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On December 10, 2013, the U.S. functional financial services regulators – the U.S. Department of the Treasury’s Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission (“SEC”) (together, the “Agencies”) – adopted the final version of the long-awaited Volcker Rule.1 The final rule becomes effective on April 1, 2014, with a conformance period until July 21, 2015, to enable banking entities to come into compliance with the final rule’s prohibitions on proprietary trading and on covered fund ownership and sponsorship.2
Section 13 of the Bank Holding Company Act of 1956, as amended (the “Volcker Rule”), introduced in the Dodd-Frank Act,3 generally “prohibits any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring or having certain relationships with a hedge fund or private equity fund, subject to certain exemptions”.4
Specifically, Section 13 “generally prohibits banking entities from engaging as principal in proprietary trading for the purpose of selling financial instruments in the near term or otherwise with the intent to resell in order to profit from short-term price movements”.5 However, subject to certain conditions, Section 13 specifically exempts certain activities from this prohibition, including:
Section 13 also prohibits banking entities from acquiring or retaining an ownership interest in, or sponsoring, so-called “covered funds,” which includes most hedge funds, venture capital funds and private equity funds. The proscription is subject to exceptions that permit limited investments in such entities, as well as exemptions that permit banking entities to engage in organizational and offering activities and to provide investment management, prime brokerage and other services to such funds under certain conditions.
The Volcker Rule is applicable to “banking entities”, defined to consist of any:
Notably, while an original focus of the Volcker Rule was to protect insured banks from essentially using federal deposit insurance as a safety net for bad investments, the final regulations are not only applicable to banking organizations that carry FDIC deposit insurance and their owners, but also foreign banks with banking operations that do not carry FDIC insurance.
“Control” by a company for these purposes means instances in which:
The term “affiliate” means any company that controls, is controlled by, or is under common control with another company.
For the purposes of the foregoing definitions, a “branch” of a foreign bank means any office or place of business of a foreign bank located in the United States “at which deposits are received”.
A “commercial lending company” means any institution organized under U.S. law, which maintains credit balances incidental to or arising out of the exercise of banking powers and engages in the business of making commercial loans. This does not, therefore, include foreign entities that make loans from outside of the United States.
An “agency” of a foreign bank means any office or place of business of a foreign bank located in the United States at which credit balances are maintained incidental to or arising out of the exercise of banking powers, checks are paid, or money is lent but at which deposits may not be accepted from citizens or residents of the United States.
Thus, the Volcker Rule’s jurisdictional provisions have extensive, but not unlimited extraterritorial effect.
The Volcker Rule does apply to every foreign entity that directly or indirectly maintains a bank branch or agency in the United States, or controls a commercial lending company. It also applies to an entity’s affiliates and subsidiaries, which are defined as companies an entity controls through ownership or control of 25% or greater, direct or indirect, voting power of any class of voting securities of the company or through other indicia of “control” as defined in the Bank Holding Company Act of 1956, as amended.
The Volcker Rule does not apply to entities whose contacts with the United States do not require licensed agencies or branches. For example, foreign banks that maintain only representative offices in the United States are not subject to the Volcker Rule.
Thus, a commercial loan made to a corporate entity in the United States by an office of a foreign bank located outside of the United States will not, in itself, be sufficient to trigger the Volcker Rule prohibitions because, as explained below, commercial loans are not “financial instruments” covered by the Volcker Rule. The establishment by U.S. residents of bank accounts at a foreign bank outside of the United States will similarly not require compliance with the Volcker Rule. Ownership by a foreign bank that has no U.S. banking presence but does maintain an SEC-registered broker-dealer or investment adviser will not itself trigger the application of the Volcker Rule.
All of these examples, however, require great care in monitoring the less than 25% ownership limit for entities that are affiliated with foreign financial institutions that are banking entities for purposes of the Volcker Rule. It also requires that foreign financial institutions continuously assess the totality of their U.S. contacts to ensure that they and their affiliates do not inadvertently become subject to U.S. bank licensing requirements.
For foreign financial institutions that are not “banking entities”, great care must be taken, if the effect of the Volcker Rule is to be appropriately avoided, in ensuring that a presence does not arise through a course of conduct involving the establishment of a de facto U.S. office by utilizing personnel of subsidiaries as agents of the foreign institution, or conducting U.S. visits by banking personnel in such a way as to establish a U.S. presence.
The proprietary trading prohibition in the Volcker Rule relates to trading as “principal” for the “trading account” of a “banking entity” in any purchase or sale of one or more “financial instruments”. A “trading account” is any account used for acquiring or taking positions in financial instruments principally for the purpose of selling in the near-term or with the intent to resell in order to profit from short-term price movement, short-term arbitrage or hedging such resulting positions. A trading account can generally be contrasted with an investment account that is maintained for longer term appreciation. If a banking entity calculates risk-based capital ratios under the market risk capital rule, trading of financial instruments that are both market risk capital covered positions and trading positions (or related hedges) constitute proprietary trading.
Purchases and sales of financial instruments for its own account by a registered dealer, swap dealer or security-based swap dealer affiliate for any purpose within the scope of its dealing activities constitutes proprietary trading. In the supplementary commentary accompanying the text of the final rule, the Agencies noted that positions held by a registered dealer in connection with its dealing activity are generally held for sale to customers upon request or otherwise support the firm’s trading activities, which is indicative of trading intent. These types of activities conducted outside of the United States also constitute proprietary trading. Therefore, subject to the exemptions discussed below, all trading activities by registered broker-dealers and their foreign equivalents, such as Canadian investment dealers, are subject to this prohibition.
In addition, a purchase and sale of a financial instrument is subject to a rebuttable presumption that it is for the trading account of a banking entity if it is held for fewer than 60 days or the risk of the financial instrument is substantially transferred within such period. However, the Agencies did not adopt the converse of this presumption. Therefore, a purchase or sale of a financial instrument that is held for more than 60 days does not necessarily mean that it is not for the trading account of a banking entity.
As used in the Volcker Rule, financial instruments consist of the following:
Since the U.S. securities law definition of “security” is utilized, loan syndications, highly-rated short term commercial paper, and spot transactions in physical commodities such as gold, among other non-securities, are not subject to the Volcker Rule.
Although there are limited exemptions to the broad ban on proprietary trading for banking entities, for foreign entities, the Agencies have crafted two important exemptions that help mitigate the extraterritorial effects of the proprietary trading prohibition.
The proprietary trading prohibition does not apply to financial instruments that are sovereign debt obligations (including debt obligations of multinational central banks, such as the European Central Bank, of which the foreign sovereign is a member), including obligations of agencies and political subdivisions of that sovereign, in cases in which:
A similar exemption is afforded to a foreign entity that is a foreign bank or regulated by the foreign sovereign as a securities dealer, even if controlled by a top-tier U.S. bank, provided that the financial instrument is owned by the foreign entity and is not financed by an affiliate located in the United States or organized under U.S. law. The Agencies noted, however, with respect to this exemption, that they intend to monitor activity of banking entities to ensure that U.S. banking entities are not seeking to evade the restrictions of the Volcker Rule by using an affiliated foreign bank or broker-dealer to engage in proprietary trading in foreign sovereign debt on behalf of or for the benefit of other parts of the U.S. banking entity.
The foregoing exemption provides a weak parallel to the full exemption under the U.S. securities laws for U.S. sovereign, political subdivision (including municipal) and agency securities by any banking entity.
The Agencies have also afforded a circumscribed exemption for certain proprietary trading activities of foreign banking entities conducted “solely outside of the United States”. The final version of this exemption significantly expands on the exemption that had been proposed and that had been widely criticized by the international banking community. However, the Agencies still placed a number of conditions on the availability of the foreign banking exemption, as outlined below. In the supplementary commentary accompanying the final rule, the Agencies noted that these conditions were designed to ensure that any foreign banking entity engaging in trading activity under this exemption would do so in a manner that ensures that the risk, decision-making, arrangement, negotiation, execution8 and financing of the activity occurs solely outside of the United States.
The foreign banking exemption is applicable to the purchase and sale of any financial instrument if:
While personnel located in the United States acting for the foreign entity cannot be involved in soliciting, arranging, negotiating, making the decision to transact, or executing a transaction, personnel performing back office functions, such as clearing and settlement, would be able to do so in the United States.11
For purposes of this exemption, a “U.S. entity” is considered to be any entity that is, or is controlled by, or is acting on behalf of, or at the direction of, any other entity that is located in the United States or organized under the laws of the United States or any state. A U.S. branch, agency or subsidiary of a foreign banking entity is considered to be located in the United States. However, the foreign banking entity is not treated as being located in the United States solely by virtue of operating or controlling such an office or subsidiary.
Examples of the constraints arising from the strict conditions applicable to the sovereign debt exemption and “solely outside the United States” foreign banking exemption include the following:
In light of these constraints, it is important to note that the “solely outside the United States” foreign banking exemption and the home country sovereign debt trading exemption are not the only exemptions from the proprietary trading ban that may be utilized by foreign banking entities and their affiliates. There are also certain other exemptions that may be available to foreign entities, including heavily conditioned exemptions for:
Certain of these other exemptions are discussed in the sections that follow.
Underwriting activities of a banking entity are exempted from the proprietary trading prohibitions only if:
For purposes of this exemption, a “distribution” is either a U.S.-registered offering or any other offering of securities that is distinguished from ordinary trading transactions by the presence of special selling efforts and selling methods. Offerings that qualify as distributions include, among other offerings, private placements made in reliance on the SEC’s Rule 144A or Rule 506 of Regulation D or other available exemptions and, to the extent that commercial paper being offered is a security, commercial paper offerings that involve the underwriter receiving special compensation.
Unlike the SEC Regulation M definition of distribution (governing purchases and offers to purchase during a distribution and market stabilization), the definition used in the Volcker Rule excludes the magnitude of the offering as a relevant factor.12 However, the Agencies noted that they would rely on the same factors considered under Regulation M to analyze the presence of special selling efforts and selling methods, including, delivering a sales document (e.g., a prospectus or offering memorandum), conducting road shows, and receiving compensation that is greater than that for secondary trades but consistent with underwriting compensation.
For purposes of the exemption, an “underwriter” is defined as:
The definition of “underwriter” includes members of an underwriting syndicate or selling group. Engaging in the following activities may indicate that a banking entity is acting as an underwriter as part of a distribution of securities:
A trading desk’s underwriting position constitutes the securities positions that are acquired in connection with a single distribution for which the banking entity is acting as an underwriter. A trading desk may not aggregate securities positions acquired in connection with two or more distributions to determine its “underwriting position”. A trading desk may, however, have more than one “underwriting position” at a particular point in time if the banking entity is acting as an underwriter for more than one distribution. Therefore, the underwriting exemption’s requirements pertaining to a trading desk’s underwriting position will apply on a distribution-by-distribution basis.
Unlike the way securities practitioners generally think of a “U.S. distribution”, a distribution for purposes of the underwriting exemption will include foreign SEC Regulation S distributions of all categories. Thus, this exemption will potentially affect local underwriting practices of banking entities on a worldwide basis unless, instead, the foreign banking exemption, discussed above, can be utilized. It will also apply to Rule 144A transactions not conducted on a riskless principal basis.
For firms that effect a foreign public offering in conjunction with a U.S. private placement conducted on an agency basis or in a riskless principal Rule 144A transaction, if these transactions are conducted as separate distributions, it may be possible to effect the foreign offering under the foreign banking exemption and the U.S. portion under the exemptions for agency and Rule 144A transactions, without resorting to the underwriting exemption. If this is the case, then foreign underwriting practices would not be affected by the limitations in the underwriting exemption. This position is consistent with the non-integration of these offerings for U.S. securities law purposes and the need to use separately licensed entities and personnel in such offerings. However, it remains uncertain whether dually-registered personnel of these distinct entities located outside of the United States, acting in distinct capacities, can be used in both distributions. These matters will need to be clarified with the staff of the functional regulators.
This position may potentially apply in the case of offerings using the Canada-U.S. multi-jurisdictional disclosure system in which an underwriting commitment is entered into by a Canadian investment dealer and U.S. offers and sales are made by an affiliated U.S. registered broker-dealer on an agency basis. If these offerings can be viewed as distinct, separate exemptions could also be utilized. However, in many of these cases, dually registered personnel are utilized, so clarification concerning this issue will be needed.
Under the terms of the underwriting exemption, it appears that an underwriter’s compensation warrants or other stock-based compensation would not constitute an underwriting position since these units would be for compensation rather than in connection with a distribution and, therefore, would not fit within the underwriting exemption. Since such compensation arrangements are common in Canadian and other foreign investment banking transactions, the foreign banking exemption may instead be useful in this context with the foreign investment banking affiliate exclusively receiving such compensation. Such compensation could be received for the investment account of a U.S. firm rather than for its trading account, but the resale of such securities would be subject to more restrictive conditions than under the foreign banking exemption because of the 60 day holding presumption noted above.
As noted above, another exemption from the ban on proprietary trading was created for market-making related activities. Market making-related activities are exempted from the proprietary trading ban if:
For these purposes, a trading desk or other organizational unit of another banking entity cannot be treated as a customer, client or counterparty if that other entity has trading assets and liabilities of $50 billion or more, unless the trading desk documents why they should be treated as such an entity or the transaction is conducted anonymously on an exchange or trading facility that permits trading by a broad range of market participants.
Under this exemption, affiliated broker-dealers would need to be approved by the Financial Industry Regulatory Authority, Inc. (“FINRA”) (or foreign regulators in foreign markets) to engage in market-making activities and be permitted to act in this capacity on marketplaces on which such activities are conducted. In addition to being appropriately registered in this manner, the broker-dealer would need to demonstrate consistency and substantial market-making activity, whether effected on an exchange, alternative trading systems or in other over-the-counter markets, either domestically or in foreign markets, in order to rely on this exemption. Thus, practices such as withdrawing from market making during periods of market stress or auto-quoting away from the market may disqualify a firm from relying on the exemption if not combined with robust bona fide market-making activities.
The prohibition on proprietary trading also exempts risk-mitigating hedging activities. These activities are permitted in connection with, and related to, individual or aggregated positions, contracts, or other holdings of the banking entity that are designed to reduce the specific risks to the banking entity in such connection. Risk-mitigating hedging activities of a banking entity are permitted if the following conditions are met:
As noted above, the determination of whether an activity or strategy is risk-reducing or mitigating must be made at the inception of the hedging activity.13
Although not originally permitted under the final rule, the Agencies issued a supplemental interim final rule (the “Supplemental Rule”), effective April 1, 2014, that also permits banking entities to retain interests in certain collateralized debt obligations that are backed primarily by trust preferred securities (TruPS CDOs).14 Under the Supplemental Rule, banking entities may retain an interest in TruPS CDOs if the TruPS CDO was established, and the interest was issued, before May 19, 2010, the banking entity reasonably believes that the offering proceeds received by the TruPS CDO were invested primarily in Qualifying TruPS Collateral and the banking entity’s interest in the TruPS CDO was acquired on or before December 10, 2013.15
Qualifying TruPS Collateral means any trust preferred security or subordinated debt instrument that was issued prior to May 19, 2010, by a depository institution holding company that as of the end of any reporting period within 12 months immediately preceding the issuance of such trust preferred security or subordinated debt instrument, had total consolidated assets of less than $15 billion, or a trust preferred security or subordinated debt instrument that was issued prior to May 19, 2010 by a mutual holding company.
Notwithstanding the exemptions from the proprietary trading ban described above, transactions will be deemed to be impermissible if they:
A “high-risk asset” means an asset or group of assets that would, if held by a banking entity, significantly increase the likelihood that the banking entity would incur a substantial financial loss or would pose a threat to the financial stability of the United States. A “high-risk trading strategy” includes any strategy that would, if engaged in by a banking entity, significantly increase the likelihood that the banking entity would incur a substantial financial loss or would pose a threat to the financial stability of the United States. The Agencies have not identified any particular assets or trading strategies that are per se high-risk, noting instead that a determination of whether a particular asset or strategy is “high-risk” depends on the particular facts and circumstances. However, the amount of capital at risk in a transaction, whether or not the transaction can be hedged, the amount of leverage present in the transaction and the general financial condition of the banking entity engaging in the transaction, should be considered.
In addition to the proprietary trading ban, subject to enumerated exceptions, the Volcker Rule prohibits a banking entity from, as principal, directly or indirectly, acquiring or retaining any ownership interest in or sponsoring a “covered fund” Sponsorship of a “covered fund” includes (i) serving as a general partner, managing member, trustee or commodity pool operator of any such fund, (ii) in any manner, selecting or controlling (or having employees, officers or directors or agents who constitute) a majority of the directors, trustees or management of any such fund or (iii) sharing, for any purpose, the same name or a variation of the same name with any such fund.
A “covered fund” generally includes most hedge funds, venture capital funds and private equity funds, but the definition is subject to technical nuances. In particular, the term “covered funds” includes:
The foreign fund is only included within the definition of “covered fund” with respect to a banking entity that is, or that is controlled directly or indirectly by a banking entity that is, located in the U.S. or organized under U.S. law.
The final rule also provides for specific exemptions from the definition of “covered fund”:
“Ownership Interest” is defined as any equity, partnership, or “other similar interest”. A similar interest consists of an interest:
Ownership Interest expressly excludes performance compensation to investment managers and other service providers to the covered fund and their employees or former employees, provided that any holdback is used solely for the purpose of satisfying contractual claw back rights and the holdback reserve does not share in subsequent performance. Such interests must generally be non-transferrable, except to affiliates, immediate family members or in connection with the sale of the business to an unaffiliated entity that provides such services.
The Volcker Rule also expressly provides that certain activities are permitted notwithstanding the general prohibition.
A banking entity is permitted to make initial investments in a covered fund that it sponsors, including acting as the governing body for such entity, if:
The final rule imposes per Fund and aggregate de minimis limits on banking entity investments in covered funds. These limits are:
For the purpose of establishing a fund and establishing a track record to attract unaffiliated investors, the per fund limit may be exceeded during an initial “seeding period,” provided that unaffiliated investors are sought so that the stake can be reduced and compliance with the per fund limit is attained not later than one year after the establishment of the fund, unless a specific exemption is granted.
For fund of funds structures, compliance is measured only with regard to master funds and not individual feeder funds. The greater of the amount contributed to covered funds and the fair market value of such interests must be deducted from Tier 1 Capital. An exemption similar to the exemption for permitted risk-mitigating hedging activities in the proprietary trading prohibition is also provided for permitted covered fund activities.
Foreign banking organizations are not subject to the prohibitions on covered fund activities if the following (among other) requirements are satisfied:
An activity or investment occurs solely outside of the United States if: (i) the banking entity (including relevant personnel) acting as principal in the purchase or sale is not located in the United States or organized under U.S. law; (ii) the banking entity (including relevant personnel) that makes the investment decision is not located in the United States or organized under U.S. law; (iii) the investment or sponsorship, including any transaction arising from risk-mitigating hedging related to an ownership interest, is not accounted for as principal directly or indirectly on a consolidated basis by any branch or affiliate that is located in the United States or organized under U.S. law; (iv) no financing for the banking entity’s ownership or sponsorship is provided, directly or indirectly, by any branch or affiliate that is located in the United States or organized under U.S. law and (v) the purchase or sale is not conducted with or through any U.S. entity, other than through the foreign operations of the U.S. entity or an unaffiliated market intermediary.
Thus, considerably more flexibility is provided to foreign banking organizations, through reliance on a combination of the seeding period exemption and the foreign covered fund activity exemption, than is provided to U.S. banks.
Banking entities that, directly or indirectly, serve as an investment manager or sponsor of a covered fund, or organize a covered fund and continue to maintain an ownership interest are prohibited from engaging in “covered transactions” with a covered fund. In this way, the relationship between a banking entity and a covered fund is subject to the same prohibitions on affiliated transactions as are non-covered fund affiliates of a U.S. bank. “Covered transaction” is defined, in relevant part, in Section 23A of the Federal Reserve Act as:
However, notwithstanding the covered transaction prohibition, a banking entity that is in compliance with the fund ownership interest limitations described above, may enter into “any prime brokerage transaction” with any covered fund managed or sponsored by the banking entity or an affiliate.
“Prime brokerage transactions” are defined to mean covered transactions as defined in Section 23A of the Federal Reserve Act that are provided in connection with custody, clearance and settlement, securities borrowing or lending services, trade execution, financing, or data, operational and administrative support.
All such transactions are required to be entered into on terms that are comparable to those entered into with unaffiliated entities. If a banking entity enters into a prime brokerage transaction with a covered fund, the chief executive officer of the banking entity must certify annually (with a duty to update) that the banking entity does not, directly or indirectly guarantee, assume or otherwise insure the obligations or performance of the covered funds or of any covered fund in which it invests.
Each banking entity is required to develop and maintain a compliance program “reasonably designed to ensure and monitor compliance” with the proprietary trading and covered fund restrictions of the Volcker Rule. Rather than adopting a “one size fits all” approach, the terms, scope and detail of the compliance program must be tailored to the activities and business structure of the banking entity. A banking entity’s total consolidated assets are a determinative factor in the type of compliance program it is required to adopt.
If a banking entity that engages in Volcker Rule covered activities has total consolidated assets of $10 billion or less, it may fold its Volcker Rule compliance measures into its existing compliance programs. Banking entities with more than $10 billion but less than $50 billion in total consolidated assets are required to implement a separate compliance program that, at a minimum, includes the following:
Banking entities with total consolidated assets of $50 billion or more (or a foreign banking entity with total U.S. consolidated assets of $50 billion or more) are subject to enhanced compliance requirements. Banking entities that do not engage in any Volcker Rule covered activities are not required to establish a Volcker Rule compliance program.
The CEO of the banking entity is required to annually provide a written attestation that the banking entity has in place “processes to establish, maintain, enforce, review, test and modify” the Volcker Rule compliance program in a manner reasonably designed to achieve compliance with the Volcker Rule. For foreign banking entities, it is sufficient if the U.S.-based senior management officer of the U.S. operations of the foreign banking entity provides the attestation with respect to the foreign banking entity’s U.S. operations.
Banking entities that are engaged in significant trading must furnish periodic reports to their primary regulatory agencies on a range of quantitative measurements regarding their proprietary trading. Beginning on June 30, 2014, any U.S. banking entity (together with its affiliates and subsidiaries) that has trading assets and liabilities (excluding certain U.S. government obligations) that over the previous consecutive four quarters exceeded $50 billion or more, on a global basis, will be required to file reports regarding its proprietary trading activity monthly. Foreign banking entities with trading assets and liabilities of the combined U.S. operations of the foreign banking entity (including all subsidiaries, affiliates, branches and agencies operating, located or organized in the United States and excluding certain U.S. government obligations) of $50 billion or more will also be required to file such reports. Banking entities with trading assets and liabilities of $25 billion or more will be required to submit these reports on April 30, 2016 and banking entities with trading assets and liabilities of $10 billion or more will be required to make such reports on December 31, 2016. Thereafter, such reports for banking entities with less than $50 billion (but more than $10 billion) in trading assets and liabilities will be required to be filed on a quarterly basis.
The reports that are required to be filed cover the following measurements for each of the reporting entity’s trading desks that are engaged in proprietary trading:
Any banking entity subject to these reporting requirements must create and retain records documenting the preparation and content of each report, as well as the information necessary to permit a regulator to verify the accuracy of such information in the report for a period of five years.
See 79 Fed. Reg. 5536 (January 31, 2014). Note that the Agencies have established an inter-agency Volcker Rule implementation task force that, among other things, will examine the means for coordinated interpretations and enforcement of the Volcker Rule.
Note, however, that certain reporting obligations, discussed in Section IV of this Advisory, begin as early as June 30, 2014.
Pub. L. 111-203, July 21, 2010, section 619, codified at 12 U.S.C. § 1851.
79 Fed. Reg. 5536, 5538. Citations are to the text of the common rule, which each agency will incorporate into its regulations. For example, the Federal Reserve Board will incorporate the final rule as 12 C.F.R. Part 248, Regulation VV.
79 Fed. Reg. 5536, 5538.
For purposes of this Advisory, the term “foreign” is used to mean “non-U.S.” Although we understand that this is a relative term, we have used this terminology to correspond with the language of the final rule.
The definition of “financial instrument” does not include spot foreign exchange or spot physical commodity transactions.
In November 2013, CFTC staff issued an Advisory stating that a foreign swap dealer’s use of personnel located in the United States to “arrange, negotiate, or execute” a swap transaction with a non-U.S. person similarly could subject that swap to certain regulatory requirements under the Dodd-Frank Act and the CFTC’s implementing regulations. This Advisory proved to be highly controversial, and the CFTC subsequently issued a request for public comment on the matter. See 79 Fed. Reg. 1347 (January 8, 2014). In addition, CFTC staff has issued a no-action letter providing non-U.S. swap dealers until September 15, 2014, to comply with applicable requirements in these circumstances. See Extension of No-Action Relief: Transaction-Level Requirements for Non-U.S. Swap Dealers, CFTC Letter No. 14-01 (January 3, 2014).
Under the Federal Reserve Board’s Regulation K, to be a qualifying foreign banking organization, disregarding its U.S. banking business, more than half of the entity's worldwide business must be banking, and more than half of its banking business must be outside the United States. See 12 C.F.R. § 211.23. Banking entities that are not qualifying foreign banking organizations are subject to comparable tests set forth in the Volcker Rule itself.
Paragraphs (9) and (13) of section 4(c) of the BHC Act allow for foreign banking entities operating in the United States to conduct certain activities outside of the United States.
See 79 Fed. Reg. 5655, footnote 1521.
The proposed definition of “distribution” mirrored the definition used in the SEC’s Regulation M under the Exchange Act and took into account the magnitude of the offering and the presence of special selling efforts and selling methods. The Agencies determined in the final Volcker Rule that the requirement to have special selling efforts and selling methods was sufficient to distinguish between permissible securities offerings and prohibited proprietary trading, and that the additional magnitude factor was not needed to further this goal. See 79 Fed. Reg. 5561.
A foreign banking entity will have to navigate the distinctions between the hedging provisions of the Volcker Rule and those that apply for other purposes under the Dodd-Frank Act, such as those that could be relevant to determining whether the entity is required to register as a swap dealer or a major swap participant with the CFTC. See 7 U.S.C. §§ 1a(33), 1a(49); 17 C.F.R. §§ 1.3(ggg)(6)(iii), 1.3(hhh)(1)(ii)(A).
See 79 Fed Reg. 5223 (January 31, 2014).
The Agencies have released a non-exclusive list of TruPS CDO issuers that meet these requirements.
Note, though, that the Agencies explicitly declined to adopt in the final Volcker Rule exemptions for other securitization vehicles that had been identified by commenters, such as insurance-linked securities.
See 79 Fed. Reg. 5734-5735 for a discussion of the calculation of Tier 1 Capital.
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