliance program requirements?
The compliance program requirements are tiered according to the banking entity’s level of trading assets and liabilities
- Banking entities with significant trading assets and liabilities: The banking entity has, together with its affiliates and subsidiaries, average gross sum of trading assets and liabilities (subject to certain exceptions) over the previous consecutive four calendar quarters, that equals or exceeds $20 billion on a worldwide consolidated basis.
- Banking entities with Moderate trading assets and liabilities: The banking entity has, together with its affiliates and subsidiaries, average gross sum of trading assets and liabilities (subject to certain exceptions) over the previous consecutive four calendar quarters, that do not come within the definition of “significant” or “limited” trading assets and liabilities.
- Banking entities with limited trading assets and liabilities: The banking entity has, together with its affiliates and subsidiaries, average gross sum of trading assets and liabilities (subject to certain exceptions) over the previous consecutive four calendar quarters, that is less than $1 billion.
- Banking entities with no activities subject to the Volcker rule (“covered activities”).
The regulators also have the discretion to assign a particular banking entity to a different category if they wish.
Non-US banking organizations
As noted above, non-US banking organizations are subject to the Volcker Rule if they maintain banking operations in the United States: a direct branch or agency of the non-US bank or a US banking subsidiary. The Volcker Rule does provide an exemption for non-US banking entities conducting transactions subject to the Volcker Rule that are conducted solely outside the United States in accordance with certain requirements.
- With respect to a banking entity that is a non-US banking organization or a subsidiary of such a banking organization with limited trading assets and liabilities trading assets and liabilities means the trading assets and liabilities (excluding those attributable to certain limited trading activities) of the combined US operations of the top-tier non-US banking organization (including all subsidiaries, affiliates, branches, and agencies of the foreign banking organization operating, located, or organized in the United States).
- With respect to a banking entity that is a non-US banking organization or a subsidiary of such a banking organization with significant trading assets and liabilities, trading assets and liabilities means the trading assets and liabilities (excluding those attributable to certain limited trading activities) of the combined US operations of the top-tier non-US banking organization (including all subsidiaries, affiliates, branches, and agencies of the foreign banking organization operating, located, or organized in the United States as well as branches outside the United States that are managed or controlled by a branch or agency of the foreign banking entity operating, located or organized in the United States.) [Note the difference.]
What are the specific requirements per tier?
- Banking entities with significant trading assets and liabilities: These entities would be subject to the most detailed compliance program requirements, similar to what was imposed when the regulation was adopted originally, including: written policies and procedures, internal controls, independent testing and audit, training, detailed recordkeeping, all aimed at ensuring compliance with the Volcker Rule. In addition, these banking entities still need to have the Chief Executive Officer of the banking entity attest in writing that it has processes to ensure that the compliance program is reasonably designed to achieve compliance with the Volcker Rule. The CEO attestation has been lifted for other banking entities with trading assets and liabilities.
- Banking entities with moderate trading activities and liabilities: These banking entities may satisfy the compliance program requirements by including in their existing compliance policies and procedures appropriate references to Volcker Rule requirements, adjusted as appropriate given the particular banking entity’s activities, size, scope and complexity.
- Banking entities with limited trading assets and liabilities: These banking entities would be presumed to be in compliance with the Volcker Rule and not be required to establish a Volcker Rule compliance program unless otherwise specifically ordered to do so by their primary federal regulator.
- Banking entities with no activities subject to the Volcker rule (other than limited trading in US government obligations): These banking entities only need to establish a compliance program when it commences covered activities other than permissible US government obligations trading.
What should banks be doing now:
Even though as a result of the recent regulatory changes, some banking entities will be subject to fewer compliance requirements than when the Volcker Rule regulations were originally adopted, there still are adjustments that banking entities may need to make in their Volcker Rule compliance programs. In addition, it is not enough to just make the revisions to the compliance program; banking entities need to build in procedures for ongoing periodic reviews of their compliance processes as well. More widely, all relevant banking entities should ensure that they clearly understand the extent to which they are captured by these requirements and plan accordingly.
We recommend that that banking entities undertake a thorough review of their current Volcker Rule compliance programs to ensure that they will be in compliance once the revised regulations are effective in January 2021.