Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds

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, AttorneyAdviser, 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

2 Id.
3 12 U.S.C. 1851(d)(1).
4E.g., 12 U.S.C. 1851(d)(1)(G).
5 12 U.S.C. 1851(b)(2).
6Prohibitions 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). 7Proposed 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). 8See 83 FR 33437, 40–42. 9See 83 FR 33442–46. 10See 83 FR 33453–54. 11See 83 FR 33471–82. 12The 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. 13See 83 FR 33446–51. 14See 83 FR 33454–62. 15See 83 FR 33464–67. 16See 83 FR 33467–70. 17See 83 FR 33451–52. 18See 83 FR 33452–53. 19See 83 FR 33482–83 20See 83 FR 33483–86. 21See 83 FR 33471–82. 22See 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 makingrelated 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

23See 83 FR 33487–89; 33490–94.
24See 83 FR 33489.
25See 83 FR 33490.
26See 83 FR 33454.
27See 83 FR 33494–514.
28See, e.g., Senators Merkley et al.; Elise J. Bean (Bean); National Association of Federally-Insured Credit Unions (NAFCU); Better Markets, Inc. (Better Markets); Americans for Financial Reform (AFR); Volcker Alliance; Occupy the SEC; and Volcker 2.0 Form Letter. 29Under the proposal, the ‘‘limited’’ compliance threshold would have been based on the trading assets and liabilities of a foreign banking organization’s worldwide operations whereas the ‘‘significant’’ compliance threshold would have been based on the trading assets and liabilities of a foreign banking organization’s U.S. operations. compliance requirements based on new compliance tiers. The proposed rule would have applied the six-pillar compliance program, and a CEO attestation requirement largely consistent with the 2013 rule, to firms with significant trading assets and liabilities and eliminated the enhanced minimum standards for compliance programs in Appendix B of the 2013 rule.23 Firms with moderate trading assets and liabilities would have been required to adhere to a simplified compliance program, with a CEO attestation requirement,24 and firms with limited trading assets and liabilities would have had a presumption of compliance with the rule.25 The proposal also included a reservation of authority specifying that the agencies could impose additional requirements on banking entities with limited or moderate trading assets and liabilities if warranted.26 The proposal would have revised the metrics reporting and recordkeeping requirements by, for example, applying those requirements based on a banking entity’s size and level of trading activity, eliminating some metrics, and adding a limited set of new metrics to enhance compliance efficiencies.27 In addition, the agencies requested comment on whether some or all of the reported quantitative measurements should be made publically available. The agencies invited comment on all aspects of the proposal, including specific proposed revisions and questions posed by the agencies. The agencies received over 75 unique comments from banking entities and industry groups, public interest groups, and other organizations and individuals. In addition, the agencies received approximately 3,700 comments from individuals using a version of a short form letter to express opposition to the proposed rule. For the reasons discussed below, the agencies are now adopting a final rule that incorporates a number of modifications.
III. Overview of the Final Rule and
Modifications From the Proposal A. The Final Rule Similar to the proposal, the final rule includes a risk-based approach to revising the 2013 rule that relies on a set of clearly articulated standards for both prohibited and permitted activities and investments. The final rule is intended to further tailor and simplify the rule to allow banking entities to more efficiently provide financial services in a manner that is consistent with the requirements of section 13 of the BHC Act. The comments the agencies received from banking entities and financial services industry trade groups were generally supportive of the proposal, with the exception of the proposed accounting prong, and provided recommendations for further targeted changes. The agencies also received a few comments in opposition to the proposal from various organizations and individuals.28 As described further below, the agencies have adopted many of the proposed changes to the 2013 rule, with certain targeted adjustments based on comments received. Furthermore, the agencies intend to issue an additional notice of proposed rulemaking that would propose additional, specific changes to the restrictions on covered fund investments and activities and other issues related to the treatment of investment funds under the regulations implementing section 13 of the BHC Act. The final rule includes the same general three-tiered approach to tailoring the compliance program requirements as the proposal. However, based on comments received, the agencies have modified the threshold for banking entities in the ‘‘significant’’ compliance category from $10 billion in gross trading assets and liabilities to $20 billion in gross trading assets and liabilities. The final rule also includes modifications to the calculation of trading assets and liabilities for purposes of determining which compliance tier a banking entity falls into by excluding certain financial instruments that banking entities are permitted to trade without limit under
section 13. Additionally, the final rule
aligns the methodologies for calculating the ‘‘limited’’ and ‘‘significant’’ compliance thresholds for foreign banking organizations by basing both thresholds on the trading assets and liabilities of the firm’s U.S. operations.29 The final rule also includes many of the proposed changes to the proprietary trading restrictions, with certain changes based on comments received. One such change is that the final rule does not include the proposed accounting prong in the trading account definition. Instead, the final rule retains a modified version of the short-term intent prong and replaces the 2013 rule’s rebuttable presumption that financial instruments held for fewer than 60 days are within the short-term intent prong of the trading account with a rebuttable presumption that financial instruments held for 60 days or longer are not within the short-term intent prong of the trading account. The final rule also provides that a banking entity that is subject to the market risk capital rule prong of the trading account definition is not also subject to the short-term intent prong, and a banking entity that is not subject to the market risk capital rule prong may elect to apply the market risk capital rule prong (as an alternative to the short-term intent prong). Additionally, the final rule modifies the liquidity management exclusion from the proprietary trading restrictions to permit banking entities to use a broader range of financial instruments to manage liquidity, and it adds new exclusions for error trades, certain customer-driven swaps, hedges of mortgage servicing rights, and purchases or sales of instruments that do not meet the definition of trading assets or liabilities. Furthermore, the final rule revises the trading desk definition to provide more flexibility to banking entities to align the definition with other trading desk definitions in existing or planned compliance programs. This modified definition also will provide for consistent treatment across different regulatory regimes. The final rule also includes the proposed changes to the exemptions from the prohibitions in section 13 of the BHC Act for underwriting and market making-related activities, riskmitigating hedging, and trading by foreign banking entities solely outside the United States. The final rule also includes the proposed changes to the covered funds provisions for which specific rule text was proposed, including with respect to permitted underwriting and market making and risk-mitigating hedging with respect to a covered fund, as well as investment in or sponsorship of covered funds by foreign banking entities solely outside the United States and the exemption for prime brokerage transactions. With respect to the exemptions for underwriting and market making-related activities, the final rule adopts the presumption of compliance with the

30 12 U.S.C. 1851(b)(2)(B)(ii). 31 83 FR 33436. 32See, e.g., American Bankers Association (ABA); Institute of International Bankers (IIB); BB&T; Committee on Capital Markets Regulation (CCMR); Japanese Bankers Association (JBA); and the CFA Institute (CFA). Commenters also recommended designating to one agency the task of interpreting the implementing regulations and issuing guidance to smaller banking entities. See, e.g., Credit Suisse and Lori Nuckolls. 33See, e.g., ABA; Arvest Bank (Arvest); Credit Suisse; and Financial Services Forum (FSF). 34See ABA. 35See, e.g., ABA; BB&T; CCMR; and FSF. 36See, e.g., AFR; Public Citizen; Volcker Alliance; and CFA. 37See, e.g., CAP; Merkley; and Public Citizen. 38See, e.g., Public Citizen and CAP. reasonably expected near-term demand requirement for trading within certain internal limits, but instead of requiring banking entities to promptly report limit breaches or increases to the agencies, banking entities are required to maintain and make available upon request records of any such breaches or increases and follow certain internal escalation and approval procedures in order to remain qualified for the presumption of compliance. With respect to the compliance program requirements, the final rule includes the changes from the proposal to eliminate the enhanced compliance requirements in Appendix B of the 2013 rule and to tailor the compliance program requirements based on the size of the banking entity’s trading activity. However, different from the proposal, the final rule only applies the CEO attestation requirement to firms with significant trading assets and liabilities. Also, in response to comments, the final rule includes modifications to the metrics collection requirements to, among other things, eliminate certain metrics and reduce the compliance burden associated with the requirement. For the OCC, Board, FDIC, and CFTC, the final amendments will be effective on January 1, 2020. For the SEC, the final amendments will be effective on January 13, 2020. In order to give banking entities a sufficient amount of time to comply with the changes adopted, banking entities will not be required to comply with the final amendments until January 1, 2021. During that time, the 2013 rule will remain in effect as codified in appendix Z, which is a temporary appendix that will expire on the compliance date. However, banking entities 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 technical changes. In particular, the agencies need to complete certain technological programming in order to accept metrics compliant with the final amendments. The agencies will conduct a test run with banking entities of the revised metrics submission format. A banking entity seeking to switch to the revised metrics prior to January 1, 2021, must first successfully test submission of the revised metrics in the new XML
format. Accordingly, banking entities should work with each appropriate agency to determine how and when to voluntarily comply with the metrics requirements under the final rules and to notify such agencies of their intent to comply, prior to the January 1, 2021, compliance date. B. Interagency Coordination and Other Comments
Section 13(b)(2)(B)(ii) of the BHC Act
directs the agencies to ‘‘consult and coordinate’’ in developing and issuing the implementing regulations ‘‘for the purpose of assuring, to the extent possible, that such regulations are comparable and provide for consistent application and implementation of the applicable provisions of [section 13 of the BHC Act] to avoid providing advantages or imposing disadvantages to the companies affected . . . .’’ 30 The agencies recognize that coordinating with each other to the greatest extent practicable with respect to regulatory interpretations, examinations, supervision, and sharing of information is important to maintaining consistent oversight, promoting compliance with
section 13 of the BHC Act and
implementing regulations, and to fostering a level playing field for affected market participants. The agencies further recognize that coordinating these activities helps to avoid unnecessary duplication of oversight, reduces costs for banking entities, and provides for more efficient regulation. In the proposal, the agencies requested comment on interagency coordination regarding the Volcker Rule in general and asked several specific questions relating to transparency, efficiency, and safety and soundness.31 Numerous commenters, including banking entities and industry groups, suggested that the agencies more effectively coordinate Volcker Rule related supervision, examinations, and enforcement, in order to improve efficiency and predictability in supervision and oversight.32 For example, several commenters suggested that Volcker Rule related supervision should be conducted solely by a bank’s prudential onsite examiner,33 and that the two market regulators be required to consult and coordinate with the prudential onsite examiner.34 Several commenters encouraged the agencies to memorialize coordination and information sharing between the agencies by entering into a formal written agreement, such as an interagency Memorandum of Understanding.35 Several comment letters from public interest organizations suggested that the agencies have not provided sufficient transparency when implementing and enforcing the Volcker Rule, and urged the agencies to make public certain information related to enforcement actions, metrics, and covered funds activities.36 In addition, several commenters, including a member of Congress, argued that the agencies have not adequately explained or provided evidence to support the current rulemaking.37 The agencies agree with commenters that interagency coordination plays an important role in the effective implementation and enforcement of the Volcker Rule, and acknowledge the benefits of providing transparency in proposing and adopting rules to implement section 13 of the BHC Act. Accordingly, the agencies have endeavored to provide specificity and clarity in the final rule to avoid conflicting interpretations or uncertainty. The final rule also includes notice and response procedures that provide a greater degree of certainty about the process by which the agencies will make certain determinations under the final rule. The agencies continue to recognize the benefits of consistent application of the rules implementing
section 13 of the BHC Act and intend to
continue to consult with each other when formulating guidance on the final rule that would be shared with the public generally. That said, the agencies also are mindful of the need to strike an appropriate balance between public disclosure and the protection of sensitive, confidential information, and the agencies are generally restricted from disclosing sensitive, confidential business and supervisory information on a firm-specific basis. Several commenters provided general comments regarding the proposal and the current rulemaking. For example, several public interest commenters suggested that the proposed rule did not provide a sufficient financial disincentive against proprietary trading and encouraged the agencies to adopt certain limitations on compensation arrangements.38 A commenter also suggested possible penalties for rule violations and encouraged the agencies to elaborate on the consequences of

39See Public Citizen.
40See Volcker 2.0 Form Letter.
41See, e.g., Systemic Risk Council and Oonagh McDonald. 42 12 U.S.C. 1851(a)(1)(A). A banking entity may engage in an activity that is permissible under
section 13 of the BHC Act only to the extent
permitted by any other provision of Federal and State law, and subject to other applicable restrictions. See 12 U.S.C. 1851(d)(1). 43 12 U.S.C. 1851(h)(1). 44See 2013 rule §ll.2(c). 45See final rule §ll.2(r). 46Public Law 115–174 (May 24, 2018). 47See 84 FR 35008. 48See 83 FR 33442–446. 49See, e.g., ABA; American Investment Council (AIC); Bundesverband Investment (BVI); Canadian Bankers Association (CBA); European Banking Federation (EBF); Federated Investors II; Financial Services Agency and Bank of Japan (FSA/Bank of Japan); European Fund and Asset Management Association (EFAMA); and IIB. 50 Id. 51See, e.g., IIB and Securities Industry and Financial Markets Association (SIFMA). 52See, e.g., Capital One et al.; Credit Suisse; EBF; and Investment Adviser Association (IAA). 53See, e.g., ABA; EBF; and Investment Company Institute (ICI). 54 Id. In addition to the requests from commenters for the agencies to exclude foreign excluded funds from the ‘‘banking entity’’ definition, commenters also asked the agencies to adopt other amendments to address the treatment of such funds, including by providing a presumption of compliance for such funds (CBA; EBF; and IIB), to permit a banking entity to elect to treat a foreign excluded fund as a covered fund (CBA; EBF; and IIB), and to permanently extend the temporary relief currently provided to foreign excluded funds (IIB). 55See Data Boiler Technologies, LLC (Data Boiler). significant violations of the rule.39 Other commenters recommended that the agencies impose strong penalties on banking entities that break the law.40 The agencies believe that the appropriate consequences for a violation of the rule will likely depend on the specific facts and circumstances in individual cases, as well as each agency’s statutory authority under
section 13, and therefore are not
amending the rule to provide for specific penalties or financial disincentives for violations. Finally, several commenters suggested that the proposed rule is too complex and may provide too much deference to a banking entity’s internal procedures and models (for example, in provisions related to underwriting, market making, and hedging), and that the proposed revisions would make the rule less effective.41 As discussed further below, the agencies believe that the particular changes adopted in the final rule are meaningfully simpler and streamlined compared to the 2013 rule, and are appropriate for the reasons described in greater detail below.
IV. Section by Section Summary of the
Final Rule
A. Subpart A—Authority and Definitions

Section ll.2: Definitions
a. Banking Entity
Section 13(a)(1)(A) of the BHC Act
prohibits a banking entity from engaging in proprietary trading or acquiring or retaining an ownership interest, or sponsoring, a covered fund, unless the activity is otherwise permissible under
section 13.42 Therefore, the definition of
the term ‘‘banking entity’’ defines the scope of entities subject to restrictions under the rule. Section 13(h)(1) of the BHC Act defines the term ‘‘banking entity’’ to include (i) any insured depository institution (as defined by statute); (ii) any company that controls an insured depository institution; (iii) any company that is treated as a bank holding company for purposes of
section 8 of the International Banking
Act of 1978; and (iv) any affiliate or subsidiary of any such entity.43 The regulations implementing this provision are consistent with the statute and also exclude covered funds that are not themselves banking entities, certain portfolio companies, and the FDIC acting in its corporate capacity as conservator or receiver.44 In addition, the agencies note that, consistent with the statute, for purposes of this definition, the term ‘‘insured depository institution’’ does not include certain institutions that function solely in a trust or fiduciary capacity, and certain community banks and their affiliates.45 Section 203 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) amended the definition of ‘‘banking entity’’ in the Volcker Rule to exclude certain community banks from the definition of insured depository institution, the general result of which was to exclude community banks and their affiliates and subsidiaries from the scope of the Volcker Rule.46 On July 22, 2019, the agencies adopted a final rule amending the definition of ‘‘insured depository institution,’’ in a manner consistent with EGRRCPA.47 The proposed rule did not propose specific rule text to amend the definition of ‘‘banking entity,’’ but invited comment on a number of specific issues.48 The agencies received several comments about the ‘‘banking entity’’ definition, many of which asked that the agencies revise this definition to exclude specific types of entities. Several commenters expressed concern about the treatment of certain funds that are excluded from the definition of ‘‘covered fund’’ in the 2013 rule, including registered investment companies (RICs), foreign public funds (FPFs), and, with respect to a foreign banking entity, certain foreign funds offered and sold outside of the United States (foreign excluded funds).49 In particular, these commenters noted that when a banking entity invests in such funds, or has certain corporate governance rights or other control rights with respect to such funds, the funds could meet the definition of ‘‘banking entity’’ for purposes of the Volcker Rule.50 Concerns about certain funds’ potential status as banking entities arise, in part, because of the interaction between the statute’s and the 2013 rule’s definitions of the terms ‘‘banking entity’’ and ‘‘covered fund.’’ Sponsors of RICs, FPFs, and foreign excluded funds have noted that the treatment of such funds as ‘‘banking entities’’ would disrupt bona fide asset management activities (including fund investment strategies that may include proprietary trading or investing in covered funds), which these sponsors argued would be inconsistent with section 13 of the BHC Act.51 Commenters also noted that treatment of RICs, FPFs, and foreign excluded funds as ‘‘banking entities’’ would put such banking entity-affiliated funds at a competitive disadvantage compared to funds not affiliated with a banking entity, and therefore not subject to restrictions under
section 13 of the BHC Act.52 In general, commenters also asserted that the treatment of RICs, FPFs, and foreign excluded funds as banking entities would not further the policy objectives of section 13 of the BHC Act.53 Several commenters suggested that the agencies exclude from the definition of ‘‘banking entity’’ foreign excluded funds.54 These commenters generally noted that failing to exclude such funds from the definition of ‘‘banking entity’’ in the 2013 rule has the unintended consequence of imposing proprietary trading restrictions and compliance obligations on foreign excluded funds that are in some ways more burdensome than the requirements that would apply under the 2013 rule to covered funds. Another commenter expressed opposition to carving out foreign excluded funds from the definition of banking entity.55 The staffs of the agencies continue to consider ways in which the regulations may be amended in a manner consistent with the statutory definition of ‘‘banking entity,’’ or other appropriate actions that may be taken, to address any unintended consequences of section 13 of the BHC Act and the 2013 rule. The agencies intend to issue a separate proposed

56Foreign banking entity was defined for purposes of the policy statement to mean a banking entity that is not, and is not controlled directly or indirectly by, a banking entity that is located in or organized under the laws of the United States or any State. 57See Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency, ‘‘Statement regarding Treatment of Certain Foreign Funds under the Rules Implementing Section 13 of the Bank Holding Company Act’’ (July 17, 2019). This policy statement continued the position of the Federal banking agencies that was released on July 21, 2017, and the position that the agencies expressed in the proposal. See 83 FR 33444. 58See, e.g., CCMR; IAA; ICI; and Capital One et al. One commenter also expressed support for a narrower exclusion for RICs and FPFs that would apply only during a non-time-limited seeding period. JP Morgan Asset Management. 59See https://www.occ.treas.gov/topics/ capitalmarkets/financial-markets/trading-volckerrule/volcker-rule-implementation-faqs.html (OCC); https://www.federalreserve.gov/bankinforeg/ volcker-rule/faq.htm (Board); https://www.fdic.gov/ regulations/reform/volcker/faq.html (FDIC); https:// www.sec.gov/divisions/marketreg/faq-volckerrulesection13.htm (SEC); https://www.cftc.gov/ LawRegulation/DoddFrankAct/Rulemakings/DF_ 28_VolckerRule/index.htm (CFTC). 60 Id., FAQ 16. 61 Id., FAQ 14. 62The FAQs represent the views of staff of the agencies. They are not rules, regulations, or statements of the agencies. Furthermore, the agencies have neither approved nor disapproved their content. The FAQs, like all staff guidance, have no legal force or effect: They do not alter or amend applicable law, and they create no new or additional obligations for any person. 63See Bank Policy Institute (BPI). 64See EFAMA. 65See, e.g., ABA and FSF. 66See ABA. 67See, e.g., ABA; BPI; SIFMA; JBA. 68See BB&T. 69See JBA. This commenter suggested that in the absence of an exclusion for such entities, simplified compliance program requirements should apply to foreign subsidiaries of foreign banking entities that do not engage in trading activities in the United States. The agencies believe that several of the other changes in this final rule will provide relief to foreign banking entities that engage in no trading activities in the United States, including simplifications to the exemption for foreign banking entities engaged in trading outside of the United States, and more tailored compliance program requirements. See also FSA/Bank of Japan; IIB. 70See, e.g., EnerBank USA (EnerBank); Marketplace Lending Association; National Association of Industrial Bankers. 71See IIB. This commenter also proposed modifying the manner in which ‘‘banking entity’’ Continued rulemaking that specifically addresses the fund structures under the rule, including the treatment of foreign excluded funds. To provide additional time to complete this
rulemaking, the Federal banking agencies released a policy statement on July 17, 2019, in response to concerns about the treatment of foreign excluded funds. This policy statement provides that the Federal banking agencies would not propose to take action during the two-year period ending on July 21, 2021, against a foreign banking entity based on attribution of the activities and investments of a qualifying foreign excluded fund to the foreign banking entity,56 or against a qualifying foreign excluded fund as a banking entity, in each case where the foreign banking entity’s acquisition or retention of any ownership interest in, or sponsorship of, the qualifying foreign excluded fund would meet the requirements for permitted covered fund activities and investments solely outside the United States, as provided in section 13(d)(1)(I) of the BHC Act and §ll.13(b) of the 2013 rule, as if the qualifying foreign excluded fund were a covered fund.57 Several commenters expressed concern with the treatment of RICs and FPFs, which are subject to significant regulatory requirements in the United States and foreign jurisdictions, respectively. These commenters encouraged the agencies to consider excluding such entities from the definition of ‘‘banking entity.’’ 58 In the past, the staffs of the agencies issued several FAQs to address the treatment of RICs and FPFs.59 One of these staff FAQs provides guidance about the treatment of RICs and FPFs during the period in which the banking entity is testing the fund’s investment strategy, establishing a track record of the fund’s performance for marketing purposes, and attempting to distribute the fund’s shares (the so-called seeding period).60 Another FAQ stated that staffs of the agencies would not view the activities and investments of an FPF that meets certain eligibility requirements in the 2013 rule as being attributed to the banking entity for purposes of section 13 of the BHC Act or the 2013 rule, where the banking entity (i) does not own, control, or hold with the power to vote 25 percent or more of any class of voting shares of the FPF (after the seeding period), and (ii) provides investment advisory, commodity trading advisory, administrative, and other services to the fund in compliance with applicable limitations in the relevant foreign jurisdiction. Similarly, this FAQ stated that the staffs of the agencies would not view the FPF to be a banking entity for purposes of section 13 of the BHC Act and the 2013 rule solely by virtue of its relationship with the sponsoring banking entity, where these same conditions are met.61 As noted above, the agencies intend to issue a separate proposal addressing and requesting comment on the covered fund provisions and other fund-related issues. The final rule does not modify or revoke any previously issued staff FAQs or guidance related to RICs, FPFs, and foreign excluded funds.62 Apart from these topics, the agencies received numerous other comments about the
treatment of entities as ‘‘banking entities’’ under section 13 of the BHC Act. In general, these commenters requested that the agencies provide additional exclusions from the definition of ‘‘banking entity’’ for various types of entities. One commenter suggested that, as an alternative to excluding certain entities from the banking entity definition, the agencies could exempt the activities of these entities from the proprietary trading and covered fund prohibitions.63 One commenter recommended that the agencies provide a general exemption from the banking entity definition for investment funds, except in circumstances where the investment fund is determined to have been organized to permit the banking entity sponsor to engage in impermissible proprietary trading.64 Some commenters encouraged the agencies to exclude employee securities companies from the definition of ‘‘banking entity.’’ 65 One commenter argued that despite a banking entity’s role as a general partner in employee securities companies, treating such entities as ‘‘banking entities’’ does not further the policy goals of section 13 of the BHC Act.66 Several commenters encouraged the agencies to exclude from the definition of ‘‘banking entity’’ any nonconsolidated subsidiaries not operated or managed by a banking entity, on the basis that such entities were never intended to be subject to section 13 of the BHC Act.67 Another commenter said the agencies should exclude from the definition of ‘‘banking entity’’ all employee compensation plans, regardless of whether such plans are qualified or non-qualified.68 Other commenters suggested that the agencies should exclude subsidiaries of foreign banking entities that do not engage in trading activities in the United States, or otherwise limit application to foreign subsidiaries of foreign banking groups.69 Other commenters requested modification of the definition of ‘‘banking entity’’ to exclude parent companies and affiliates of industrial loan companies, noting that such companies are generally not subject to other restrictions on their activities under the BHC Act.70 One commenter encouraged the agencies to exclude international banks from the definition of ‘‘banking entity’’ if they have limited U.S. trading assets and liabilities.71 This commenter also

status is determined by disaggregating separate, independent corporate groups. 72 Id. 73See, e.g., EnerBank and Capital One et al. See 12 U.S.C. 1841(a)(2)(C). 74See Capital One et al. 75 12 U.S.C. 1841(a)(2); 12 CFR 225.2(e). 76 Id. 77See ‘‘Control and Divestiture Proceedings,’’ 84 FR 21634–666 (May 14, 2019). 78See, e.g., Economic Growth, Regulatory Relief, and Consumer Protection Act § 203 (excluding community banks from the definition of ‘‘banking entity’’). 79See proposed rule §ll.2(t), (v), (ff). Under the proposal, a foreign banking entity’s trading assets and liabilities would have been calculated based on worldwide trading assets and liabilities with respect to the $1 billion threshold between limited and moderate trading assets and liabilities, but based on the trading assets and liabilities only of its combined U.S. operations with respect to the $10 billion threshold between moderate and significant trading assets and liabilities. See proposed rule §ll.2(t)(1), (ff)(2)–(3). 80Proposed rule §ll.2(ff). 81Proposed rule §ll.2(v). 82Proposed rule §ll.2(t). 83Proposed rule §ll.20(h). 84See 83 FR at 33442 (question 7). 85See final rule §ll.2(s), (u), (ee). 86See, e.g., BB&T Corporation; CFA; CCMR; and State Street Corporation (State Street). 87See State Street. 88See, e.g., Bean; Data Boiler Technologies; and Occupy the SEC. encouraged the agencies to exclude certain non-U.S. commercial companies that are comparable to U.S. merchant banking portfolio companies.72 This commenter argued that excluding these entities would not pose material risks to the financial stability of the United States. Some commenters suggested that the agencies should clarify the standards for what constitutes ‘‘control’’ in the context of determining whether an entity is an ‘‘affiliate’’ or ‘‘subsidiary’’ for purposes of the definition of ‘‘banking entity’’ in the Volcker Rule.73 One commenter suggested that the definition of ‘‘banking entity’’ should include only a company in which a banking entity owns, controls, or has the power to vote 25 percent or more of a class of voting securities of the company.74 The definition of ‘‘banking entity’’ in
section 13 of the BHC Act uses the
definition of control in section 2 of the BHC Act.75 Under the BHC Act, ‘‘control’’ is defined by a three-pronged test. A company has control over another company if the first company (i) directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25 percent or more of any class of voting securities of the other company; (ii) controls in any manner the election of a majority of the directors of the other company; or (iii) directly or indirectly exercises a controlling influence over the management or policies of the other company.76 The Board recently issued a proposed rulemaking that would clarify the standards for evaluating whether one company exercises a controlling influence over another company for purposes of the BHC Act.77 The final rule does not amend the definition of banking entity. Commenters raised important considerations with respect to the consequences of the current ‘‘banking entity’’ definition under section 13 of the BHC Act and the 2013 rule. The agencies believe that other amendments to the requirements of the regulations implementing the Volcker Rule may address some of the issues raised by commenters. Certain concerns raised by commenters may need to be addressed through amendments to section 13 of the BHC Act.78 In addition, as noted above, the agencies intend to revisit the fund-related provisions of the Volcker Rule in a separate rulemaking. b. Limited, Moderate, and Significant Trading Assets and Liabilities The proposal would have established three categories of banking entities based on their level of trading activity, as measured by the average gross trading assets and liabilities of the banking entity and its subsidiaries and affiliates (excluding obligations of or guaranteed by the United States or any agency of the United States) over the previous four consecutive quarters.79 These categories would have been used to calibrate compliance requirements for banking entities, with the most stringent compliance requirements applicable to those with the greatest level of trading activities. The first category would have included firms with ‘‘significant’’ trading assets and liabilities, defined as those banking entities that have consolidated trading assets and liabilities equal to or exceeding $10 billion.80 The second category would have included firms with ‘‘moderate’’ trading assets and liabilities, which would have included those banking entities that have consolidated trading assets and liabilities of $1 billion or more, but with less than $10 billion in consolidated trading assets and liabilities.81 The final category would have included firms with ‘‘limited’’ trading assets and liabilities, defined as those banking entities that have less than $1 billion in consolidated trading assets and liabilities.82 The proposal would have also provided the agencies with a reservation of authority to require a banking entity with limited or moderate trading assets and liabilities to
apply the compliance program requirements of a higher compliance tier if an agency determined that the size or complexity of the banking entity’s trading or investment activities, or the risk of evasion of the requirements of the rule, warranted such treatment.83 The proposal also solicited comment as to whether there should be further tailoring of the thresholds for a banking entity that is an affiliate of another banking entity with significant trading assets and liabilities, if that entity generally operates on a basis that is separate and independent from its affiliates and parent companies.84 Commenters provided feedback on multiple aspects of the tiered compliance framework, including the level of the proposed thresholds between the categories ($1 billion and $10 billion in trading assets and liabilities), the manner in which ‘‘trading assets and liabilities’’ should be measured, and alternative approaches that commenters believed would be preferable to the proposed three-tiered compliance framework. As described further below, after consideration of the comments received, the agencies are adopting a three-tiered compliance framework that is consistent with the proposal, with targeted adjustments to further tailor compliance program requirements based on the level of a firm’s trading activities, and in light of concerns raised by commenters.85 The agencies believe that this approach will increase compliance efficiencies for all banking entities relative to the 2013 rule and the proposal, and will further reduce compliance costs for firms that have little or no activity subject to the prohibitions and restrictions of section 13 of the BHC Act. Several commenters expressed support for the proposed three-tiered compliance framework in the proposal.86 One commenter noted that the 2013 rule’s compliance regime, which imposes significant compliance obligations on all banking entities with $50 billion or more in total consolidated assets, does not appropriately tailor compliance obligations to the scope of activities covered under the regulation, particularly for firms engaged in limited trading activities.87 Other commenters expressed general opposition to the proposed three-tiered compliance program.88 Another commenter expressed concern in particular that banking entities with ‘‘limited’’ trading assets and liabilities would have been presumed compliant with the requirements of section 13 of the BHC

89See Occupy the SEC.
90See, e.g., ABA; Capital One et al.; and KeyCorp and KeyBank (KeyCorp). 91See Data Boiler Technologies. 92See, e.g., ABA; Capital One et al.; and BPI. 93See, e.g., Data Boiler (encouraging the agencies to lower the threshold to $500 million in trading assets and liabilities) and B&F Capital Markets (B&F) (expressing support for the proposed $1 billion threshold). 94See final rule §ll.2(s)(2)–(3). 95See, e.g., ABA; Bank of New York Mellon Corporation, Northern Trust Corporation, and State Street Corporation (Custody Banks); New England Council; Capital One et al.; SIFMA; State Street; and BPI. 96 Id. 97 Id. 98See, e.g., ABA; Capital One et al.; and SIFMA. 99See final rule §ll.2(ee)(1)(i). 100See Capital One et al. 101See, e.g., final rule §ll.2(ee)(1)(i). 102See, e.g., IIB and JBA. 103See proposed rule §ll.2(t)(1), (ff)(2)–(3). 104See, e.g., IIB and JBA. 105 Id. Act under the proposed rule.89 Some commenters also suggested that the agencies adopt a two-tiered compliance program, bifurcating banking entities into those with and without significant trading assets and liabilities.90 One commenter expressed opposition to tailoring compliance requirements for banking entities that operate separately and independently from their affiliates, by calculating trading assets and liabilities for such entities independent of the activities of affiliates.91 The agencies believe that the three-tiered framework set forth in the proposal, subject to the additional amendments described below, appropriately differentiates among banking entities for the purposes of tailoring compliance requirements. Specifically, the agencies believe that the significant differences in business models and activities among banking entities that would have significant trading assets and liabilities, moderate trading assets and liabilities, and limited trading assets and liabilities, as described below, support having a three-tiered compliance framework. A few commenters recommended that the agencies raise the proposed $1 billion threshold between banking entities with limited and moderate trading assets and liabilities.92 These commenters suggested that raising this threshold to $5 billion in trading assets and liabilities would be consistent with the objective of the proposal to have the most streamlined requirements imposed on banking entities with a relatively small amount of trading activities. Other commenters recommended that the threshold between banking entities with limited and moderate trading activities was appropriate or should be set at a lower level.93 The agencies believe that the compliance obligations applicable to banking entities with limited trading assets and liabilities are most appropriately reserved for banking entities below the $1 billion threshold set forth in the proposal. Such banking entities tend to have simpler business models and do not have large trading operations that would warrant the expanded compliance obligations applicable to banking entities
with moderate and significant trading assets and liabilities. As discussed further below, these banking entities also hold a relatively small amount of the trading assets and liabilities in the U.S. banking system. Therefore, the final rule adopts the threshold from the proposed rule for determining whether a banking entity has limited trading assets and liabilities.94 Several commenters recommended that the agencies modify the threshold for ‘‘significant’’ trading assets and liabilities.95 Generally, these commenters expressed support for raising the threshold from $10 billion in trading assets and liabilities to $20 billion in trading assets and liabilities.96 These commenters noted that this change would have minimal impact on the number of banking entities that would remain categorized as having significant trading assets and liabilities.97 Several commenters also noted that increasing the threshold from $10 billion to $20 billion would provide additional certainty to banking entities that are near or approaching the $10 billion threshold, because market events or unusual customer demands could cause such banking entities to exceed (permanently or on a short-term basis) the $10 billion trading assets and liabilities threshold.98 The final rule adopts the change recommended by several commenters to raise the threshold from $10 billion to $20 billion for calculating whether a banking entity has significant trading assets and liabilities.99 The agencies estimate that, under the final rule with the increased threshold from $10 billion to $20 billion described above, banking entities classified as having significant trading assets and liabilities would hold approximately 93 percent of the trading assets and liabilities in the U.S. banking system. The agencies also estimate that banking entities with significant trading assets and liabilities and those with moderate trading assets and liabilities in combination would hold approximately 99 percent of the trading assets and liabilities in the U.S. banking system. Therefore, both of these thresholds will tailor the compliance obligations under the final rule for all firms by virtue of imposing greater compliance obligations on those banking entities with the most substantial levels of trading activities. One commenter suggested that the agencies index the compliance tier thresholds to inflation.100 At present, the agencies do not believe that the additional complexity associated with inflation-indexing the thresholds in the final rule is necessary in light of the other changes to the thresholds and calculation methodologies described below, including the increase in the threshold for firms with significant trading assets and liabilities from $10 billion to $20 billion, and the modifications to the calculation of trading assets and liabilities adopted in the final rule.101 Commenters recommended that the regulations incorporate a number of changes to the methodology used in the proposed rule to
classify firms into different compliance tiers. Some commenters recommended that the agencies apply a consistent methodology to foreign banking entities to classify such firms as having significant trading assets and liabilities, moderate trading assets and liabilities, or limited trading assets and liabilities.102 For purposes of classifying the banking entity as having significant trading assets and liabilities, the proposal would have included only the trading assets and liabilities of the combined U.S. operations of a foreign banking entity, but used the banking entity’s worldwide trading assets and liabilities for purposes of classifying the firm as having either limited trading assets and liabilities or moderate trading assets and liabilities.103 Commenters recommended that the agencies apply a consistent standard for classifying a foreign banking entity as having significant trading assets and liabilities, moderate trading assets and liabilities, or limited trading assets and liabilities, and that the most appropriate measure would look only at the combined U.S. operations of such a banking entity.104 These commenters noted that classifying foreign banking entities based on their global trading activities could have the result of imposing extensive compliance obligations on the non-U.S. trading activities of a banking entity with minimal U.S. trading activities.105 The final rule adopts a consistent methodology for calculating the trading assets and liabilities of foreign banking entities across all categories, taking into account only the trading assets and

106See final rule §ll.2(s)(3), (ee)(3). 107See Section 13(d)(1)(H), (I) (12 U.S.C. 1851(d)(1)(H), (I)). 108See JBA. 109See, e.g., ABA; Capital One et al. 110See, e.g., Data Boiler and John Hoffman. 111See, e.g., BMO Financial Group (BMO); Capital One et al.; and KeyCorp. 112See final rule §ll.2(s)(2), (3); see also final rule §ll.6(a)(1), (2). 113See, e.g., ABA; Arvest; and BOK Financial (BOK). 114See Insurance Coalition. 115See JBA. 116See final rule §ll.2(s)(2)–(3), (ee)(2)–(3). 117Compliance obligations are determined on a consolidated basis under the final rule. For that reason, where a banking entity has an unconsolidated subsidiary, the banking entity would not need to examine additional financial reports to determine its compliance obligations. 118See, e.g., Bank of Oklahoma; KeyCorp; BPI; and Capital One et al Banks. liabilities of such banking entities’ combined U.S. operations.106 The agencies believe this approach is appropriate, particularly for foreign firms with little or no U.S. trading activity but substantial worldwide trading operations. The agencies further believe that the trading activities of foreign banking entities that occur outside of the United States and are booked into such foreign banking entities (or into their foreign affiliates), pose substantially less risk to the U.S. financial system than trading activities booked into a U.S. banking entity, including a U.S. banking entity that is an affiliate of a foreign banking entity. This approach is also appropriate in light of provisions in section 13 of the BHC Act that provide foreign banking entities with significant flexibility to conduct trading and covered fund activities outside of the United States.107 One commenter expressed concern that the regulations did not give banking entities sufficient guidance as to how to calculate their trading assets and liabilities, and asked that the regulations expressly permit a banking entity to rely on home jurisdiction accounting standards when calculating trading assets and liabilities.108 In light of the changes to the methodology for calculating trading assets and liabilities noted above, in particular using combined U.S. trading assets and liabilities for establishing the appropriate compliance tier for foreign banking entities, the agencies believe that further clarifications to the standards for calculating ‘‘trading assets and liabilities’’ are not necessary for banking entities to have sufficient information available as to the manner in which to calculate trading assets and liabilities. A few commenters suggested that the threshold for ‘‘significant trading assets and liabilities’’ should be determined based on the relative size of the banking entity’s total trading assets and liabilities as compared to other metrics, such as total consolidated assets or capital, thereby establishing a banking entity’s compliance requirements based on the significance of trading activities to the banking entity.109 Some commenters
suggested that the use of trading assets and liabilities alone as a metric to classify banking entities for determining compliance obligations was inappropriate.110 The agencies believe that a banking entity’s trading assets and liabilities, as calculated under the methodology described in the final rule, is an appropriate metric to use in establishing compliance requirements for banking entities. Imposing compliance obligations on a banking entity based on the relative significance of trading activities to the firm could have the result of imposing fewer compliance obligations on a larger banking entity with identical trading activities to a smaller counterpart, simply because of that entity’s larger size. Several commenters recommended that the regulations exclude particular types of trading assets and liabilities for purposes of determining whether a banking entity has significant trading assets and liabilities, moderate trading assets and liabilities, or limited trading assets and liabilities. In particular, some commenters encouraged the agencies to exclude all government obligations and other assets and liabilities that are not subject to the prohibition on proprietary trading under section 13 of the BHC Act and the regulations.111 The final rule modifies the methodology for calculating a firm’s trading assets and liabilities to exclude all financial instruments that are obligations of, or guaranteed by, the United States, or that are obligations, participations, or other instruments of or guaranteed by an agency of the United States or a government-sponsored enterprise as described in the regulations.112 As commenters noted, banking entities are permitted to engage in trading activities in these products under section 13 of the BHC Act and the implementing regulations, and therefore the exclusion of such instruments for the final rule will result in a more appropriately tailored standard than under the proposal. The agencies also believe that the calculation of trading assets and liabilities, subject to these modifications, should continue to be relatively simple for banking entities and the agencies, without requiring the imposition of additional reporting requirements. A few commenters recommended that certain de minimis risk portfolios, such as matched derivatives holdings and loan-related swaps, be excluded from the calculation of trading assets and liabilities.113 Another commenter recommended the calculation of trading assets and liabilities should exclude insurance assets.114 Another commenter proposed that the trading assets and liabilities of non-consolidated affiliates be excluded, because tracking the trading assets and liabilities of such subsidiaries on an ongoing basis may present significant practical burdens.115 As discussed herein, the final rule makes several amendments to the methodology for calculating trading assets and liabilities, for example by excluding securities issued or guaranteed by certain
governmentsponsored enterprises, and by calculating trading assets and liabilities for foreign banking entities based only on the combined U.S. operations of such banking entities.116 The agencies believe that the revisions in the final rule should simplify the manner in which a banking entity calculates its trading assets and liabilities. However, the final rule does not adopt the changes recommended by a few commenters to exclude trading assets and liabilities associated with particular business activities or business lines, other than the express modifications noted above, or to exclude the trading assets and liabilities of certain types of subsidiaries. Rather, the final rule adopts an approach that is intended to be straightforward and consistent and allow banking entities greater ability to leverage regulatory reports that banking entities are already required to prepare under existing law, such as the Form Y9–C and the Call Report.117 Some commenters noted that the regulations should clarify the manner in which a banking entity should calculate trading assets and liabilities, and make clear whether it would be appropriate to rely on regulatory reporting forms such as the Board’s Consolidated Financial Statements for Holding Companies, Form FR Y–9C or call report information, or other regulatory reporting forms.118 Other commenters recommended that the agencies clarify whether the calculation of ‘‘trading assets and liabilities’’ should include only positions that would be within the scope of the ‘‘trading account’’ definition, or should otherwise exclude

119See, e.g., BMO and Capital One et al. 120See final rule §ll.2(s)(1)(i), (ee)(1)(i). 121See, e.g., ABA; BPI; Custody Banks; Capital One et al.; and State Street. 122See State Street. 123A banking entity approaching a compliance threshold is encouraged to contact its primary financial regulatory agency to discuss the steps the banking entity should take to satisfy its compliance obligations under the new threshold. 124See BPI. 125See final rule §ll.20(i). 126 12 U.S.C. 1851(h)(6). 127See 2013 rule §ll.3(b)(1)(i). 128See 2013 rule §ll.3(b)(2). 129See 2013 rule §ll.3(b)(1)(ii). certain types of instruments.119 The agencies support banking entities relying on current regulatory reporting forms to the extent possible to determine their compliance obligations under the final rule. As discussed above, the calculation of significant trading assets and liabilities, moderate trading assets and liabilities, and limited trading assets and liabilities is based on a four-quarter average, and therefore would not require daily or more frequent monitoring of trading assets and liabilities.120 A few commenters encouraged the agencies to include transition periods for a banking entity that moves to a higher compliance tier, to allow the banking entity time to comply with the different expectations under the compliance tier.121 Some commenters said that the regulations should permit a banking entity to breach a threshold for a higher compliance category without needing to comply with the heightened compliance requirements applicable to banking entities with that level of trading assets and liabilities, provided the banking entity’s trading assets and liabilities drop below the relevant threshold within a limited period of time.122 The final rule does not adopt transition periods or cure periods as recommended by commenters. The calculation of a banking entity’s trading assets and liabilities is calculated based on a 4- quarter average, which should provide banking entities with ample notice to come into compliance with the requirements of the final rule when crossing from having limited to moderate trading assets and liabilities, or from moderate to significant trading assets and liabilities.123 One commenter recommended that the agencies provide for notice and response procedures prior to exercising the reservation of authority to require a banking entity to apply the requirements of a higher compliance program tier, and, if a banking entity is determined to be required to apply increased compliance program requirements, it should be given a twoyear conformance period to come into compliance with such requirements.124 After considering this comment, the agencies believe that the notice and response procedures provided in the proposal for rebutting the presumption of compliance for banking entities with limited trading assets and liabilities would also be appropriate with respect to an agency exercising this reservation of authority. However, the agencies believe
that providing an automatic twoyear conformance period would be inappropriate, especially in instances where the agency has concerns regarding evasion of the requirements of the final rule. Therefore, the agencies are adopting the reservation of authority with a modification to require that the agencies exercise such authority in accordance with the notice and response procedures in section ll.20(i) of the final rule.125 To the extent that an agency exercises this authority to require a banking entity to apply increased compliance program requirements, an appropriate conformance period shall be determined through the notice and response procedures. B. Subpart B—Proprietary Trading Restrictions
Section 13(a)(1)(A) of the BHC Act
prohibits a banking entity from engaging in proprietary trading unless otherwise permitted in section 13. Section 13(h)(4) of the BHC Act defines proprietary trading, in relevant part, as engaging as principal for the trading account of the banking entity in any transaction to purchase or sell, or otherwise acquire or dispose of, a security, derivative, contract of sale of a commodity for future delivery, or other financial instrument that the agencies include by rule. Section 13(h)(6) of the BHC Act defines ‘‘trading account’’ to mean any account used for acquiring or taking positions in the securities and instruments described in section 13(h)(4) principally for the purpose of selling in the near term (or otherwise with the intent to resell in order to profit from short-term price movements), and any such other accounts as the agencies, by rule determine.126 Section 3 of the implementing regulations defines ‘‘proprietary trading,’’ ‘‘trading account,’’ and several related definitions.

Section ll.3: Prohibition on
Proprietary Trading and Related Definitions a. Trading Account The 2013 rule’s definition of trading account includes three prongs and a rebuttable presumption. The short-term intent prong includes within the definition of trading account the purchase or sale of one or more financial instruments principally for the purpose of (A) short-term resale, (B) benefitting from actual or expected short-term price movements, (C) realizing short-term arbitrage profits, or (D) hedging one or more positions resulting from the purchases or sales of financial instruments for the foregoing purposes.127 Under the 2013 rule’s rebuttable presumption, the purchase (or sale) of a financial instrument by a banking entity is presumed to be for the trading account under the short-term intent prong if the banking entity holds the financial instrument for fewer than sixty days or substantially transfers the risk of the financial instrument within sixty days of the purchase (or sale). A banking entity could rebut the presumption by demonstrating, based on all relevant facts and circumstances, that the banking entity did not purchase (or sell) the financial instrument principally for any of the purposes described in the short-term intent prong.128 The market risk capital rule prong (market risk capital prong) includes within the definition of trading account the purchase or sale of one or more financial instruments that are both covered positions and trading positions under the market risk capital rule (or hedges of other covered positions under the market risk capital rule), if the banking entity, or any affiliate of the banking entity, is an insured depository institution, bank holding company, or savings and loan holding company, and calculates risk-based capital ratios under the market risk capital rule.129 Finally, the dealer prong includes within the definition of trading account any purchase or sale of one or more financial instruments for any purpose if the banking entity (A) is licensed or registered, or is required to be licensed or registered, to engage in the business of a dealer, swap dealer, or securitybased swap dealer, to the extent the instrument is purchased or sold in connection with the activities that require the banking entity to be licensed or registered as such; or (B) is engaged in the business of a dealer, swap dealer, or security-based swap dealer outside of the United States, to the extent the instrument is purchased or sold in

130See 2013 rule §ll.3(b)(1)(iii). An insured depository institution may be registered as a swap dealer, but only the swap dealing activities that require it to be so registered are covered by the dealer trading account. If an insured depository institution purchases or sells a financial instrument in connection with activities of the insured depository institution that do not trigger registration as a swap dealer, such as lending, deposit-taking, the hedging of business risks, or other end-user activity, the financial instrument is included in the trading account only if the instrument falls within the definition of trading account under at least one of the other prongs. See 79 FR at 5549. 131See final rule §ll.3(b)(4). 132See 12 U.S.C. 1851(h)(6); see also Instructions for Preparation of Consolidated Financial Statements for Holding Companies, Trading Assets and Liabilities, Schedule HC–D, available at https:// www.federalreserve.gov/reportforms/forms/FR_Y9C20190731_i.pdf, and Instructions for Preparation of Consolidated Reports of Condition and Income,
Schedule RC–D, available at https://www.ffiec.gov/
pdf/FFIEC_forms/FFIEC031_FFIEC041_201803_ i.pdf. 133See final rule §ll.3(b)(2)(i). 134See final rule §ll.3(b)(2)(ii). 135See proposed rule §ll.3(b)(3); 83 FR at 33447–48. 136See 83 FR at 33447–48. 137See, e.g., BOK; New York Community Bank (NYCB); IAA; ABA; KeyCorp; International Swaps and Derivatives Association (ISDA); Mortgage Bankers Association (MBA); Commercial Real Estate Finance Council (CREFC), Mortgage Bankers Association, and the Real Estate Roundtable (Real Estate Associations); State Street; Chatham Financial et al. (Chatham); Capital One et al.; BPI; FSF; Goldman Sachs; SIFMA; Center for Capital Markets Competitiveness (CCMC); IIB; Credit Suisse; EBF; and Arvest. 138See, e.g., BPI and SIFMA. 139See, e.g., Capital One et al.; BPI; SIFMA; and CCMR. 140See, e.g., BPI and ISDA. 141See, e.g., KeyCorp; BPI; Capital One et al.; FSF; and Goldman Sachs. 142See e.g., ISDA and BPI. 143See MBA. 144See, e.g., ICI; Capital One et al.; Credit Suisse; FSF; and SIFMA. 145See, e.g., Capital One et al. and BPI. 146See, e.g., Capital One et al. and BPI. 147See Capital One et al. 148See Capital One et al. 149See, e.g., Capital One et al.; CCMC; IAA; ABA; ISDA; Credit Suisse; CREFC; BPI; FSF; Goldman Sachs; and SIFMA. 150See, e.g., CCMC; JBA; Structured Finance Industry Group (SFIG); IIB; American Action Forum; ABA; BPI; ISDA; and SIFMA. 151See, e.g., BPI and IIB. 152See BPI. 153See, e.g., BOK; ABA; and NYCB. 154See SFIG. 155See IAA. 156See IIB. 157See, e.g., SIFMA; BPI; CCMR; FSF; and BB&T. connection with the activities of such business.130 The proposal would have replaced the 2013 rule’s short-term intent prong with a new third prong based on the accounting treatment of a position (the accounting prong). The proposal also would have added a presumption of compliance with the proposed rule’s prohibition on proprietary trading for trading desks whose activities are not covered by the market risk capital prong or the dealer prong if the activities did not exceed a specified quantitative threshold. The proposal would have retained a modified version of the market risk capital prong and would have retained the dealer prong unchanged from the 2013 rule. As described in detail below, the final rule retains the three-pronged definition of trading account from the 2013 rule and does not adopt the proposed accounting prong or presumption of compliance with the proprietary trading prohibition. Rather, the final rule makes targeted changes to the definition of trading account. Among other changes, the final rule eliminates the 2013 rule’s rebuttable presumption and replaces it with a rebuttable presumption that financial instruments held for sixty days or more are not included in the trading account under the short-term intent prong.131 The agencies believe that the market risk capital prong, which expressly includes certain short-term trading activities, is an appropriate interpretation of the statutory definition of trading account for all firms subject to the
market risk capital rule.132 Therefore, the final rule provides that banking entities that are subject to the market risk capital prong are not subject to the short-term intent prong.133 However, the final rule provides that banking entities that are subject to the short-term intent prong may elect to apply the market risk capital prong instead of the short-term intent prong.134 These changes are designed to simplify and tailor the trading account definition in a manner that is consistent with section 13 of the BHC Act and applicable safety and soundness standards.
i. Accounting Prong
The proposed accounting prong would have provided that ‘‘trading account’’ meant any account used by a banking entity to purchase or sell one or more financial instruments that is recorded at fair value on a recurring basis under applicable accounting standards.135 Such instruments generally include, but are not limited to, derivatives, trading securities, and available-for-sale securities. The proposed inclusion of this prong in the definition of ‘‘trading account’’ was intended to provide greater certainty and clarity to banking entities than the short-term intent prong in the 2013 rule about which transactions would be included in the trading account, because banking entities could more readily determine which positions are recorded at fair value on their balance sheets.136 Many commenters strongly opposed replacing the short-term intent prong with the accounting prong.137 These commenters asserted that the accounting prong could inappropriately scope in, among other things: Over $400 billion in available-for-sale debt securities; 138 certain long term investments; 139 static hedging of long term investments; 140 traditional assetliability management activities; 141 derivative transactions entered into for any purpose and duration; 142 long-term holdings of commercial mortgagebacked securities; 143 seed capital investments; 144 investments that are expressly permitted under the covered fund provisions; 145 investments in connection with employee compensation; 146 bank holding company-permissible investments in enterprises engaging in activities that are part of the business of banking or incidental thereto, as well as other investments made pursuant to the BHC Act; 147 and financial holding company merchant banking investments.148 Some commenters argued that the accounting prong was inconsistent with the statute; 149 would lead to increased regulatory burden and uncertainty; 150 could encourage banking entities not to elect to account for financial instruments at fair value, thereby reducing transparency into banking entities’ financial reporting and frustrating risk management practices that are based on the fair value option; 151 could result in disparate treatment of the same activity between two banking entities where one banking entity elects the fair value option and the other does not; 152 would have a disproportionately negative impact on midsize and regional banks; 153 could negatively impact the securitization industry if liquidity for asset-backed securities is impeded; 154 could inappropriately scope in investment advisers’ use of seed capital to develop products, services, or strategies for asset management clients; 155 could lead to increased burden for international banks by requiring them to apply both local accounting standards and U.S. generally accepted accounting principles (GAAP) to non-U.S. positions, one for regular accounting purposes and one specifically for assessing compliance with the regulations implementing
section 13 of the BHC Act; 156 that the
exclusions and exemptions from the prohibition on proprietary trading in the 2013 rule are ill-suited with respect to positions captured by the accounting prong; 157 and that fair valuation of

158See, e.g., Capital One et al.; ABA; BPI; FSF; SIFMA; and Credit Suisse. 159See, e.g., Chatham; BPI; SIFMA; IIB; Credit Suisse; and Arvest. 160See BOK. 161See BOK. 162See JBA. 163See Volcker Alliance. 164See, e.g., Public Citizen; CAP; Better Markets; and AFR. 165See CAP. 166See Better Markets. 167See Better Markets. 168See, e.g., BOK; NYCB; IAA; ABA; KeyCorp; ISDA; MBA; Real Estate Associations; State Street; Chatham; Capital One et al.; BPI; FSF; Goldman Sachs; SIFMA; CCMC; IIB; Credit Suisse; EBF; CREFC; and Arvest. 169See 83 FR at 33448. 170See proposed rule §ll.3(c); 83 FR at 33449– 51. 171See, e.g., New England Council and CFA. 172See, e.g., Volcker Alliance; Public Citizen; CAP; Bean; Feng; AFR; and Better Markets. 173See, e.g., Volcker Alliance; Public Citizen; CAP; and Bean. 174See Public Citizen. 175See IIB. 176See, e.g., Bean and CAP. 177See, e.g., BOK; BPI; IIB; and JBA. 178See, e.g., BOK; BPI; IIB; and Capital One et al. 179See, e.g., CFA. 180See, e.g., Capital One et al.; BPI; FSF; and SIFMA. assets and liabilities under applicable accounting standards is not indicative of short-term trading intent.158 Some commenters expressed a preference for the 2013 rule’s short-term intent prong over the accounting prong.159 Other commenters suggested revisions to the accounting prong if adopted, such as excluding from the definition of trading account any financial instrument for which financial institutions record the change in value in other comprehensive income; 160 expressly excluding available-for-sale portfolios from the accounting prong; 161 and clarifying that non-U.S. banking entities are permitted to use accounting standards adopted by individual banking entities other than International Financial Reporting Standards and GAAP.162 One commenter expressed concern that a banking entity could circumvent the prohibition on proprietary trading by recording financial instruments at amortized cost instead of fair value.163 Some commenters supported adopting the accounting prong.164 One commenter urged the agencies to retain the short-term intent prong and to adopt the accounting prong as an additional test without any presumption of compliance.165 Another commenter argued that the accounting prong should be implemented as a new presumption within the short-term trading prong.166 This commenter urged the agencies to revise the accounting prong by codifying language from the applicable accounting standards and coupling this with preamble language indicating that the agencies intend to interpret the accounting prong in a manner that is consistent with GAAP and international accounting codifications and guidance, thereby allowing the agencies to definitively interpret the text rather than accounting authorities, who might not consider the regulations implementing
section 13 of the BHC Act when making
further changes to accounting standards.167 After considering all comments received,168 the agencies are not adopting the accounting prong in the final rule. The agencies agree with commenters’ concerns that the accounting prong would have inappropriately scoped in many financial instruments and activities that
section 13 of the BHC Act was not
intended to capture, including some long-term investments. In addition, the accounting prong would have inappropriately scoped in entire categories of financial instruments, regardless of the banking entity’s purpose for buying or selling the instrument, such as all derivatives and equity securities with a readily determinable fair value. Furthermore, the accounting prong would have captured certain seeding activity that would otherwise be permitted under subpart C of the regulations implementing section 13 of the BHC Act. As noted in the preamble to the proposed rule, the impetus behind replacing the short-term intent prong with the accounting prong was to address the uncertain application of the short-term intent prong to certain trades.169 As discussed in detail below, the agencies have modified the shortterm intent prong to provide more clarity. The agencies have also provided further clarity to the trading account definition in the final rule by adding additional exclusions from the ‘‘proprietary trading’’ definition. The agencies are adopting these clarifying measures as a more tailored approach to address the difficulties that have arisen under the existing short-term intent prong.
ii. Presumption of Compliance With the
Prohibition on Proprietary Trading Under the accounting prong, the proposal would have added a presumption of compliance with the proprietary trading prohibition based on an objective, quantitative measure of a trading desk’s activities.170 Under this proposed presumption of compliance, the activities of a trading desk of a banking entity that are not covered by the market risk capital prong or the dealer prong—i.e., the activities that would be within the trading account under the proposed accounting prong— would have been presumed to comply with the proposed rule’s prohibition on proprietary trading if the activities did not exceed a specified quantitative threshold. The trading desk would have remained subject to the prohibition on proprietary trading and, unless the desk engaged in a material level of trading activity (or the presumption of compliance was rebutted), the desk would not have been required to comply with the more extensive requirements that would otherwise apply under the proposal to demonstrate compliance. The agencies proposed to use the absolute value of the trading desk’s profit and loss on a 90-calendar-day rolling basis as the relevant quantitative measure for this threshold. Two commenters supported adopting the presumption of compliance with the prohibition on proprietary trading.171 Several commenters opposed adopting this presumption of compliance.172 Some of these commenters argued that the presumption of compliance could allow banks to evade the restrictions on proprietary trading by splitting trades over multiple trading desks.173 One of these commenters suggested that the presumption of compliance for trading desk activities that would have been within the trading account under the accounting prong in the proposed rule could invite proprietary trading within the $25 million threshold.174 Another commenter had several concerns with this proposal, including that not all businesses calculate daily profits and losses, and that even businesses that do not sell a single position within a 90- day period might exceed $25 million in unrealized gains and losses.175 Two commenters asserted there is no statutory basis to permit a de minimis amount of proprietary trading.176 Other commenters asserted that the presumption could increase regulatory burden.177 Several commenters argued that, if the presumption is adopted, the threshold should be increased,178 or the method of calculating profit and loss should be modified.179 Many commenters stated that the proposed trading desk-level presumption of compliance did not adequately address the overbreadth of the accounting prong.180 After considering the comments, the agencies have decided not to adopt a trading desk-level presumption of compliance with the prohibition on

181See 83 FR at 33449.
182See 2013 rule §ll.3(b)(1)(i).
183See 2013 rule §ll.3(b(2).
184See, e.g., Capital One et al.; BPI; FSF; KeyCorp; and SIFMA. 185See, e.g., JBA; Credit Suisse; CREFC; and SIFMA. 186See AFR and Bean. 187See Occupy the SEC. 188See, e.g., SIFMA; BPI; State Street; Chatham; FSF; CCMR; ABA; KeyCorp; Capital One et al.; Arvest; and IIB. 189See final rule §ll.3(b)(1)(i). 190See 12 U.S.C. 1851(h)(6). 191See final rule §ll.3(b)(2)(i), (ii). 192See 12 CFR part 3, subpart F; part 217, subpart F; part 324, subpart F. 193See 79 FR at 5548. 194A number of commenters suggested that, due to the overlap between the market risk capital prong and the short-term intent prong, banking entities that are subject to the market risk capital prong should not also be subject to the short-term intent prong. See, e.g., Capital One et al.; BPI; FSF; Goldman Sachs; CREFC; and SIFMA. 195See final rule §ll.3(b)(2)(ii). proprietary trading. As discussed in the preamble to the proposal, this presumption of compliance would have been available only for a trading desk’s activities that would have been within the trading account under the proposed accounting prong, and not for a trading desk that is subject to the market risk capital prong or the dealer prong of the trading account definition. This presumption of compliance was intended to address the potential impact of the accounting prong, which the proposal recognized would have been a significant change from the 2013 rule. In particular, the proposal noted that the proposed trading desk-level presumption of compliance with the prohibition on proprietary trading was intended to allow banking entities to conduct ordinary banking activities without having to assess every individual trade for compliance with subpart B of the implementing regulations and the proposed accounting prong.181 Since the agencies are not adopting the accounting prong and are adopting additional clarifying revisions to the short-term intent prong, the agencies have determined it is not necessary to adopt the presumption of compliance.
iii. Short-Term Intent Prong
The 2013 rule’s short-term intent prong included within the definition of trading account the purchase or sale of one or more financial instruments principally for the purpose of (A) shortterm resale, (B) benefitting from actual or expected short-term price movements, (C) realizing short-term arbitrage profits, or (D) hedging one or more positions resulting from the purchases or sales of financial instruments for the foregoing purposes.182 Under the 2013 rule’s rebuttable presumption, the purchase (or sale) of a financial instrument by a banking entity was presumed to be for the trading account under the short-term intent prong if the banking entity held the financial instrument for fewer than sixty days or substantially transferred the risk of the financial instrument within sixty days of the purchase (or sale). A banking entity could rebut the presumption by demonstrating, based on all relevant facts and circumstances, that the banking entity did not purchase (or sell) the financial instrument principally for any of the purposes described in the short-term intent prong.183 Several commenters stated that, for banking entities that are subject to the market risk capital prong, the short-term intent prong is redundant.184 In addition, several commenters stated that the final rule should eliminate the shortterm intent prong altogether, as proposed.185 Other commenters stated that, consistent with the statutory definition of trading account, the agencies should not eliminate the shortterm intent prong.186 One commenter suggested re-adopting the short-term intent prong but defining the term ‘‘short-term’’ differently based on asset class.187 Several commenters supported retaining the short-term intent prong with modifications, such as eliminating or reversing the rebuttable presumption or aligning the short-term intent prong more closely with the market risk capital prong.188 The agencies agree that there is substantial overlap between the short-term intent prong and the market risk capital prong and have revised the definition of trading account accordingly. Under the final rule, the definition of trading account includes any account that is used by a banking entity to purchase or sell one or more financial instruments principally for the purpose of short-term resale, benefitting from actual or expected short-term price movements, realizing short-term arbitrage profits, or hedging one or more of the positions resulting from the purchases or sales of financial instruments for the foregoing purposes.189 The agencies believe that it is necessary to include a prong other than the market risk capital prong or the dealer prong to define ‘‘trading account’’ for banking entities that are subject to the final rule but are not subject to the market risk capital prong. The agencies believe that requiring banking entities that are not subject to the market risk capital rule to apply the market risk capital prong in order to identify the scope of positions
subject to the Volcker Rule’s proprietary trading provisions could be unduly complex and burdensome for banking entities with smaller and less active trading activities. The final rule allows a banking entity not subject to the market risk capital prong to define its trading account by reference to either the short-term intent prong or the market risk capital prong because both tests are consistent with the statutory definition of trading account; this flexible approach for banking entities with less trading activities is appropriate for various reasons, including because these banking entities are already familiar with the short-term intent prong.190 Under the final rule, the regulatory short-term intent prong applies only to a banking entity that is not subject to the market risk capital prong and that has not elected to apply the market risk capital prong to determine the scope of the banking entity’s trading account.191 For purposes of the final rule, a banking entity is subject to the market risk capital prong if it, or any affiliate with which the banking entity is consolidated for regulatory reporting purposes, calculates risk-based capital ratios under the market risk capital rule.192 Applying the short-term intent prong only to banking entities whose trading account is not covered by the market risk capital prong will simplify application of the rule. No longer applying the short-term intent prong to banking entities that are subject to the market risk capital prong is appropriate because the scope of activities captured by the short-term intent prong is substantially similar to the scope of activities captured by the market risk capital prong. Indeed, the preamble to the 2013 rule noted that the definition of trading position in the market risk capital rule largely parallels the statutory definition of trading account,193 which in turn mirrors the language in the short-term intent prong. Accordingly, the agencies believe that a banking entity should be subject either to the short-term intent prong or to the market risk capital prong, but not both.194 The final rule allows a banking entity that is not subject to the market risk capital prong to elect to apply the market risk capital prong in place of the short-term intent prong.195 The final rule includes this option to provide parity between smaller banking entities that are not subject to the market risk capital rule and larger banking entities with active trading businesses that are

196Several commenters recommended defining the trading account solely by reference to the dealer prong and market risk capital prong for banking entities subject to the market risk capital rule. See, e.g., Capital One et al.; BPI; FSF; Goldman Sachs; CREFC; and SIFMA. One commenter suggested that banking entities that are not subject to the market risk capital rule and subject to a third prong should be allowed to elect to be treated as a banking entity subject to the market risk capital rule for purposes of the regulations implementing section 13 of the BHC Act. This approach would maintain parity between banking entities that are subject to the market risk capital rule and those that are not. See SIFMA. 197See final rule §ll.3(b)(3). 198See, e.g., State Street; Chatham; BPI; FSF; CCMR; and CFA. 199See, e.g., ABA; KeyCorp; Capital One et al.; State Street; and Arvest. 200See, e.g., ABA; Arvest; BPI; SIFMA; and IIB. 201See SIFMA. 202See, e.g., ABA; Arvest; BPI; SIFMA; State Street; and FSF. 203See, e.g., ABA and Arvest. 204 Id. 205See Capital One et al. 206See AFR and Occupy the SEC. 207See Occupy the SEC. 208See Bean. 209For example, asset-liability, liquidity management activities, transactions to correct error trades and loan-related swaps. See Part IV.B.2.b.i– iii. 210 12 U.S.C. 1851(h)(4) and (6). 211See, e.g., State Street; Chatham; BPI; FSF; CCMR; and CFA. 212Such activities include a foreign branch of a U.S. banking entity purchasing a foreign sovereign debt obligation with remaining maturity of fewer than 60 days in order to meet foreign regulatory requirements. Similarly, error correcting trades and matched derivative transactions, discussed infra may have triggered the 2013 rule’s rebuttable presumption but are not undertaken principally for the purpose of selling in the near term (or otherwise Continued subject to the market risk capital prong.196 Under the final rule, a banking entity that is not subject to the market risk capital rule may choose to define its trading account as if the banking entity were subject to the market risk capital prong. If a banking entity opts into the market risk capital prong, the banking entity’s trading account would include all accounts used by the banking entity to purchase or sell one or more financial instruments that would be covered positions and trading positions under the market risk capital rule if the banking entity were subject to the market risk capital rule. Banking entities that do not make this election will continue to apply the short-term intent prong. Under the final rule, an election to apply the market risk capital prong must be consistent among a banking entity and all of its wholly owned subsidiaries.197 This consistency requirement is intended to facilitate banking entities’ compliance with the proprietary trading prohibition by subjecting wholly owned legal entities within a firm to the same definition. Requiring a consistent definition of ‘‘trading account’’ is particularly
important to simplify compliance because a trading desk may book trades into different legal entities within an organization, and having a consistent definition of ‘‘trading account’’ among these entities should help ensure that each banking entity can identify relevant trading activity and meet its compliance obligations under the final rule. This requirement is also expected to facilitate the agencies’ supervision of compliance with the final rule. This consistency requirement would apply only to a banking entity and its wholly owned subsidiaries. In the case of minority-owned subsidiaries or other subsidiaries that the banking entity does not functionally control, it may be impractical for one banking entity within the organization to ensure that all affiliates will make a consistent election. However, the relevant primary financial regulatory agency may subject a banking entity that is not a wholly owned subsidiary to the consistency requirement if the agency determines it is necessary to prevent evasion of the rule’s requirements. When exercising this authority, the relevant primary financial regulatory agency will follow the same notice and response procedures used elsewhere in the final rule.
iv. 60-Day Rebuttable Presumption
The proposal would have eliminated the 2013 rule’s 60-day rebuttable presumption. Many commenters supported the proposed rule’s elimination of this rebuttable presumption.198 Some commenters urged the agencies to establish a presumption that positions held for more than 60 days are not proprietary trading.199 Some commenters suggested that the agencies should presume, for banking entities not subject to the market risk capital rule, that financial instruments held for longer than 60 days, or that have an original maturity or remaining maturity upon acquisition of fewer than 60 days to their stated maturities, are not for the banking entity’s trading account.200 One commenter suggested that any third prong to the definition of trading account that applies to banking entities that are not subject to the market risk capital rule should have a rebuttable presumption that any position held by the banking entity as principal for 60 days or more is not for the trading account, as well as a reasonable challenge procedure through which a banking entity would be provided an opportunity to demonstrate to its primary financial regulatory agency that positions held for fewer than 60 days do not constitute proprietary trading.201 Several commenters asked that the agencies—if they do not eliminate the presumption—provide guidance on the rebuttal process,202 or make certain revisions to the presumption, such as revising the ‘‘substantial transfer of risk’’ language; 203 exempting financial instruments close to maturity; 204 and excluding hedging activity.205 Some commenters argued, in contrast, that the 60-day rebuttable period was underinclusive.206 One commenter argued that any position purchased or sold within 180 days should be automatically included within the definition of trading account, or, in the alternative, that the presumption should be extended from 60 to 180 days, and the agencies should mandate ongoing monitoring and disclosure of all components, excluded or not, of the banking entities’ reported trading account assets.207 This commenter also argued that there should not be a presumption that certain positions are not within the trading account; that documentation requirements for rebutting the presumption should be clearly specified and the criteria more restrictive; that all arbitrage positions should be presumed to be trading positions; and that the definition of ‘‘short-term’’ should vary by asset class. Another commenter generally opposed eliminating the 60-day rebuttable presumption.208 After considering all comments received, the agencies are eliminating the 60-day rebuttable presumption from the 2013 rule and establishing a new rebuttable presumption that financial instruments held for sixty days or more are not within the short-term intent prong. Since the 2013 rule came into effect, the agencies have found that the rebuttable presumption has captured many activities that should not be included in the definition of proprietary
trading,209 which, under the statute, only covers buying and selling financial instruments principally for the purpose of selling in the near term (or otherwise with the intent to resell in order to profit from short-term price movements).210 Several commenters supported eliminating the 2013 rule’s rebuttable presumption for this reason or due to difficulties in rebutting the presumption.211 Given the type of activities that have triggered the 2013 rule’s rebuttable presumption but that are not undertaken principally for the purpose of selling in the near-term,212

with the intent to resell in order to profit from short-term price movements). 213See 79 FR at 5550; see also ABA; KeyCorp; Capital One et al.; State Street; Arvest; and SIFMA. 214See final rule §ll.3(b)(4). 215See proposed rule §ll. 3(b)(1)(ii); 83 FR at 33447. 216See IIB. 217See id. 218See IIB (noting that the scope of some foreign supervisory market risk capital frameworks may capture positions that are not held solely for shortterm purposes and thus should be out of scope for purposes of the final rule). 219 In the course of developing the final rule, the agencies have considered the prudential actions of foreign regulators in this area and the resulting effects on U.S. and non-U.S. financial institutions and the relevant markets in which they participate. 220See final rule §ll.3(b)(1)(ii). The final rule’s market risk capital prong has, however, been modified as compared to the 2013 rule to account for a banking entity that is not consolidated with an affiliate (for regulatory reporting purposes) that calculates risk-based capital ratios under the market risk capital rule. For example, the trading positions of a broker-dealer that is not consolidated with its parent bank holding company will not be included in the holding company’s trading positions in the holding company’s Form FR Y–9C. In such an instance, even though the broker-dealer is affiliated with an entity that calculates risk-based capital ratios under the market risk capital rule, it would not be subject to the market capital risk prong due to the fact that the broker-dealer is not consolidated with the affiliate for regulatory reporting purposes. As a result, the broker-dealer would be subject to the amended short-term intent prong and the dealer prong (with respect to instruments purchased or sold in connection with the activities that require the broker-dealer to be licensed or registered as such). It may, however, be able to elect to use the market risk capital prong (as an alternative to the short-term intent prong) by following the procedures described above. 221Unlike the Volcker Rule compliance program requirements, which are based on average gross trading assets and liabilities over the prior four quarters, the thresholds in the market risk capital rule are based on the most recent quarter. 222See 12 CFR 3.202; 12 CFR 217.202; 12 CFR
324.202 (defining ‘‘covered position’’).
the agencies have concluded that it is not appropriate to continue to presume short-term trading intent from holding a financial instrument for fewer than 60 days. However, the agencies recognize the utility for both the agencies and the subject banking entities of an objective time-based standard.213 The final rule contains a new rebuttable presumption:
The purchase or sale of a financial instrument presumptively lacks shortterm trading intent if the banking entity holds the financial instrument for 60 days or longer and does not transfer substantially all of the risk of the financial instrument within 60 days of the purchase (or sale).214 The agencies agree with commenters that a banking entity subject to the short-term intent prong that holds an instrument for at least 60 days should receive the benefit of a presumption that the trade was not entered into for the purpose of selling in the near term or otherwise with the intent to resell in order to profit from short-term price movements. Replacing the 2013 rule’s rebuttable presumption with a rebuttable presumption that financial instruments held for sixty days or longer are not within the short-term intent prong will provide clarity for banking entities with respect to such positions, without imposing the burden associated with the 2013 rule’s rebuttable presumption. In light of the revision to the 60-day rebuttable presumption, the agencies do not believe it is necessary to provide a formal challenge procedure with respect to financial instruments that are purchased or sold within 60 days. Under the final rule, such activity is no longer presumptively within a banking entity’s trading account. As in the 2013 rule, the final rule’s presumption only applies to the shortterm intent prong and does not apply to the market risk capital or dealer prongs
v. Market Risk Capital Prong
Modification
The proposal would have revised the market risk capital prong to apply to the activities of foreign banking organizations (FBOs) to take into account the different market risk frameworks FBOs may have in their home countries.215 Specifically, the proposal included within the market risk capital prong an alternative definition that permitted a banking entity that is not, and is not controlled directly or indirectly by a banking entity that is, located in or organized under the laws of the United States or any State, to include any account used by the banking entity to purchase or sell one or more financial instruments that are subject to risk-based capital requirements under a market risk framework established by the homecountry supervisor that is consistent with the market risk framework published by the Basel Committee on Banking Supervision (Basel Committee), as amended from time to time. One commenter asserted that, under some foreign regulatory market risk capital frameworks, this expansion would capture positions that are not held for short-term trading.216 This commenter advocated adopting a flexible approach where foreign banking entities could exclude a position subject to a foreign jurisdiction’s market risk capital framework from the trading account by demonstrating that the position was not acquired for short-term purposes or otherwise should not be treated as a trading account position.217 After considering the comments on this issue,218 the agencies have decided not to modify the market risk capital prong to incorporate foreign market risk capital frameworks. The agencies believe that relying on the short-term intent prong, market risk capital prong, and dealer prong will ensure consistent treatment of U.S. and foreign banking entities. Foreign banking entities that are not subject to the market risk capital rule may continue to use the short-term intent prong to define their trading accounts. However, a banking entity, including a foreign banking entity, may elect to apply the market risk capital prong in determining the scope of its trading account. As discussed above, a banking entity that uses the market risk capital prong to determine the scope of its trading account is not also subject to the short-term intent prong. This approach will provide appropriate parity between U.S. and foreign banking entities and will also maintain consistency with the statutory trading account definition.219 Accordingly, the final rule retains a market risk capital prong that is substantially similar to that in the 2013 rule. The final rule’s market risk capital prong includes within the definition of trading account any account that is used by a banking entity to purchase or sell one or more financial instruments that are both covered positions and trading positions under the market risk capital rule (or hedges of other covered positions under the market risk capital rule), if the banking entity, or any affiliate that is consolidated with the
banking entity for regulatory reporting purposes, calculates risk-based capital ratios under the market risk capital rule.220 In addition, the final rule includes a transition period for banking entities as they become subject to the market risk capital prong.221 Under the final rule, if a banking entity is subject to the shortterm intent prong and then becomes subject to the market risk capital prong, the banking entity may continue to apply the short-term intent prong instead of the market risk capital prong for one year from the date on which it becomes, or becomes consolidated for regulatory reporting purposes with, a banking entity that calculates risk-based capital ratios under the market risk capital rule. The agencies are adopting this transition period to provide banking entities a reasonable period to update compliance programs. The market risk capital rule includes a position that is reported as a covered position for regulatory reporting purposes on applicable reporting forms.222 Certain banking entities that may be subject to, or elect to apply, the

223See 12 CFR part 217.
224See, e.g., BPI; FSF; and SIFMA. 225See e.g., BPI; FSF; and SIFMA. 226See Better Markets. 227 In response to the commenter, the agencies clarify that banking entities that are licensed or registered (or required to be licensed or registered) as dealers, swap dealers, or security-based swap dealers analyze the types of activities that would be captured by the dealer prong without regard to the de minimis thresholds for swap dealer or securitybased swap dealer registration. However, regardless of whether a banking entity is so licensed or registered, the banking entity is also required to determine whether a purchase or sale of a financial instrument would be captured by either the shortterm intent prong or the market risk capital prong, as applicable. 228See final rule §ll.3(b)(1)(iii). 229See final rule §ll.3(b)(1)(i), (ii). 230See infra section IV.B.1.b.v. 231See 2013 rule §ll.3(d)(3). market risk capital prong may not report positions on applicable regulatory reporting forms as trading assets or trading liabilities. Therefore, the final rule amends the definition of ‘‘market risk capital rule covered position and trading position’’ to clarify that this definition includes any position that meets the criteria to be a covered position and a trading position, without regard to whether the financial instrument is reported as a covered position or trading position on any applicable regulatory reporting forms. The final rule also modifies the definition of ‘‘market risk capital rule’’ to update a cross-reference to the Board’s capital rules and to clarify what the applicable market risk capital rule would be for a firm electing to apply the market risk capital prong.223
vi. Dealer Prong
The proposal did not propose revisions to the dealer prong. However, several commenters requested that the agencies clarify that not all purchases and sales of financial instruments by a dealer are captured by the dealer prong.224 Specifically, these commenters requested that the agencies clarify that the dealer prong does not capture purchases or sales made by a dealer in a non-dealing capacity, including financial instruments purchased for long-term investment purposes.225 Among other things, those commenters noted that without such modifications, the dealer prong may require a position-by-position analysis to confirm whether a long-term investment is part of the trading account. Another commenter requested that the agencies revise the dealer prong to ensure that derivatives activities remain in the trading account without regard to potential SEC and CFTC actions on the de minimis thresholds or other registration requirements, and that such derivatives activities do not benefit from any presumption of compliance.226 The final rule retains the 2013 rule’s dealer prong without any substantive change.227 The final rule’s dealer prong includes within the definition of trading account any account that the banking entity uses to purchase or sell one or more financial instruments for any purpose if the banking entity (A) is licensed or registered, or is required to be licensed or registered, to engage in the business of a dealer, swap dealer, or securitybased swap dealer, to the extent the instrument is purchased or sold in connection with the activities that require the banking entity to be licensed or registered as such; or (B) is engaged in the business of a dealer, swap dealer, or security-based swap dealer outside of the United States, to the extent the instrument is purchased or sold in connection with the activities of such business.228 In response to commenters and consistent with the 2013 rule, the agencies reaffirm that a banking entity may be licensed or registered as a dealer, but only the types of activities that require it to be so licensed or registered are covered by the dealer prong. Thus, if a banking entity purchases or sells a financial instrument in connection with activities that are not the types of activities that would trigger registration as a dealer, the purchase or sale of the financial instrument is not covered by the dealer prong. However, it may be included in the trading account under the short-term intent prong or the market risk capital prong, as applicable.229 Moreover, in response to commenters’ concerns that the existing rule may require dealers to conduct a position-by-position analysis of their trading activities to determine whether a position is captured by the dealer prong, the agencies believe that the changes being adopted today, particularly the exclusions for financial instruments that are not trading assets or liabilities,230 should help alleviate those concerns by narrowing the range of transactions
covered by the rule. b. Proprietary Trading Exclusions
Section ll.3 of the 2013 rule
generally prohibits a banking entity from engaging in proprietary trading. In addition to defining the scope of trading activity subject to the prohibition on proprietary trading, the 2013 rule also provides several exclusions from the definition of proprietary trading. Based on experience implementing the 2013 rule, the agencies proposed modifying the exclusion for liquidity management and adopting new exclusions for transactions made to correct errors and for certain offsetting swap transactions. In addition, the agencies requested comment regarding whether any additional exclusions should be added, for example, to address certain derivatives entered into in connection with a customer lending transaction. The agencies are adopting the liquidity management exclusion as proposed, with a modification to encompass nondeliverable cross-currency swaps, and additional exclusions for the following activities: (i) Trading activity to correct trades made in error, (ii) loan-related and other customer accommodation swaps, (iii) matched derivative transactions, (iv) hedges of mortgage servicing rights where trading in the underlying mortgage servicing rights is not prohibited by the rule; and (v) financial instruments that do not meet the definition of trading assets or trading liabilities under applicable reporting forms.
i. Liquidity Management Exclusion
Amendments
The 2013 rule excludes from the definition of proprietary trading the purchase or sale of securities for the purpose of liquidity management in accordance with a documented liquidity management plan.231 This exclusion contains several requirements. First, the liquidity management exclusion is limited by its terms to securities and requires that transactions be conducted pursuant to a liquidity management plan that specifically contemplates and authorizes the particular securities to be used for liquidity management purposes; describes the amounts, types, and risks of securities that are consistent with the banking entity’s liquidity management plan; and the liquidity circumstances in which the particular securities may or must be used. Second, any purchase or sale of securities contemplated and authorized by the plan must be principally for the purpose of managing the liquidity of the banking entity, and not for the purpose of shortterm resale, benefitting from actual or expected short-term price movements, realizing short-term arbitrage profits, or hedging a position taken for such shortterm purposes. Third, the plan must require that any securities purchased or sold for liquidity management purposes be highly liquid and limited to instruments the market, credit, and other risks of which the banking entity does not reasonably expect to give rise to appreciable profits or losses as a result of short-term price movements. Fourth, the plan must limit any

232See 79 FR at 5555.
233See 7 U.S.C. 1a(24) and 1a(25). 234See proposed rule §ll.3(e)(3). 235See 83 FR at 33451–52 236See id. 237See, e.g., ISDA; Goldman Sachs; ABA; SIFMA; IIB; BPI; GFMCA; CFA; New England Council, CCMC; Capital One et al., FSF; and State Street. 238See, e.g., ISDA; ABA; FSF; New England Council; CCMC; Capital One et al.; Goldman Sachs; SIFMA; IIB; Credit Suisse; and State Street. 239See ISDA. 240See, e.g., Global Financial Markets Association (GFMA) (noting that certain non-deliverable financial instruments are also used for liquidity management purposes); SIFMA; State Street; JBA; ABA; BPI; IIB; and Credit Suisse. 241See, e.g., FSF; Capital One et al.; IIB; and JBA. 242See, e.g., IIB and State Street. 243See, e.g., Capital One et al.; BPI; JBA; SIFMA; CCMC; and FSF. 244See, e.g., ISDA; KeyCorp; IIB; CCMC; SIFMA; and Goldman Sachs. 245See, e.g., FSF and Credit Suisse. 246See, e.g., SIFMA and Goldman Sachs. 247See, e.g., BPI; IIB; and FSF. 248See ABA. 249See, e.g., Volcker Alliance; Data Boiler; NAFCU; Public Citizen; CAP; Occupy the SEC; and Merkley. 250See Bean. 251See Volcker Alliance. 252See Data Boiler. 253See, e.g., Public Citizen and Bean. securities purchased or sold for liquidity management purposes to an amount that is consistent with the banking entity’s near-term funding needs, including deviations from normal operations of the banking entity or any affiliate thereof, as estimated and documented pursuant to methods specified in the plan. Fifth, the banking entity must incorporate into its compliance program internal controls, analysis, and independent testing designed to ensure that activities undertaken for liquidity management purposes are conducted in accordance with the requirements of the 2013 rule and the banking entity’s liquidity management plan. Finally, the plan must be consistent with the supervisory requirements, guidance, and expectations regarding liquidity management of the agency responsible for regulating the banking entity. The 2013 rule established these requirements to provide some safeguards to ensure that the liquidity management exclusion is not misused for the purpose of impermissible proprietary trading.232 While some safeguards around a banking entity’s liquidity management are appropriate, the restrictions under the 2013 rule have limited the ability of banking entities to engage in certain types of bona fide liquidity management activities. The proposal would have amended the exclusion for liquidity management activities to allow banking entities to use foreign exchange forwards and foreign exchange swaps, each as defined in the Commodity Exchange Act,233 and physically settled cross-currency swaps (i.e., cross-currency swaps that involve an actual exchange of the underlying currencies) as part of their liquidity management activities.234 Foreign exchange forwards, foreign exchange swaps, and physically settled crosscurrency swaps are often used by trading desks of foreign branches and subsidiaries of a U.S.
banking entity to manage liquidity in foreign jurisdictions.235 The proposal would have provided that a banking entity could use foreign exchange forwards, foreign exchange swaps, and physically settled cross-currency swaps for liquidity management purposes provided that the use of such financial instruments was in accordance with a documented liquidity management plan.236 Many commenters supported the proposed expansion of activities covered by the liquidity management exclusion.237 However, some commenters expressed the view that the expansion did not go far enough and should be expanded to include other types of financial instruments.238 One commenter asserted that expanding the scope of the liquidity management exclusion would streamline compliance for banking entities without introducing additional safety and soundness concerns or the risk of impermissible proprietary trading.239 Some commenters said that non-deliverable currency derivatives should also qualify for the exclusion, because there are some currencies for which physically settled cross-currency swaps are not available.240 Additionally, other commenters argued that given the role of derivatives in liquidity risk management, the agencies should expand the exclusion further to cover all derivatives, including interest rate swaps.241 Certain commenters suggested that the agencies should further expand the liquidity management exclusion to include all financial instruments that would be convenient and useful for managing liquidity and asset-liability mismatch risks of the organization.242 Several commenters claimed that the eligibility criteria of the liquidity management exclusion are opaque and confusing, and suggested modifying, clarifying, or eliminating some or all of the requirements.243 For example, several commenters argued that the requirement to maintain a documented liquidity management plan with certain enumerated elements is unnecessarily prescriptive.244 Some commenters stated that banking entities do not rely on the exclusion due to the number and limiting nature of the requirements.245 Some commenters argued that the agencies should be promoting, rather than restricting, appropriate liquidity management and structural interest rate risk management activities, and that the retention of these requirements is not consistent with the removal of the prescriptive requirements of Appendix B in the 2013 rule.246 Other commenters argued that the agencies should eliminate the compliance-related requirements and permit banking entities to design and manage their liquidity management function according to their existing internal compliance frameworks.247 In addition, a commenter recommended clarifying whether treasury functions within banking entities may manage global liquidity through the newly added financial instruments.248 In contrast, other commenters did not support the proposed expansion of the liquidity management exclusion.249 One commenter asserted that the proposed
rule fails to demonstrate the need for providing banks greater opportunity to use foreign currency transactions to manage their liquidity needs when those needs are already being met via the securities markets.250 Another commenter argued that the proposed change would create concern for the currency markets by making it easier for trading desks to trade these instruments for speculative purposes under the guise of legitimate liquidity management.251 One commenter argued that the proposal would encourage banking entities to exclude impermissible trades as liquidity management and engage in speculative currency trading. As a result, it would increase banks’ risktaking and moral hazard, reducing the effectiveness of regulatory oversight.252 In addition, some commenters suggested that the agencies did not provide sufficient justification to support the proposed changes to the exclusion.253 After reviewing the comments received, the agencies are adopting the liquidity management exclusion substantially as proposed, but with a modification to permit the use of nondeliverable cross-currency swaps. The agencies recognize the various types of financial instruments that can be used by a banking entity for liquidity management as noted by commenters. However, the agencies continue to believe, as stated in the proposal, that the purpose of the expansion is to streamline compliance for banking entities operating in foreign

254See 83 FR at 33451–52. 255As proposed, the final rule defines a crosscurrency swap as a swap in which one party exchanges with another party principal and interest rate payments in one currency for principal and interest rate payments in another currency, and the exchange of principal occurs on the date the swap is entered into, with a reversal of the exchange of principal at a later date that is agreed upon for when the swap is entered. This definition is consistent with regulations pertaining to margin and capital requirements for covered swap entities, swap dealers, and major swap participants. See 12 CFR 45ll.2; 12 CFR 237.2; 12 CFR 349.2; 17 CFR 23.151. 256See final rule §ll.3(d)(3). 257See §ll.3(e)(3)(i)–(vi) of the final rule. 258See 83 FR at 33452. 259See §ll.3(d)(3)(ii) of the final rule. 260See §ll.3(d)(3). jurisdictions.254 Thus, the final rule expands the liquidity management exclusion to permit the purchase or sale of foreign exchange forwards (as that term is defined in section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)), foreign exchange swaps (as that term is defined in section 1a(25) of the Commodity Exchange Act (7 U.S.C. 1a(25)), and cross-currency swaps 255 entered into by a banking entity for the purpose of liquidity management in accordance with a documented liquidity management plan.256 In response to commenters’ concerns that physically settled cross-currency swaps are not available for some currencies (e.g., due to currency controls), the exclusion also encompasses non-deliverable crosscurrency swaps. For currencies where physically settled cross-currency swaps are not available, a banking entity may have had to engage in procedures such as using spot transactions or holding currency at foreign custodians, which could be inefficient. Allowing banking entities to use non-deliverable crosscurrency swaps can provide greater flexibility in conducting liquidity management in these situations. Even though physically settled cross-currency swaps are available in many currencies, the agencies believe it is appropriate to allow non-deliverable cross-currency swaps to be used for liquidity management in all currencies. Requiring physical settlement for some crosscurrency swaps but not others would make the exclusion more difficult for banking entities to use and for the agencies to monitor, particularly if currency controls change, causing the list of currencies for which physical settlement is permitted to change. These administrative hurdles would negate many of the benefits of allowing the use of non-deliverable cross-currency swaps. Regarding the assertion that banking entities could meet their liquidity needs in the securities markets, the agencies have found that, to the contrary, foreign exchange forwards, foreign exchange swaps, and cross-currency swaps are often used by trading desks to manage liquidity both in the United States and in foreign jurisdictions. As foreign branches and subsidiaries of U.S.
banking entities often have liquidity requirements mandated by foreign jurisdictions, U.S. banking entities often use foreign exchange products to address currency risk arising from holding this liquidity in foreign currencies. Thus, these foreign exchange products are important for liquidity management and should be included in the expansion of the liquidity management exclusion. The agencies believe that adding foreign exchange forwards, foreign exchange swaps, and cross-currency swaps to the exclusion addresses the primary liquidity management needs for foreign entities, and therefore are declining to expand the exclusion to other products as suggested by some commenters. While some commenters asserted that further expanding the liquidity management exclusion would streamline compliance without introducing additional safety and soundness or proprietary trading concerns, the agencies believe that the range of financial instruments that will qualify for the exclusion under the final rule will be sufficient for managing banking entities’ liquidity risks. The final rule permits a banking entity to purchase or sell foreign exchange forwards, foreign exchange swaps, and cross-currency swaps to the same extent that a banking entity may purchase or sell securities under the liquidity management exclusion in the 2013 rule, and the conditions that apply for securities transactions also apply to transactions in foreign exchange forwards, foreign exchange swaps, and cross-currency swaps.257 The agencies acknowledge that, as stated in the proposal, cross-currency swaps generally are more flexible in their terms, may have longer durations, and may be used to achieve a greater variety of potential outcomes, as compared to foreign exchange forwards and foreign exchange swaps.258 However, the agencies believe that the requirement to conduct liquidity management in accordance with a documented liquidity management plan appropriately limits the use of crosscurrency swaps to activities conducted for liquidity management purposes, and therefore banking entities’ use of these swaps should not adversely affect currency markets, as one commenter warned. Under the plan, the purpose of the transactions must be liquidity management. The timing of purchases and sales, the types and duration of positions taken and the incentives provided to managers of these purchases and sales must all indicate that managing liquidity, and not taking short-term profits (or limiting short-term losses), is the purpose of these activities. Thus, to be in compliance with the plan, cross-currency swaps must be used principally for the purpose of managing the liquidity of the banking entity, and not for the purpose of short-term resale, benefitting from actual or expected short-term price movements, realizing short-term arbitrage profits, or hedging a position taken for such short-term purposes.259 Regarding the assertion from some commenters that the compliance-related requirements for the
liquidity management exclusion are opaque or unnecessarily prescriptive, the agencies believe it is important to retain these requirements in order to provide clarity in administration of the rule and to protect against potential misuse of the liquidity management exclusion for proprietary trading. As noted above, the documented liquidity management plan, required under the 2013 rule and retained in the final rule,260 is a key element in assuring that liquidity management is the purpose of the relevant transactions. The agencies do not believe that the final rule will stand as an obstacle to or otherwise impair the ability of banking entities to manage their liquidity risks. Although other changes to the 2013 rule in the final rule, such as the elimination of
Appendix B, reflect efforts to tailor
compliance obligations, the agencies believe it is important to be explicit in maintaining targeted compliance requirements for specific provisions of the final rule, such as the liquidity management exclusion. The agencies believe that the six required elements of the liquidity management plan help to mitigate commenters’ concerns that the proposal would have encouraged banking entities to exclude impermissible trades as liquidity management or increase risktaking. Under the liquidity management plan required by the final rule, the exclusion does not apply to activities undertaken with the stated purpose or effect of hedging aggregate risks incurred by the banking entity or its affiliates related to asset-liability mismatches or other general market risks to which the entity or affiliates may be exposed. Further, the exclusion does not apply to any trading activities

261See 79 FR at 5555.
262See 2013 rule §ll.3(d)(3)(vi). 263 Interagency Statement Clarifying the Role of Supervisory Guidance (Sept. 11, 2018; https:// www.occ.gov/news-issuances/news-releases/2018/ nr-ia-2018-97a.pdf, https://www.fdic.gov/news/ news/financial/2018/fil18049.html, https:// www.federalreserve.gov/supervisionreg/srletters/ sr1805.htm). The final rule similarly removes references to ‘‘guidance’’ from subparts A and C. 264The term ‘‘financial instruments’’ is substituted for the term ‘‘securities’’ when referring to what contracts are permitted under the exclusion. 265See 83 FR at 33452–53. 266See, e.g., ABA; BB&T; Capital One et al.; BPI; FSF; CFA; and JBA. 267See, e.g., ABA; BB&T; BPI; Capital One et al.; and FSF. 268See, e.g., ABA; Credit Suisse; FSF; JBA; and SIFMA. 269See SIFMA. 270See Capital One et al. 271See Better Markets. 272See Public Citizen. 273See CAP. that expose banking entities to substantial risk from fluctuations in market values, unrelated to the management of near-term funding needs, regardless of the stated purpose of the activities.261 This final rule also includes a change to one of the liquidity management exclusion’s requirements. The 2013 rule requires that activity conducted under the liquidity management exclusion be consistent with applicable ‘‘supervisory requirements, guidance, and expectations.’’ 262 Consistent with changes elsewhere in the final rule and with the Federal banking agencies’ Interagency Statement Clarifying the Role of Supervisory Guidance,263 the agencies are removing references to guidance and expectations from the regulatory text of the liquidity management exclusion. In addition, the final rule includes conforming changes that reflect the addition of foreign exchange forwards, foreign exchange swaps, and cross-currency swaps as permissible contracts in conjunction with the other criteria under the exclusion.264
ii. Transactions To Correct Bona Fide
Trade Errors
The proposal included an exclusion from the definition of proprietary trading for trading errors and subsequent correcting transactions.265 As discussed in the proposal, the exclusion was intended to address situations in which a banking entity erroneously executes a purchase or sale of a financial instrument in the course of conducting a permitted or excluded activity. For example, a trading error may occur when a banking entity is acting solely in its capacity as an agent, broker, or custodian pursuant to § ll.3(d)(7) of the 2013 rule, such as by trading the wrong financial instrument, buying or selling an incorrect amount of a financial instrument, or purchasing rather than selling a financial instrument (or vice versa). To correct such errors, a banking entity may need to engage in a subsequent transaction as principal to fulfill its obligation to deliver the customer’s desired financial instrument position and to eliminate any principal exposure that the banking entity acquired in the course of its effort to deliver on the customer’s original request. As the proposal noted, banking entities have expressed concern that, however, under the 2013 rule, the initial trading error and any corrective transactions could, depending on the facts and circumstances involved, fall within the proprietary trading definition if the transaction is covered by any of the prongs of the trading account definition and is not otherwise excluded pursuant to a different provision of the rule. To address this concern, the agencies proposed a new exclusion from the definition of proprietary trading for trading errors and subsequent correcting transactions. The proposal noted that the availability of this exclusion would depend on the facts and circumstances of the transactions, such as whether the banking entity made reasonable efforts to prevent errors from occurring, or identified and corrected trading errors in a timely and appropriate manner. The proposed exclusion required that banking entities, once they identified purchases or sales made in error, transfer the financial instrument to a separately managed trade error account for disposition. The proposal would have required that this separately managed trade error account be monitored and managed by personnel independent from the traders responsible for the error, and that banking entities monitor and manage trade error corrections and trade error accounts. The majority of commenters generally supported the proposed exclusion for trade errors.266 Some commenters noted that, consistent with operational risk management practices, bona fide trade error activity is separately managed and classified as an operational loss when there is a loss event or a ‘‘near miss’’ when error activity results in a gain.267 Many commenters urged the agencies not to mandate a separately managed trade error account, but to permit banking entities to resolve trading errors in accordance with internal policies and procedures to avoid
duplicative resolution systems and unnecessary regulatory costs.268 One commenter argued that error trades are clearly outside the scope of activities meant to be prohibited by the statute, so it should not be necessary to include any additional documentation or administrative requirements related to them.269 One comment letter requested that the agencies clarify that the exclusion covers both pre-settlement trade errors (where the error is identified and corrected prior to being settled in the client’s account and is settled in a separately managed trade error account) and post-settlement trade errors (where the trade error is settled in and posted directly to the client’s account).270 One commenter supported providing an exclusion for bona fide error trades, but suggested certain changes to the proposed exclusion.271 This commenter expressed concern that the proposed exclusion did not provide sufficient protections to ensure that banking entities correct errors in a timely and comprehensive manner and do not use the exclusion to facilitate directional exposures. To this end, the commenter recommended requiring banking entities to establish reasonably designed controls, including periodic exception reports containing certain specified fields. These reports, the commenter argued, should be provided to independent personnel in the second line-of-defense, including compliance and risk personnel, and escalated internally in accordance with the banking entity’s internal policies and procedures. The commenter also recommended requiring periodic error trade testing and audits conducted by the second line-of-defense. One commenter argued against a blanket exclusion for error trades, and urged the agencies to require any profit from error trades be forfeited to the U.S. Treasury, thereby removing any incentive for a banking entity to erroneously classify intentional financial positions as error trades.272 Another commenter argued that the proposal did not adequately explain or provide sufficient data to justify the necessity of providing an exclusion for error trades, and that the exclusion could be used to evade the prohibition on proprietary trading.273 After weighing the comments received, the agencies are excluding from the definition of ‘‘proprietary trading’’ any purchase or sale of one or more financial instruments that was made in error by a banking entity in the course of conducting a permitted or

274Final rule §ll.3(d)(10).
275See final rule §ll.3(b)(4).
276See 12 U.S.C. 1851(h)(6).
277See, e.g., BPI and FSF.
278See, e.g., ABA; Credit Suisse; FSF; JBA; and SIFMA. 279See Better Markets. 280See 83 FR at 33462–64. 281See id. at 33462. 282 Id. 283 Id. 284 Id. 285 Id. In this example, the banking entity retains the counterparty risk from both swaps. However, depending on the type of swap and the particular transaction, the banking entity may be able to manage the counterparty risk, for example, by clearing the transaction at a clearing agency or derivatives clearing organization acting as a central counterparty, as applicable. 286 Id. 287 Id. at 33463. 288 Id. 289 Id. at 33464. 290 Id. at 33463. 291See, e.g., BOK; ABA; Covington & Burling LLP (Covington); JBA; Chatham; Credit Suisse; BPI; SIFMA; IIB, Covington; Arvest; IIB; KeyCorp; and Capital One et al. 292See, e.g., Covington and BPI. 293See, e.g., Covington; BPI; SIFMA; Credit Suisse; and BB&T. 294See, e.g., BOK; ABA; Covington; JBA; Chatham; Credit Suisse; BPI; SIFMA; IIB, Covington; Arvest; IIB; KeyCorp; and Capital One et al. excluded activity or is a subsequent transaction to correct such an error.274 The agencies do not believe bona fide trading errors and correcting transactions are proprietary trading. Under the 2013 rule, trading errors and subsequent transactions to correct such errors could trigger the short-term intent prong’s 60-day rebuttable presumption and thus could be considered to be presumptively within the trading account. In addition, trading errors and correcting transactions could be within the definition of proprietary trading under the market risk prong or dealer prong. While the final rule eliminates the 2013 rule’s 60-day rebuttable presumption,275 the agencies believe it is useful and appropriate to clarify in the final rule that trading errors and subsequent correcting transactions are not proprietary trading because banking entities do not enter into these transactions principally for the purpose of selling in the near-term (or otherwise with the intent to resell in order to profit from short-term price movements).276 Rather, the principal purpose of a trading error correction is to remedy a mistake made in the ordinary course of the banking entity’s permissible activities.277 Accordingly, the agencies are adopting this exclusion to provide clarity regarding bona fide trading errors and subsequent correcting transactions. Consistent with feedback from several commenters,278 the exclusion in the final rule does not require banking entities to transfer erroneously purchased (or sold) financial instruments to a separately managed trade error account for disposition. The agencies agree that this requirement could have resulted in duplicative resolution systems and imposed undue regulatory costs, which are not appropriate in light of the narrow class of bona fide trading errors that fall within the exclusion. As with all exclusions and permitted trading activities, the agencies intend to monitor use of this exclusion for evasion. For example, the magnitude or frequency of
errors could indicate that the trading activity is inconsistent with this exclusion. The agencies have considered comments suggesting that the agencies should impose on banking entities certain reporting, auditing, and testing requirements specifically related to trade error transactions.279 As noted above, the agencies believe mandating requirements such as these could lead to undue costs for banking entities, which are not appropriate in light of the narrow class of bona fide trading errors that fall within the exclusion. Such bona fide trade errors and subsequent correcting transactions do not fall within the statutory definition of ‘‘proprietary trading’’ because they lack the requisite short-term intent. Accordingly, the agencies do not find it necessary to impose additional requirements with respect to such activities. Further, the agencies do not agree that any profits resulting from trade error transactions should be remitted to the U.S. Treasury.
iii. Matched Derivative Transactions
The proposal requested comment on the treatment of loan-related swaps between a banking entity and customers that have received loans from the banking entity.280 The proposal explained that, in a loan-related swap transaction, a banking entity enters into a swap with a customer in connection with the customer’s loan and contemporaneously offsets the swap with a third party. The swap with the customer is directly related to the terms of the customer’s loan.281 In one typical type of loan-related swap, a banking entity seeks to make a floating-rate loan to a customer that could have the benefit to the banking entity of reducing the banking entity’s interest rate risk, but the customer would prefer to have the economics of a fixed-rate loan.282 To achieve a result that addresses these divergent preferences, the banking entity makes a floating-rate loan to the customer and contemporaneously or nearly contemporaneously enters into a floating rate to fixed rate interest rate swap with the same customer and an offsetting swap with another counterparty.283 As a result, the customer receives economic treatment similar to a fixed-rate loan.284 The banking entity has entered into the preferred floating rate loan, provided the customer with the customer’s preferred fixed rate economics though the interest rate swap with the customer and offset its market risk exposure from the customer-facing interest rate swap through a swap with another counterparty.285 Loan-related swaps have presented a compliance challenge particularly for smaller non-dealer banking entities.286 These banking entities may enter into loan-related swaps infrequently, and the decision to do so tends to be situational and dependent on changes in market conditions as well as on the interaction of a number of factors specific to the banking entity, such as the nature of the customer relationship.287 The proposal sought comment on whether loan-related swaps should be excluded from the definition of proprietary trading, exempted from the prohibition on proprietary trading, or permitted under the exemption for market making-related activities.288 The proposal also asked whether other types of swaps, such as end-user customerdriven swaps that are used by a customer to hedge commercial risk should be treated the same way as loanrelated swaps.289 The proposal also requested comment as to whether it is appropriate to permit loan-related swaps to be conducted pursuant to the exemption for market making-related activities where the frequency with which a banking entity executes such swaps is minimal but the banking entity remains prepared to execute such swaps when a customer makes an appropriate request.290 Most commenters supported allowing loan-related swaps, either by adopting an exclusion from the definition of proprietary trading,291 creating a new exemption for loan-related swaps,292 or clarifying that banking entities could enter into loan-related swaps under existing exemptions.293 The
majority of these commenters supported explicitly excluding loan-related swaps from the definition of proprietary trading.294 These commenters noted that loanrelated swap transactions generally do not fall within the statutory definition of trading account and that these

295See, e.g., BOK; ABA; Covington; JBA; Chatham; Arvest; and IIB. 296See, e.g., Covington and Credit Suisse. 297See, e.g., Arvest and BOK. 298See Data Boiler. 299See, e.g., Covington and BPI. 300See, e.g., SIFMA and Credit Suisse. 301See, e.g., Covington; BPI; SIFMA; and Credit Suisse. 302See, e.g., BB&T and Credit Suisse (Credit Suisse noted, however, that an exclusion would be preferable to using the market-making exemption). 303See, e.g., IIB; Covington; SIFMA; Capital One et al.; BPI; and B&F. 304See, e.g., BOK; JBA; ABA; Capital One et al.; and KeyCorp. 305See, e.g., BOK and ABA. 306See, e.g., BOK. 307See, e.g., ABA; Arvest; and IIB. 308See Chatham. 309See BOK. 310See Covington. 311See id. 312Price risk is the risk of loss on a fair-value position that could result from movements in market prices. 313Final rule §ll.3(d)(11). 314See final rule §ll.3(b)(4). 315See 12 U.S.C. 1851(h)(6). 316See, e.g., BOK; JBA; ABA; Capital One et al.; and KeyCorp. 317As a result, the agencies are not adopting a definition of ‘‘loan-related swap’’ substantially similar to the definition adopted by the CFTC for swaps executed in connection with originating loans to customers, as requested by one customer. See Chatham. The agencies also note that this exclusion does not impact the ‘‘insured depository institution swaps in connection with originating loans to customers’’ provisions in the CFTC’s definition of ‘‘swap dealer.’’ See 17 CFR 1.3, Swap dealer, paragraphs (4)(i)(C) and (5). Additionally, this exclusion does not affect any other aspects of the ‘‘swap dealer’’ definition in CFTC regulations, or how that term is interpreted by the CFTC. transactions are important riskmitigating activities.295 Commenters stated that providing an exclusion or permitted activity exemption for loanrelated swaps would prevent section 13 of the BHC Act from having an unintended chilling effect on an important and prudent lending-related activity.296 Commenters also stated that these types of swap transactions are important tools that facilitate bank customers’ ability to manage their risks.297 One commenter opposed providing an exclusion for loan-related swaps, arguing that these activities instead should be conducted under the risk-mitigating hedging exemption.298 Two commenters requested that the agencies adopt a permitted activity exemption for loan-related swaps or revise the existing exemption for market making-related activities if the agencies do not explicitly exclude loan-related swaps from the definition of proprietary trading.299 In addition, two commenters suggested that the exemption for riskless principal transactions in §ll.6(c)(2) of the 2013 rule could cover loan-related swaps.300 These commenters and two others suggested that excluding loanrelated swaps from the definition of proprietary trading would be more effective than adopting a new permitted activity exemption or relying on an existing permitted activity exemption.301 Two commenters argued that banking
entities should be allowed to engage in loan-related swaps using the exemption for market making-related activities.302 Several other commenters asserted that the market-making exemption is a poor fit for loan-related swaps and that the market-making exemption’s requirements were unduly burdensome with respect to this activity, particularly for smaller banking entities.303 Several commenters supported excluding additional derivatives activities from the definition of proprietary trading, such as customerdriven matched-book trades that enable customers to hedge commercial risk regardless of whether the swaps are related to a loan.304 Commenters noted that such customer-driven matchedbook trades do not expose banking entities to risk other than counterparty credit risk.305 Moreover, these trades reduce risks to the bank’s customer and thus also reduce the risk of the banking entity’s loans to that customer.306 Three commenters requested that the exclusion be expanded to cover instances where a banking entity enters into a loan-related swap with a customer but does not offset that swap with a third party.307 One commenter urged the agencies to adopt a definition of loan-related swaps that is substantially similar to the definition adopted by the CFTC for swaps executed in connection with originating loans to customers, and to include in the definition, the derivatives transaction entered into with a dealer to offset the risk of the customer-facing swap.308 Another commenter opposed using the CFTC’s definition, noting that the CFTC’s definition would not address commodity-based matched-book derivative transactions.309 One commenter recommended defining ‘‘customer-facing loan-related swap’’ to mean any swap with a customer or affiliate thereof in which the rate, asset, liability, or other notional item underlying the swap with the customer or affiliate thereof is, or is directly related to, a financial term of a loan or other credit facility with the customer or affiliate thereof (including, without limitation, the loan or other credit facility’s duration, rate of interest, currency or currencies, or principal amount).310 The same commenter stated that the exclusion should not include a timing requirement with respect to the offsetting swap or, if a timing condition is included, the banking entity should be required to enter into the offsetting swap ‘‘contemporaneously or substantially contemporaneously’’ with the customer-facing loan-related swap.311 After considering the comments received, the agencies are excluding from the definition of ‘‘proprietary trading’’ entering into a customer-driven swap or a customer-driven securitybased swap and a matched swap or security-based swap if: (i) The transactions are entered into contemporaneously; (ii) the banking entity retains no more than minimal price risk; 312 and (iii) the banking entity is not a registered dealer, swap dealer, or security-based swap dealer.313 The agencies are adopting this
exclusion to provide greater certainty for non-dealer banking entities that engage in these customer-driven matched-book swap transactions. Under the 2013 rule, these customerdriven matched swap transactions could trigger the short-term intent prong’s rebuttable presumption and thus would be presumptively within the trading account. Although the agencies are eliminating the 2013 rule’s rebuttable presumption,314 the agencies believe that it is nevertheless useful and appropriate to clarify in the final rule that these customer-driven matched swap transactions are not proprietary trading because banking entities do not enter into these transactions principally for the purpose of selling in the nearterm (or otherwise with the intent to resell in order to profit from short-term price movements).315 For this reason, the agencies are providing an exclusion for these activities from the proprietary trading definition rather than requiring them to be conducted pursuant to the risk-mitigating hedging exemption, as one commenter suggested. The agencies believe that adopting this exclusion will reduce costs for nondealer banking entities and avoid disrupting a common and traditional banking service provided to small and medium-sized businesses. This exclusion will provide a greater degree of certainty that these customer-driven matched swap transactions are outside the scope of the final rule. Consistent with feedback received from commenters,316 the exclusion in the final rule is not limited to loanrelated swaps.317 Thus, the exclusion in the final rule could apply to a swap with a customer in connection with the

318See 12 U.S.C. 1851(h)(6).
319 If a transaction does not satisfy all of the conditions of the exclusion but is not within the definition of trading account, the transaction would not constitute proprietary trading. 320See, e.g., Chatham; ABA; and Covington. 321See, e.g., IIB; Covington; SIFMA; Capital One et al.; BPI; and B&F. 322See final rule §ll.4(b). 323The banking entity would retain minimal price risk if the economic terms of the two swaps (e.g., index, amount, maturity, and underlying reference asset or index) match. 324The exclusion only applies to transactions where the customer-driven swap or customerdriven security-based swap is offset by a matching swap or security-based swap on a one-for-one basis. The exclusion does not apply to portfolio-hedged derivatives transactions. 325See 12 U.S.C. 1851(h)(6). 326Whether the banking entity is actually engaged in impermissible proprietary trading would depend on the facts and circumstances of the particular transaction. 327See ABA and Arvest. 328See final rule §ll.3(b). customer’s end-user activity (provided that all the terms of the exclusion are met). For example, a corn farmer is a customer of a non-dealer banking entity. To manage its risk with respect to the price of corn, the corn farmer enters into a swap on corn prices with the banking entity. The banking entity contemporaneously enters into a cornprice swap with another counterparty to offset the price risk of the swap with the corn farmer. The swap with the corn farmer and the offsetting swap with the counterparty have matching terms such that the banking entity retains no more than minimal price risk. The agencies have determined that it is appropriate to exclude these types of transactions from the definition of proprietary trading because, like matched loan-related swaps discussed above, banking entities do not enter into these customer-driven transactions principally for the purpose of selling in the near-term (or otherwise with the intent to resell in order to profit from short-term price movements).318 Several conditions must be met for the exclusion to apply.319 The exclusion applies only to banking entities that are not registered dealers, swap dealers, or security-based swap dealers. This approach is consistent with feedback from commenters noting that primarily smaller banking entities have faced compliance challenges with respect to customer-driven swaps activities.320 Banking entities that are registered dealers, swap dealers, or security-based swap dealers generally engage in these activities on a more regular basis and therefore have been able to conduct their derivatives activities pursuant to the exemption for market makingrelated activities. Although some commenters argued that the exemption for market making-related activities is too burdensome to apply to this type of activity,321 the agencies note that the final rule streamlines certain requirements of that exemption.322 The exclusion only applies to transactions where one of the two
matched swaps or security-based swaps is customer-driven, in that the transaction is entered into for a customer’s valid and independent business purposes. In addition, the hedging swap or hedging security-based swap must match the customer-driven swap or customer-driven security-based swap. The banking entity may retain no more than minimal price risk between the two swaps or security-based swaps.323 Finally, the banking entity must enter into the customer-driven swap or customer driven security-based swap contemporaneously with the matching swap or matching securitybased swap.324 These conditions carve out from the exclusion activities whose principal purpose is resale in the near term.325 For example, if a banking entity entered into a hedging swap whose economic terms did not match the terms of the customer-driven swap, the banking entity would be exposed to price risk and could be speculating on short-term price movements. Similarly, if a banking entity waited multiple days between entering into a customer-driven swap and entering into the offsetting swap, the banking entity could be speculating on short-term price movements during the unhedged period of the swap transaction. In either case, the banking entity could be engaged in proprietary trading.326 The requirements in the final rule’s exclusion are intended to limit the exclusion to activities that the agencies have determined lack the requisite short-term trading intent. The agencies have considered the comments requesting an exclusion for unmatched loan-related swaps and determined that such an exclusion is not necessary in the final rule.327 For example, if a bank provides a loan to a customer and enters into a swap with the customer related directly to the terms of that loan but does not offset that customer-driven swap with a thirdparty, the exclusion does not apply. Although the exclusion may not apply, the agencies believe that this type of activity is unlikely to be within the trading account under the final rule, particularly because the agencies are not adopting the proposed accounting prong. Entering into such a loan-related swap would be proprietary trading only if the purchase or sale of the swap is principally for short term trading purposes or is otherwise within the definition of trading account.328
iv. Hedges of Mortgage Servicing Rights
or Assets
The final rule excludes from the definition of proprietary trading any purchase or sale of one or more financial instruments that the banking entity uses to hedge mortgage servicing rights or mortgage servicing assets in accordance with a documented hedging strategy. The agencies are adopting this exclusion to clarify the scope of the prohibition on proprietary trading and to provide parity between banking entities that are subject to the market risk capital prong and banking entities that are subject to the short-term intent prong.
Section 13 of the BHC Act defines
‘‘trading account’’ to mean ‘‘any account used for acquiring or taking positions in . . . securities and instruments . . . principally for the purpose of selling in the near term (or otherwise with the intent to resell in order to profit from short-term price movements),’’ and any such other accounts that the agencies determine by rule. The purchase or sale of a financial instrument as part of a bona fide mortgage servicing rights or mortgage servicing asset hedging program is not within the statutory definition of ‘‘trading account’’ under the short-term intent prong because the principal purpose of such a purchase or sale is hedging rather than short-term resale for profit. The agencies have determined to explicitly exclude this type of hedging activity from the definition of ‘‘proprietary trading’’ to provide greater clarity to banking entities that are subject to the short-term intent prong in light of changes made elsewhere in the final rule. Under the final rule, banking entities that are subject to the market risk capital prong (or that elect to apply the market risk capital prong) are not subject to the short-term intent prong. The market risk capital rule explicitly excludes intangibles, including servicing assets, from the definition of ‘‘covered position.’’ Financial instruments used to hedge mortgage servicing rights or assets generally would not be captured under the market risk capital prong. Therefore, absent an explicit exclusion, banking entities that are subject to the market risk capital prong have more certainty than banking entities that are subject to the short-term intent prong that the purchase or sale of a financial instrument to hedge mortgage servicing rights or mortgage servicing assets is not proprietary

329See final rule §ll.3(b).
330See 12 CFR 3.202(b); 12 CFR 217.202(b); 12 CFR 324.202(b). In addition, the market risk capital rule’s ‘‘covered position’’ definition expressly includes and excludes additional classes of instruments. 331See SIFMA. 332See, e.g., Instructions for Preparation of Consolidated Reports of Condition and Income, FFIEC 031 and FFIEC 041, Schedule RC–D; Instructions for Preparation of Consolidated Financial Statements for Holding Companies, Reporting Form FR Y–9C, Schedule HC–D. 333 12 U.S.C. 1851(h)(6). 334See 2013 rule §§ll.4, ll.5, App. A., App. B; final rule §§ll.4, ll.5, App. A. 335 2013 rule §ll.3(e)(13). 336See 83 FR at 33453. trading. The agencies are explicitly excluding mortgage servicing rights and mortgage servicing asset hedging activity to provide banking entities that are not subject to the market risk capital prong (or that elect to apply the market risk capital prong) the same degree of certainty. As described in part IV.B.1.a.iii of this SUPPLEMENTARY INFORMATION, the final rule seeks to provide parity between smaller banking entities that are not subject to the market risk capital rule and larger banking entities with active trading businesses that are subject to the market risk capital prong. The agencies believe an express exclusion for mortgage servicing rights and mortgage servicing hedging activity is useful in light of the revision to the trading account definition that applies the short-term intent prong only to banking entities that are not subject to the market risk capital prong. This exclusion applies only to bona fide hedging activities, conducted in accordance with a documented hedging strategy. This requirement will assist the agencies in monitoring for evasion or abuse. In addition, the agencies note that banking entities’ mortgage servicing activities and related hedging activities remain subject to applicable law and regulation, including the Federal banking agencies’ safety and soundness standards.
v. Financial Instruments That Are Not
Trading Assets or Trading Liabilities The final rule excludes from the trading account any purchase or sale of a financial instrument that does not meet the definition of ‘‘trading asset’’ or ‘‘trading liability’’ under the banking entity’s applicable reporting form. As with the exclusion for hedges of mortgage servicing rights or assets, the agencies are adopting this exclusion to clarify the scope of the prohibition on proprietary trading and to provide parity between banking entities that are subject to the market risk capital prong (or that elect to apply the market risk capital prong) and banking entities that are subject to the short-term intent prong. The agencies have determined to exclude the purchase or sale of assets that would not meet the definition of trading asset or trading liability from the definition of ‘‘proprietary trading’’ to provide greater clarity to banking entities that are subject to the short-term intent prong. As described above, under the final rule, banking entities that are subject to the market risk capital prong (or that elect to apply the market risk capital prong) are not subject to the short-term intent prong.329 Under the market risk capital prong, a purchase or sale of a financial instrument is within the trading account if it would be both a covered position and trading position under the market risk capital rule. In general, a position is a covered position under the market risk capital prong if it is a trading asset or trading liability (whether on- or off-balance sheet).330 Thus, the exclusion for financial instruments that are not ‘‘trading assets and liabilities’’ extends the same certainty to banking entities subject to the short-term intent prong as is provided by operation of the market risk capital prong. One commenter recommended that the agencies modify the short-term intent prong to include only financial instruments that meet the definition of trading assets and liabilities and that are held for the purpose of short-term trading.331 The agencies have determined that including only financial instruments that meet the definition of trading assets and liabilities (by excluding instruments that do not meet this definition) is appropriate because the trading asset and liability definitions used for regulatory reporting purposes incorporate substantially the same short-term trading standard as the shortterm intent prong and section 13 of the BHC Act. The Call Report and FR Y–9C provide that trading activities typically include, among other activities, acquiring or taking positions in financial instruments ‘‘principally for the purpose of selling in the near term or otherwise with the intent to resell in order to profit from short-term price movements.’’ 332 This language is substantially identical to the statutory definition of trading account, which applies to any account used for acquiring or taking positions in financial instruments ‘‘principally for the purpose of selling in the near term (or
otherwise with the intent to resell in order to profit from short-term price movements) . . . .’’ 333 Therefore, excluding any purchase or sale of a financial instrument that would not be classified as a trading asset or trading liability on these applicable reporting forms is consistent with the statutory definition of trading account in section 13 of the BHC Act. This exclusion is expected to provide additional clarity to banking entities subject to the shortterm intent prong, while also better aligning the compliance program requirements with the scope of activities subject to section 13 of the BHC Act. This exclusion applies to any purchase or sale of a financial instrument that does not meet the definition of ‘‘trading asset’’ or ‘‘trading liability’’ under the applicable reporting form as of the effective date of this final rule. The final rule references the reporting forms in effect as of the final rule’s effective date to ensure the scope of the exclusion remains consistent with the statutory trading account definition. Because the reporting forms are used for many purposes and are generally based on generally accepted accounting principles, future revisions to the reporting forms could define ‘‘trading asset’’ and ‘‘trading liability’’ inconsistently with the ‘‘trading account’’ definition in section 13 of the BHC Act. Further, tying the exclusion to the reporting forms currently in effect will provide greater certainty to banking entities. If the scope of the exclusion were subject to change based on revisions to the applicable reporting forms, it could require banking entities to make corresponding changes to compliance systems to remain in compliance with the rule, which could result in disruption both for banking entities and the agencies. Accordingly, the final rule excludes any purchase or sale of a financial instrument that does not meet the definition of trading asset or trading liability under the applicable reporting form as of the effective date of the final rule.
c. Trading Desk
The 2013 rule applies certain requirements at the ‘‘trading desk’’-level of organization.334 The 2013 rule defined ‘‘trading desk’’ to mean the smallest discrete unit of organization of a banking entity that purchases or sells financial instruments for the trading account of the banking entity or an affiliate thereof.335 As noted in the proposal, some banking entities had indicated that, in practice, the 2013 rule’s definition of trading account had led to uncertainty regarding the meaning of ‘‘smallest discrete unit.’’ 336 In addition, banking

337See id.
338See id.
339See id.
340See, e.g., ABA; ISDA 1; CCMC; SIFMA 2; Goldman Sachs; FSF; JBA; and AFR. 341See, e.g., ABA and CCMC. 342See, e.g., ABA; ISDA 1; CCMC; SIFMA 2; Goldman Sachs; FSF; and JBA. 343See AFR. 344See JBA. 345See CCMC. 346Currently, the market risk capital rule does not include a definition of ‘‘trading desk.’’ However, the federal banking agencies expect to implement the Basel Committee’s revised market risk capital standards, which do. See Basel Committee on Banking Supervision, ‘‘Minimum Capital Requirements for Market Risk,’’ MAR12 (Feb. 2019). The federal banking agencies expect their revised market risk capital rule will include a definition of ‘‘trading desk’’ that is consistent with the trading desk concept described in the ‘‘Minimum Capital Requirements for Market Risk,’’ and the multifactor approach in this final rule. 347See final rule §ll.3(e)(13)(ii). 348Final rule §ll.3(e)(13)(i)(A). 349See Basel Committee on Banking Supervision, Minimum Capital Requirements for Market Risk (Feb. 2019). 350Compare 83 FR at 33453 with final rule §ll.3(e)(13)(i)(B). entities had communicated that this definition has caused confusion and duplicative compliance and reporting efforts for banking entities that also define trading desks for purposes unrelated to the 2013 rule, including for internal risk management and reporting and calculating regulatory capital requirements.337 In response to these concerns, the proposal included a detailed request for comment on whether to revise the trading desk definition to align with the trading desk concept used for other purposes.338 Specifically, the proposal requested comment on using a multi-factor trading desk definition based on the same criteria typically used to establish trading desks for other operational, management, and compliance purposes.339 Commenters that addressed the definition of ‘‘trading desk’’ generally supported revising the definition along the lines contemplated in the proposal.340 Commenters asserted that the 2013 rule’s ‘‘smallest discrete unit language’’ was subjective, ambiguous, and had been interpreted in different ways.341 Commenters said that adopting a multi-factor definition would be preferable to the 2013 rule’s definition because a multi-factor definition would align the definition of trading desk with other operational and managerial structures, whereas the 2013 rule’s definition could be interpreted to require banking entities to designate certain units of organization as trading desks purely for purposes of the regulations implementing section 13 of the BHC Act.342 One commenter supported the multi-factor definition in the proposal but recommended that the agencies should be required to approve the initial trading desk designations and any changes in trading desk designations.343 One commenter said the agencies should allow the unit of the trading desk to be determined at the discretion of each financial institution 344 and another said it is not necessary to introduce complexity
into how banking entities organize their internal operations.345 The final rule adopts a multi-factor definition that is substantially similar to the definition included in the request for comment in the proposal, except that the first prong has been revised and the reference to incentive compensation has been removed. This multi-factor definition will align the criteria used to define trading desk for purposes of the regulations implementing section 13 of the BHC Act with the criteria used to establish trading desks for other operational, management, and compliance purposes. The definition of trading desk includes a new second prong that explicitly aligns the definition with the market risk capital rule.346 The final rule provides that, for a banking entity that calculates risk-based capital ratios under the market risk capital rule, or a consolidated affiliate of a banking entity that calculates risk-based ratios under market risk capital rule, ‘‘trading desk’’ means a unit of organization that purchases or sells financial instruments for the trading account of the banking entity or an affiliate thereof that is established by the banking entity or its affiliate for purposes of capital requirements under the market risk capital rule.347 This change specifies that, for a banking entity that is subject to the market risk capital prong, the trading desk established for purposes of the market risk capital rule must be the same unit of organization that is established as a trading desk under the regulations implementing section 13 of the BHC Act. This prong of the trading desk definition is expected to simplify the supervisory activities of the Federal banking agencies that also oversee compliance with the market risk capital rule because the same unit of organization can be assessed for purposes of both the market risk capital rule and section 13 of the BHC Act, which will reduce complexity and cost for banking entities, and improve the effectiveness of the final rule. Together with providing firms with the flexibility to leverage existing or planned compliance programs in order to satisfy the elements of §ll.20 as appropriate, the agencies expect aligning the definition of trading desk will minimize compliance burden on banking entities subject to both rules. To further align the final rule’s trading desk concept with the market risk capital rule, the final rule provides that a trading desk must be ‘‘structured by the banking entity to implement a well-defined business strategy.’’ 348 This further aligns the trading desk definition with the definition of ‘‘trading desk’’ in the Basel Committee’s minimum capital requirements for market risk.349 This change will ensure that banking entities that are subject to the market risk capital prong and banking entities that are not subject to the market risk capital prong have comparable trading desk definitions. In general, a well-defined business strategy typically includes a written description of a desk’s
objectives, including the economics behind its trading and hedging strategies, as well as the instruments and activities the desk will use to accomplish its objectives. A desk’s welldefined business strategy may also include an annual budget and staffing plan and management reports. Like the proposal, the final rule states that a trading desk is organized to ensure appropriate setting, monitoring, and management review of the desk’s trading and hedging limits, current and potential future loss exposures, and strategies. The final rule also states that a trading desk is characterized by a clearly-defined unit that: (i) Engages in coordinated trading activity with a unified approach to its key elements; (ii) operates subject to a common and calibrated set of risk metrics, risk levels, and joint trading limits; (iii) submits compliance reports and other information as a unit for monitoring by management; and (iv) books its trades together. The agencies consider a unit to be ‘‘clearly-defined’’ if it meets these four factors. The proposal included a multi-factor definition of trading desk that referenced incentive compensation as one defining factor. However, the banking agencies do not incorporate incentive compensation in regulatory capital rules generally, and therefore omitting this criterion would better align the trading desk definition between the market risk capital rule and the Volcker Rule. Thus, the final rule does not incorporate any reference to incentive compensation.350 The final rule does not require the agencies to approve banking entities’

351See AFR.
352See JBA.
353See 83 FR at 33454.
354See, e.g., BB&T and CFA.
355 Id.
356See CFA.
357See proposed rule §ll.3(g).
358Although banking entities that are subject to the market risk capital prong are not subject to the short-term intent prong, the market risk capital prong incorporates a substantially similar shortterm intent standard. As described above, the market risk capital rule’s definition of trading position largely parallels the statutory definition of trading account, which in turn mirrors the language in the short-term intent prong. 359 In contrast to the proposal, the discussions of the exemptions for underwriting and market making-related activity have been combined in order to avoid any unnecessary redundancy as well as any confusion that could arise to the extent there are differences in the way that otherwise identical provisions of those exemptions operate. However, the two exemptions remain separate and distinct. Banking entities seeking to rely on one or both exemptions are required to comply with the requirements and legal standards contained in each applicable exemption, and will continue to be required to do so following adoption of the final rule. 360 12 U.S.C. 1851(d)(1)(B). 361See 79 FR at 5615. 362See 79 FR at 5561 (internal footnotes omitted). 363 Id. 364See 79 FR at 5576. 365See 79 FR at 5541. initial trading desk designations and any changes in trading desk designations, as one commenter had recommended.351 The agencies believe such an approval process is unnecessary for purposes of the final rule because the agencies intend to continue assessing banking entities’ trading desk designations as part of the agencies’ ongoing supervision of banking entities’ compliance with the final rule as well as other safety and soundness regulations, as applicable. At the same time, the final rule does not allow the trading desk to be set completely at the discretion of the banking entity, as one commenter suggested.352 The adopted definition will provide flexibility to allow banking entities to define their trading desks based on the same criteria typically used for other operational, management, and compliance purposes but would not be so broad as to hinder the agencies’ or banking entities’ ability to detect prohibited proprietary trading. d. Reservation of Authority The proposal included a reservation of authority that would have permitted an agency to determine, on a case-bycase basis, that any purchase or sale of one or more financial instruments by a banking entity for which it is the primary financial regulatory agency either is or is not for the trading account as defined in section 13(h)(6) of the BHC Act.353 The preamble requested comment on whether such a reservation of authority would be necessary in connection with the proposed trading account definition, which would have focused on objective factors to define proprietary trading. The agencies explained that this approach may have produced results that were over- or under-inclusive with respect to the statutory trading account definition. The agencies further explained that the
reservation of authority could provide appropriate balance by recognizing the subjective elements of the statute in light of the bright-line approach of the proposed accounting prong. Two commenters supported adopting the reservation of authority.354 Both of these commenters noted the importance of coordination and consistent application of the reservation of authority, particularly in instances where the primary financial regulatory agency may vary by legal entity within a firm.355 One of these commenters suggested that the agencies keep such authority in reserve for use solely in those circumstances wherein poor management is putting an institution at risk of failure.356 The final rule does not include the proposed reservation of authority.357 The revised trading account definition in the final rule retains a short-term intent standard that largely tracks the statutory standard.358 Because the final trading account definition does not include the proposed accounting prong and is aligned with the statutory standard, the agencies do not find it necessary to retain a reservation of authority.
2. Section ll.4: Permitted
Underwriting and Market Making Related Activities a. Current Exemptions for Underwriting and Market Making—Related Activities 359
Section 13(d)(1)(B) of the BHC Act
contains an exemption from the prohibition on proprietary trading for the purchase, sale, acquisition, or disposition of securities, derivatives, contracts of sale of a commodity for future delivery, and options on any of the foregoing in connection with underwriting or market making-related activities, to the extent that such activities are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties (RENTD).360 As the agencies noted when they adopted the 2013 rule, clientoriented financial services, which include underwriting, market making, and asset management services, are important to the U.S. financial markets and the participants in those markets.361 In particular, underwriters play a key role in facilitating issuers’ access to funding, and are accordingly important to the capital formation process and to economic growth.362 For example, underwriters can help reduce issuers’ costs of capital by mitigating potential information asymmetries between issuers and their potential investors.363 Similarly, market makers operate to help ensure that securities, commodities, and derivatives markets in the United States remain wellfunctioning by, among other things, providing important intermediation and liquidity.364 At the same time, however, the agencies also recognized that providing appropriate latitude to banking entities to provide such clientoriented services need not and should not conflict with clear, robust, and effective implementation of the statute’s prohibitions and restrictions.365 Accordingly, the 2013 rule follows a comprehensive, multi-faceted approach to implementing the statutory exemptions for underwriting and market making-related activities. Specifically,
section ll.4(a) of the 2013 rule
implements the statutory exemption for underwriting and sets forth the requirements that banking entities must meet in order to rely on the exemption. Among other things, the 2013 rule requires that:

The banking entity act as an
‘‘underwriter’’ for a ‘‘distribution’’ of securities and the trading desk’s underwriting position be related to such distribution;
The amount and types of securities
in the trading desk’s underwriting position be designed not to exceed RENTD, and reasonable efforts be made to sell or otherwise reduce the underwriting position within a reasonable period, taking into account the liquidity, maturity, and depth of the market for the relevant type of security;
The banking entity has established
and implements, maintains, and enforces an internal compliance program that is reasonably designed to ensure the banking entity’s compliance with the requirements of the underwriting exemption, including reasonably designed written policies and procedures, internal controls, analysis, and independent testing identifying and addressing:
Æ The products, instruments, or exposures each trading desk may purchase, sell, or manage as part of its underwriting activities; Æ Limits for each trading desk, based on the nature and amount of the trading

366See 2013 rule §ll.4(b)(2)(iii). 367See 79 FR at 5615. 368 2013 rule §ll.4(b)(2). This provision was not intended to expand the scope of licensing or registration requirements under relevant U.S. or foreign law that are applicable to a banking entity engaged in market-making activities, but rather to recognize that compliance with applicable law is an essential indicator that a banking entity is engaged in market-making activities. See 79 FR at 5620. 369 83 FR at 33435, 33459. 370 83 FR at 33445–46. 371Proposed rules §ll.4(a)(8) and §ll.4(b)(6). 372 83 FR at 33438 and 33459. 373 12 U.S.C. 1851(d)(1)(B). 374 2013 rule §ll.4(a)(2)(ii). 375 2013 rule §ll.4(b)(2)(ii). 376 Id. 377 2013 rule §ll.4(b)(2)(iii)(C). desk’s underwriting activities, including RENTD, on the (1) amount, types, and risk of the trading desk’s underwriting position, (2) level of exposures to relevant risk factors arising from the trading desk’s underwriting position, and (3) period of time a security may be held; Æ Internal controls and ongoing monitoring and analysis of each trading desk’s compliance with its limits; and Æ Authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk’s limit(s), demonstrable analysis of the basis for any temporary or permanent increase to a trading desk’s limit(s), and independent review of such demonstrable analysis and approval;

The compensation arrangements of
persons performing the banking entity’s underwriting activities are designed not to reward or incentivize prohibited proprietary trading; and
The banking entity is licensed or
registered to engage in the activity described in the underwriting exemption in accordance with applicable law. Similarly, section ll.4(b) of the 2013 rule implements the statutory exemption for market making-related activities and sets forth the requirements that all banking entities must meet in order to rely on the exemption. Among other things, the 2013 rule requires that:
The trading desk that establishes
and manages the financial exposure routinely stands ready to purchase and sell one or more types of financial instruments related to its financial exposure and is willing and available to quote, purchase and sell, or otherwise enter into long and short positions in those types of financial instruments for its own account, in commercially reasonable amounts and throughout market cycles on a basis appropriate for the liquidity, maturity, and depth of the market for the relevant types of financial instruments;
The amount, types, and risks of the
financial instruments in the trading desk’s market-maker inventory are designed not to exceed, on an ongoing basis, RENTD, as required by the statute and based on certain factors and analysis specified in the rule;
The banking entity has established
and implements, maintains, and enforces an internal compliance program that is reasonably designed to ensure its compliance with the exemption for market making-related activities, including reasonably designed written policies and procedures, internal controls, analysis, and independent testing identifying and assessing certain specified factors; 366
To the extent that any required
limit 367 established by the trading desk is exceeded, the trading desk takes action to bring the trading desk into compliance with the limits as promptly as possible after the limit is exceeded;
The compensation arrangements of
persons performing market makingrelated activities are designed not to reward or incentivize prohibited proprietary trading; and
The banking entity is licensed or
registered to engage in market makingrelated activities in accordance with applicable law.368 In the several years since the adoption of the 2013 rule, public commenters have observed that the significant and costly compliance requirements in the existing exemptions may unnecessarily constrain underwriting and market making without a corresponding reduction in the type of trading activities that the rule was designed to prohibit.369 As the agencies noted in the proposal, implementation of the 2013 rule has indicated that the existing approach to give effect to the statutory standard of RENTD may be overly broad and complex, and also may inhibit otherwise permissible activity.370 Accordingly, the proposal was intended to tailor, streamline, and clarify the requirements that a banking entity must satisfy to avail itself of either exemption for underwriting or market making-related activities. In particular, the proposal intended to provide a clearer way to determine if a trading desk’s activities satisfy the statutory requirement that underwriting or market making-related activity, as applicable, be designed not to exceed RENTD. Specifically, the proposal would have established a presumption, available to banking entities both with and without significant trading assets and liabilities, that trading within internally set limits satisfies the requirement that permitted activities must be designed not to exceed RENTD.371 In addition, the agencies also proposed to tailor the exemption for underwriting and market making-related activities’ compliance program requirements to the size, complexity, and type of activity conducted by the banking entity by making those requirements applicable only to banking entities with significant trading assets and liabilities.372 b. Proposed Presumption of Compliance With the Statutory RENTD Requirement As described above, the statutory exemptions for underwriting and market making-related activities in section 13(d)(1)(B) of the BHC Act requires that such activities be designed not to exceed RENTD.373 Consistent with the statute, for the purposes of the exemption for underwriting activities,
section ll.4(a)(2)(ii) of the 2013 rule
requires that the amount and type of the securities in the trading desk’s underwriting position be designed not to exceed RENTD, and reasonable efforts are made to sell or otherwise reduce the underwriting position within a reasonable period, taking into account the liquidity, maturity, and depth of the market for the relevant type of security.374 Similarly, for the purposes of the exemption for market making-related activities, section ll.4(b)(2)(ii) of the 2013 rule requires that the amount, types, and risks of the financial instruments in the trading desk’s market-maker inventory are designed not to exceed, on an ongoing basis, RENTD, based on certain factors and analysis.375 Specifically, these factors are: (i) The liquidity, maturity, and depth of the market for the relevant type of financial instrument(s), and (ii) demonstrable analysis of historical customer demand, current inventory of financial instruments, and market and other factors regarding the amount, types, and risks of or associated with positions in financial instruments in which the trading desk makes a market, including through block trades.376 Under §ll.4(b)(2)(iii)(C) of the 2013 rule, a banking entity must account for these considerations when establishing limits for each trading desk.377 In the proposal, the agencies recognized that the prescriptive standards for meeting the statutory RENTD requirements in the exemptions for underwriting and market makingrelated activities were complex, costly, and did not provide bright line conditions under which trading activity

378See 83 FR at 33455, 33459.
379 Id.
380As stated in the proposal, as a consequence of the changes to focus on limits, many of the requirements of the 2013 rule relating to limits associated with the exemptions for underwriting and market making-related activities would be incorporated into this requirement and modified or removed as appropriate in the proposal. 381See proposed rule §ll.4(a)(8); proposed rule §ll.4(b)(6). 382 83 FR at 33438. 383Proposed rule §ll.4(a)(8)(i). 384Proposed rule §ll.4(6)(i)(B). 385See 83 FR at 33456, 33460. Under the proposal, banking entities with significant trading assets and liabilities would have continued to be required to establish internal limits for each trading desk as part of the underwriting compliance program requirement in §ll.4(a)(2)(iii)(B), the elements of which would cross-reference directly to the requirement in proposed §ll.4(a)(8)(i). Similarly, banking entities with significant trading assets and liabilities would have continued to be required to establish internal limits for each trading desk as part of the compliance program requirement for market making-related activity in §ll.4(b)(2)(iii)(C), the elements of which would cross-reference directly to the requirement in proposed §ll.4(b)(6)(i). Banking entities without significant trading assets and liabilities would have no longer been required to establish a compliance program that is specific for the purposes of complying with the either exemption, but would need to establish, implement, maintain and enforce internal limits if they chose to utilize the proposed presumption of compliance with respect to the statutory RENTD requirement in section 13(d)(1)(B) of the BHC Act. 386See 83 FR at 33456, 34460. In the proposal, the agencies indicated that they expected that the risk and position limits metric that is required for certain banking entities under the 2013 rule (and would continue to be required under the Appendix to the proposal) would help banking entities and the agencies to manage and monitor the underwriting and market making-related activities of banking entities subject to the metrics reporting and recordkeeping requirements of the Appendix. 387Proposed rule §ll.4(a)(8)(iii); proposed rule §ll.4(b)(6)(iii). 388See 83 FR at 33456. 389See proposed rule §ll.4(a)(8)(iv); proposed rule §ll.4(b)(6)(iv). could be classified as permissible underwriting or market making-related activity.378 Accordingly, the agencies sought comment on a proposal to implement this key statutory factor—in connection with both relevant exemptions—in a manner designed to provide banking entities and the agencies with greater certainty and clarity about what activity constitutes permissible underwriting or market making-related activity pursuant to the applicable exemption.379 Instead of the approach taken in the 2013 rule, the agencies proposed to establish the articulation and use of internal limits as a key mechanism for conducting trading activity in accordance with the rule’s exemptions for
underwriting and market makingrelated activities.380 Specifically, the proposal would have provided that the purchase or sale of a financial instrument by a banking entity would be presumed to be designed not to exceed RENTD if the banking entity establishes internal limits for each trading desk, subject to certain conditions, and implements, maintains, and enforces those limits, such that the risk of the financial instruments held by the trading desk does not exceed such limits.381 As stated in the proposal, the agencies believe that this approach would provide banking entities with more flexibility and certainty in conducting permissible underwriting and market making-related activities.382 Under the proposal, all banking entities, regardless of their volume of trading assets and liabilities, would have been able to voluntarily avail themselves of the presumption of compliance with the RENTD requirement by establishing and complying with these internal limits. With respect to the underwriting exemption, the proposal would have provided that a banking entity would establish internal limits for each trading desk that are designed not to exceed RENTD, based on the nature and amount of the trading desk’s underwriting activities, on the:
(1) Amount, types, and risk of its underwriting position; (2) Level of exposures to relevant risk factors arising from its underwriting position; and (3) Period of time a security may be held.383 With respect to the exemption for market making-related activities, the proposal would have provided that all banking entities, regardless of their volume of trading assets and liabilities, would be able to voluntarily avail themselves of the presumption of compliance with the RENTD requirement by establishing and complying with internal limits. Specifically, the proposal would have provided that a banking entity would establish internal limits for each trading desk that are designed not to exceed RENTD, based on the nature and amount of the trading desk’s market making-related activities, on the:
(1) Amount, types, and risks of its market-maker positions; (2) Amount, types, and risks of the products, instruments, and exposures the trading desk may use for risk management purposes; (3) Level of exposures to relevant risk factors arising from its financial exposure; and (4) Period of time a financial instrument may be held.384 In the case of both exemptions, the proposal provided that banking entities utilizing the applicable presumption of compliance with the RENTD requirement would have been required to maintain internal policies and procedures for setting and reviewing desk-level risk limits.385 The proposed approach would not have required that a banking entity’s limits be based on any specific or mandated analysis, as required with respect to RENTD analysis under the 2013 rule. Rather, a banking entity would have established the limits according to its own internal analyses and processes around conducting its underwriting activities and market making-related activities in accordance with section 13(d)(1)(B).386 In addition, the proposal would have required, for both the exemption for underwriting and market making-related activities, a banking entity to promptly report to the appropriate agency when a trading desk exceeds or increases its internal limits.387 The proposal also provided that internal limits established by a banking entity for the presumption of compliance with the statutory RENTD requirement under both the exemption for underwriting and market makingrelated activities would have been subject to review and oversight by the appropriate agency on an ongoing basis. Any review of such limits would have assessed whether or not those limits are established based on the statutory standard—i.e., the trading desk’s RENTD, based on the nature and amount of the trading desk’s underwriting or market making-related activities.388 Finally, under the proposal, the presumption of compliance with the statutory RENTD requirement for permissible underwriting and market making-related activities could have been rebutted by the appropriate agency if the agency determines, based on all relevant facts and circumstances, that a trading desk is engaging in activity that is not based on the trading desk’s RENTD on an ongoing basis. The agency would have provided notice of any such determination to the banking entity in writing.389 The agencies requested comment on the proposed addition of a presumption that conducting underwriting or market making-related activities within internally set limits satisfies the requirement that permitted such activities be designed not to exceed RENTD.

390See proposed rule §ll.4(a)(8); proposed rule §ll.4(b)(6). 391See, e.g., Credit Suisse; SIFMA; State Street; Real Estate Associations; and BOK. 392See SIFMA. 393See State Street. 394 Id. 395See JBA. 396See ABA. 397See, e.g., Merkley; AFR; Bean; Better Markets; Center for American Progress (CAP); Public Citizen; Volcker Alliance; and Data Boiler. 398See, e.g., Bean; Better Markets; CAP; and Public Citizen. 399See AFR. 400See, e.g., AFR; Bean; CAP; Public Citizen; Volcker Alliance; and Data Boiler. 401See, e.g., Bean and Volcker Alliance. 402See Better Markets. 403See NAFCU. 404See 83 FR 33459. 405See 83 FR at 33460. In the proposal, the agencies noted that they expect that the risk and position limits metric that is already required for certain banking entities under the 2013 rule (and would continue to be required under the Appendix to the proposal) would help banking entities and the agencies to manage and monitor the market making-related activities of banking entities subject to the metrics reporting and recordkeeping requirements of the Appendix. 406See, e.g., Capital One et al. and SIFMA. 407See FSF; State Street and SIFMA. 408See Merkley; Volcker Alliance; and Data Boiler. 409See Better Markets. 410See AFR.
c. Commenters’ Views
General Approach of a Presumption of Compliance With the Statutory RENTD Requirement As discussed above, the agencies proposed to establish the articulation and use of internal limits as a key mechanism for conducting trading activity in accordance with the rule’s exemptions for underwriting and market making-related activities.390 A number of commenters expressed support for the general approach of a presumption of compliance to satisfy the RENTD standard.391 Claiming that the 2013 rule has chilled market making-related activities and is complex and costly and does not provide bright line conditions under which trading can clearly be classified as permissible market makingrelated activities, one commenter asserted that the general approach would significantly improve upon the approach of the 2013 rule.392 One commenter supported the proposed approach on the basis that the presumption would allow banking entities to estimate and manage inventory limits in a more holistic manner to allow for greater and more efficient liquidity and pricing for its clients.393 That commenter argued that, in comparison to the 2013 rule, a presumption will more effectively leverage existing industry practices and reporting requirements related to managing market-making inventory, such as maintaining daily VaR metrics by product and position limits compared to relative levels of client activity.394 Another suggested that because internally set limits are developed and applied by each banking entity in light of capital requirements and risk management it would be reasonable to provide a presumption of compliance tied to internally set limits.395 Finally, one commenter said that the approach would provide a more efficient use of compliance resources and allow banking entities to tailor compliance requirements to its specific underwriting and market making-related activities.396 Several commenters, however, expressed concerns about the creation of a presumption of compliance to satisfy the statutory RENTD standard.397 For example, commenters argued that the proposed presumption is not consistent with the statute,398 with one commenter claiming that the statutory requirement was intended to constrain bank activities, not bank risks.399 Commenters expressed concerns that the proposed presumption of compliance is too deferential to banking entities 400 and would reward aggressive banking entities that set their risk limits too high.401 One commenter argued that the limits would not constrain proprietary trading because the proposed presumption of compliance with RENTD allows banking entities to raise their limits and does not distinguish between permissible and impermissible proprietary trades within risk limits.402 Another commenter disagreed with a presumption of compliance for underwriting activity, asserting that this approach would undermine well-established principles of safety and soundness, particularly given what the commenter referred to as a general lack of
scrutiny over bankdeveloped risk limits.403 Required Analysis for Establishing Risk Limits As discussed above, the agencies recognized in the proposal that the prescriptive standards in the 2013 rule for meeting the RENTD requirements were complex, costly, and did not provide bright line conditions under which trading can clearly be classified as permissible proprietary trading.404 As a result, the proposal would not have required that a banking entity’s limits be based on any specific or mandated analysis, as was required under the 2013 rule. Rather, under the presumption of compliance with the RENTD requirement in the proposal, a banking entity would have established limits according to its own internal analyses and processes around conducting its underwriting and market making-related activities in accordance with section 13(d)(1)(B) of the BHC Act.405 Several commenters provided their views on this element of the proposal. Two commenters supported the agencies’ contention in the proposal that the prescriptive standards in the 2013 rule were complex, costly, and did not provide bright line conditions under which trading can clearly be classified as permissible proprietary trading.406 Some commenters said that removing certain conditions, such as the demonstrable analysis of historical customer demand in §ll.4(b)(2)(ii)(B) of the 2013 rule, would increase flexibility and provide certainty for banking entities to engage in market making-related activities since current or reasonably forecasted market demand may be different than historical data may suggest.407 Several commenters, however, expressed concerns about the proposed removal of the demonstrable analysis requirement. Some commenters argued that the removal of this requirement will make it harder to for the agencies to rebut the presumption or determine when banking entities have not properly set their RENTD limits.408 One commenter argued that by not requiring a demonstrable analysis, the proposed rule will allow banking entities to engage in trading activities only superficially tied to customer demand.409 One commenter expressed a belief that the demonstrable analysis cannot be effectively replaced by other metrics in the proposal, such as the risk and position limits and usage metric in the Appendix because this metric does not provide information on customer demand relative to trading inventories.410 To increase flexibility and certainty for banking entities engaged in permitted activities, several of the commenters that supported the general approach of the presumption of compliance with the RENTD requirement requested that this proposed requirement be modified in certain ways. One commenter suggested that the presumption should be available to trading desks that establish internal limits appropriate for their risk appetite, risk capacity, and business strategy and hold themselves out as a

411See JBA.
412See SIFMA (recommended that such factors might include, for example, anticipated market volatility and current client inquiries and other indications of client interest, among many others); FSF. 413See Capital One et al. 414See CCMR and JBA (In particular, this commenter argued that the agencies should not compare banking entities as it would be an impediment to banking entities that are not the most conservative in its internal risk controls). 415See Better Markets. 416See BB&T. 417 Id. 418 Id. 419See JBA. 420See proposed rule §ll.4(a)(8)(iii); proposed rule §ll.4(b)(6)(iii). 421See, e.g., CFA at 7 (stating that, some small and mid-sized institutions may not have strong internal controls and may be susceptible to the activities of a rogue trader, so the prompt notice requirements allow regulators to impose stricter controls if necessary); Data Boiler at 36 (representing that the prompt reporting requirement would decrease opportunities for evasion of the rule’s requirements). 422See, e.g., CCMC; BOK; ISDA; Real Estate Associations; Goldman Sachs; GFMA; CREFC; ABA; SIFMA; IIB; BB&T; JBA; FSF; Credit Suisse; and Capital One et al. 423See, e.g., CCMR; Credit Suisse; GFMA; FSF; and JBA. 424See, e.g., Credit Suisse; ABA; GFMA; IIB; BOK; and SIFMA. 425See, e.g., FSF; JBA; ABA; Goldman Sachs; CREFC; and CCMC. 426See, e.g., BOK (stating that limit excesses do not, of themselves, show that an institution has changed it strategy or risk tolerance and that reporting by financial institutions might detract from a focus on risk management and shift to a ‘‘number of times exceeded’’ view which provides very little insight into how risk is managed); MBA (stating that prompt reporting would encourage the agencies to view events in isolation without consideration to facts and circumstances and that it would be more appropriate to review limit-events in the ordinary course of established supervisory process). 427See, e.g., JBA (stating that it would be operationally difficult and costly for foreign headquarters to collect and report data to US regulators); IIB (stating that foreign trading desks would not have on-site examiners to receive reports and that the requirement could intrude into local supervisory matters). 428See, e.g., Better Markets; Capital One et al.; and State Street. 429See, e.g., GFMA and BOK (stating that limits that are never exceeded ‘‘may not be very useful limits.’’). 430See CCMC. 431See, e.g., CCMR and BB&T. 432See, e.g., FSF; GFMA; and Real Estate Associations. 433See, e.g., FSF; JBA; and ABA. market maker.411 A commenter requested that the agencies revise the presumption to make it available to a banking entity that sets, in a manner agreed to with its onsite prudential examiner and consistent with the intent and purposes of section 13 of the BHC, internal RENTD limits based on factors relevant to the reasonable near-term demand of clients, customers and counterparties, which are calibrated with the intention of not exceeding
RENTD.412 One commenter suggested that, instead of adhering to the more prescriptive aspects of the proposed RENTD presumption, the trading desks of moderate and limited trading assets and liabilities banking entities should be given discretion to adopt internal risk limits appropriate to the activities of the desk subject to other existing bank regulations, supervisory review, and oversight by the appropriate agency and still be able to utilize the presumption of compliance.413 Some commenters requested that the agencies clarify aspects of the proposal’s RENTD presumption. Commenters asked the agencies to clarify that supervisors and examiners will not impose a one-size fits all approach given the differences in business models among banking entities.414 While opposed to the general approach of a presumption of compliance with the statutory RENTD requirement, one commenter suggested that, if the agencies adopt the presumption of compliance, additional guidance should be given to banking entities regarding the factors to consider when setting the limits required to establish the presumption of compliance, as the factors in the proposal were too broad and malleable.415 Another commenter suggested that the agencies clarify that the presumption of compliance should include activity-based limits as a part of its risk-limit structure, such as financial instrument holding periods, notional size and inventory turnover, because activity-based limits are reflective of client demand and an appropriate statutory substitute compared to riskbased limits, which can be hedged.416 Specific to the underwriting exemption, one commenter asserted that underwriting activity can be sporadic due to client demand or market factors, which may result in low limit utilization and a rebuttal of the presumption of compliance even when the underwriting position itself is identifiable as part of a primary or follow-on offering of securities.417 The commenter suggested that the agencies consider corporate actions, such as a debt offering, as an appropriate identifier of permissible underwriting.418 Another commenter suggested that the agencies permit banking entities to set limits based on the absolute value of profits and losses in the case of an underwriting desk.419 Prompt Notifications As discussed above, the proposal would have required a banking entity to promptly report to the appropriate agency when a trading desk exceeds or increases the internal limits it sets to avail itself of the RENTD presumption with respect to the exemptions for underwriting and market making-related activities.420 With two exceptions,421 commenters strongly opposed the proposal’s requirement that banking entities promptly report limit breaches.422 For example, many of these commenters stated that the notifications would be impractical and burdensome to banking entities 423 and would not enhance the oversight capabilities of the agencies because the information is already otherwise available
through ordinary supervisory processes,424 including the internal limits and usage metric.425 Two commenters asserted that the notices would provide little insight into how risk is managed.426 Some commenters expressed concern that complying with the requirement would be particularly challenging for banking entities with parents that are FBOs because these banking entities lack on-site examiners to receive notifications.427 A few commenters claimed that the prompt notification requirement provides incentives for banking entities to set their limits so high that they have fewer breaches and changes to limits.428 Commenters also noted that, when risk limits are appropriately calibrated, breaches are not uncommon, and notifying the agencies of each breach could overwhelm the agencies.429 Another commenter argued that the prompt notification may chill traders’ willingness to request changes to limits where it would otherwise be appropriate to accommodate legitimate customer demand.430 As an alternative to the prompt notification requirement, many commenters suggested that the agencies require banking entities to make detailed records of limit changes and breaches.431 Other commenters suggested that the agencies rely on existing supervisory processes to monitor limit breaches and increases,432 including the internal limits and usage metric.433 Rebutting the Presumption As discussed above, under the proposal, the RENTD presumption could have been rebutted by the appropriate agency if the agency determined, based on all relevant facts and circumstances, that a trading desk is engaging in activity that is not based

434See proposed rule §ll.4(a)(8)(iv); proposed rule §ll.4(b)(6)(iv). 435See MBA. 436See IIB. 437See Better Markets. 438 In addition to the changes described in this
section, the presumption of compliance has been
moved into a new paragraph (c) in §ll.4, as opposed to including separate provisions under each of the two relevant exemptions. That change was intended solely for clarity and to avoid any unnecessary duplication in light of the fact that the process for complying with the presumption of compliance is identical for both exemptions. New paragraph (c) does, however, recognize that the limits banking entities will be required to implement, maintain, and enforce will differ as between the exemptions for underwriting and market making-related activities. See final rule §§ll.4(c)(2)(A) and ll.4(c)(2)(B). 439As noted above, this includes commenters who argue that such amendments will undermine the operation of the 2013 rule, lead to increased risk taking among banking entities, and conflict with the statutory requirements in section 13(d)(1)(B) of the BHC Act. See supra notes 28, 36–41 and accompanying text. 440For consistency with the final rule’s RENTD requirement, the sub-heading for §ll.4(c)(1) has been changed from ‘‘risk limits’’ to ‘‘limits.’’ 441 83 FR at 33459. 442See final rule, §ll.4(c)(1)(i). 443See final rule §ll.4(c)(1)(ii)(A). The language in this paragraph of the rule has been modified slightly from the proposal to clarify that such limits should take into account the liquidity, maturity, and depth of the market for the relevant types of financial instruments. As this language comes directly from the RENTD requirement in §ll.4 (a)(2)(ii)(A), the agencies do not view this as a substantive change. Rather, the agencies believe that it is important to emphasize in the rule text that the limit used to satisfy the presumption of compliance for one type of financial instrument will not necessarily be the same for other types of financial instruments and that the particular characteristics of the relevant market should be taken into account throughout the process of setting these limits. 444See final rule §ll.4(c)(1)(ii)(B). For the reasons described in connection with the limits required as satisfy the presumption of compliance in connection with the underwriting exemption, the Continued on the trading desk’s RENTD on an ongoing basis.434 A few commenters discussed the rebuttal process. For example, one commenter requested that the agencies specify the procedures for an agency to rebut the presumption of compliance.435 Another commenter recommended that the agencies adopt a consistent procedure for challenging the presumptions in the rule.436 Another commenter stated that the proposal would only allow the agencies to challenge the risk limit approval and exception process, not the nexus between RENTD and the limits themselves.437 d. Final Presumption of Compliance With the Statutory RENTD Requirement The agencies are adopting the presumption of compliance with the RENTD requirement for both the exemptions for underwriting and market making-related activities largely as proposed, but with modifications intended to be responsive to commenters’
concerns.438 The agencies are mindful of the concerns raised by commenters regarding the general approach of relying on a banking entity’s internal limits to satisfy the statutory RENTD requirement.439 With respect to the comments described above that the presumption would not be consistent with the statute, the agencies note that the statute permits underwriting and market making-related activities to the extent that such activities are designed not to exceed RENTD. Accordingly, under the final rule the presumption will be available to each trading desk that establishes, implements, maintains, and enforces internal limits that are designed not to exceed RENTD.440 In addition, with respect to the commenter who expressed concern that the presumption would undermine safety and soundness due to a perceived lack of general scrutiny over banking entitydeveloped limits, the agencies note that these internal limits will be subject to supervisory review and oversight, which constrains banking entities’ ability to set their limits too high. Further, the agencies may review such limits to assess whether or not those limits are consistent with the statutory RENTD standard. This allows the supervisors and examiners to look to the articulation and use of limits to distinguish between permissible and impermissible proprietary trading. The agencies believe that the presumption of compliance, along with the other requirements of the final rule’s exemptions for underwriting and market making-related activities, create a framework that will allow banking entities and the agencies to determine whether a trading activity has been designed not to exceed RENTD. Further, the agencies are concerned that compliance with the 2013 rule’s exemptions for underwriting and market making-related activities may be unnecessarily complex and costly to achieve the intended goal of compliance with these exemptions. For example, as noted in the proposal, a number of banking entities have indicated that even after conducting a number of complex and intensive analyses to meet the ‘‘demonstrable analysis’’ requirements for the exemption for market making-related activities, they still may be unable to gain comfort that their bona fide market making-related activity meets the factors.441 Further, the absence of clear, bright-line standards for assessing compliance with the statutory RENTD standard may be unnecessarily constraining underwriting and market making, two critical functions to the health and well-being of financial markets in the United States. The agencies note commenters’ concerns regarding the removal of ‘‘demonstrable analysis’’ requirement will make it harder for agencies to rebut the presumption of compliance with the RENTD requirement or determine when banking entities have not properly set their RENTD limits. The agencies believe, however, that requiring a banking entity’s internal limits to be based on RENTD as a requirement for utilizing the presumption of
compliance should help to simplify compliance with, and oversight of, that statutory standard by placing the focus on how those limits are established, maintained, implemented, and enforced. Accordingly, under the rule, a banking entity will be presumed to meet the RENTD requirements in §ll.4 (a)(2)(ii)(A) or § ll.4(b)(2)(ii) with respect to the purchase or sale of a financial instrument if the banking entity has established and implements, maintains, and enforces the limits for the relevant trading desk as described in the final rule.442 With respect to underwriting activities, the presumption will be available to each trading desk that establishes, implements, maintains, and enforces internal limits that are designed not to exceed RENTD, based on the nature and amount of the trading desk’s underwriting activities, on the:
(1) Amount, types, and risk of its underwriting position; (2) Level of exposures to relevant risk factors arising from its underwriting position; and (3) Period of time a security may be held.443 With respect to market making-related activities, the presumption will be available to each trading desk that establishes, implements, maintains, and enforces risk and position limits that are designed not to exceed RENTD, based on the nature and amount of the trading desk’s market making-related activities, that address the:
(1) Amount, types, and risks of its market-maker positions; (2) Amount, types, and risks of the products, instruments, and exposures the trading desk may use for risk management purposes; (3) Level of exposures to relevant risk factors arising from its financial exposure; and (4) Period of time a financial instrument may be held.444

language in this paragraph has been modified slightly from the proposal to clarify that such limits must take into account the liquidity, maturity, and depth of the market for the relevant types of financial instruments. See id. 445See e.g., FSF, SIFMA. 446As previously noted, the final rule also replaces the existing definition of ‘‘market makerinventory’’ with a definition of ‘‘market-maker positions.’’ This change was intended to reflect the fact that requiring banking entities seeking to rely on the presumption of compliance with the RENTD requirement to have limits on market makerinventory is generally unworkable in the context of derivatives. See infra note 458 and accompanying text. 447The agencies note that this discussion does not encompass or impact the CFTC’s or SEC’s treatment of market-making in derivatives for purposes other than section 13 of the BHC Act and the rule. 448See final rule §ll.4(c)(2). The supervisory review provision in the proposed rule stated that ‘‘any review of such limits will include assessment of whether the limits are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties.’’ Sectionslll .4(c)(1)(i)–(ii) of the final rule clearly stipulate that such limits must be designed not to exceed the reasonably expected near term demand of clients, customers, or counterparties. To avoid redundancy, this language has been omitted from §ll.4(c)(2) in the final rule. 449See final rule §ll.4(c)(4). 450See infra notes 655–58 and accompanying text (discussion of the notice and response procedures in §ll.20(i)). 451See proposed rule §§ll.4(a)(8)(iii) and ll.4(b)(6)(iii). See also supra note 387 and accompanying text. 452See final rule §ll.4(c)(3)(i). 453See final rule §ll.4(c)(3)(i). 454The agencies note that the final rule requires that banking entities with significant trading assets Some commenters also noted that the agencies should not take a ‘‘one-sizefits-all’’ approach to the limits that must be established to satisfy the presumption of compliance with RENTD on the basis that not all of the proposed limits may be applicable to every type of financial instrument, particularly derivatives.445 In response to these commenters, the agencies have modified the rule text to clarify that the limits required to be established by a banking entity in order to satisfy the presumption of compliance must address certain items. The agencies recognize that certain of the enumerated items, which are unchanged from the proposal, may be more easily applied for desks that engage in market-making in securities rather than derivatives, and emphasize that section ll.4(b), both as currently in effect and as amended, is intended to provide banking entities with the flexibility to determine appropriate limits for market makingrelated activities that are designed not to exceed RENTD, taking into account the liquidity, maturity, and depth of the market for the relevant types of financial
instruments. With respect to derivatives, certain of the enumerated items may not be effective for designing market makingrelated activities not to exceed RENTD, which is ultimately the primary purpose of adopting a presumption of compliance based on the establishment and use of internal limits.446 Under those circumstances, the agencies acknowledge that it may be appropriate for banking entities to establish limits based on specific conditions that would need to be satisfied in order to utilize the presumption of compliance, rather than a fixed number of market-maker positions.447 For example, for a desk that engages in market making-related activities only with respect to derivatives (or derivatives and non-financial instruments), the requirement to establish, implement, maintain, and enforce limits designed not to exceed RENTD could be satisfied to the extent the banking entity establishes limits on the market making desk’s level of exposures to relevant risk factors arising from its financial exposure and such limits are designed not to exceed RENTD (including derivatives positions related to a request from a client, customer, or counterparty), based on the nature and amount of the trading desk’s market making-related activities. Such limits would be consistent with the underlying purpose of the exemption for market making-related activities, which is to implement the restriction on a banking entity’s proprietary trading activities while still allowing market makers to provide intermediation and liquidity services necessary to the functioning of our financial markets. Consistent with the proposal, the limits used to satisfy the presumption of compliance under the final rule will be subject to supervisory review and oversight by the applicable agency on an ongoing basis.448 Moreover, the final rule provides that the presumption of compliance may be rebutted by the applicable agency if such agency determines, taking into account the liquidity, maturity, and depth of the market for the relevant types of financial instruments and based on all relevant facts and circumstances, that a trading desk is engaging in activity that is not designed not to exceed RENTD.449 In a modification from the proposed rule, the final rule contains additional language that specifies that the agencies will take into account the liquidity, maturity, and depth of the market for the relevant types of financial instruments when determining whether to rebut the presumption of compliance. This change is intended to provide additional clarity regarding the factors the agencies will consider when making this determination. In response to commenters’ concerns about the rebuttal process, the final rule specifies that any such rebuttal of the presumption must be made in accordance with the notice and response procedures in subpart D of the rule.450 The agencies are, however, persuaded by the arguments raised by some commenters with respect to the proposed requirement that a
banking entity promptly report to the appropriate agency when a trading desk exceeds or increases its internal limits to avail itself of the RENTD presumption with respect to the exemptions for underwriting and market making-related activity.451 The agencies recognize that limits that are set so high as to never be breached are not necessarily meaningful limits. Thus, breaches of appropriately set limits may occur with a frequency that does not justify notifying the agencies for every single breach. The agencies recognize that the burdens associated with preparing and reporting such information may not be justified in light of the potential benefits of such requirement. Accordingly, the final rule instead requires banking entities to maintain and make available to the applicable agency, upon request, records regarding (1) any limit that is exceeded and (2) any temporary or permanent increase to any limit(s), in each case in the form and manner as directed by the agency.452 Moreover, when a limit is breached or increased, the presumption of compliance with RENTD will continue to be available so long as the banking entity: (1) Takes action as promptly as possible after a breach to bring the trading desk into compliance; and (2) follows established written authorization procedures, including escalation procedures that require review and approval of any trade that exceeds a trading desk’s limit(s), demonstrable analysis of the basis for any temporary or permanent increase to a trading desk’s limit(s), and independent review of such demonstrable analysis and approval.453 The agencies believe that this requirement will provide the agencies with sufficient information to determine whether a banking entity’s existing limits are appropriately calibrated to comply with the RENTD requirement for that particular financial instrument.454

and liabilities must record and report the quantitative measurements contained in the
Appendix to the final rule. See infra Subpart E—
Metrics: Appendix to Part [•]—Reporting and Recordkeeping Requirements. The agencies believe that the risk and position limits metric will also help banking entities and the agencies monitor the underwriting and market making-related activities of banking entities with significant trading assets and liabilities. 455Unlike the 2013 rule, §ll.4(a)(ii) in the final rule contains subparagraphs (A) and (B). 456See §ll.4(a)(6). 457See §ll.4(b)(4). 458See §ll.4(c)(ii)(B)(1). With respect to the exemption for market making-related activities, the rebuttable presumption of compliance for the RENTD requirement in the final rule requires, among other things, that a trading desk establish, implement, and enforce limits on the amounts, types, and risks of its market-maker positions. 459These factors include the: (1) Amount, types, and risk of its underwriting position; (2) level of exposures to relevant risk factors arising from its underwriting position; and (3) period of time a security may be held. 460Specifically, such limits include the: (1) Amount, types, and risks of its market-maker inventory; (2) amount, types, and risks of the products, instruments, and exposures the trading desk may use for risk management purposes; (3) the level of exposures to relevant risk factors arising from its financial exposure; and (4) period of time a financial instrument may be held. 461Under the 2013 rule, the compliance program requirement in §ll.4(a)(2)(iii) is part of the compliance program required by subpart D but is specifically used for purposes of complying with the exemption for underwriting activity. e. Additional Changes to the Final Rule’s Underwriting and Market Making-Related Activities Exemptions In addition to the changes described above, the final rule’s exemptions for underwriting and market making-related activities contain several other conforming and clarifying changes. Consistent with the proposed rule, the structure of § ll.4(a)(ii) in the final rule has been modified to clarify that the applicable paragraph contains two separate and distinct requirements.455 In addition, several definitions used in the final rule’s exemptions for underwriting and market making-related activities have also been modified. Specifically, the phrase ‘‘paragraph (b)’’ has been replaced with ‘‘this section’’ in the definition of ‘‘underwriting position’’ because the defined term is used in several places.456 The definition of ‘‘financial exposure’’ has been similarly modified.457 Finally, the final rule, however, replaces the existing definition of ‘‘market maker-inventory’’ with a definition for ‘‘market-maker positions’’ to correspond with the language in § ll.4(c)(ii)(B)(1), which is the only place such definition is used.458 f. Compliance Program and Other Requirements for Underwriting and Market Making-Related Activities 2013 Rule Compliance Program Requirements The underwriting exemption in § ll.4(a) of the 2013 rule requires a banking entity to establish,
implement, maintain, and enforce an internal compliance program, as required by subpart D, that is reasonably designed to ensure compliance with the requirements of the exemption. Such compliance program is required to include reasonably designed written policies and procedures, internal controls, analysis and independent testing identifying and addressing: (i) The products, instruments, or exposures each trading desk may purchase, sell, or manage as part of its underwriting activities; (ii) certain limits for each trading desk, based on the nature and amount of the trading desk’s underwriting activities, including the reasonably expected near term demands of clients, customers, or counterparties; 459 (iii) internal controls and ongoing monitoring and analysis of each trading desk’s compliance with its limits; and (iv) authorization procedures, including escalation procedures that require review and approval of any trade that would exceed one or more of a trading desk’s limits, demonstrable analysis of the basis for any temporary or permanent increase to one or more of a trading desk’s limits, and independent review (i.e., by risk managers and compliance officers at the appropriate level independent of the trading desk) of such demonstrable analysis and approval. The exemption for market makingrelated activities in the 2013 rule contains similar requirements. Specifically, §ll.4(b) of the 2013 rule requires that a banking entity establish, implement, maintain, and enforce an internal compliance program, as required by subpart D, that is reasonably designed to ensure compliance with the requirements of the exemption. Such a compliance program is required to include reasonably designed written policies and procedures, internal controls, analysis, and independent testing identifying and addressing: (i) The financial instruments each trading desk stands ready to purchase and sell in accordance with the exemption for market making-related activities; (ii) the actions the trading desk will take to demonstrably reduce or otherwise significantly mitigate the risks of its financial exposure consistent with the limits required under paragraph (b)(2)(iii)(C), and the products, instruments, and exposures each trading desk may use for risk management purposes; the techniques and strategies each trading desk may use to manage the risks of its market making-related activities and inventory; and the process, strategies, and personnel responsible for ensuring that the actions taken by the trading desk to mitigate these risks are and continue to be effective; (iii) the limits for each trading desk, based on the nature and amount of the trading desk’s market makingrelated activities, including the reasonably expected near term demands of clients, customers, or counterparties; 460 (iv) internal controls and ongoing monitoring and analysis of each trading desk’s compliance with its limits; and (v) authorization procedures, including escalation procedures that
require review and approval of any trade that would exceed one or more of a trading desk’s limits, demonstrable analysis of the basis for any temporary or permanent increase to one or more of a trading desk’s limits, and independent review (i.e., by risk managers and compliance officers at the appropriate level independent of the trading desk) of such demonstrable analysis and approval. Proposed Compliance Program Requirement Feedback from market participants and agency oversight have indicated that the compliance program requirements of the existing exemptions for underwriting and market makingrelated activities may be unduly complex and burdensome for banking entities with smaller and less active trading activities. In the proposed rule, the agencies proposed a tiered approach to such compliance program requirements, to make these requirements commensurate with the size, scope, and complexity of the relevant banking entity’s trading activities and business structure. Under the proposed rule, a banking entity with significant trading assets and liabilities would continue to be required to establish, implement, maintain, and enforce a comprehensive internal compliance program as a condition for relying on the exemptions for underwriting and market making-related activities. However, the agencies proposed to eliminate such compliance program requirements for banking entities that have moderate or limited trading assets and liabilities.461 Comments on the Proposed Compliance Program Requirement Some commenters did not support the removal of the underwriting or market making-specific compliance program

462See Better Markets.
463 Id.
464 Id.
465 Id.
466See Data Boiler.
467See Coalition of Derivatives End Users. 468 Id. 469See CFA. 470 Id. 471Final rule §ll.4(a)(2)(ii)(A) requires that the amount and type of the securities in the trading desk’s underwriting position are designed not to exceed RENTD, taking into account the liquidity, maturity, and depth of the market for the relevant type of security; and (B) that reasonable efforts are made to sell or otherwise reduce the underwriting requirements for banking entities with limited and moderate trading assets and liabilities under the proposal. For example, one commenter urged the agencies to require all banking entities to establish, implement, maintain, and enforce such compliance program, independent of any presumption of compliance.462 This commenter indicated that there are ‘‘exceedingly low incremental costs’’ associated with most elements of the RENTD compliance and controls framework for the exemptions for underwriting and market making-related activities, even for those banking entities with limited or moderate trading assets and liabilities.463 In the commenter’s view, minimal incremental costs support the retention of such requirements, which are further justified by the increased stability of financial institutions and financial markets as a result of the 2013 rule.464 Further, that same commenter asserted that the compliance requirements under the 2013 rule permit too much discretion for banking entities to implement policies, procedures, and controls, noting that judgments on the effectiveness of implemented controls depend on the methodologies used by banking entities’ testing functions, and argued that the agencies should consider additional capital and activities-based requirements specifically tied to the reported inventory of trading assets, taking into account the total size of those trading assets, the overall capital position of the financial institution, and the average holding period or aging of trading assets, which may indicate that inventories are unrelated to underwriting and market making activities.465 Similarly, another commenter indicated that a tiered compliance approach would not be appropriate because it considered the proposed categorization of entities in terms of trading assets and liabilities to be flawed.466 Other commenters supported the revisions under the proposed rule to apply the market making-related activities’ compliance program requirements only to those banking entities with significant trading assets and liabilities. For example, one commenter expressed concern that the market making-related activities’ compliance program requirements under the 2013 rule have contributed to decreased market making activities with, and increased costs for, banking entities’ commercial end-user counterparties.467 This commenter indicated that applying the market making-related activities’ compliance program requirements only to banking entities with significant trading assets and liabilities would allow banking entities to develop
more efficient compliance and liquidity risk management programs, which would ultimately reduce transaction costs for commercial end users.468 Another commenter expressed the view that the proposed approach of applying the compliance program requirements under the exemptions for underwriting and market making-related activities only to those banking entities with significant trading assets and liabilities was an appropriate means of reducing the regulatory burdens on banks with limited or moderate trading and underwriting exposures.469 That commenter noted that such approach would continue to allow for the appropriate monitoring of these activities to ensure compliance with the provisions of the 2013 rule.470 Final Compliance Program Requirement The agencies believe that the compliance program requirements that apply specifically to the exemptions for underwriting and market making-related activities play an important role in facilitating and monitoring a banking entity’s compliance with the requirements of those exemptions. However, the agencies also believe that those requirements can be appropriately tailored to the nature of the underwriting and market making activities conducted by each banking entity. It also is important to recognize that the removal of such compliance program requirements for banking entities that do not have significant trading assets and liabilities would not relieve those banking entities of the obligation to comply with the other requirements of the exemptions for underwriting and market making-related activities, including RENTD requirements, under the final rule. Accordingly, and after consideration of the comments, the agencies continue to believe that removing the § ll.4 compliance program requirements for banking entities that do not have significant trading assets and liabilities as a condition to engaging in permitted underwriting and market making-related activities should provide these banking entities with additional flexibility to tailor their compliance programs in a way that takes into account the risk profile and relevant trading activities of each particular trading desk. The agencies recognize that banking entities that do not have significant trading assets and liabilities may incur costs to establish, implement, maintain, and enforce the compliance program requirements applicable to permitted underwriting activities under the 2013 rule. As the trading activities of banking entities that do not have significant trading activities comprise approximately seven percent of the total U.S. trading activity subject to the Volcker Rule, the agencies believe the costs of the compliance program requirement would be disproportionate to the banking entity’s trading activity and the risk posed to U.S. financial stability. Accordingly, eliminating the § ll.4 compliance program requirements for permitted underwriting and market making-related activities conducted by banking entities that do not have significant
trading assets and liabilities may reduce compliance costs without materially impacting conformance with the objectives set forth in section 13 of the BHC Act. Applying these specific compliance requirements only to banking entities with significant trading assets and liabilities also is consistent with the modifications to the general compliance program requirements for these banking entities under §ll.20 of the final rule, as discussed below. Accordingly, §ll.4(a)(2)(iii) of the final rule will require banking entities with significant trading assets and liabilities, as a condition to complying with the underwriting exemption, to establish and implement, maintain, and enforce an internal compliance program required by subpart D that is reasonably designed to ensure the banking entity’s compliance with the requirements of the exemption, including reasonably designed written policies and procedures, internal controls, analysis and independent testing identifying and addressing:
(A) The products, instruments or exposures each trading desk may purchase, sell, or manage as part of its underwriting activities; (B) Limits for each trading desk, in accordance with § ll.4(a)(2)(ii)(A); 471

position within a reasonable period, taking into account the liquidity, maturity, and depth of the market for the relevant type of security. 472Final rule §ll.4(b)(2)(i) requires that the trading desk that establishes and manages the financial exposure routinely stands ready to purchase and sell one or more types of financial instruments related to its financial exposure and is willing and available to quote, purchase and sell, or otherwise enter into long and short positions in those types of financial instruments for its own account, in commercially reasonable amounts and throughout market cycles on a basis appropriate for the liquidity, maturity, and depth of the market for the relevant types of financial instruments. 473Final rule §ll.4(b)(2)(ii) requires that the trading desk’s market making-related activities are designed not to exceed, on an ongoing basis, RENTD, taking into account the liquidity, maturity, and depth of the market for the relevant type of security. 474See supra section IV.B.2.d (discussing the requirements in the final rule associated with the presumption of compliance with the statutory RENTD requirement). 475See final rule §ll.4(b)(2)(iii)(C). 476See final rule §ll.4(b)(2)(iii)(D). (C) Written authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk’s limit(s), demonstrable analysis of the basis for any temporary or permanent increase to a trading desk’s limit(s), and independent review of such demonstrable analysis and approval; and (D) Internal controls and ongoing monitoring and analysis of each trading desk’s compliance with its limits. With respect to the exemption for market making-related activities, § ll.4(a)(b)(iii) of the final rule will require banking entities with significant trading assets and liabilities to establish and implement, maintain, and enforce an internal compliance program required by subpart D that is reasonably designed to ensure the banking entity’s compliance with the requirements of the exemption, including reasonably designed written policies and procedures, internal controls, analysis and independent testing identifying and addressing:
(A) The financial instruments each trading desk stands ready to purchase and sell in accordance with § ll.4(b)(2)(i); 472 (B) The actions the trading desk will take to demonstrably reduce or otherwise significantly mitigate promptly the risks of its financial exposure consistent with the limits required under § ll.4 (b)(2)(iii)(C); the products, instruments, and exposures each trading desk may use for risk management purposes; the techniques and strategies each trading desk may use to manage the risks of its market making-related activities and positions; and the process, strategies, and personnel responsible for ensuring that the actions taken by the trading desk to mitigate these risks are and continue to be effective; (C) Limits for each trading desk, in accordance with § ll.4(b)(2)(ii); 473 (D) Written authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk’s limit(s), demonstrable analysis of the basis for any temporary or permanent increase to a trading desk’s limit(s), and independent review of such demonstrable analysis and approval; and (E) Internal controls and ongoing monitoring and analysis of each trading desk’s compliance with its limits. The agencies are clarifying in the final rule that the authorization procedures for banking entities with significant trading assets and liabilities of proposed § ll.4(a)(2)(iii)(D) and § ll.4(b)(2)(iii)(E) are to be in writing pursuant to § ll.4(a)(2)(iii)(C) and § ll.4(b)(2)(iii)(D). Requiring that these authorization procedures are written provides a basis for which banking entities and supervisors can review for compliance with the underwriting and market making exemption compliance requirements. Sections ll.4(a)(2)(iii) (which sets forth the compliance program requirements for the underwriting exemption) and § ll.4(b)(2)(iii) (which sets forth the compliance program requirements for the exemptions for market making-related activities) further provide that a banking entity with significant trading assets and liabilities may satisfy the requirements pertaining to limits and written authorization procedures by complying with the requirements pursuant to the presumption of compliance with the statutory RENTD requirement in § ll.4(c).474 As such, § ll.4(c)(1) provides for a rebuttable presumption that a banking entity’s purchase or sale of a financial instrument complies with the RENTD requirements in § ll.4(a)(2)(ii)(A) and § ll.4(b)(2)(ii) if the relevant trading desk establishes, implements, maintains, and enforces internal limits that are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, taking into account the liquidity, maturity, and depth of the market for the relevant type of security. In taking this approach, the agencies recognize that requiring a banking entity to establish separate limits in accordance with the statutory RENTD requirement would be
unnecessary and may reduce the benefit of relying on internal limits set pursuant to § ll.4(c)(1). Additionally, in the case of a banking entity with significant trading assets and liabilities, the relevant exemption compliance requirements pertaining to written authorization procedures in § ll.4(a)(2)(iii)(C) are not required if the criteria in §ll.4(c) are satisfied. Without the requirement to establish limits pursuant to §ll.4(a)(iii)(B), such a requirement for written authorization procedures would be unnecessary. Further, because § ll.4(c)(3)(ii)(2) contains written authorization procedures, also requiring written authorization procedures in § ll.4(a)(2)(iii)(C) would be duplicative. These revisions clarify that banking entities with significant trading assets and liabilities that establish limits and written authorization procedures pursuant to the rebuttable presumption of compliance do not have to establish a second set of limits and written authorization procedures pursuant to the compliance program requirements of the underwriting or market making exemptions. Regardless of whether a banking entity with significant trading assets and liabilities relies on the presumption of compliance in § ll.4(c), every banking entity with significant trading assets and liabilities is required to maintain limits and written authorization procedures for purposes of complying with the exemption for permitted underwriting or market making-related activities under §ll.4. The agencies are removing the proposed rule’s requirement for a banking entity with significant trading assets and liabilities that, to the extent that any limit identified pursuant to § ll.4(b)(2)(iii)(C) of the proposed rule is exceeded, the trading desk takes action to bring the trading desk into compliance with the limits as promptly as possible after the limit is exceeded. Instead, this requirement is being moved to § ll.4(c), the rebuttable presumption of compliance for banking entities that establish internal limits pursuant to § ll.4(c)(1). Such requirements would be redundant for a banking entity with significant trading assets and liabilities that is required, on an ongoing basis, to ensure that its trading desk’s market making activities are designed not to exceed RENTD while also establishing limits designed not to exceed RENTD.475 In addition, the written authorization procedures 476

477See CCMC.
478See 79 FR 5607.
479See 79 FR 5606–5607.
480See ISDA.
481 83 FR at 33464.
482 Id.
483 Id.
484 Id.
485See, e.g., HSBC; JBA; and IIB. 486See Data Boiler. 487See IIB. require internal compliance processes to handle such limit breaches. g. Other Comments Finally, some commenters recommended changes to certain aspects of the existing exemptions for underwriting and market making-related activities in the 2013 rule that were not specifically proposed. For example, one commenter suggested that the agencies eliminate the limitations on treating banking entities with greater than $50 billion in trading assets and liabilities as clients, customers, or counterparties.477 As stated in the 2013 rule, the agencies believe that removing this limitation could make it difficult to meaningfully distinguish between permitted market making-related activity and impermissible proprietary trading, and allow a trading desk to maintain an outsized inventory and to justify such inventory levels as being tangentially related to expected market-wide demand.478 The agencies also believe that banking entities engaged in substantial trading activity do not typically act as customers to other market makers.479 As a result, the agencies have retained the 2013 rule’s definition of client, customer, or counterparty. Another commenter suggested broadening the scope of the exemption for underwriting activities to encompass any activity that assists persons or entities in accessing the capital markets or raising capital.480 The agencies believe the final rule’s changes provide additional clarity while maintaining consistency with statutory objectives. Accordingly, after consideration of these comments, the agencies have decided not to make any changes to the exemptions for underwriting or market making-related activities other than those discussed above. h. Market Making Hedging As noted in the proposal, during implementation of the 2013 rule, the agencies received a number of inquiries regarding the circumstances under which banking entities could elect to comply with the market making risk management provisions permitted in § ll.4(b) or alternatively the riskmitigating hedging requirements under § ll.5. These inquiries generally related to whether a trading desk could treat an affiliated trading desk as a client, customer, or counterparty for purposes of the exemption market making-related activities’ RENTD requirement; and whether, and under what circumstances, one trading desk could undertake market making risk management activities for one or more other trading desks.481 Each trading desk engaging in a transaction with an affiliated trading desk that meets the definition of proprietary trading must rely on an exemption or exclusion in order for the transaction to be permissible. As noted in the proposal, in one example presented to the agencies, one trading desk of a banking entity may make a market in a certain financial instrument (e.g., interest rate swaps), and then transfer some of the risk of that instrument (e.g., foreign exchange (FX) risk) to a second trading desk
(e.g., an FX swaps desk) that may or may not separately engage in market makingrelated activity. In the proposal, the agencies requested comment as to whether, in such a scenario, the desk taking the risk (in the preceding example, the FX swaps desk) and the market making desk (in the preceding example, the interest rate desk) should be permitted to treat each other as a client, customer, or counterparty for purposes of establishing internal limits or RENTD levels under the exemption for market making-related activities.482 The agencies also requested comment as to whether each desk should be permitted to treat swaps executed between the desks as permitted market making-related activities of one or both desks if the swap does not cause the relevant desk to exceed its applicable limits and if the swap is entered into and maintained in accordance with the compliance requirements applicable to the desk, without treating the affiliated desk as a client, customer, or counterparty for purposes of establishing or increasing its limits. This approach was intended to maintain appropriate limits on proprietary trading by not permitting an expansion of a trading desk’s market making limits based on internal transactions. At the same time, this approach was intended to permit efficient internal risk management strategies within the limits established for each desk.483 The agencies also requested comment on the circumstances in which an organizational unit of an affiliate (affiliated unit) of a trading desk engaged in market making-related activities in compliance with §ll.4(b) (market making desk) would be permitted to enter into a transaction with the market making desk in reliance on the market making desk’s risk management policies and procedures. In this scenario, to effect such reliance the market making desk would direct the affiliated unit to execute a riskmitigating transaction on the market making desk’s behalf. If the affiliated unit did not independently satisfy the requirements of the exemption for market making-related activities with respect to the transaction, it would be permitted to rely on the exemption for market making-related activities available to the market making desk for the transaction if: (i) The affiliated unit acts in accordance with the market making desk’s risk management policies and procedures; and (ii) the resulting risk-mitigating position is attributed to the market making desk’s financial exposure (and not the affiliated unit’s financial exposure) and is included in the market making desk’s daily profit and loss calculation. If the affiliated unit establishes a risk-mitigating position for the market making desk on its own accord (i.e., not at the direction of the market making desk) or if the riskmitigating position is included in the affiliated unit’s financial exposure or daily profit and loss calculation, then the affiliated unit may still be able to comply with the requirements of the risk-mitigating hedging
exemption pursuant to § ll.5 for such activity.484 The commenters were generally in favor of permitting affiliated trading desks to treat each other as a client, customer, or counterparty for the purposes of establishing risk limits or RENTD levels under the exemption for market making-related activities,485 particularly for banking entities that service customers in different jurisdictions. One commenter, however, did not support this approach, and expressed that it would be difficult to validate banking entities’ RENTD limits if affiliates could be considered as a client, customer, or counterparty.486 One commenter argued that affiliated trading desks with different mandates should be able to treat each other as a client, customer, or counterparty as long as each desk stays within its limits, because such an approach would allow banking entities to take an enterprisewide view of risk management.487 Two commenters explained that, to increase efficiencies, certain internationally active banking entities employ a ‘‘hub-and-spoke’’ model, where trading desks at local entities

488See HSBC and JBA.
489See JBA.
490See HSBC.
491See 79 FR at 5594.
492 §ll.4(b)(3).
493See 79 FR at 5590.
494See HSBC; JBA; and IIB.
495The agencies are streamlining several aspects of the risk-mitigating hedging exemption for banking entities with and without significant trading assets and liabilities. See final rule §ll.5; See also section IV.B.3, infra. 496The agencies have expanded the types of financial instruments eligible for the exclusion to include for exchange forwards and foreign exchange swaps. See final rule §ll.3(e); See also section IV.B.1.b.i, supra. 497See Part IV.B.2.h, supra; see also 83 FR 33463. 498The interest rate market making desk can rely on the exemption for market making-related activities for the FX swap it enters into with the FX swaps desk provided the interest rate market making desk enters into the FX swap to hedge its market making-related position and otherwise complies with the requirements of the exemption for market making-related activities. (spoke) enter into transactions with major affiliates (hub) that manage the risks of, and source trading positions for, the local entities.488 One of these commenters expressed that these trading desks have trouble demonstrating they are indeed market making desks without intra-entity and inter-affiliate transactions being treated as transactions with a client, customer, or counterparty.489 The other commenter expressed that, under the hub-and-spoke model, treating the ‘‘spoke’’ trading desk as a client, customer, or counterparty, would allow the hub desk to look through to the customer of the local entity since the hub is acting as the ultimate market maker.490 After consideration of comments, the agencies continue to recognize that, under certain circumstances, a trading desk may undertake market making risk management activities for one or more affiliated trading desks 491 and trading desks may rely on the exemption for market making-related activities for its transactions with affiliated trading desks. The agencies, however, are declining to permit banking entities to treat affiliated trading desks as ‘‘clients, customers, or counterparties’’ 492 for the purposes of determining a trading desk’s RENTD pursuant to §ll.4(b)(2)(ii) of the exemption for market makingrelated activities. The agencies believe that, under the exemption for market making-related activities, each trading desk must be able to independently tie its activities to the RENTD of external customers that the trading desk services. Allowing a desk to treat affiliated trading desks as customers for purposes of RENTD would allow the desk to accumulate financial instruments if it has a reason to believe that other internal desks will be interested in acquiring the positions in the near term. Those other desks could then acquire the positions from the first desk at a later time when they have a reasonable expectation of near term demand from external customers. The agencies also believe that generally allowing a desk to treat other internal desks as customers for purposes of RENTD could impede monitoring of market making-related
activity and detection of impermissible proprietary trading since a banking entity could aggregate in a single trading desk the RENTD of trading desks that engage in multiple different trading strategies and aggregate a larger volume of trading activities.493 With respect to the arguments raised by these commenters that permitting this treatment would facilitate efficient risk management,494 the agencies believe that the amendments to the riskmitigating hedging exemption in the final rule 495 and the amendments to the liquidity management exemption in the final rule 496 will provide banking entities with additional flexibility to manage risks more efficiently than the 2013 rule. Further, the agencies note that while affiliated trading desks may not consider each other clients, customers, or counterparties, transactions between affiliated trading desks may be permitted under the exemption for market making-related activities in certain circumstances that do not require the expansion of a trading desk’s market making limits based on internal transactions. Returning to the example from the proposal and described above 497 concerning an interest rate swaps desk transferring some of the risk of a financial instrument to an affiliated FX swaps desk, if the FX swaps desk acts as a market maker in FX swaps, the FX swaps desk may be able to rely on the exemption for market makingrelated activities for its transactions with the interest rate swaps desk if those transactions are consistent with the requirements of the exemption for market making-related activities, including the FX swaps desk’s RENTD.498 Further, if the FX swaps desk does not independently satisfy the requirements of the exemption for market making-related activities with respect to the transaction, it would be permitted to rely on the exemption for market making-related activities available to the market making desk for the transaction under certain conditions. If the banking entity has significant trading assets and liabilities, the FX swaps desk would be permitted to rely on the exemption for market making-related activities if: (i) The FX swaps desk acts in accordance with the interest rate swaps desk’s risk management policies and procedures established in accordance with § ll.4(b)(2)(iii) and (ii) the resulting risk-mitigating position is attributed to the interest rate swaps desk’s financial exposure (and not the FX swaps desk’s financial exposure) and is included in the interest rate swaps desk’s daily profit and loss calculation. If the banking entity does not have significant trading assets and liabilities, the FX swaps desk would be permitted to rely on the exemption for market makingrelated activities if the resulting riskmitigating position is attributed to the interest rate swaps desk’s financial exposure (and not the FX swaps desk’s financial exposure) and is included in the interest rate swaps desk’s daily profit and loss calculation. If the FX swaps desk cannot
independently satisfy the requirements of the exemption for market making-related activities with respect to its transactions with the interest rate swaps desk, the risk-mitigating hedging exemption would be available, provided the conditions of that exemption are met.
3. Section ll.5: Permitted RiskMitigating Hedging Activities
a. Section ll.5 of the 2013 Rule
Section 13(d)(1)(C) of the BHC Act
provides an exemption from the prohibition on proprietary trading for risk-mitigating hedging activities that are designed to reduce the specific risks to a banking entity in connection with and related to individual or aggregated positions, contracts, or other holdings.
Section ll.5 of the 2013 rule
implements section 13(d)(1)(C).
Section ll.5 of the 2013 rule
provides a multi-faceted approach to implementing the hedging exemption to ensure that hedging activity is designed to be risk-reducing and does not mask prohibited proprietary trading. Under the 2013 rule, risk-mitigating hedging activities must comply with certain conditions for those activities to qualify for the exemption. Generally, a banking entity relying on the hedging exemption must have in place an appropriate internal compliance program that meets specific requirements, including the requirement to conduct certain correlation analysis, to support its compliance with the terms of the exemption, and the compensation arrangements of persons performing risk-mitigating hedging activities must be designed not to reward or incentivize

499See 2013 rule §ll.5(b)(1) and (3). 500See 2013 rule §ll.5(b)(2). 501See 2013 rule §ll.5(c). 502See 83 FR at 33465. 503See 83 FR at 33465. 504See id. 505See id. 506See 83 FR at 33465. 507 12 U.S.C. 1851(d)(1)(C). 508See 83 FR at 33465. 509See id. 510See id. 511See 83 FR at 33466. 512 Id. prohibited proprietary trading.499 In addition, the hedging activity itself must meet specified conditions. For example, at inception, the hedge must be designed to reduce or otherwise significantly mitigate, and must demonstrably reduce or otherwise significantly mitigate, one or more specific, identifiable risks arising in connection with and related to identified positions, contracts, or other holdings of the banking entity, and the activity must not give rise to any significant new or additional risk that is not itself contemporaneously hedged.500 Finally, §ll.5 establishes certain documentation requirements with respect to the purchase or sale of financial instruments made in reliance of the risk-mitigating exemption under certain circumstances.501 b. Proposed Amendments to Section ll.5
i. Correlation Analysis for Section
ll.5(b)(1)(iii)
The agencies proposed to remove the specific requirement to conduct a correlation analysis for risk-mitigating hedging activities.502 In particular, the agencies proposed to remove the words ‘‘including correlation analysis’’ from the requirement that the banking entity seeking to engage in risk-mitigating hedging activities conduct ‘‘analysis, including correlation analysis, and independent testing’’ designed to ensure that hedging activities may reasonably be expected to reduce or mitigate the risks being hedged. Thus, the requirement to conduct an analysis would have remained, but the banking entity would have had flexibility to apply a type of analysis that was appropriate to the facts and circumstances of the hedge and the underlying risks targeted.503 The agencies noted that they have become aware of practical difficulties with the correlation analysis requirement, which according to banking entities can add delays, costs, and uncertainty to permitted riskmitigating hedging.504 The agencies anticipated that removing the correlation analysis requirement would reduce uncertainties in meeting the analysis requirement without significantly impacting the conditions that risk-mitigating hedging activities must meet in order to qualify for the exemption.505 The agencies also noted that section 13 of the BHC Act does not specifically require this correlation analysis.506 Instead, the statute only provides that a hedging position, technique, or strategy is permitted so long as it is ‘‘. . . designed to reduce the specific risks to the banking entity . . . .’’ 507 The 2013 rule added the correlation analysis requirement as a measure intended to ensure compliance with this exemption.
ii. Hedge Demonstrably Reduces or
Otherwise Significantly Mitigates Specific Risks for Sections ll.5(b)(1)(iii), ll.5(b)(2)(ii), and ll.5(b)(2)(iv)(B) The agencies stated in the proposal that the requirements in § ll.5(b)(1)(iii), §ll.5(b)(2)(ii), and § ll.5(b)(2)(iv)(B), that a riskmitigating hedging activity demonstrably reduces or otherwise significantly mitigates specific risks, is not directly required by section 13(d)(1)(C) of the BHC Act.508 The statute instead requires that the hedge be designed to reduce or otherwise significantly mitigate specific risks.509 Thus, the agencies proposed to remove the ‘‘demonstrably reduces or otherwise significantly mitigates’’ specific risk requirement from § ll.5(b)(2)(ii) and § ll.5(b)(2)(iv)(B). This change would retain the requirement that the hedging activity be designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks, while providing banking entities with the flexibility to apply a type of analysis that was appropriate to the facts and circumstances of the hedge and the underlying risks targeted. The agencies also proposed to remove parallel provisions in §ll.5(b)(1)(iii). In particular, the agencies proposed to delete the word ‘‘demonstrably’’ from the requirement that ‘‘the positions, techniques and strategies that may be used for hedging may reasonably be expected to demonstrably reduce or otherwise significantly mitigate the specific, identifiable risk(s) being hedged’’ in § ll.5(b)(1)(iii). This change would have meant that the banking entity’s analysis and testing would have had to show that the hedging may be expected to reduce or mitigate the risks being hedged, but without the specific requirement that such reduction or mitigation be demonstrable. The agencies also proposed to delete the requirement in § ll.5(b)(1)(iii) that ‘‘such correlation analysis demonstrates that the hedging activity demonstrably reduces or otherwise significantly mitigates the specific, identifiable risk(s) being hedged’’ because this requirement was not necessary if the ‘‘correlation analysis’’ and ‘‘demonstrable’’ requirements were deleted. The agencies noted that, in practice, it appears that the requirement to show that hedging activity demonstrably reduces or otherwise significantly mitigates a specific, identifiable risk that develops over time can be complex and could potentially reduce bona fide riskmitigating hedging activity. For example, in some circumstances it would be very difficult, if not impossible, for a banking entity to comply with the continuous requirement to demonstrably reduce or significantly mitigate the identifiable risks, and therefore the firm would not enter into what would otherwise be effective hedges of foreseeable risks.510
iii. Reduced Compliance Requirements
for Banking Entities That Do Not Have Significant Trading Assets and Liabilities for Section ll.5(b) and (c) For banking entities that do not have significant trading assets and liabilities, the agencies proposed to eliminate the requirements for a separate internal compliance program for risk-mitigating hedging under § ll.5(b)(1); certain of the specific requirements of § ll.5(b)(2); the limits on compensation arrangements for persons performing risk-mitigating activities in § ll.5(b)(3); and the documentation requirements for certain hedging activities in § ll.5(c).511 In place of those requirements, the agencies proposed a new §ll.5(b)(2) that would require that the risk-mitigating hedging activities be: (i) At the inception of the hedging activity (including any adjustments), designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks, including the risks specifically enumerated in the proposal; and (ii) subject to ongoing recalibration, as appropriate, to ensure that the hedge remains designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks.512 The proposal also included conforming changes to § ll.5(b)(1) and § ll.5(c) of the 2013 rule to make the requirements of those sections

513 Id.
514 Id.
515 Id.
516 Id.
517 Id.
518 Id.
519See 83 FR at 33466–67.
520See SIFMA.
521See, e.g., State Street; FSF; ABA; BPI; and SIFMA. 522See, e.g., State Street; FSF; ABA; BPI; and SIFMA. 523See, e.g., SIFMA; JBA; ABA; BPI; FSF; and CREFC. 524See BPI. 525See Credit Suisse. 526See, e.g., Volcker Alliance; Bean; Data Boiler; CFA; AFR; NAFCU; Merkley; Better Markets; CAP; Systemic Risk Council; and Public Citizen. 527See Bean. 528See Bean. 529See Data Boiler. 530See 83 FR at 33465. applicable only to banking entities that have significant trading assets and liabilities.513 The agencies explained that these requirements are overly burdensome and complex for banking entities that do not have significant trading assets and liabilities, which are generally less likely to engage in the types of trading activities and hedging strategies that would necessitate these additional compliance requirements. Given these considerations, the agencies believed that removing the requirements for banking entities that do not have significant trading assets and liabilities would be unlikely to materially increase risks to the safety and soundness of the banking entity or U.S. financial stability. The agencies also believed that the proposed requirements for banking entities without significant trading assets and liabilities would effectively implement the statutory requirement that the hedging transactions be designed to reduce specific risks the banking entity incurs.514
iv. Reduced Documentation
Requirements for Banking Entities That Have Significant Trading Assets and Liabilities for Section ll.5(c) For banking entities that have significant trading assets and liabilities, the agencies proposed to retain the enhanced documentation requirements for the hedging transactions identified in §ll.5(c)(1) to permit evaluation of the activity.515 However, the agencies proposed a new paragraph (c)(4) in § ll.5 that would eliminate the enhanced documentation requirement for hedging activities that meets certain conditions.516 Under new paragraph (c)(4) in § ll.5, compliance with the enhanced documentation requirement would not apply to purchases and sales of financial instruments for hedging activities that are identified on a written list of financial instruments preapproved by the banking entity that are commonly used by the trading desk for the specific types of hedging activity for which the financial instrument is being purchased or sold.517 In addition, at the time of the purchase or sale of the financial instruments, the related hedging activity would need to comply with written, pre-approved hedging limits for the trading desk purchasing or selling the financial instrument, which would be required to be appropriate for the size, types, and risks of the hedging activities commonly undertaken by the trading desk; the financial instruments purchased and sold by the trading desk for hedging activities; and the levels and duration of the risk exposures being hedged.518 The agencies explained that certain of the regulatory purposes of these documentation requirements, such as facilitating subsequent evaluation of the hedging activity and prevention of evasion, are less relevant in circumstances where common hedging strategies are used repetitively. Therefore the agencies believed that the enhanced documentation requirements were not necessary in such instances and that reducing them would make beneficial risk-mitigating activity more efficient and effective. The agencies intended that the conditions on the preapproved limits would provide clarity regarding the limits needed to comply with requirements.519
c. Commenters’ Views
One commenter argued that the requirements associated with the 2013 rule’s risk-mitigating hedging exemption have been overly prescriptive, cumbersome, and unnecessary for sound and efficient risk management.520 Many commenters supported the agencies’ efforts to reduce costs and uncertainty and improve the utility of the risk-mitigating hedging exemption.521 More specifically, commenters agreed with the recommendations to remove the correlation analysis requirement, remove the requirement that a hedge demonstrably reduce or otherwise significantly mitigate one or more specific risks, and reduce the enhanced documentation requirements.522 Although some commenters supported the agencies’ effort to reduce the compliance burden in the riskmitigating hedging exemption, others argued that the agencies did not go far enough. Several commenters argued that the agencies should reduce the enhanced documentation requirements and go further to remove these requirements for all banking entities.523 Another commenter urged the agencies to eliminate the enhanced documentation requirements altogether in light of the proposed rule’s robust compliance framework.524 In addition, a commenter suggested targeted modifications to the provision, including permitting certain types of hedging in line with internal risk limits, allowing aggregate assessment of hedging, and clarifying how firms can comply with the provision.525 In contrast, other commenters did not support the agencies’ proposed changes to the compliance obligations associated with the risk-mitigating hedging exemption.526 One commenter argued that eliminating the correlation analysis requirement would eliminate the primary means used by most banks today to ensure a hedging activity is, in fact, offsetting risk.527 Moreover, the same commenter argued that eliminating the existing regulatory requirement that banks show a hedge ‘‘demonstrably reduces’’ or ‘‘significantly mitigates’’ the risks targeted by the hedge would be a direct repudiation of the statute, because that type of demonstration is required by the statute.528 Another commenter argued that the various changes proposed by the agencies would lead to uncontrollable speculations.529 d. Final Rule
i. Correlation Analysis for Section
ll.5(b)(1)(i)(C)
The agencies are adopting § ll.5(b)(1)(iii) as proposed, but renumbered as § ll.5(b)(1)(i)(C). Based on the agencies’ implementation experience of the 2013 rule and commenters’ feedback on the proposed changes, the agencies are removing the requirement that a correlation analysis be the type of analysis used to assess risk-mitigating hedging activities. The agencies continue to believe, as stated in the proposal, that allowing banking entities to use the type of analysis that is appropriate to the hedging activities in question will avoid the uncertainties discussed in the proposal without substantially impacting the conditions that risk-mitigating hedging activities must meet in order to qualify for the exemption.530 Furthermore, section 13 of the BHC Act does not require that the analysis used by the banking entity be a correlation analysis. Instead, the statute only provides that a hedging position,

531 12 U.S.C. 1851(d)(1)(C).
532See 83 FR at 33465.
533See id.
534 12 U.S.C. 1851(d)(1)(C). technique, or strategy is permitted so long as it is ‘‘. . . designed to reduce the specific risks to the banking entity . . . .’’ 531 The agencies believe the continuing requirement that the banking entity conduct ‘‘analysis and independent testing designed to ensure that the positions, techniques and strategies that may be used for hedging may reasonably be expected to reduce or otherwise significantly mitigate the specific, identifiable risk(s) being hedged’’ will effectively implement the statute. The agencies anticipate that the banking entity’s flexibility to apply the type of analysis that is appropriate to assess the particular hedging activity at issue will facilitate the appropriate use of risk-mitigating hedging under the exemption. Regarding the comment asserting that correlation analysis is the primary means used by banking entities to test whether a hedging activity is offsetting risk, the agencies note that if this is the case it would be reasonable to expect that the banking entity would use correlation analysis to satisfy the regulatory requirements with respect to that hedging activity. However, if another type of analysis is more appropriate, the banking entity would have the flexibility to use that form of analysis instead.
ii. Hedge Demonstrably Reduces or
Otherwise Significantly Mitigates Specific Risks for Sections ll.5(b)(1)(i)(C), ll.5(b)(1)(ii)(B) and ll.5(b)(1)(ii)(D)(2) The agencies are adopting § ll.5(b)(1)(iii), §ll.5(b)(2)(ii), and § ll.5(b)(2)(iv)(B) as proposed, but renumbered as § ll.5(b)(1)(i)(C), § ll.5(b)(1)(ii)(B) and § ll.5(b)(1)(ii)(D)(2). As stated in the proposal, the requirement that the reduction or mitigation of specific risks resulting from a risk-mitigating hedging activity be demonstrable is not directly required by section 13(d)(1)(C) of the BHC Act.532 In practice, it appears that the requirement to show that hedging activity demonstrably reduces or otherwise significantly mitigates a specific, identifiable risk that develops over time can be complex and could potentially reduce bona fide riskmitigating hedging activity. The agencies continue to believe that in some circumstances, it may be difficult for banking entities to know with sufficient certainty that a potential hedging activity that a banking entity seeks to commence will continuously demonstrably reduce or significantly mitigate an identifiable risk after it is implemented, even if the banking entity is able to enter into a hedge reasonably designed to reduce or significantly mitigate such a risk. As stated in the proposal, unforeseeable changes in market conditions, event risk, sovereign risk, and other factors that cannot be known with certainty in advance of undertaking a hedging transaction could reduce or eliminate the otherwise intended hedging benefits.533 In these events, the requirement that a hedge ‘‘demonstrably reduce’’ or ‘‘significantly mitigate’’ the identifiable risks could create uncertainty with respect to the hedge’s continued eligibility for the exemption. In such cases, a banking entity may determine not to enter into what would otherwise be a reasonably designed hedge of foreseeable risks out of concern that the banking entity may not be able to effectively comply with the requirement that such a hedge demonstrably reduces such risks due to the possibility of unforeseen risks occur. Therefore, the final rule removes the ‘‘demonstrably reduces or otherwise significantly mitigates’’ specific risk requirement from § ll.5(b)(1)(i)(C), § ll.5(b)(1)(ii)(B) and § ll.5(b)(1)(ii)(D)(2). The agencies do not agree with a commenter’s assertion that the requirement that banking entities show that a hedge ‘‘demonstrably’’ reduces or significantly mitigates the risks is a core requirement under section 13 of the BHC Act. Instead, the statute expressly permits hedging activities that are ‘‘designed to reduce the specific risks of the banking entity.’’ 534 The final rule maintains the requirement that hedging activity undertaken pursuant to §ll.5 be designed to reduce or otherwise mitigate specific, identifiable risks. Hedging activity must also be subject to ongoing recalibration by the banking entity to ensure that the hedging activity satisfies the requirement that the activity is designed to reduce
or otherwise significantly mitigate one or more specific, identifiable risks even after changes in market conditions or other factors. In light of these requirements, the agencies do not find it necessary to require that the hedge ‘‘demonstrably reduce’’ risk to the banking entity on an ongoing basis.
iii. Reduced Compliance Requirements
for Banking Entities That Do Not Have Significant Trading Assets and Liabilities for Section ll.5(b)(2) and
Section ll.5(c)
The agencies are adopting §§ ll.5(b)(2) and ll.5(c) as proposed. Consistent with the changes in the final rule relating to the scope of the requirements for banking entities that do not have significant trading assets and liabilities, the agencies are also revising the requirements in §§ ll.5(b)(2) and ll.5(c) for banking entities that do not have significant trading assets and liabilities. For these firms, the agencies are eliminating the requirements for a separate internal compliance program for risk-mitigating hedging under § ll.5(b)(1); certain of the specific requirements of § ll.5(b)(2); the limits on compensation arrangements for persons performing risk-mitigating activities in § ll.5(b)(1)(iii); and the documentation requirements for those activities in § ll.5(c). Based on comments received, the agencies have determined that these requirements are overly burdensome and complex for banking entities with moderate trading assets and liabilities, in light of the reduced scale of their trading and hedging activities. In place of those requirements, new § ll.5(b)(2) requires that riskmitigating hedging activities for those banking entities be: (i) At the inception of the hedging activity (including any adjustments), designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks, including the risks specifically enumerated in the proposal; and (ii) subject to ongoing recalibration, as appropriate, to ensure that the hedge remains designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks. The agencies continue to believe that these tailored requirements for banking entities without significant trading assets and liabilities effectively implement the statutory requirement that the hedging transactions be designed to reduce specific risks the banking entity incurs. The agencies believe that the remaining requirements for a firm with moderate trading assets and liabilities would be effective in ensuring such banking entities engage only in permissible riskmitigating hedging activities. The agencies also note that reducing these compliance requirements for banking entities that do not have significant trading assets and liabilities is unlikely to materially increase risks to the safety and soundness of the banking entity or

535Section 13(d)(1)(H) of the BHC Act permits trading conducted by a foreign banking entity pursuant to paragraph (9) or (13) of section 4(c) of the BHC Act (12 U.S.C. 1843(c)), if the trading occurs solely outside of the United States, and the banking entity is not directly or indirectly controlled by a banking entity that is organized under the laws of the United States or of one or more States. See 12 U.S.C. 1851(d)(1)(H). 536This section’s discussion of the concept of ‘‘solely outside of the United States’’ is provided solely for purposes of the rule’s implementation of
section 13(d)(1)(H) of the BHC Act and does not
affect a banking entity’s obligation to comply with additional or different requirements under applicable securities, banking, or other laws. Among other differences, section 13 of the BHC Act does not necessarily include the customer protection, transparency, anti-fraud, antimanipulation, and market orderliness goals of other statutes administered by the agencies. These other goals or other aspects of those statutory provisions may require different approaches to the concept of ‘‘solely outside of the United States’’ in other contexts. U.S. financial stability. Therefore, the agencies are eliminating and modifying these requirements for banking entities that do not have significant trading assets and liabilities. In connection with these changes, the final rule also includes conforming changes to §§ ll.5(b)(1) and ll.5(c) of the 2013 rule to make the requirements of those sections applicable only to banking entities that have significant trading assets and liabilities.
iv. Reduced Documentation
Requirements for Banking Entities That Have Significant Trading Assets and Liabilities for Section ll.5(c) The agencies are adopting §ll.5(c) as proposed. The final rule retains the enhanced documentation requirements for banking entities that have significant trading assets and liabilities for hedging transactions identified in § ll.5(c)(1) to permit evaluation of the activity. Although this documentation requirement results in more extensive compliance efforts, the agencies continue to believe it serves an important role to prevent evasion of the requirements of section 13 of the BHC Act and the final rule. The hedging transactions identified in § ll.5(c)(1) include hedging activity that is not established by the specific trading desk that creates or is responsible for the underlying positions, contracts, or other holdings the risks of which the hedging activity is designed to reduce; is effected through a financial instrument, exposure, technique, or strategy that is not specifically identified in the trading desk’s written policies and procedures as a product, instrument, exposure, technique, or strategy such trading desk may use for hedging; or established to hedge aggregated positions across two or more trading desks. The agencies believe that hedging transactions established at a different trading desk, or which are not identified in the relevant policies, may present or reflect heightened potential for prohibited proprietary trading. In other words, the further removed hedging activities are from the specific positions, contracts, or other holdings the banking entity intends to hedge, the greater the danger that such activity is not limited to hedging specific risks of individual or aggregated positions, contracts, or other holdings of the banking entity. For this reason, the agencies do not agree with commenters who argued that the enhanced documentation requirements should be removed for all banking entities. However, based on the agencies’ experience during the first several years of implementation of the 2013 rule, it appears that many hedges established by one trading desk for other affiliated desks are often part of common hedging strategies that are used regularly and that do not raise the concerns of those trades prohibited by the rule. In those instances, the documentation requirements of § ll.5(c) of the 2013 rule are less necessary for purposes of evaluating the hedging activity and preventing evasion. In weighing the significantly reduced regulatory and supervisory utility of additional documentation of common hedging trades against the complexity of complying with the enhanced documentation requirements, the agencies have determined that the documentation requirements are not necessary in those instances. Reducing the documentation requirement for common hedging activity undertaken in the normal course of business for the benefit of one or more other trading desks would also make beneficial riskmitigating activity more
efficient and potentially improve the timeliness of important risk-mitigating hedging activity, the effectiveness of which can be time sensitive. Therefore, §ll.5(c)(4) of the final rule eliminates the enhanced documentation requirement for hedging activities that meet certain conditions. In excluding a trading desk’s common hedging instruments from the enhanced documentation requirements in § ll.5(c), the final rule seeks to distinguish between those financial instruments that are commonly used for a trading desk’s ordinary hedging activities and those that are not. The final rule requires the banking entity to have in place appropriate limits so that less common or more unusual levels of hedging activity would still be subject to the enhanced documentation requirements. The final rule provides that the enhanced documentation requirement does not apply to purchases and sales of financial instruments for hedging activities that are identified on a written list of financial instruments pre-approved by the banking entity that are commonly used by the trading desk for the specific types of hedging activity for which the financial instrument is being purchased or sold. In addition, at the time of the purchase or sale of the financial instruments, the related hedging activity would need to comply with written, pre-approved hedging limits for the trading desk purchasing or selling the financial instrument. These hedging limits must be appropriate for the size, types, and risks of the hedging activities commonly undertaken by the trading desk; the financial instruments purchased and sold by the trading desk for hedging activities; and the levels and duration of the risk exposures being hedged. These conditions on the preapproved limits are intended to provide clarity as to the types and characteristics of the limits needed to comply with the final rule. The pre-approved limits should be reasonable and set to correspond to the type of hedging activity commonly undertaken and at levels consistent with the hedging activity undertaken by the trading desk in the normal course. The agencies considered comments that suggested additional targeted modifications to the risk-mitigating hedging requirements, but believe that the suggested modifications would add additional complexity and administrative burden without significantly changing the efficiency and effectiveness of the final rule. Additionally, the agencies believe that because the final rule maintains significant requirements for hedging activities to qualify for the exemption, it should not lead to uncontrollable speculation, as one commenter warned.
4. Section ll.6(e): Permitted Trading
Activities of a Foreign Banking Entity
Section 13(d)(1)(H) of the BHC Act 535
permits certain foreign banking entities to engage in proprietary trading that occurs solely outside of the United States (the foreign trading exemption); 536 however, the statute does not define when a foreign banking entity’s trading occurs ‘‘solely outside of the United States.’’ The 2013 rule includes several conditions on the availability of the foreign trading exemption. Specifically, in addition to limiting the exemption to foreign banking entities where the purchase or sale is made pursuant to paragraph (9)

537 12 U.S.C. 1843(c)(9), (13). See 2013 rule §ll.6(e)(1)(i) and (ii). 538See 2013 rule §ll.6(e). 539 ‘‘U.S. entity’’ is defined for purposes of this provision as 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 of any State. See 2013 rule §ll.6(e)(4). 540A foreign banking entity wishing to engage in trading activities with a U.S. entity’s foreign affiliate generally must rely on the counterparty prong. or (13) of §ll.4(c) of the BHC Act,537 the 2013 rule provides that the foreign trading exemption is available only if: 538 (i) The banking entity engaging as principal in the purchase or sale (including any personnel of the banking entity or its affiliate that arrange, negotiate, or execute such purchase or sale) is not located in the United States or organized under the laws of the United States or of any State. (ii) The banking entity (including relevant personnel) that makes the decision to purchase or sell as principal is not located in the United States or organized under the laws of the United States or of any State. (iii) The purchase or sale, including any transaction arising from riskmitigating hedging related to the instruments purchased or sold, is not accounted for as principal directly or on a consolidated basis by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State. (iv) No financing for the banking entity’s purchase or sale is provided, directly or indirectly, by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State (the financing prong). (v) The purchase or sale is not conducted with or through any U.S. entity,539 except if the purchase or sale is conducted:
(A) With the foreign operations of a U.S. entity, if no personnel of such U.S. entity that are located in the United States are involved in the arrangement, negotiation or execution of such purchase or sale (the counterparty prong); 540 (B) with an unaffiliated market intermediary acting as principal, provided the transaction is promptly cleared and settled through a clearing agency or derivatives clearing organization acting as a central counterparty; or (C) through an unaffiliated market intermediary, provided the transaction is conducted anonymously (i.e., each party to the transaction is unaware of the identity of the other party(ies)) on an exchange or similar trading facility and promptly cleared and settled through a clearing agency or derivatives clearing organization acting as a central counterparty. Since the adoption of the 2013 rule, foreign banking entities have asserted that certain of these criteria limit their ability to make use of the statutory exemption for trading activity that occurs outside of the United States, which has adversely impacted their foreign trading operations. Additionally, many foreign banking entities have suggested that the full set of eligibility criteria to rely on the exemption for foreign trading activity are unnecessary to accomplish the policy objectives of
section 13 of the BHC Act. This
information has raised concerns that the current requirements for the exemption may be overly restrictive and not effective in permitting foreign banks to engage in foreign trading activities consistent with the policy objective of the statute. The proposal would have modified the requirements for the foreign trading exemption so that it would be more usable by foreign banking entities. Specifically, the proposal would have retained the first three requirements of the 2013 rule, with a modification to the first requirement, and would have removed the last two requirements of § ll.6(e)(3). As a result, §ll.6(e)(3), as modified by the proposal, would have required that for a foreign banking entity to be eligible for this exemption:
(i) The banking entity engaging as principal in the purchase or sale (including relevant personnel) is not located in the United States or organized under the laws of the United States or of any State; (ii) The banking entity (including relevant personnel) that makes the decision to purchase or sell as principal is not located in the United States or organized under the laws of the United States or of any State; and (iii) The purchase or sale, including any transaction arising from riskmitigating hedging related to the instruments purchased or sold, is not accounted for as principal directly or on a consolidated basis by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State. The proposal would have maintained these three requirements in order to ensure that the banking entity (including any relevant personnel) that engages in the purchase or sale as principal or makes the decision to purchase or sell as principal is not located in the United States or organized under the laws of the United States or any State. Furthermore, the proposal would have retained the 2013 rule’s requirement that the purchase or sale, including any transaction arising from a related risk-mitigating hedging transaction, may not be accounted for as principal by the U.S. operations of the foreign banking entity. However, the proposal would have replaced the first requirement that any personnel of the banking entity that arrange, negotiate, or execute such purchase or sale are not located in the United States with one that would restrict only the relevant personnel engaged in the banking entity’s decision in the purchase or sale are not located in the United States. Under the proposed approach, the requirements for the foreign trading exemption focused on whether the banking entity that engages in or that decides to engage in the purchase or sale as principal (including any relevant personnel) is located in the United States. The proposed modifications recognized that some limited involvement by U.S. personnel (e.g., arranging or negotiating) would be consistent with this exemption so long as the principal risk and actions of the purchase or sale do not take place in the United States for purposes of section 13 of the BHC Act and the implementing regulations. The proposal also would have eliminated the financing prong and the counterparty prong. Under the proposal, these changes would have focused the key requirements of the foreign trading exemption on the principal actions and risk of the transaction. In addition, the proposal would have removed the financing prong to address concerns that the fungibility of financing has made this requirement in certain circumstances difficult to apply in practice to determine whether a particular financing is tied to a particular trade. Market participants have raised a number of questions about the financing prong and have indicated that identifying whether
financing has been provided by a U.S. affiliate or branch can be exceedingly complex, in particular with respect to demonstrating that financing has not been provided by a U.S. affiliate or branch with respect to a particular transaction. To address the concerns raised by foreign banking entities and other market participants, the proposal would have amended the exemption to focus on the principal risk of a transaction and the location of the actions as principal and trading decisions, so that a foreign banking entity would be able to make use of the exemption so long as the risk of the transaction is booked outside of the United States. While the agencies

541See 12 U.S.C. 1851(h)(4) (emphasis added). 542See, e.g., ISDA; IIB; ABA; New England Council; BVI; HSBC; EBF; Credit Suisse; JBA FSF; and EFAMA. 543See, e.g., HSBC and JBA. 544See EFAMA. 545See HSBC. 546See JBA. 547See JBA. 548See, e.g., Bean; Data Boiler; and Better Markets. 549See, e.g., Better Markets and FSF. 550See Bean. 551See Bean. recognize that a U.S. branch or affiliate that extends financing could bear some risks, the agencies note that the proposed modifications to the foreign trading exemption were designed to require that the principal risks of the transaction occur and remain solely outside of the United States. Similarly, foreign banking entities have communicated to the agencies that the counterparty prong has been overly difficult and costly for banking entities to monitor, track, and comply with in practice. As a result, the agencies proposed to remove the requirement that any transaction with a U.S. counterparty be executed solely with the foreign operations of the U.S. counterparty (including the requirement that no personnel of the counterparty involved in the arrangement, negotiation, or execution may be located in the United States) or through an unaffiliated intermediary and an anonymous exchange. These changes were intended to materially reduce the reported inefficiencies associated with rule compliance. In addition, market participants have indicated that this requirement has in practice led foreign banking entities to overly restrict the range of counterparties with which transactions can be conducted, as well as disproportionately burdened compliance resources associated with those transactions, including with respect to counterparties seeking to do business with the foreign banking entity in foreign jurisdictions. The proposal would have removed the counterparty prong and focused the requirements of the foreign trading exemption on the location of a foreign banking entity’s decision to trade, action as principal, and principal risk of the purchase or sale. This proposed focus on the location of actions and risk as principal in the United States was intended to align with the statute’s definition of ‘‘proprietary trading’’ as ‘‘engaging as principal for the trading account of the banking entity.’’ 541 The proposal would have scaled back those requirements that were not critical for this determination and thus would not be needed in the final rule. Therefore, the proposal would have removed the requirements of § ll.6(e)(3) since they are less directly relevant to these considerations. Consistent with the 2013 rule, the exemption under the proposal would not have exempted the U.S. or foreign operations of U.S. banking entities from having to comply with the restrictions and limitations of section 13 of the BHC Act. Thus, for example, the U.S. and foreign operations of a U.S. banking entity that is engaged in permissible market making-related activities or other permitted activities may engage in those transactions
with a foreign banking entity that is engaged in proprietary trading in accordance with the exemption under § ll.6(e) of the 2013 rule, so long as the U.S. banking entity complies with the requirements of § ll.4(b), in the case of market making-related activities, or other relevant exemption applicable to the U.S. banking entity. The proposal, like the 2013 rule, would not have imposed a duty on the foreign banking entity or the U.S. banking entity to ensure that its counterparty is conducting its activity in conformance with section 13 and the implementing regulations. Rather, that obligation would have been on each party subject to section 13 to ensure that it is conducting its activities in accordance with section 13 and the implementing regulations. The proposal’s exemption for trading of foreign banking entities outside the United States potentially could have given foreign banking entities a competitive advantage over U.S. banking entities with respect to permitted activities of U.S. banking entities because foreign banking entities could trade directly with U.S. counterparties without being subject to the limitations associated with the market making-related activities exemption or other exemptions under the rule. This competitive disparity in turn could create a significant potential for regulatory arbitrage. In this respect, the agencies sought to mitigate this concern through other changes in the proposal; for example, U.S. banking entities would have continued to be able to engage in all of the activities permitted under the 2013 rule and the proposal, including the simplified and streamlined requirements for market making and risk-mitigating hedging and other types of trading activities. In general, commenters supported the proposed changes.542 However, a number of commenters requested further modifications to the foreign trading exemption. For example, some commenters requested that the agencies clarify the definition of ‘‘relevant personnel’’ to mean employees that conduct risk management, and not the traders or others associated with executing the transaction.543 One commenter requested clarification that the proposed changes not constrain foreign banking entities from delegating investment authority to non-affiliated U.S. investment advisers.544 Another commenter supported eliminating the conduct restriction.545 One commenter proposed several additional modifications, including further simplifying the exemption to only focus on where the transaction is booked, clarifying certain terms (e.g., subservicing, dark pools, engaging in), and including inter-affiliate or intra-bank transactions in the exemption.546 This commenter also requested that the agencies include execution as one of the examples of limited involvement.547 A few commenters opposed the proposed changes to eliminate the financing and counterparty requirements.548 These commenters argued that the proposed changes might provide foreign entities with a competitive
advantage over domestic entities.549 One commenter asserted that the proposed changes would increase uncertainty and could increase the exposure of U.S. institutions to foreign proprietary trading losses.550 This commenter also argued that the agencies did not provide factual data to support the change and that the proposal was contrary to law.551 After consideration of these comments, the agencies are adopting the changes to the foreign trading exemption as proposed. The proposal’s modifications in general sought to balance concerns regarding competitive impact while mitigating the concern that an overly narrow approach to the foreign trading exemption may cause market bifurcations, reduce the efficiency and liquidity of markets, make the exemption overly restrictive to foreign banking entities, and harm U.S. market participants. The agencies believe that this approach appropriately balances one of the key objectives of
section 13 of the BHC Act by limiting
the risks that proprietary trading poses to the U.S. financial system, while also modifying the application of section 13 as it applies to foreign banking entities, as required by section 13(d)(1)(H). As noted in the preamble to the proposal, the statute contains an exemption that allows foreign banking entities to engage in trading activity that is, only for purposes of the prohibitions of the statute, solely outside the United

552See, e.g., ABA; AIC; Center for American Entrepreneurship; Goldman Sachs; and JBA. 553See, e.g., Capital One et al.; Credit Suisse; and SIFMA. 554See, e.g., AFR and Occupy the SEC. 555See, e.g., AFR; Bean; and Volcker Alliance. 556 In addition, consistent with changes described in Part IV.B.1.b.i of this SUPPLEMENTARY INFORMATION, the final rule removes references to ‘‘guidance’’ from subpart C. 557 12 U.S.C. 1851(d)(1)(B). 558 2013 rule §ll.12(a)(2)(iii). 559 2013 rule §ll.12(d). 560See 2013 rule §ll.11(c). States. The statute also contains a prohibition on proprietary trading for U.S. banking entities regardless of where their activity is conducted. The statute generally prohibits U.S. banking entities from engaging in proprietary trading because of the perceived risks of those activities to U.S. banking entities and the U.S. financial system. The modified foreign trading exemption excludes from the statutory prohibitions transactions where the principal risk is booked outside of the United States and the actions and decisions as principal occur outside of the United States by foreign operations of foreign banking entities. The agencies also are confirming that the foreign trading exemption does not preclude a foreign banking entity from engaging a nonaffiliated U.S. investment adviser as long as the actions and decisions of the banking entity as principal occur outside of the United States. By continuing to limit the risks of foreign banking entities’ proprietary trading activities to the U.S. financial system, the agencies believe that the rule continues to protect and promote the safety and soundness of banking entities and the financial stability of the United States, while also allowing U.S. markets to continue to operate efficiently in conjunction with foreign markets.
C. Subpart C—Covered Fund Activities
and Investments

Overview of Agencies’ Approach to
the Covered Fund Provisions The proposal included several proposed revisions to subpart C (the covered fund provisions). The proposal also sought comments on other aspects of the covered fund provisions beyond those changes for which specific rule text was proposed. As described further below, the agencies have determined to adopt, as proposed, the changes to subpart C for which specific rule text was proposed. The agencies continue to consider other aspects of the covered fund provisions on which the agencies sought comment in the proposal and intend to issue a separate proposed rulemaking that specifically addresses those areas. The proposal sought comment on the 2013 rule’s general approach to defining the term ‘‘covered fund,’’ as well as the existing exclusions from the covered fund definition and potential new exclusions from this definition. The agencies received numerous comments on these aspects of the covered fund provisions. Some commenters encouraged the agencies to make significant revisions to these provisions, such as narrowing the covered fund ‘‘base definition’’ 552 or providing additional exclusions from this definition.553 Other commenters argued that the agencies should not narrow the covered fund definition or should retain the definition in section 13 of the BHC Act.554 Some commenters raised concerns about the agencies’ ability to finalize changes to the covered fund provisions for which the proposal did not provide specific rule text.555 In light of the number and complexity of issues under consideration, the agencies intend to address these and other comments received on the covered fund provisions in a subsequent proposed rulemaking. In this final rule, the agencies are adopting only those changes to the covered fund provisions for which specific rule text was proposed.556 Those changes are being adopted as final without change from the proposal for the reasons described below. While the agencies are not including any other changes to subpart C in this final rule, this approach does not reflect any final determination with respect to the comments received on other aspects of the covered fund provisions. The agencies continue to consider comments received and intend to address additional aspects of the covered funds provisions in the future covered funds proposal.
Section ll.11: Permitted Organizing
and Offering, Underwriting, and Market Making With Respect to a Covered Fund
Section 13(d)(1)(B) of the BHC Act
permits a banking entity to purchase and sell securities and other instruments described in section 13(h)(4) of the BHC Act in connection with the banking entity’s underwriting or market making-related activities.557 The 2013 rule provides that the prohibition against acquiring or retaining an ownership interest in or sponsoring a covered fund does not apply to a banking entity’s underwriting or market making-related activities involving a covered fund as long as:

The banking entity conducts the
activities in accordance with the requirements of the underwriting exemption in § ll.4(a) of the 2013 rule or market making exemption in § ll.4(b) of the 2013 rule, respectively.
The banking entity includes the
aggregate value of all ownership interests of the covered fund acquired or retained by the banking entity and its affiliates for purposes of the limitation on aggregate investments in covered funds (the aggregate-fund limit) 558 and capital deduction requirement; 559 and
The banking entity includes any
ownership interest that it acquires or retains for purposes of the limitation on investments in a single covered fund (the per-fund limit) if the banking entity (i) acts as a sponsor, investment adviser or commodity trading adviser to the covered fund; (ii) otherwise acquires and retains an ownership interest in the covered fund in reliance on the exemption for organizing and offering a covered fund in §ll.11(a) of the 2013 rule; (iii) acquires and retains an ownership interest in such covered fund and is either a securitizer, as that term is used in section 15G(a)(3) of the Exchange Act, or is acquiring and retaining an ownership interest in such covered fund in compliance with
section 15G of that Act and the
implementing regulations issued thereunder, each as permitted by § ll.11(b) of the 2013 rule; or (iv) directly or indirectly, guarantees, assumes, or otherwise insures the obligations or performance of the covered fund or of any covered fund in which such fund invests.560 The proposal would have removed the requirement that the banking entity include for purposes of the aggregate fund limit and capital deduction the value of any ownership interests of a third-party covered fund (i.e., covered funds that the banking entity does not advise or organize and offer pursuant to § ll.11 of the final rule) acquired or retained in accordance with the underwriting or market-making exemptions in § ll.4. Under the proposal, these limits, as well as the per-fund limit, would have applied only to a covered fund that the banking entity organizes or offers and in which the banking entity acquires or retains an ownership interest pursuant to § ll.11(a) or (b) of the 2013 rule. The agencies proposed this change to more closely align the requirements for engaging in underwriting or marketmaking-related activities with respect to ownership interests in a covered fund with the requirements for engaging in these activities with respect to other financial instruments.

561See, e.g., ABA; BPI; FSF; Goldman Sachs; IIB; ISDA; and SIFMA. 562See, e.g., BPI; FSF; ISDA; and SIFMA. 563See SIFMA. 564See ISDA. 565See SIFMA. 566See, e.g., AFR; Bean; and Volcker Alliance. 567See Bean. 568See ISDA. 569See, e.g., BPI; ISDA; and SIFMA. 570See, e.g., BPI and ISDA. 571As in the proposal, this requirement is also eliminated for underwriting and market-making activities involving funds with respect to which the banking entity directly or indirectly, guarantees, assumes, or otherwise insures the obligations or performance of the covered fund or of any covered fund in which such fund invests. Such funds are not organized and offered pursuant to §ll.11(a) or (b) of the final rule and thus treatment as a thirdparty fund is more appropriate for purposes of the underwriting and market-making exemption for covered funds. The agencies note, however, that other provisions of section 13 of the BHC Act, as well as other laws and regulations, limit banking entities’ ability to guarantee, assume, or otherwise insure the obligations or performance of covered funds. See 12 U.S.C. 1851(f); 12 U.S.C. 1851(d)(2); §§ll.14 and ll.15 of the final rule. See also 12 CFR 7.1017 (limiting authority of national bank to act as a guarantor). 572See SIFMA. 573See Bean. 574See 79 FR 5535, 5722. 575The quantitative limits and capital deduction requirements in 12 U.S.C. 1851(d)(4)(B) are required to apply only in the case of seeding investments and other de minimis investments made pursuant to 12 U.S.C. 1851(d)(4)(B). 576See, e.g., AFR; Bean; and Volcker Alliance. 577See Credit Suisse. Several commenters supported eliminating these requirements for underwriting and market making in ownership interests in covered funds.561 Many of these commenters said this proposal would reduce the compliance burden for banking entities engaged in client-facing underwriting and market making activities and would facilitate these permitted activities.562 One of these commenters noted in particular the difficulties for banking entities to determine whether a third-party fund is a covered fund subject to the limits of the 2013 rule and to determine with certainty whether certain non-U.S. securities may be issued by covered funds.563 Some of these commenters argued that providing underwriting and market making in the interests in such funds increases liquidity and benefits the marketplace generally.564 One of these commenters also stated that this would facilitate capital-raising activities of covered funds and other issuers.565 Other commenters opposed this change because they believed that it would greatly expand banking entities’ ability to hold ownership interests in covered funds,566 and is contrary to section 13 of the BHC Act.567 Several commenters supported making additional revisions to §ll.11 by eliminating the aggregate fund limit and capital deduction for other funds, such as affiliated funds or sponsored funds 568 and advised funds.569 Certain of these commenters
argued that underwriting and market making in interests in these covered funds would not expose banking entities to greater risk because ownership interests in such funds acquired in accordance with the risk-mitigating hedging, market-making or underwriting exemptions would nevertheless be subject to the restrictions contained in those exemptions.570 The agencies are eliminating the aggregate fund limit and the capital deduction requirement for the value of ownership interests in third-party covered funds acquired or retained in accordance with the underwriting or market-making exemption (i.e., covered funds that the banking entity does not advise or organize and offer pursuant to § ll.11(a) or (b) of the final rule).571 The agencies believe this change will better align the compliance requirements for underwriting and market making involving covered funds with the risks those activities entail. In particular, the agencies understand that it has been difficult for banking entities to determine whether ownership interests in covered funds are being acquired or retained in the context of trading activities, especially for nonU.S. issuers. Banking entities have had to undertake an often time-consuming process to determine whether an issuer is a covered fund and the security issued is an ownership interest, all for the purpose of ensuring compliance with the aggregate fund limit and capital deduction requirement for the period of time that the banking entity holds the ownership interest as part of its otherwise permissible underwriting and market making activities.572 These compliance challenges are heightened in the case of third-party funds. However, a banking entity can more readily determine whether a fund is a covered fund if the banking entity advises or organizes and offers the fund. Thus, the agencies are not eliminating the aggregate fund limit and capital deduction requirement for advised covered funds or covered funds that the banking entity organizes or offers. The agencies continue to consider whether the approach being adopted in the final rule may be extended to other issuers, such as funds advised by the banking entity, and intend to address and request additional comment on this issue in the future proposed rulemaking. The agencies disagree with the commenter who argued that eliminating the aggregate fund limit and capital deduction is contrary to section 13 of the BHC Act.573 An exemption from the prohibition on acquiring or retaining an ownership interest in a covered fund for underwriting and market making involving covered fund ownership interests is consistent with and supported by section 13 of the BHC Act.574 Section 13(d)(1)(B) provides a statutory exemption for underwriting and market making activities and, by its terms, applies to both prohibitions in
section 13(a), whether on proprietary
trading or covered fund activities.
Section 13 does not require any perfund or aggregate limits, or capital
deduction, with respect to covered fund ownership interests acquired pursuant to the underwriting and market making exemption in section 13(d)(1)(B), and eliminating these requirements with respect to third-party funds will improve the effectiveness of the statutory exemption for these activities.575 The agencies also disagree with commenters who asserted that this change will greatly expand banking entities’ ability to hold ownership interests in covered funds.576 This exemption for underwriting and market making involving ownership interests in covered funds applies only to underwriting and market making activities conducted pursuant to the requirements in section 13(d)(1)(B) of the BHC Act and §ll.4 of the final rule. This exemption is intended to allow banking entities to engage in permissible underwriting and market making involving covered fund ownership interests to the same extent as other financial instruments. It is also intended to increase the effectiveness of the underwriting and market making exemptions in § ll.4 by appropriately limiting the covered fund determinations a banking entity must make in the course of these permissible activities. For these reasons, and to limit the potential for evasion, the exemption for underwriting and market making involving ownership interests in covered funds continues to apply only to activities that satisfy the requirements of the underwriting or market making exemptions in § ll.4. One commenter argued that the aggregate fund limit should apply only at the global consolidated level for all firms.577 This commenter argued that measuring aggregate covered fund ownership at the parent-level is a better test of immateriality than measuring covered fund investments at a lower level, such as at the level of an

578 Id.
579 Id.
580See Goldman Sachs.
581 12 U.S.C. 1851(d)(1)(C).
582See 83 FR at 33483–84. 583See supra Part IV.B.3.b.ii. 584See, e.g., ABA; BPI; FSF; Goldman Sachs; IIB; ISDA; SIFMA; and IIB. 585See, e.g., BPI and FSF. 586See, e.g., FSF and SIFMA. 587See, e.g., FSF; ISDA; and SIFMA. 588See FSF. 589See, e.g., AFR and Volcker Alliance. 590See AFR. 591See Occupy the SEC. 592See, e.g., FSF; ISDA; and SIFMA. intermediate holding company.578 This commenter also said the agencies should expand the per-fund limit to allow bank-affiliated securitization investment managers to rely on applicable foreign risk retention regulations as a basis for exceeding the three percent per-fund limitation, provided that those foreign regulations are generally comparable to U.S. requirements.579 Another commenter asserted that the preamble to the 2013 rule indicated that direct investments made alongside a covered fund should be aggregated for purposes of the perfund limit in certain circumstances.580 This commenter asked the agencies to clarify that the 2013 rule does not prohibit banking entities from making direct investments alongside covered funds, regardless of whether the fund is sponsored or the investments are coordinated, so long as such investments are otherwise authorized for such banking entities (e.g., under merchant banking authority). The agencies continue to consider these issues. As noted above, the agencies expect to address and request additional comments on these and other covered fund provisions in the future proposed rulemaking.
3. Section ll.13: Other Permitted
Covered Fund Activities a. Permitted Risk-Mitigating Hedging
Section 13(d)(1)(C) of the BHC Act
provides an exemption for riskmitigating hedging activities in connection with and related to individual or aggregated positions, contracts, or other holdings of a banking entity that are designed to reduce the specific risks to the banking entity in connection with and related to such positions, contracts, or other holdings.581 As described in the preamble to the proposal, the 2013 rule implemented this authority narrowly in the context of covered fund activities. Specifically, the 2013 rule permitted only limited risk-mitigating hedging activities involving ownership interests in covered funds for hedging employee compensation arrangements. Like the proposal, the final rule allows a banking entity to acquire or retain an ownership interest in a covered fund as a hedge when acting as intermediary on behalf of a customer that is not itself a banking entity to facilitate the exposure by the customer to the profits and losses of the covered fund. This provision is consistent with the agencies’ original 2011 proposal.582 The proposal also would have amended §ll.13(a) to align with the proposed modifications to § ll.5. In particular, the proposal would have required that a risk-mitigating hedging transaction pursuant to § ll.13(a) be designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks to the banking entity. It would have removed the requirement that the hedging transaction ‘‘demonstrably’’ reduces or otherwise significantly mitigates the relevant risks, consistent with the proposed modifications to § ll.5.583 Several commenters supported permitting banking entities to acquire and retain ownership interests in covered funds as a hedge when acting as intermediary on behalf of a customer.584 Certain of these commenters argued that acquiring or retaining ownership interests in covered funds for this purpose (fund-linked products) is beneficial because it accommodates banking entities’ client facilitation and related risk management activities.585 Two commenters noted that restricting institutions’ ability to find the best hedge for a transaction may increase risks to safety and soundness and, conversely, permitting banking entities to use the best available hedge for risks arising from customer facilitation activities would promote safety and soundness and reduce risk.586 Several of these commenters also argued that fund-linked products are not a high-risk trading strategy.587 For example, one commenter argued that the magnitude of counterparty default risk that banking entities would face in acquiring or retaining a covered fund ownership interest under these circumstances (i.e., to hedge a position by the banking entity when acting as intermediary on behalf of a customer that is not itself a banking entity to facilitate exposure by the customer to a covered fund) is no different than any other counterparty default risk that banking entities face when entering into other risk-mitigating hedges.588 Other
commenters opposed this change and noted that, at the time the 2013 rule was adopted, the agencies considered acting as principal in providing exposure to the profits and losses of a covered fund for a customer, even if hedged by the banking entity with ownership interests of the covered fund, to constitute a highrisk trading strategy.589 One commenter stated that the proposal did not offer specific examples or explain why such fund-linked products are necessary.590 Another commenter argued that the exemption for risk-mitigating hedging involving ownership interests in covered funds should be further restricted or completely removed from the rule.591 The final rule adopts the proposed revision without change. This exemption is tailored to permit bona fide customer facilitation activities and to limit the risk incurred directly by the banking entity. The new exemption in § ll.13(a) extends only to a position taken by the banking entity when acting as intermediary on behalf of a customer that is not itself a banking entity to facilitate the customer’s exposure to the profits and losses of the covered fund. The banking entity’s acquisition or retention of the ownership interest as a hedge must be designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks arising out of a transaction conducted solely to accommodate a specific customer request with respect to the covered fund. As a result, a transaction conducted in reliance on this exemption must be customer-driven. A banking entity cannot rely on this exemption to solicit customer transactions in order to facilitate the banking entity’s own exposure to a covered fund. As some commenters noted, in the preamble to the 2013 rule, the agencies stated that they were not adopting an exemption for customer facilitation activities and related hedging activities involving ownership interests in covered funds because these activities could potentially expose a banking entity to the types of risks that section 13 of the BHC Act sought to address. However, in light of other comments received,592 the agencies do not believe that a banking entity’s customer facilitation activities and related hedging activities involving ownership interests in covered funds necessarily constitute high-risk trading strategies that could threaten the safety and soundness of the banking entity. The agencies believe that, properly monitored and managed, these activities can be conducted without creating a greater degree of risk to the banking entity than the other customer facilitation activities permitted by the

593See, e.g., final rule §ll.3(d)(11). 594See final rule §ll.13. 595Section 13(d)(1)(I) of the BHC Act permits a banking entity to acquire or retain an ownership interest in, or have certain relationships with, a covered fund notwithstanding the restrictions on investments in, and relationships with, a covered fund, if: (i) Such activity or investment is conducted by a banking entity pursuant to paragraph (9) or (13) of section 4(c) of the BHC Act; (ii) the activity occurs solely outside of the United States; (iii) no ownership interest in such fund is offered for sale or sold to a resident of the United States; and (iv) the banking entity is not directly or indirectly controlled by a banking entity that is organized under the laws of the United States or of one or more States. See 12 U.S.C. 1851(d)(1)(I). 596See final rule §ll.13(b)(4). 597See, e.g., BPI; BVI; EBF; IIB; JBA; and New England Council. 598See EBF. 599See BPI. 600See, e.g., Better Markets and CAP. 601See 12 U.S.C. 1851(d)(1)(I). 602See final rule §ll.13(b)(1)(iii). final rule.593 In particular, these activities remain subject to all of the final rule’s requirements for riskmitigating hedging transactions, including requirements that such transactions must:

Be designed to reduce or otherwise
significantly mitigate the specific, identifiable risks to the banking entity;
be made in accordance with the
banking entity’s written policies, procedures and internal controls;
not give rise, at the inception of the
hedge, to any significant new or additional risk that is not itself hedged contemporaneously in accordance with the risk-mitigating hedging requirements; and
be subject to continuing review,
monitoring and management by the banking entity.594 In addition, these activities remain subject to § ll.15 of the final rule and, therefore, to the extent they would in practice 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, they would not be permissible. The agencies are also adopting without change the amendment to align §ll.13(a) with § ll.5 by eliminating the requirement that a risk-mitigating hedging transaction ‘‘demonstrably’’ reduces or otherwise significantly mitigates the relevant risks. The agencies are adopting this amendment to §ll.13(a) for the same reason the agencies are adopting the amendment to §ll.5. b. Permitted Covered Fund Activities and Investments Outside of the United States
Section 13(d)(1)(I) of the BHC Act
permits foreign banking entities to acquire or retain an ownership interest in, or act as sponsor to, a covered fund, so long as those activities and investments occur solely outside the United States and certain other conditions are met (the foreign fund exemption).595 Section 13 of the BHC Act does not further define ‘‘solely outside of the United States’’ (SOTUS). The 2013 rule established several conditions on the availability of the foreign fund exemption. Specifically, the 2013 rule provided that an activity or investment occurs solely outside the United States for purposes of the foreign fund exemption only if:
The banking entity acting as
sponsor, or engaging as principal in the acquisition or retention of an ownership interest in the covered fund, is not itself, and is not controlled directly or indirectly by, a banking entity that is located in the United States or organized under the laws of the United States or of any State;
The banking entity (including
relevant personnel) that makes the decision to acquire or retain the ownership interest or act as sponsor to the covered fund is not located in the United States or organized under the laws of the United States or of any State;
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 the laws of the United States or of any State; and
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 the laws of the United States or of any State (the ‘‘financing prong’’).596 Much like the similar requirement under the exemption for permitted trading activities of a foreign banking entity, the proposal would have removed the financing prong of the foreign fund exemption, while leaving in place the other requirements for an activity or investment to be considered ‘‘solely outside of the United States.’’ Removing the financing prong was intended to streamline the requirements of the foreign fund exemption with the intention of improving implementation of the statutory exemption. Several commenters supported removing the financing prong from the foreign fund exemption.597 One commenter argued that this change would appropriately refocus the foreign fund exemption on the location of the activities of the banking entity as principal.598 Another commenter argued that the proposed changes to the foreign fund exemption, including removal of the financing prong, could promote international regulatory cooperation.599 Other commenters argued against eliminating the financing prong because it could result in a U.S. branch or affiliate that extends financing to bear some risks.600 The agencies are adopting the proposal to remove the financing prong for the same reasons described above in
section IV.B.4 for the trading outside of
the United States exemption. This change focuses one of the key requirements of the foreign fund exemption on the principal actions and risk of the transaction. Removing the financing prong would also address concerns that the fungibility of financing has made this requirement in certain circumstances difficult to apply in practice to determine whether a particular financing is tied to a particular activity or investment. Eliminating the financing prong, while retaining the other prongs of the foreign fund exemption, strikes a better balance between the risks posed to U.S. banking entities and the U.S. financial system, on the one hand, and effectuating the statutory exemption for activities conducted solely outside of the United States, on the other. The agencies note that a U.S. banking entity’s affiliate lending activities remain subject to other laws and regulations—including sections 23A and 23B of the Federal Reserve Act and prudential safety and soundness standards, as applicable. One of the restrictions of the statutory exemption for covered fund activities conducted by foreign banking entities solely outside the United States is the restriction that ‘‘no ownership interest in such hedge fund or private equity fund is be offered for sale or sold to a resident of the United States.601 To implement this restriction, §ll.13(b) of the 2013 rule requires, as one condition of the foreign fund exemption, that ‘‘no ownership interest in the covered fund is offered for sale or sold to a resident of the United States’’ (the ‘‘marketing restriction’’).602 The final rule, like the proposal, clarifies that an ownership interest in a covered fund is not offered for sale or sold to a resident of the United States for purposes of the marketing restriction only if it is not sold and has not been sold pursuant to an offering that targets residents of the United States in which the banking entity or any affiliate of the banking entity participates. The final

603See proposal §ll.13(b)(3).
604See supra note 59, FAQ 13.
605See, e.g., AIC; BPI; BVI; IIB; and EBF. 606See, e.g., EBF and IIB. 607See, e.g., AIC; BPI; and BVI. 608See supra note 59, FAQ 13. 609See BVI. 610 79 FR at 5741. 611See supra Part IV.B.4. 612See U.S.C. 1851(f)(1). 613See final rule §ll.14(a)(1). 614See U.S.C. 1851(f)(3). 615Neither the statute nor the proposal limits covered transactions between a banking entity and a covered fund for which the banking entity does not serve as investment manager, investment adviser, or sponsor (as defined in section 13 of the BHC Act) or have an interest in reliance on section 13(d)(1)(G) of the BHC Act. Similarly, the final rule does not limit such covered transactions. 616See 12 U.S.C. 1851(f)(3). 617See final rule §ll.14(a)(2)(ii). rule, like the proposal, also clarifies that if the banking entity or an affiliate sponsors or serves, directly or indirectly, as the investment manager, investment adviser, commodity pool operator, or commodity trading advisor to a covered fund, then the banking entity or affiliate will be deemed for purposes of the marketing restriction to participate in any offer or sale by the covered fund of ownership interests in the covered fund.603 This revision adopts existing staff guidance addressing this issue.604 Several commenters supported this clarification.605 Some commenters argued that this clarification appropriately excludes from the marketing restriction those activities where the risk occurs and remains outside of the United States and reflects the intended extraterritorial limitations of the section 13 of the BHC Act.606 In addition, commenters stated that codifying the previously issued staff guidance will provide greater clarity and certainty for non-U.S. banking entities making investments in third party funds (i.e., covered funds that the banking entity does not advise or organize and offer pursuant to § ll.11(a) or (b) of the final rule) and will enable long-term strategies in reliance on this provision.607 The agencies are adopting this clarification as proposed to formally incorporate the existing staff guidance. As staff noted in the previous staff guidance, the marketing restriction constrains the foreign banking entity in connection with its own activities with respect to covered funds rather than the activities of unaffiliated third parties.608 This ensures that the foreign banking entity seeking to rely on the foreign fund exemption does not engage in an offering of ownership interests that targets residents of the United States. This clarification limits the extraterritorial application of section 13 to foreign banking entities while seeking to ensure that the risks of covered fund investments by foreign banking entities occur and remain solely outside of the United States. If the marketing restriction were applied to the activities of third parties, such as the sponsor of a third-party covered fund (rather than the foreign banking entity investing in a third-party covered fund), the foreign fund exemption may
not be available in certain circumstances even though the risks and activities of a foreign banking entity with respect to its investment in the covered fund are solely outside the United States. One commenter asked the agencies to clarify that the requirement that the banking entity (including the relevant personnel) that makes the decision ‘‘to acquire or retain the ownership interest or act as sponsor to the covered fund’’ must not be located in the United States does not prohibit non-U.S. investment funds from utilizing the expertise of U.S. investment advisers under delegation agreements.609 This commenter noted that a foreign investment fund may appoint a qualified U.S. investment adviser for providing investment management or investment advisory services under delegation but that the ultimate responsibility for the investment decisions and compliance with statutory and contractual investment limits remains with the foreign management company that manages the foreign investment fund. As stated in the preamble to the 2013 rule, the foreign fund exemption permits the U.S. personnel and operations of a foreign banking entity to act as investment adviser to a covered fund in certain circumstances. For example, the U.S. personnel of a foreign banking entity may provide investment advice and recommend investment selections to the manager or general partner of a covered fund so long as the investment advisory activity in the United States does not result in U.S. personnel participating in the control of the covered fund or offering or selling an ownership interest to a resident of the United States.610 Consistent with the foreign trading exemption, as discussed above,611 the agencies also are confirming that under the final rule, the foreign fund exemption does not preclude a foreign banking entity from engaging a nonaffiliated U.S. investment adviser as long as the actions and decisions of the banking entity as principal occur outside of the United States. The agencies intend to address and request further comment on additional covered fund issues in a future proposed rulemaking.
4. Section ll.14: Limitations on
Relationships With a Covered Fund a. Relationships With a Covered Fund
Section 13(f) of the BHC Act provides
that, with limited exceptions, no banking entity that serves, directly or indirectly, as the investment manager, investment adviser, or sponsor to a hedge fund or private equity fund, or that organizes and offers a hedge fund or private equity fund pursuant to
section 13(d)(1)(G), and no affiliate of
such entity, may enter into a transaction with the fund, or with any other hedge fund or private equity fund that is controlled by such fund, that would be a ‘‘covered transaction,’’ as defined in
section 23A of the Federal Reserve Act,
as if such banking entity and the affiliate thereof were a member bank and the hedge fund or private equity fund were an affiliate thereof.612 The 2013 rule includes this prohibition as well.613 The proposal included a request for comment regarding the restrictions in section 13(f) of the BHC Act and § ll.14 of the 2013 rule. As with the other covered fund issues for which no specific rule text was proposed, the agencies continue to consider the prohibition in section 13(f) of the BHC Act and intend to issue a separate proposed rulemaking that addresses this issue. b. Prime Brokerage Transactions
Section 13(f) of the BHC Act provides
an exemption from the prohibition on covered transactions with a hedge fund or private equity fund for any prime brokerage transaction with a hedge fund or private equity fund in which a hedge fund or private equity fund managed, sponsored, or advised by a banking entity has taken an ownership interest (a second-tier fund).614 The statute by its terms permits a banking entity with a relationship to a hedge fund or private equity fund described in section 13(f) of the BHC Act to engage in prime brokerage transactions (that are covered transactions) only with second-tier funds and does not extend to hedge funds or private equity funds more generally.615 Under the statute, the exemption for prime brokerage transactions is available only so long as certain enumerated conditions are satisfied.616 The 2013 rule included this exemption as well and similarly required satisfaction of certain enumerated conditions in order for a banking entity to engage in permissible prime brokerage transactions.617 The

618See 83 FR at 33486–87. 619See supra note 59, FAQ 18. 620See 83 FR at 33487. 621This duty to update the certification is required as a condition of the statutory exemption. See 12 U.S.C. 1851(f)(3)(A)(ii). 622See SIFMA. 623See id. 624See ABA. 625See id. 626See Occupy the SEC. 627See 79 FR 5753. 628Banking entities did not have any compliance program obligations under the 2013 rule if they do not engage in any covered activities other than trading in certain government, agency, State or municipal obligations. §ll20(f)(1). Additionally, banking entities with $10 billion or less in total consolidated assets could satisfy the compliance program requirements under the 2013 rule by including appropriate references to the requirements of section 13 of the BHC Act and the implementing regulations in their existing policies and procedures. §ll.20(f)(2). 629As discussed below, the proposal would have amended the Appendix A metrics requirements to reduce compliance-related inefficiencies while allowing for the collection of data to permit the agencies to better monitor compliance with section 13 of the BHC Act. In addition, the proposal would have eliminated Appendix B of the 2013 rule, which would have resulted in Appendix A being re-designated as the ‘‘Appendix.’’ 2013 rule’s conditions are that (i) the banking entity is in compliance with each of the limitations set forth in §ll.11 of the 2013 rule with respect to a covered fund organized and offered by the banking entity or any of its affiliates; (ii) the CEO (or equivalent officer) of the banking entity certifies in writing annually that the banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the covered fund or of any covered fund in which such covered fund invests; and (iii) the Board has not determined that such transaction is inconsistent with the safe and sound operation and condition of the banking entity. The proposal retained each of the 2013 rule’s conditions for the prime brokerage exemption described above, including the requirement that certification be made to the appropriate agency for the banking entity.618 Staffs of the agencies previously issued guidance explaining when a banking entity was required to provide this certification during the conformance period.619 The proposal incorporated this guidance into the rule text by requiring banking entities to provide the CEO certification annually no later than March 31 of the relevant year.620 This change was intended to provide banking entities with certainty about when the required certification must be provided to the appropriate agency in order to comply with the prime brokerage exemption. As under the 2013 rule, under the proposal, the CEO would have a duty to update the certification if the information in the certification materially changes at any time during the year when he or she becomes aware of the material change.621 One commenter recommended that the
agencies expressly state that the CEO certification for purposes of the prime brokerage exemption is based on a reasonable review by the CEO and is made based on the knowledge and reasonable belief of the CEO.622 That commenter also requested that the agencies clarify that the term ‘‘prime brokerage transaction’’ includes transactions and services commonly provided in connection with prime brokerage transactions, as described under the 2013 rule, including: (1) Lending and borrowing of financial assets, (2) provision of secured financing collateralized by financial assets, (3) repurchase and reverse repurchase of financial assets, (4) derivatives, (5) clearance and settlement of transactions, (6) ‘‘give-up’’ agreements, and (7) purchase and sale of financial assets from inventory.623 Similarly, another commenter requested that the agencies clarify that the term ‘‘prime brokerage transaction’’ applies to any transaction provided in connection with custody, clearance and settlement, securities borrowing or lending services, trade execution, financing, or data, operational, and administrative support regardless of which business line within the banking entity conducts the business.624 The same commenter suggested that any prime brokerage transaction with a second-tier covered fund should be presumed to comply with section ll.14 of the rule and the prime brokerage exemption as long as it is executed in compliance with the requirements of Section 23B of the Federal Reserve Act.625 In addition, one commenter recommended limiting the prime brokerage exemption by, for instance, excluding financing and securities lending and borrowing from the prime brokerage exemption.626 The final rule adopts the proposed revision to the prime brokerage exemption with no changes. The agencies believe that codifying a deadline for CEO certification with respect to prime brokerage transactions will provide banking entities with greater certainty and facilitate supervision and review of the prime brokerage exemption. With respect to the other issues raised by commenters regarding the prime brokerage exemption in section 13(f) of the BHC Act, the agencies continue to consider these issues and intend to issue a separate proposed rulemaking that specifically addresses these issues. D. Subpart D—Compliance Program Requirement; Violations

Section ll.20: Program for
Compliance; Reporting
Section ll.20 of the 2013 rule
contains compliance program and metrics collection and reporting requirements. The 2013 rule was intended to focus the most significant compliance obligations on the largest and most complex organizations, while minimizing the economic impact on small banking entities.627 To this end, the 2013 rule included a simplified compliance program for small banking entities and banking entities that did not engage in extensive trading activity.628 However, as the agencies noted in the proposal, public feedback has indicated that even determining whether a banking entity is eligible for the simplified compliance program could require significant analysis for small banking entities. In addition, certain traditional banking activities of small banks fall within the scope of the proprietary trading and covered fund prohibitions and exemptions, making banks engaging in these activities ineligible for the simplified compliance program. As the agencies noted in the proposal, public feedback has also indicated that the compliance program requirements are unduly burdensome for larger banking entities that must implement the rule’s enhanced compliance program, metrics, and CEO attestation requirements. Accordingly, the agencies proposed to revise the compliance program requirements to allow greater flexibility for banking entities in integrating the Volcker compliance and exemption requirements into existing compliance programs and to focus the requirements on the banking entities with the most significant and complex activities. Specifically, the agencies proposed applying the compliance program requirement to banking entities as follows:

Banking entities with significant
trading assets and liabilities. Banking entities with significant trading assets and liabilities would have been subject to the six-pillar compliance program requirement (§ll.20(b) of the 2013 rule), the metrics reporting requirements (§ ll.20(d) of the 2013 rule),629 the covered fund documentation requirements (§ll.20(e) of the 2013 rule), and the CEO attestation

630Although the proposal would have eliminated
Appendix B, as noted above, it would have
continued to apply a modified version of the CEO attestation to banking entities without limited trading assets and liabilities. 631The enhanced minimum standards in
Appendix B of the 2013 rule required that the firm’s
compliance program: (1) Be reasonably designed to identify, document, monitor, and report the trading and covered fund activities and investments of the banking entity; identify, monitor and promptly address the risks of these activities and investments and potential areas of noncompliance; and prevent activities or investments prohibited by, or that do not comply with, section 13 of the BHC Act and the 2013 rule; (2) establish and enforce appropriate limits on the activities and investments of the banking entity, including limits on the size, scope, complexity, and risks of the individual activities or investments consistent with the requirements of
section 13 of the BHC Act and the 2013 rule; (3)
subject the effectiveness of the compliance program to periodic independent review and testing, and ensure that the entity’s internal audit, corporate compliance and internal control functions involved in review and testing are effective and independent; (4) make senior management, and others as appropriate, accountable for the effective implementation of the compliance program, and ensure that the board of directors and CEO (or equivalent) of the banking entity review the effectiveness of the compliance program; and (5) facilitate supervision and examination by the agencies of the banking entity’s trading and covered fund activities and investments. 632See, e.g., Insurance Coalition; Real Estate Associations; CREFC; Credit Suisse; JBA; FSF; and ABA. 633See Credit Suisse. 634See, e.g., Bean; Data Boiler; and AFR. 635See Bean. 636See AFR. 637 Id. requirement (Appendix B of the 2013 rule).630

Banking entities with moderate
trading assets and liabilities. Banking entities with moderate trading assets and liabilities would have been required to establish the simplified compliance program (described in §ll.20(f)(2) of the 2013 rule) and comply with the CEO attestation requirement.
Banking entities with limited
trading assets and liabilities. Banking entities with limited trading assets and liabilities would have been presumed to be in compliance with the proposal and would have had no obligation to demonstrate compliance with subpart B and subpart C of the implementing regulations on an ongoing basis. These banking entities would not have been required to demonstrate compliance with the rule unless and until the appropriate agency, based upon a review of the banking entity’s activities, determined that the banking entity should have been treated as if it did not have limited trading assets and liabilities. After reviewing all of the comments to this section, the agencies are finalizing these changes largely as proposed, except for further tailoring application of the CEO attestation requirement to only banking entities with significant trading assets and liabilities and revising the notice and response procedures in subpart D to be more broadly applicable. a. Compliance Program Requirements for Banking Entities With Significant Trading Assets and Liabilities
i. Section 20(b)—Six-Pillar Compliance
Program
Section ll.20(b) of the 2013 rule
specifies six elements that each compliance program required under that
section must at a minimum contain.
The six elements specified in § ll.20(b) are:
Written policies and procedures
reasonably designed to document, describe, monitor and limit trading activities and covered fund activities and investments conducted by the banking entity to ensure that all activities and investments that are subject to section 13 of the BHC Act and the rule comply with section 13 of the BHC Act and the 2013 rule;
A system of internal controls
reasonably designed to monitor compliance with section 13 of the BHC Act and the rule and to prevent the occurrence of activities or investments that are prohibited by section 13 of the BHC Act and the 2013 rule;
A management framework that
clearly delineates responsibility and accountability for compliance with
section 13 of the BHC Act and the 2013
rule and includes appropriate management review of trading limits, strategies, hedging activities, investments, incentive compensation and other matters identified in the rule or by management as requiring attention;
Independent testing and audit of
the effectiveness of the compliance program conducted periodically by qualified personnel of the banking entity or by a qualified outside party;
Training for trading personnel and
managers, as well as other appropriate personnel, to effectively implement and enforce the compliance program; and
Records sufficient to demonstrate
compliance with section 13 of the BHC Act and the 2013 rule, which a banking entity must promptly provide to the relevant agency upon request and retain for a period of no less than 5 years. Under the 2013 rule, these six elements have to be part of the required compliance program of each banking entity with total consolidated assets greater than $10 billion that engages in covered trading activities and investments subject to section 13 of the BHC Act and the implementing regulations (excluding trading permitted under §ll.6(a) of the 2013 rule). The agencies proposed further tailoring the compliance program requirements to make the scale of compliance activity required by the rule commensurate with a banking entity’s size and level of trading activity. Specifically, the proposal would have applied the six-pillar compliance program requirements to banking entities with significant trading assets and liabilities and would have afforded flexibility to integrate the §ll.20 compliance program requirements into other compliance programs of the banking entity. The proposal also would have eliminated the enhanced compliance program requirements found in Appendix B of the 2013 rule,631 except for the CEO attestation requirement discussed below. The proposal also would have revised the covered fund documentation requirements in § ll.20(e), which applied to all banking entities with greater than $10 billion in total consolidated assets under the 2013 rule, to only apply to firms with significant trading assets and liabilities. Several commenters expressed support for the elimination of the enhanced compliance program requirements in Appendix B of the 2013 rule.632 One commenter requested that the agencies provide greater discretion to banking entities with significant trading assets and liabilities to tailor their compliance programs to the size and complexity of their activities and structure of their business.633 A few commenters opposed the elimination of
Appendix B of the 2013 rule.634 One
asserted that firms have already made investments in their compliance programs, so there was no justification for the change.635 Another commenter argued that the remaining controls are not sufficient to ensure compliance with the rule because they lack specificity.636 This commenter also asserted that merging the Volcker Rule requirements with the safety and soundness compliance framework would be problematic as the Volcker Rule considers market supply and demand dynamics while the safety and soundness compliance framework generally only considers risks.637 The concern was that a combined program might not adequately consider the activities restrictions of the Volcker Rule. The agencies are adopting the sixpillar compliance program requirements and retaining the covered fund

638See, e.g., AFR; Merkley; Better Markets; and Data Boiler. 639See, e.g., Capital One et al.; ABA; Arvest; BB&T; State Street; BPI; and IIB. 640See Capital One et al. 641See BOK. 642See Capital One et al. 643See IIB. 644See, e.g., ABA and JBA. 645See, e.g., ABA and FSF. 646See JBA. 647See BOK and Capital One et al. documentation requirements for banking entities with significant trading assets and liabilities as proposed. The agencies continue to believe that these banking entities are engaged in activities at a scale that warrants the costs of establishing and maintaining the detailed and comprehensive compliance program elements described in §§ ll.20(b) and ll.20(e) of the rule. Accordingly, the agencies believe it is appropriate to require banking entities with significant trading assets and liabilities to maintain a six-pillar compliance program to ensure that banking entities’ activities are conducted in compliance with section 13 of the BHC Act and the implementing regulations. Based on experience with the six-pillar compliance program requirements under the 2013 rule, the agencies believe that such requirements are appropriate and effective for firms with significant trading assets and liabilities; these standards impose certain minimum standards, but permit the banking entity flexibility to reasonably design the program in light of the banking entity’s activities. The agencies also believe that the prescribed sixpillar compliance requirements are consistent with the standards banking entities use in their traditional risk management and compliance processes. The agencies believe that banking entities should have discretion to tailor their compliance programs to the structure and activities of their organizations. The flexibility to build on compliance programs that already exist at banking entities, including internal limits, risk management systems, boardlevel governance protocols, and the level at which compliance is monitored, may reduce the costs and complexity of compliance while also enabling a robust compliance mechanism for the final rule. The agencies therefore believe that removal of the specific, enhanced minimum standards in Appendix B will afford a banking entity considerable flexibility to satisfy the elements of § ll.20 in a manner that it determines to be most appropriate given its existing compliance regimes, organizational structure, and activities. Allowing banking entities the flexibility to integrate Volcker Rule compliance requirements into existing compliance programs should increase the effectiveness of the §ll.20 requirements by eliminating duplicative governance and oversight structures arising from the Appendix B requirement for a stand-alone compliance program.
ii. CEO Attestation Requirement
The 2013 rule included a requirement in its Appendix B that a banking entity’s CEO must review and annually attest in writing to the appropriate agency that the banking entity has in place processes to establish, maintain, enforce, review, test, and modify the compliance program established pursuant to Appendix B and § ll.20 of the 2013 rule in a manner reasonably designed to achieve compliance with
section 13 of the BHC Act and the
implementing regulations.
Under the proposal, Appendix B would have been eliminated, and a modified CEO attestation requirement would have applied to banking entities with significant trading assets and liabilities or moderate trading assets and liabilities. The agencies believed that, while the revisions to the compliance program requirements under the proposal generally would simplify the compliance program requirements, this simplification should be balanced against the requirement for all banking entities to maintain compliance with
section 13 of the BHC Act and the
implementing regulations. Accordingly, the agencies believed that applying the CEO attestation requirement to banking entities with meaningful trading activities would ensure that the compliance programs established by these banking entities pursuant to § ll.20(b) or § ll.20(f)(2) of the proposal would be reasonably designed to achieve compliance with section 13 of the BHC Act and the implementing regulations as proposed. The agencies proposed limiting the CEO attestation requirement to banking entities with moderate trading assets and liabilities or significant trading assets and liabilities because, under the proposal, banking entities with limited trading assets and liabilities would have been subject to a rebuttable presumption of compliance. Thus, the agencies did not believe it necessary to require a CEO attestation for banking entities with limited trading assets and liabilities as those banking entities would not be subject to the express requirement to maintain a compliance program pursuant to § ll.20 under the proposal. Further, the agencies proposed retaining the 2013 rule’s language concerning how the CEO attestation requirement applies to the U.S. operations of a foreign banking entity. This language states that, in the case of the U.S. operations of a foreign banking entity, including a U.S. branch or agency of a foreign banking entity, the attestation may be provided for the entire U.S. operations of the foreign banking entity by the senior management officer of the U.S. operations of the foreign banking entity who is located in the United States. Several commenters expressed support for the CEO attestation requirement and recommended that the agencies make no changes to the requirement or apply it to all banking entities.638 Other commenters believed that the CEO attestation requirement should not apply to banking entities with moderate trading assets and liabilities,639 as requiring the development of costly and burdensome internal compliance efforts would not be consistent with the activities or risks of such firms.640 One commenter argued that the CEO attestation requirement duplicates existing quarterly reporting process,641 and another commenter asserted that imposing such a requirement for firms with moderate trading assets and liabilities would negate the tailoring the agencies proposed for those banking entities.642 One commenter urged the agencies to limit the application of the compliance program and reporting requirements to only the U.S. operations of foreign banking entities.643 Other requests for modification included streamlining the CEO attestation requirement,644 adding a knowledge qualifier,645 and limiting the scope to only U.S. operations.646 A few commenters requested that the CEO attestation be completely eliminated.647 After reviewing the comments, the agencies have decided to retain the CEO attestation requirement but only for banking entities with significant trading assets and liabilities. The agencies
continue to believe that incorporating the CEO attestation requirement (which was previously in Appendix B of the 2013 rule) into §ll.20(c) will help to ensure that the compliance program established pursuant to that section is reasonably designed to achieve compliance with section 13 of the BHC Act and the implementing regulations. However, the agencies have decided not to apply the CEO attestation requirement to banking entities without significant trading assets and liabilities. Such banking entities will still need to comply with section 13 of the BHC Act and the implementing regulations;

648The 2013 rule applied the CEO attestation requirement to all banking entities with total consolidated assets of $50 billion or more (or, in the case of a foreign banking entity, total U.S. assets of $50 billion or more). By applying the CEO attestation requirement to banking entities with moderate trading assets and liabilities, the proposal would have expanded its applicability to certain banking entities with less than $50 billion in total U.S. assets that were not subject to the requirement under the 2013 rule. 649 2013 rule §ll.20(f)(2). 650See, e.g., BB&T and JBA. 651See B&F. 652See JBA. 653See SIFMA. 654See ABA. however, they will not need to provide CEO attestations. This means that the CEO attestation requirement will not be expanded to cover banking entities that did not need to provide CEO attestations under the 2013 rule.648 The agencies believe that requiring a CEO attestation from banking entities with limited or moderate trading assets and liabilities would result in additional costs and burdens that would not be commensurate with the type of activities or risks of these firms. b. Compliance Program Requirements for Banking Entities With Moderate Trading Assets and Liabilities The 2013 rule provided that a banking entity with total consolidated assets of $10 billion or less as measured on December 31 of the previous two years that engages in covered activities or investments pursuant to subpart B or subpart C of the 2013 rule (other than trading activities permitted under § ll.6(a) of the 2013 rule) may satisfy the compliance program requirements by including in its existing compliance policies and procedures appropriate references to the requirements of section 13 of the BHC Act and subpart D of the implementing regulations and adjustments as appropriate given the activities, size, scope, and complexity of the banking entity.649 The agencies proposed extending the availability of this simplified compliance program to banking entities with moderate trading assets and liabilities. The agencies believed that streamlining the compliance program requirements for banking entities with moderate trading assets and liabilities would be appropriate because the scale and nature of the activities and investments in which these banking entities are engaged may not justify the additional costs associated with establishing the compliance program elements under §§ ll.20(b) and (e) of the 2013 rule. Such activities may be appropriately managed through an appropriately tailored simplified compliance program. The agencies noted that banking entities with moderate trading assets and liabilities would be able to incorporate their simplified compliance program into existing compliance policies and procedures and tailor their compliance programs to the size and nature of their activities, consistent with the approach for banking entities with significant trading assets and liabilities. Other commenters expressed support for a tailored compliance
program for banking entities with moderate trading assets and liabilities.650 The agencies are adopting the compliance program requirements, as proposed, for banking entities with moderate trading assets and liabilities, for the aforementioned reasons. Thus, a banking entity with moderate trading assets and liabilities qualifies for the simplified compliance program under § ll.20(f)(2) of the final rule.
c. Compliance Program Requirements
for Banking Entities With Limited Trading Assets and Liabilities Under the proposal, a banking entity with limited trading assets and liabilities would have been presumed to be in compliance with the rule. Banking entities with limited trading assets and liabilities would have had no obligation to demonstrate compliance with subpart B and subpart C of the implementing regulations on an ongoing basis, given the limited scale of their trading operations. The agencies believed, based on experience implementing and supervising compliance with the 2013 rule, that these banking entities generally engage in minimal trading and investment activities subject to section 13 of the BHC Act. Thus, the agencies believed that the limited trading assets and liabilities of the banking entities qualifying for the presumption of compliance would be unlikely to warrant the costs of establishing a compliance program under §ll.20 of the 2013 rule. Under the proposed approach, the agencies would not have expected a banking entity with limited trading assets and liabilities that qualified for the presumption of compliance to demonstrate compliance with the proposal on an ongoing basis in conjunction with the agencies’ normal supervisory and examination processes. However, the appropriate agency would have been able to exercise its authority to treat the banking entity as if it did not have limited trading assets and liabilities if, upon review of the banking entity’s activities, the relevant agency determined that the banking entity engaged in proprietary trading or covered fund activities that were otherwise prohibited under subpart B or subpart C. A banking entity would have been expected to remediate any impermissible activity upon being notified of such determination by the agency within a period of time deemed appropriate by the agency. In addition, irrespective of whether a banking entity had engaged in activities in violation of subpart B or C, the relevant agency would have retained its authority to require a banking entity to apply the compliance program requirements that would otherwise apply if the banking entity had significant or moderate trading assets and liabilities if the relevant agency determined that the size or complexity of the banking entity’s trading or investment activities, or the risk of evasion, did not warrant a presumption of compliance. One commenter expressed support for the rebuttable presumption of compliance for banking entities with limited trading assets and liabilities.651 Another commenter suggested completely exempting banking entities with limited trading assets and liabilities from section 13 of the BHC Act.652 One commenter requested that the evidence that an agency would require in response to its attempt to rebut a presumption should not be greater than what is required of the banking entity under the presumption.653 Another commenter recommended that the agencies treat inadvertent violations of the rule as supervisory
matters and not as violations.654 The final rule adopts the compliance program requirements for banking entities with limited trading assets and liabilities as proposed. The agencies note that the removal of the standard compliance program requirements in § ll.20 for banking entities with limited trading assets and liabilities does not relieve those banking entities of the obligation to comply with the prohibitions and other requirements of the permitted trading activity exemptions, to the extent that the banking entity engages in such activities, including RENTD requirements for permitted underwriting and market making, under the final rule. The agencies believe the presumption of compliance for banking entities with limited trading assets and liabilities will allow flexibility for these banking entities to take appropriate actions, tailored to the individual activities in which the banking entities engage, to comply with the rule. Such

655See proposed rule §ll.20(g)(2)(ii). 656See proposed rule §§ll.3(c), ll.3(g)(2), ll.4(a)(8)(iv), ll.4(b)(6)(iv). 657See IIB. 658See final rule §ll.20(i). 659Appendix A of the 2013 rule applies to U.S. banking entities with trading assets and liabilities the average gross sum of which equals or exceeds $10 billion on a worldwide consolidated basis over the previous four calendar quarters (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States), and to foreign banking entities with combined U.S. trading assets and liabilities the average gross sum of which equals or exceeds $10 billion over the previous four calendar quarters (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States). 2013 rule §ll.20(d)(1). 660See 79 FR at 5772. 661As previously noted in the section entitled ‘‘Enhanced Minimum Standards for Compliance Programs,’’ the Agencies are proposing to eliminate
Appendix B of the 2013 rule. Current Appendix A
is therefore re-designated as the ‘‘Appendix’’ in the final rule. 662The Instructions will be available on each agency’s respective website at the addresses specified in the Paperwork Reduction Act section of this SUPPLEMENTARY INFORMATION. For the SEC and CFTC, this document represents the views of SEC staff and CFTC staff; neither Commission has approved nor disapproved them. The Instructions are not a rule, regulation, or statement of the SEC or the CFTC; and like all SEC or CFTC staff guidance, it has no legal force or effect, does not alter or amend applicable law, and creates no new or additional SEC or CFTC obligations for any person. Consistent with changes elsewhere in the final rule and with the Federal banking agencies’ Interagency Statement Clarifying the Role of Supervisory Guidance (Sept. 11, 2018; https:// www.federalreserve.gov/supervisionreg/srletters/ sr1805.htm, https://www.occ.gov/news-issuances/ news-releases/2018/nr-ia-2018-97a.pdf, https:// www.fdic.gov/news/news/financial/2018/ fil18049.html), the agencies are removing references to guidance and expectations from the regulatory text of the metrics reporting requirements. actions may include, for example, integrating the requirements for permitted trading activities under the exemptions in § ll.4, ll.5, and ll.6 into existing internal policies and procedures (to the extent the banking entity engages in such activities), or taking other steps to satisfy the criteria to engage in such activities under the final rule. Regarding one commenter’s proposal that the agencies completely exempt banking entities with limited trading activities, the agencies note that
section 13 of the BHC Act does not give
the agencies authority to completely exempt banking entities from the requirements of the Volcker Rule. d. Notice and Response Procedures The proposed rule included notice and response procedures that an agency would follow when determining whether to treat a banking entity with limited trading assets and liabilities as if it did not have limited trading assets and liabilities.655 The notice and response procedures required the relevant agency to provide a written explanation of its determination and allowed the banking entity the opportunity to respond to the agency with any matters that the banking entity would have the agency consider in reaching its determination. The response procedures would have required the banking entity to respond within 30 days unless the agency extended the time period for good cause or if the agency shortened the time period either with the consent of the banking entity or because the conditions or activities of the banking entity so required. Failure to respond within the applicable timeframe would have constituted a waiver of objection to the agency’s determination. After the close of the response period, the agency would have decided, based on a review of the banking entity’s response and other information concerning the banking entity, whether to maintain the agency’s determination and would have notified the banking entity of its decision in writing. These notice and response procedures were similar, but not identical to, notice and response procedures found elsewhere in the proposed rule.656 One commenter suggested that there should be a consistent notice and response process regarding all presumptions in the final rule.657 The agencies agree and have modified the notice and response procedures in subpart D to apply more broadly to several types of determinations under the final rule, including determinations and rebuttals made under §§ll.3, ll.4, and ll.20.658 This change will provide consistency and enhance transparency with respect to the processes that an agency will follow for certain determinations throughout the final rule. E. Subpart E—Metrics: Appendix to Part [•]—Reporting and Recordkeeping Requirements Under the 2013 rule, a banking entity with substantial trading activity 659 must furnish the following quantitative measurements for each of its trading desks engaged in covered trading activity, calculated in accordance with
Appendix A:

Risk and position limits and usage;
Risk factor sensitivities;
Value-at-risk and stressed VaR;
Comprehensive profit and loss
attribution;
Inventory turnover;
Inventory aging; and
Customer-facing trade ratio.
The proposal explained that, based on the agencies’ evaluation of the effectiveness of the metrics data in monitoring covered trading activities for compliance with section 13 of the BHC Act and the associated reporting costs,660 the proposed rule would have amended Appendix A requirements to reduce compliance-related inefficiencies while allowing for the collection of data to permit the agencies to better monitor compliance with section 13 of the BHC Act.661 Specifically, the proposed rule would have made the following modifications to the reporting requirements in Appendix A:
Limit the applicability of certain
metrics only to market making and underwriting desks.
Replace the Customer-Facing Trade
Ratio with a new Transaction Volumes metric to more precisely cover types of trading desk transactions with counterparties.
Replace Inventory Turnover with a
new Positions metric, which measures the value of all securities and derivatives positions.
Remove the requirement to
separately report values that can be easily calculated from other reported quantitative measurements.
Streamline and make consistent
value calculations for different product types, using both notional value and market value to facilitate better comparison of metrics across trading desks and banking entities.
Eliminate inventory aging data for
derivatives because aging, as applied to derivatives, does not appear to provide a meaningful indicator of potential impermissible trading activity or excessive risk-taking.
Require banking entities to provide
qualitative information specifying for each trading desk the types of financial instruments traded, the types of covered trading activity the desk conducts, and the legal entities into which the trading desk books trades.
Require a Narrative Statement
describing changes in calculation methods, trading desk structure, or trading desk strategies.
Remove the paragraphs labeled
‘‘General Calculation Guidance’’ from the regulation. The Instructions generally would provide calculation guidance.662
Remove the requirement that
banking entities establish and report limits on Stressed Value-at-Risk at the trading desk-level because trading desks do not typically use such limits to manage and control risk-taking.
Require banking entities to provide
descriptive information about their reported metrics, including information uniquely identifying and describing

663The staff-level Technical Specifications Guidance describes the XML Schema. The Technical Specifications Guidance and the XML Schema are available on each agency’s respective website at the addresses specified in the Paperwork Reduction Act section of this SUPPLEMENTARY INFORMATION. 664See, e.g., AFR; Better Markets; Occupy the SEC; Public Citizen; and Volcker Alliance. 665See, e.g., ABA; FSF; IIB; New England Council; and SIFMA. 666The agencies anticipate the market risk capital calculations and the Volcker Rule quantitative measurements will align particularly closely when the banking agencies adopt a rule implementing the Basel Committee’s market risk capital standard in the United States. However, the agencies note that certain anticipated changes resulting from the Basel market risk capital standards may still result in a mismatch between metrics required under the market risk capital rule and the final rule. The agencies are aware of this potential issue and intend to address any such discrepancies at a future date. 667The proposed change would clarify that banking entities would have the discretion (but not the obligation) to report metrics with respect to a broader range of activities. 668Appendix A of the 2013 rule provides that the calculation period for each quantitative measurement is one trading day, but does not define ‘‘trading day’’. 669See, e.g., Credit Suisse; FSF; and JBA. 670See JBA. 671The definition in the Instructions require banking entities to calculate each metric for each calendar day on which a trading desk is open for trading, even if the desk is closed for trading in one jurisdiction (for example, due to a national holiday). 672See, e.g., ABA; CCMR; FSF; and SIFMA. certain risk measurements and information identifying the relationships of these measurements within a trading desk and across trading desks.

Require electronic submission of
the Trading Desk Information, Quantitative Measurements Identifying Information, and each applicable quantitative measurement in accordance with the XML Schema specified and published on each agency’s website.663 Several commenters objected to the proposed rule’s modification of the metrics. Some commenters suggested that the proposed amendments to metrics reporting were inappropriate in light of the lack of public disclosure of previously reported metrics information, and in some cases recommended that the agencies expand metrics reporting requirements.664 Other commenters recommended that the agencies simplify or eliminate the metrics.665 As described in detail below, the final rule streamlines the reporting requirements in Appendix A of the 2013 rule and adopts a limited set of the new requirements introduced in the proposal. Among other changes, the final rule entirely eliminates the stressed value-at-risk, risk factor sensitivities, and inventory aging. Taken together, the agencies estimate that the revised metrics in the final rule would result in a 67 percent reduction in the number of data items and approximately 94 percent reduction in the total volume of data, relative to the 2013 rule’s reporting requirement. The agencies believe the remaining metrics are generally useful to help firms demonstrate that their covered trading activities are conducted appropriately, and to enable the agencies to identify activities that potentially involve impermissible proprietary trading. Moreover, the agencies believe that these items do not pose a special calculation burden because firms generally already record these values in the regular course of business. The agencies expect that the changes in the final rule will enable banking entities to leverage calculations from their market risk capital programs to meet the requirements for the Volcker Rule quantitative measurements, which will reduce complexity and cost for banking entities, and improve the effectiveness of the final rule.666 As discussed above, in order to give banking entities a sufficient amount of time to comply with the changes adopted, banking entities will not be required to comply with the final amendments until January 1, 2021 (although banking entities 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). By providing an extended compliance period, the final amendments also should facilitate firms in integrating these requirements into existing or planned compliance programs.

Purpose
Paragraph I.c of Appendix A of the 2013 rule provides that the quantitative measurements that are required to be reported under the rule are not intended to serve as a dispositive tool for identifying permissible or impermissible activities. The proposal would have expanded the qualifying language in paragraph I.c of Appendix A to apply to all of the information required to be reported pursuant to the
appendix, rather than only to the
quantitative measurements themselves. In addition, the proposed rule would have also removed paragraph I.d. in
Appendix A of the 2013 rule, which
provides that the agencies would review the metrics data and revise the metrics collection requirements based on that review. The agencies received no comments on these proposed changes. The final rule adopts the changes, as proposed. The agencies believe that the trading desk information and quantitative measurements identifying information, coupled with the quantitative measurements, should assist the agencies in monitoring compliance. This information will be used to monitor patterns and identify activity that may warrant further review. Additionally, the final rule removes paragraph I.d. Appendix A of the 2013 rule, as the agencies have conducted this preliminary evaluation of the effectiveness of the quantitative measurements collected to date and have adopted modifications based on that review.
Definitions
The proposed rule would have clarified the definition of ‘‘covered trading activity’’ by adding the phrase ‘‘in its covered trading activity’’ to clarify that the term ‘‘covered trading activity,’’ as used in the proposed
appendix, may include trading
conducted under § ll.3(d), ll.6(c), ll.6(d), or ll.6(e) of the proposal.667 In addition, the proposed rule defined two additional terms for purposes of the
appendix, ‘‘applicability’’ and ‘‘trading
day,’’ that were not defined in the 2013 rule. The proposal defined ‘‘applicability’’ to clarify when certain metrics are required to be reported for specific trading desks and thus make several metrics applicable only to desks engaged in market making or underwriting. Finally, the proposal defined ‘‘trading day,’’ a term used throughout Appendix A of the 2013 rule,668 to mean a calendar day on which a trading desk is open for trading. Commenters supported the proposal to define ‘‘applicability’’ in order to clarify that certain metrics are only applicable to desks engaged in market making or underwriting.669 One commenter suggested defining the scope of ‘‘covered trading activity’’ to align with activity covered under the Basel Committee’s revised standard for market risk capital.670 While the agencies received no comments on the proposed definition of ‘‘trading day’’ in the regulation, several comments expressed serious concerns with the proposed ‘‘trading day’’ definition in the 2018 Instructions,671 specifically requiring banking entities to report metrics for trading days when U.S. markets are closed but non-U.S. locations may be open.672 These commenters argued that this would impose significant operational costs with no commensurate benefit to the agencies’ oversight ability. However, the Agencies feel the definition of trading day is appropriate because the potential for impermissible

673 In addition, the 2013 rule permits banking entities to optionally include trading under §ll.3(d), §ll.6(c), §ll.6(d), or §ll.6(e). 674 Including derivatives or securities that also meet the 2013 rule’s definition of a derivative See infra Part III.E.2.i.v (discussing the Securities Inventory Aging quantitative measurement). The definition of ‘‘security’’ and ‘‘derivative’’ are set forth in §ll.2 of the 2013 rule. See 2013 rule §§ll.2 (h), (y). 675 In addition, the proposed rule would have added to paragraph III.a. a requirement that banking entities include file identifying information in each submission to the relevant agency pursuant to
Appendix A of the 2013 rule. Specifically, the
proposal would have required the file identifying information to include the name of the banking entity, the RSSD ID assigned to the top-tier banking entity by the Board, the reporting period, and the creation date and time. 676See, e.g., ABA; CCMR; Credit Suisse; FSF; and Goldman Sachs. 677See, e.g., ABA; Credit Suisse; CCMR; and FSF. 678See, e.g., CCMR; Public Citizen; and SIFMA. 679See, e.g., Goldman Sachs; JBA; and States Street (on leveraging current industry practices for FX). 680See SIFMA. 681See, e.g., Data Boiler; IIB; JBA; SIFMA; and State Street. 682See, e.g., IIB; New England Council; SIFMA; and State Street. 683See, e.g., IIB and SIFMA. 684See, e.g., New England Council and State Street. 685See JBA. 686See Public Citizen. 687See AFR. 688See, e.g., SIFMA and IIB. 689See Data Boiler. trading activity on a desk exists on any day when the desk is open for trading, regardless of which markets are open. The final rule retains the definition. The agencies believe that the scope of ‘‘covered trading activity’’ in the final rule is appropriate, and note that, due to changes in the definition of trading account, the scope of ‘‘covered trading activity’’ will align more closely with the scope of activities covered under the Basel Committee’s market risk capital standards for certain banking entities. Therefore, the final rule adopts these definitions as proposed.
3. Reporting and Recordkeeping
Paragraph III.a of Appendix A of the 2013 rule required banking entities subject to the appendix to furnish seven quantitative metrics for all trading desks engaged in trading activity conducted pursuant to § ll.4, §ll.5, or § ll .6(a) (i.e., permitted underwriting, market making, and risk-mitigating hedging activity and trading in certain government obligations).673 The proposal would have made several modifications to streamline the reporting requirements in paragraph III.a of Appendix A of the 2013 rule. Specifically, the proposal would have:
(1) Replaced the Inventory Turnover and Customer-Facing Trade Ratio metrics with the Positions and Transaction Volumes quantitative measurements, respectively; (2) limited the Inventory Aging metric to only apply to securities 674 and changed the name of the quantitative measurement to the Securities Inventory Aging; (3) added the phrase ‘‘as applicable’’ to paragraph III.a in order to limit application of the Positions, Transaction Volumes, and Securities Inventory Aging quantitative measurements to only trading desks that rely on § ll.4(a) or § ll.4(b) to conduct underwriting activity or market makingrelated activity, respectively; and (4) inserted references in paragraph III.a to the new qualitative information requirements added to the appendix (i.e., Trading Desk Information, Quantitative Measurements Identifying Information, and Narrative Statement requirements).675 A number of commenters supported the proposed changes to remove or tailor certain of the metrics provided in
Appendix A of the 2013 rule, but
opposed the addition of new metrics reporting requirements (i.e., Trading Day definition, Trading Desk Information, Quantitative Measurements Identifying Information, Narrative Statement).676 These commenters argued that, contrary to the proposal’s objective to streamline compliance requirements, the new reporting requirements would significantly increase the overall compliance burden and impose substantial compliance costs on firms.677 Three commenters argued that the agencies did not provide reasoned cost benefit analysis to justify the inclusion of the new metrics.678 A few commenters recommended that the agencies should further streamline the current metrics to permit individual supervisors and banking entities to collaborate on determining which metrics are appropriate for that specific institution.679 One commenter expressed concern that the agencies intended for the newly added metrics to replace onsite supervision and review, as the new qualitative information requirements often duplicate the existing compliance program requirements.680 Other commenters opposed all of the proposed revisions to the metrics, with certain limited exceptions (e.g., limiting Inventory Aging to securities).681 Some of these commenters argued that the agencies should adopt an approach focused on further streamlining the metrics requirements included in
Appendix A of the 2013 rule.682 A few
of these commenters argued that the proposed changes to the existing metrics would in effect create entirely new metrics and that the new metrics would not provide new information that cannot be obtained through the existing metrics.683 Other commenters supported only retaining the Comprehensive Profit and Loss Attribution and Risk Management metrics.684 Another commenter supported retaining the current requirements, as any revisions would necessitate changes to firms’ current systems and thus impose considerable operational burdens and costs.685 One commenter stressed the inability of the general public to provide informed comment on the proposed changes as the agencies have not publically disclosed any data related to firms’ metrics submissions.686 Another commenter noted that disclosing firms’ metrics submissions on an aggregated and/or time-delayed basis would enable the general public to understand the impact of the Volcker Rule.687 In contrast, other commenters urged the agencies not to publicly disclose the metrics data because the data is confidential supervisory information that could be used by competitors and could create distortions in the capital markets.688 Another commenter recommended replacing the metrics with a utility platform that would automate and perform trade surveillance in real time.689 As described in detail below, the final rule focuses on streamlining the 2013 rule’s reporting requirements and only adopts a limited set of the new qualitative requirements introduced in the proposal. The agencies believe the remaining metrics are generally useful tools to help both firms and supervisors identify activities that potentially involve impermissible proprietary trading. Moreover, the agencies believe that these items do not pose a special calculation burden because firms already record these values in the regular course of business. Finally, although the agencies are not including any changes related to public disclosure of the quantitative measurements in this final rule, the agencies will continue to consider whether some or all of the quantitative measurements should be publicly disclosed, taking into account the need to protect sensitive, confidential information, as well as restrictions on the agencies relating to the disclosure of sensitive, confidential business and supervisory information on a firmspecific basis.
4. Trading Desk Information
The proposed rule added a new paragraph III.b to Appendix A to require

690See, e.g., ABA; Credit Suisse; CCMR; FSF; IIB; JBA; and SIFMA. 691See, e.g., ABA; CCMR; and SIFMA. 692See, e.g., ABA; CCMR; Credit Suisse; Data Boiler; JBA; and SIFMA. 693See SIFMA. banking entities to report certain descriptive information for each trading desk engaged in covered trading activity, including the trading desk name and identifier, the type of covered activity conducted by the desk, a brief description of the trading desk’s general strategy (i.e., the method for conducting authorized trading activities), the types of financial instruments purchased and sold by the trading desk, and the list of legal entities used to book trades including which were the main booking entities. The proposal also would have required firms to indicate for each trading desk whether each calendar date is a trading day or not a trading day and to specify the currency used by a trading desk as well as the conversion rate to U.S. dollars, if applicable. In general, most commenters opposed requiring banking entities to report any new information outside the scope of the 2013 rule requirements, including qualitative information for each trading desk.690 These commenters argued that the de minimis benefit to the agencies’ oversight ability did not justify the significant operational costs associated with the new requirements, in particular identifying the legal entities used as booking entities by the trading desk as well as the financial instruments and other products traded by the desk.691 After considering these comments, the final rule retains a modified version of the Trading Desk Information. The final rule eliminates the requirement for each trading desk to identify the financial instruments and other products traded by the desk. The final rule also replaces the requirement to identify the legal entities that serve as booking entities for each trading desk with the simpler requirement that the banking entity’s submission for each trading desk list: (1) Each agency receiving the submission for the desk; and (2) the exemptions or exclusions under which the desk conducts trading activity. The exemption/exclusion identification is particularly necessary in light of the fact that some of the quantitative measurements identified below (i.e., the customer-facing activity measurements) are only required for desks operating under the underwriting or market making exemptions. The list of the agencies that have received the submission for a desk should facilitate inter-agency coordination, as generally trading desks encompass multiple legal entities, for which more than one agency may be the primary federal regulator. The agencies believe that this approach appropriately balances the benefit to the agencies and the cost to firms from the new reporting obligations.
5. Quantitative Measurements
Identifying Information The proposed rule added a new paragraph III.c. to Appendix A to require banking entities to prepare and provide five schedules: (i) Risk and Position Limits Information Schedule; (ii) Risk Factor Sensitivities Information
Schedule; (iii) Risk Factor Attribution
Information Schedule; (iv) Limit/ Sensitivity Cross-Reference Schedule; and (v) Risk factor Sensitivity/ Attribution Schedule. The proposed schedules would have provided descriptive information on the quantitative measurements on a collective basis for all relevant trading desks. The new proposed Schedules would have required banking entities to provide detailed information regarding each limit and risk factor sensitivity reported in quantitative measurements as well as on the attribution of existing position profit and loss to the risk factor reported in the quantitative measurements. In addition, the new Limit/Sensitivity Cross-Reference
Schedule would have required banking
entities to cross-reference, by unique identification label, a limit reported in the Risk and Position Limits Information Schedule to any associated risk factor sensitivity reported in the Risk Factor Sensitivities Information
Schedule.
Many commenters generally opposed requiring banking entities to report any new information outside the scope of the 2013 rule requirements, including quantitative measurements identifying information.692 One commenter argued that these new requirements impose undue costs on firms without providing any new supervisory benefit as they duplicate existing requirements in § ll.20, which information the agencies can obtain through the normal supervisory and examination process.693 This commenter further noted that increasing the scope of the appendix submission may harm the agencies’ ability to effectively supervise Volcker compliance, by increasing the supervisory resources necessary to review the data at the detriment of performing normal supervision. After considering these comments, the final rule retains a modified version of the Quantitative Measurements Identifying Information that eliminates the Risk Factor Sensitivities Information
Schedule, the Limit/Sensitivity CrossReference Schedule and the Risk-Factor
Sensitivity/Attribution Cross-Reference
Schedule. Despite the potential benefit
to the agencies from having a deeper understanding of the relationship between firms’ limits and the risk factor sensitivities, the agencies agree that the proposed requirements could significantly increase firms’ reporting burden in a way not commensurate with the potential benefits. The final rule retains the Risk Factor Attribution Information Schedule and a modified version of the Risk and Position Limits Information Schedule that includes identification of the corresponding risk factor attribution for certain limits (‘‘Internal Limits Information
Schedule’’). While together these
schedules add two new reporting elements relative to the 2013 Appendix A (i.e., a description of the limit/risk factor sensitivities and risk factor attribution for certain limits), the agencies generally expect firms to realize a net reduction in reporting burden from the elimination of the duplicative reporting requirements in the current framework. The 2013 rule requires firms report internal limits, including but not limited to risk and position limits, and risk factor sensitivities established for each trading desk on a daily basis. As in practice, firms often use the same limits and risk factors for multiple desks, the 2013 rule results in firms reporting the same limit on a daily basis for multiple desks. These two new schedules reduce reporting burden by allowing firms to submit a comprehensive list of all the internal limits and the risk factor sensitivities that account for a preponderance of the profit or loss for the trading desks. Additionally, the final rule eliminates the requirement to report Risk Factor Sensitivities for each trading desk on a daily basis. Based on the submissions received to date, the agencies expect this change alone will reduce the total volume of data submitted by more than half relative to the 2013 rule.
6. Narrative Statement
The proposed rule would have added a new paragraph III.d. to require banking entities to submit a Narrative Statement in a separate electronic document to the relevant agency that describes any changes in calculation methods used for its quantitative measurements, or the trading desk structure (e.g., adding, terminating, or merging pre-existing desks) or strategies. In addition, in its Narrative Statement, a banking entity, if applicable, would

694See, e.g., ABA; CCMR; Credit Suisse; Data Boiler; JBA; and SIFMA. 695See SIFMA. 696See §ll.20(d) of the proposal. 697See, e.g., FSF and Goldman Sachs. 698See, e.g., Credit Suisse and SIFMA. 699See SIFMA. 700To the extent the XML Schema is updated, the version of the XML Schema that must be used by banking entities would be specified on the relevant agency’s website. A banking entity must not use an outdated version of the XML Schema to report the Trading Desk Information, Quantitative Measurements Identifying Information, and applicable quantitative measurements to the relevant agency. 701See, e.g., Credit Suisse and JBA. 702See Goldman Sachs. 703See Data Boiler. 704See SIFMA. 705The recordkeeping requirement in the final rule does not require that banking entities retain a copy of the Narrative Statement. have to explain its inability to report a particular quantitative measurement and to provide notice if a trading desk changes its approach to including or excluding products that are not financial instruments in its metrics. The proposed rule would have required that banking entities that do not have any information to report in a Narrative Statement to submit an electronic document stating that the firm does not have any information to report in a Narrative Statement. Most commenters generally opposed requiring banking entities to report any new information outside the scope of the 2013 rule requirements, including the Narrative Statement.694 While recognizing that currently banking entities voluntarily provide additional information about their metrics submissions, one commenter argued that requiring the Narrative Statement would impose undue costs on banking entities, as the agencies can already obtain this information through the normal supervisory process.695 After considering all comments received, the agencies are not adopting the narrative statement requirement in the final rule. Rather, the final rule retains the provision from the 2013 rule’s reporting instructions that permits, but does not require, firms to provide a narrative statement describing any additional information they believe would be helpful to the agencies in identifying material events or changes. Narrative statements may permit the agencies to understand aspects of the metrics without going back to the banking entities to ask questions. While the agencies anticipate that many banking entities will continue to voluntarily provide clarifying information, the agencies agree that the compliance costs associated with requiring a separate document are not commensurate with the potential benefit to the agencies of receiving information in this format from banking entities that do not wish to provide it.
7. Frequency and Method of Required
Calculation and Reporting The 2013 rule established a reporting
schedule in § ll.20 that required
banking entities with $50 billion or more in trading assets and liabilities to report the information required by
Appendix A of the 2013 rule within 10
days of the end of each calendar month. The proposed rule would have extended this reporting schedule for firms with significant trading activities, as defined in the final rule, to be within 20 days of the end of each calendar month.696 In general, commenters supported extending the reporting schedule to be within 20 days of the end of each calendar month.697 Two commenters suggested further extending this to 30 days.698 Of these, one commenter recommended reducing the frequency from monthly to quarterly in order to better align the metrics reporting with other regulatory reporting regimes.699 Under the final rule, metrics filers must submit metrics on a quarterly basis. In addition, the final rule retains the reporting schedule of 30 days after the end of each quarter, consistent with the reporting schedule for quarterly filers under the 2013 rule. Supervisory experience has indicated that this will reduce the incidence of errors and improve the quality of the data in the metrics submissions.
Appendix A of the 2013 rule did not
specify a format in which metrics should be reported. To clarify the formatting requirements for the data submissions and to help ensure the quality and consistency of data submissions across banking entities, the proposed rule would have required banking entities to report all the information contained within the proposed appendix in accordance with an XML Schema to be specified and published on the relevant agency’s website.700 Two commenters opposed transitioning to XML format for reporting due to the costs of changing reporting software to switch formats.701 One commenter fully supported the use of XML as a standardized format.702 Another commenter supported XML and estimated the cost of switching formats to be low compared to other costs involved in reporting.703 Finally, one commenter asserted that reporting in XML could be useful in certain cases but that it was not clear that requiring metrics reporting in XML would be useful. The commenter recommended deferring the decision to adopt the XML until after a final rule is adopted. The commenter stated that the decision of whether to adopt the XML Schema requirement should be subject to separate notice and comment.704 The final rule adopts the use of XML for reporting metrics, following the format specified in XML Schema to be posted on the relevant agency’s website. The agencies acknowledge that any changes to the metrics will impose some switching costs on banking entities. As a very common standard for data transmission, XML is expected to be a less costly format to employ than a bespoke format. Moreover, the XML Schema allows for clearer specification, which should reduce miscommunication, errors, inconsistencies, and the need for data resubmissions. The agencies believe the benefits of standardization outweigh the one-time switching costs.
8. Recordkeeping
Under paragraph III.c. of Appendix A of the 2013 rule, a banking entity’s reported quantitative measurements are subject to the record retention requirements provided in Appendix A. Under the proposed rule, this provision would have been moved to paragraph III.f. and expanded to include the new qualitative information requirements added to the appendix (i.e., Trading Desk Information, Quantitative Measurements Identifying Information, and Narrative Statement requirements). The agencies received no comments on these proposed changes. The final rule’s recordkeeping requirement is being adopted largely as proposed.705
9. Quantitative Measurements
Section IV of Appendix A of the 2013
rule sets forth the individual quantitative measurements required by the appendix. The proposed rule would have added an ‘‘Applicability’’ paragraph to each quantitative measurement to identify the trading desks for which a banking entity would be required to calculate and report a particular metric based on the type of covered trading activity conducted by the desk. The proposed rule also would have removed the ‘‘General Calculation Guidance’’ paragraphs in section IV of
Appendix A of the 2013 rule for each
quantitative measurement, and provided such guidance in the Instructions. As noted above, commenters generally supported the proposal to define ‘‘applicability’’ in order to clarify that certain metrics are only applicable

706See, e.g., Credit Suisse; FSF; and JBA. 707See supra note 662. 708 If a limit is introduced or discontinued during a calendar month, the banking entity must report this information for each trading day that the trading desk used the limit during the calendar month. 709See, e.g., FSF and Data Boiler. 710See JBA. 711See Data Boiler. 712Such information includes the name of the limit, a description of the limit, the unit of measurement for the limit, the type of limit, and identification of the corresponding risk factor attribution in the particular case that the limit type is a limit on a risk factor sensitivity and profit and loss attribution to the same risk factor is reported. 713Banking entities may base their calculations of Value-at-Risk on historical observations consistent with other applicable regulatory requirements relating to the calculation of Value-at-Risk. See, e.g., 12 CFR part 3 subpart F; 12 CFR part 217 subpart F; 12 CFR part 324 subpart F. 714See, e.g., FSF and Data Boiler. 715See JBA. 716See Goldman Sachs. to desks engaged in market making or underwriting.706 The agencies’ received no comments on providing the metrics calculation guidance in an Instructions document and removing this guidance from the appendix. The metrics are not intended to serve as a dispositive tool for identifying permissible or impermissible activities. Thus, the agencies believe that providing the metrics calculation guidance in the Instructions and not within the regulation is more appropriate.707 Therefore, the agencies are adopting these changes as proposed. a. Risk-Management Measurements
i. Internal Limits and Usage
Like the 2013 rule, the proposed rule would have applied the Risk and Position Limits and Usage metric to all trading desks engaged in covered trading activities. Additionally, the proposed rule would have removed references to Stressed Value-at-Risk (Stressed VaR) in the Risk and Position Limits and Usage metric and required banking entities to report the unique identification label for each limit as listed in the Risk and Position Limits Information Schedule, the limit size (distinguishing between the upper bound and lower bound of the limit, where applicable), and the value of usage of the limit.708 In general, most commenters supported eliminating requirements to establish limits on Stressed VaR.709 One commenter did not support this change, as any revisions would necessitate changes to firms’ current systems and thus impose considerable operational burdens and costs.710 Another commenter supported further requiring full reporting of upper and lower bounds of risk and position limits usage.711 The final rule largely adopts these changes as proposed. As noted above, the agencies believe requiring firms to submit one consolidated Internal Limits Information Schedule for the entire banking entity’s covered trading activity, rather than multiple times in the Risk and Position Limits and Usage metric for different trading desks, will alleviate inefficiencies associated with reporting redundant information and reduce electronic file submission sizes. The unique identification label should allow the agencies to efficiently obtain the descriptive information regarding the limit that is separately reported in the Internal Limits Information
Schedule.712 Recognizing that firms may
establish internal limits other than risk and position limits (e.g., inventory aging limits), the final rule adopts an Internal Limits Information Schedule and daily Internal Limits and Usage quantitative metric. As discussed in more detail below, the final rule removes the metrics for Risk Factor Sensitivities. Accordingly, the final rule also removes the cross reference between Risk and Position Limits and Risk Factor Sensitivities, and the cross-reference between Risk Factor Sensitivities and Profit and Loss Risk Factor Attributions. These crossreferences would have provided an essential link between the limits on exposures to risk factors and the factors that are demonstrably important sources of revenue. In place of these two crossreferences, the final rule adopts an identifier within the Internal Limits Information Schedule indicating the corresponding Risk Factor Attribution when a desk measures and imposes a limit on exposure to that risk factor. This identifier facilitates the agencies’ review of the Internal Limits metric and its relation to gains and losses on the positions measured by that metric.
ii. Risk Factor Sensitivities
Like the 2013 rule, the proposed rule would have applied the Risk Factor Sensitivities metric to all trading desks engaged in covered trading activities. Under the proposal, a banking entity would have to report for each trading desk the unique identification label associated with each risk factor sensitivity of the desk, the magnitude of the change in the risk factor, and the aggregate change in value across all positions of the desk given the change in risk factor. As discussed above in Quantitative Measurements Identifying Information, to reduce firms’ reporting burden the final rule eliminates the Risk Factor Sensitivities quantitative measurement.
iii. Value-at-Risk and Stressed Value-atRisk
The 2013 rule applies the Value-atRisk and Stressed Value-at-Risk metric to all trading desks engaged in covered trading activities. The proposed rule would have modified the description of Stressed VaR to align its calculation with that of Value-at-Risk and clarified that Stressed VaR is not required to be reported for trading desks whose covered trading activity is conducted exclusively to hedge products excluded from the definition of financial instrument in § ll.3(d)(2) of the proposal. The proposal would have also revised the definition of Value-at-Risk to provide that Value-at-Risk is the measurement of the risk of future financial loss in the value of a trading desk’s aggregated positions at the ninety-nine percent confidence level over a one-day period, based on current market conditions.713 In general, a few commenters supported eliminating Stressed VaR, including for non-financial instrument hedging.714 One commenter did not support this change, as any revisions would necessitate changes to firms’ current systems and thus impose considerable operational burdens and costs.715 One commenter stated that Stressed VaR was not a helpful metric because it bears an attenuated relationship to proprietary trading.716 After considering the comments received, the agencies believe that eliminating the Stressed VaR metric altogether will reduce burden without affecting the ability of the agencies to monitor for prohibited proprietary trading. The agencies believe that the other metrics retained or adopted in the final rule provide appropriate data to monitor for prohibited proprietary trading. To avoid duplicative or unnecessary metrics, the final rule eliminates the Stressed VaR metric. b. Source-of-Revenue Measurements
i. Comprehensive Profit and Loss
Attribution
The 2013 rule requires banking entities to calculate and report volatility of comprehensive profit and loss. The proposed rule would have eliminated this requirement as the measurement can be calculated from the profit and loss amounts reported under the Comprehensive Profit and Loss Attribution metric. Additionally, the proposed rule would have required banking entities to provide, for one or more factors that explain the

717Such information includes the name of the risk factor or other factor, a description of the risk factor or other factor, and the change unit of the risk factor or other factor. 718See SIFMA. 719See SIFMA. 720See, e.g., Goldman Sachs and FSF. 721As under the 2013 rule, significant unexplained profit and loss must be escalated for further investigation and analysis under the final rule. 722For example, a trading desk that relies solely on §ll.5 to conduct risk-mitigating hedging activity would not have been subject to the Positions metric under the proposed rule. 723Under the proposal, banking entities would have been required to report the effective notional value of derivatives receivables and derivatives payables for those derivatives whose stated notional amount is leveraged. 724See, e.g., GFMA and SIFMA. 725See, e.g., GFMA; Goldman Sachs; and State Street. 726See e.g., Credit Suisse. preponderance of the profit or loss changes due to risk factor changes, a unique identification label for the factor and the profit or loss due to the factor change. The proposed rule also would have required banking entities to report a unique identification label for the factor so the agencies can efficiently obtain the descriptive information regarding the factor that is separately reported in the Risk Factor Attribution Information Schedule.717 In general, commenters did not support requiring firms to attribute profit and loss to specific risk factors.718 One commenter expressed concern that this could disrupt firms’ current infrastructure projects to comply with the Basel Committee’s revised market risk capital standards, which also require specific alignment of risk factor attribution and risk factor sensitivity hierarchies.719 This commenter also noted the limited utility of this information for horizontal comparisons across firms as each banking organization defines these metrics at different levels of granularity. Two commenters supported eliminating the volatility calculation, as proposed.720 After considering these comments, the final rule adopts these changes as proposed. Under the final rule, banking entities will no longer be required to report volatility for the Comprehensive Profit and Loss metric. Banking entities will be required to provide certain information regarding the factors that explain the preponderance of the profit or loss changes due to risk factor changes when sub-attributing comprehensive profit and loss from existing positions to specific and other factors. As in the 2013 rule and the proposal, the final rule requires trading desks to attribute profit and loss into: (i) Profit and loss attributable to a trading desk’s existing positions, and (ii) profit and loss attributable to new positions. The final rule retains the category for residual profit and loss,721 but clarifies that this is a sub-category of profit and loss attributable to existing positions.
c. Customer-Facing Activity Metrics
i. Replacement of Inventory Turnover
With Positions Metric
The 2013 rule required banking entities to calculate and report inventory turnover, or the turnover of a trading desk’s inventory, over a 30-day, 60-day, and 90-day reporting period. The proposed rule would have replaced the Inventory Turnover metric with the daily data underlying that metric, rather than proposing specific calculation periods. The proposal would have replaced Inventory Turnover with the daily Positions quantitative measurement. As noted in the Supplemental Information to the proposed rule, positions information that is a component of the Inventory Turnover metric would be more useful to the agencies, and is already tracked by banking entities as a component of the Inventory Turnover metric. The proposal would have limited the scope of applicability of the Positions metric to trading desks that rely on §ll.4(a) or §ll.4(b) to conduct underwriting activity or market making-related activity, respectively. As a result, a trading desk that did not rely on § ll.4(a) or § ll.4(b) would not have been subject to the proposed Positions metric.722 The proposal would have also required banking entities subject to the
appendix to separately report the market
value of all long securities positions, the market value of all short securities positions, the market value of all derivatives receivables, the market value of all derivatives payables, the notional value of all derivatives receivables, and the notional value of all derivatives payables.723 Finally, the proposal also would have clarified that positions reported as ‘‘derivatives’’ need not be reported as ‘‘securities,’’ thereby clarifying the treatment of certain positions that may have met both definitions. This technical change would have addressed the possibility that a position could have been reported in both the ‘‘securities’’ and ‘‘derivatives’’ positions, and thus been double-counted. A few commenters recommended that the agencies eliminate the Positions metric, but retain the inventory turnover metric.724 These commenters expressed concern that the new ‘‘Positions’’ metric would be, in effect, a ‘‘new’’ metric that would require reporting banking entities to modify their systems to generate as a standalone metric and noted that this metric could create ‘‘false positives’’ due to daily changes in inventory that may be driven by fluctuations in the expectation of customer demand. Other commenters recommended that the agencies eliminate inventory turnover metrics reporting requirements for derivatives, including foreign exchange derivatives.725 One commenter supported the positions metric, but recommended removing the requirement to report market values for derivative positions—as notional value measures are sufficient to assess the size of a trading desk’s derivative inventory.726 The final rule adopts the ‘‘Positions’’ metric and eliminates the ‘‘Inventory Turnover’’ metric consistent with the proposal. The ‘‘Positions’’ metric is itself a necessary component firms already must calculate to generate the ‘‘Inventory Turnover’’ metric. Therefore, producing the ‘‘Positions’’ metric as a standalone figure would not require firms to generate additional data not produced internally today, but will result in a more effective metrics reporting framework. The agencies are aware that all changes to the metrics reporting requirements require changes to the underlying systems required to generate and report metrics to the agencies. However, the Positions metric will allow both the agencies and the firms themselves to analyze firms’ trading activities over different time horizons, as appropriate; the Inventory Turnover metric, by contrast, relied on the same underlying positions data as the final rule requires to be reported, but aggregated it in a manner (with 30-day, 60-day, and 90-day rolling averages) that is more complicated than a direct reporting of positions metrics, and is less effective. The final rule differs from the proposal in that it eliminates the requirement to report the notional value of derivatives. Removing the requirement to report notional value of derivative positions will avoid potential complexity arising from using different
calculation methods for determining the notional value for different types of derivatives. Additionally, as the definition of financial instrument in
section ll.3 lists securities,
derivatives and futures as distinct types of financial instruments, the agencies are clarifying that futures positions

727See final rule §ll.3(c)(1) (defining ‘‘financial instrument’’ to mean (i) a security, including an option on a security; (ii) a derivative, including an option on a derivative; or (iii) a contract of sale of a commodity for future delivery, or option on a contract of sale of a commodity for future delivery). 728As noted in the proposal the current Customer-Facing Trade Ratio metric does not provide meaningful information when a trading desk only conducts customer-facing trading activity. The numerator of the ratio represents transactions with counterparties that are customers, while the denominator represents transactions with counterparties that are not customers. If a trading desk only trades with customers, it will not be able to calculate this ratio because the denominator will be zero. 729The proposal defined value to mean gross market value with respect to securities, gross notional value (i.e., the current dollar market value of the quantity of the commodity underlying the derivative) for commodity derivatives, and gross notional value for all other derivatives. 730As noted in the Positions metric preamble, in calculating the Transactions Volume quantitative metric, futures positions should be reported as ‘‘derivatives.’’ 731The proposal noted that in order to avoid double-counting transactions, these four categories would be exclusive of each other (i.e., a transaction could only be reported in one category). 732See, e.g., IIB and SIFMA. 733See SIFMA. 734See, e.g., Credit Suisse. 735 Internal Transactions are used for a number of reasons, including to transfer risk to a desk better equipped to manage the position’s risk; to allow a desk with better market access or specialized market knowledge to facilitate another desk better equipped to face customers; or to allocate funding costs via transfer pricing, in which case one desk treats other internal desks or affiliate desks in much the same way as external clients. Supervisory experience has shown that, depending on the purpose of the internal transaction, banking entities sometimes report these internal transactions as transactions with customers, sometimes as transactions with non-customers, and sometimes do not report them at all. should be reported as ‘‘derivatives,’’ and are not expected to be broken out separately. The agencies are making this technical change to avoid confusion as to whether or how to classify futures for this metric.727
ii. Transaction Volumes and the
Customer-Facing Trade Ratio Paragraph IV.c.3. of Appendix A of the 2013 rule requires banking entities to calculate and report a CustomerFacing Trade Ratio comparing transactions involving a counterparty that is a customer of the trading desk to transactions with a counterparty that is not a customer of the desk. Appendix A of the 2013 rule requires the CustomerFacing Trade Ratio to be computed by measuring trades on both a trade count basis and value basis. In addition,
Appendix A of the 2013 rule provides
that the term ‘‘customer’’ for purposes of the Customer-Facing Trade Ratio is defined in the same manner as the terms ‘‘client, customer, and counterparty’’ used in § ll.4(b) of the 2013 rule describing the permitted activity exemption for market making-related activities. This metric is required to be calculated on a daily basis for 30-day, 60-day, and 90-day calculation periods. The proposed rule would have replaced the Customer-Facing Trade Ratio with a daily Transaction Volumes quantitative measurement that would allow the agencies to calculate customer-facing trade ratios over any period of time and to conduct more meaningful analysis of trading desks’ customer-facing activity.728 The proposed Transaction Volumes metric would measure the number and value 729 of all securities and derivatives transactions 730 conducted by a trading desk engaged in permitted underwriting activity or market making-related activity under the 2013 rule with four categories of counterparties: (i) Customers (excluding internal transactions); (ii) non-customers (excluding internal transactions); (iii) trading desks and other organizational units where the transaction is booked into the same banking entity; and (iv) trading desks and other organizational units where the transaction is booked into an affiliated banking entity.731 The proposed rule would have clarified that the term ‘‘customer’’ for purposes of this metric has the same meaning as ‘‘client, customer, and counterparty’’ in § ll.4(a) for underwriting desks and in § ll.4(b) for market-making desks. To reduce reporting inefficiencies, the proposed rule would have only required trading desks engaged in underwriting or market making-related activity under § ll.4(a) or § ll.4(b) to calculate this quantitative measurement for each trading day. As with the Positions metric, the proposed rule would also have further reduced reporting volume by replacing the 30-day, 60-day, and 90- day calculation periods for each transaction with a single daily transaction value and count for each type. The proposed rule would have required banking entities to separately report the value and number of securities and derivatives transactions conducted by a trading desk with the four categories of counterparties described above. The proposed classification of securities and derivatives described above for Positions would have also applied to Transaction Volumes. A few commenters opposed the replacing the Customer-Facing Trade Ratio with the new Transactions Volume quantitative metric.732 These commenters argued that the proposed changes would effectively create an entirely new metric, in particular by requiring firms to classify inter-affiliate transactions within the prescribed categories. One commenter also asserted that distinguishing trades that occur across banking entities from those within a single banking entity would not provide any informational value to the agencies in monitoring compliance with section 13 of the BHC
Act.733 One commenter supported the proposal, but also recommended excluding interaffiliate transactions.734 The final rule adopts the proposed change to add a category of counterparty for desk-to-desk transactions within the same legal entity and transactions between affiliates (collectively, Internal Transactions). In order to connect the transactions metric with the other quantitate measurements, for example risk, profit and loss, and positions, it is important for transactions metrics to include all transactions conducted by the desk, including: (i) Desk-to-desk transfers within the same legal entity; (ii) transactions between affiliates; and (iii) transactions with non-affiliated external counterparties. It is also important for supervisors to be able to distinguish Internal Transactions from transactions with external non-affiliated counterparties because, based on supervisory experience under the 2013 rule, firms report these transactions inconsistently depending on a desk’s purpose and business model.735 Considering the trading activities of a desk without Internal Transactions may not give a complete picture of the desk’s positions, risk exposure or trading strategies. To understand the activity of the desk the agencies need to observe its Internal Transactions. Transactions between one trading desk and another trading desk in which the second desk books the position in the same banking entity as the first are not purchases or sales of financial instruments subject to the rule, including the prohibition on proprietary trading in § ll.3. However, in practice many trading desks book positions into multiple affiliated banking entities and also engage in desk-to-desk transactions within the same legal entity. Distinguishing Internal Transactions that move positions to new legal entities from desk-to-desk transactions that occur purely within the same legal entity would require an additional layer of recordkeeping. The agencies agree that the benefit of distinguishing trades across affiliated banking entities from desk-to-desk transactions within the same legal entity does not justify the

736The proposed Securities Inventory Aging metric would not require banking entities to prepare an aging schedule for derivatives or include in its securities aging schedules those ‘‘securities’’ that are also ‘‘derivatives,’’ as those terms are defined under the 2013 rule. See 2013 rule §§ll.2(h), (y). See also supra Part III.E.2.i (discussing the classification of securities and derivatives for purposes of the proposed Positions quantitative measurement). 737See, e.g., Data Boiler; Credit Suisse; FSF; Goldman Sachs, GFMA; and State Street. 738Public Law 106–102, section 722, 113 Stat. 1338, 1471 (1999). 739 In an effort to provide transparency, the total cumulative burden for each agency is shown. In addition to the changes resulting from this final rule, the agencies are also applying a conforming methodology for calculating the burden estimates in order to be consistent across the agencies. extra record-keeping costs. The final rule consolidates these two proposed categories into one category, transactions with trading desks and other organizational units where the transaction is booked into either the same banking entity or an affiliated banking entity. d. Securities Inventory Aging The 2013 rule requires all trading desks engaged in covered trading activities to report Inventory Aging metrics for their securities and derivative positions. The proposed rule would have only required trading desks that relied on §ll.4(a) or § ll.4(b) to conduct underwriting or market making-related activity to report Inventory Aging and limited the scope of this metric to only securities positions.736 To reflect the revised scope, the proposed rule would have revised the name of this metric to be Securities Inventory Aging. Finally, the proposal would have required a banking entity to calculate and report the Securities Inventory Aging metric according to a specific set of age ranges. Specifically, banking entities would have to calculate and report the market value of security assets and security liabilities over the following holding periods: 0–30 calendar days; 31–60 calendar days; 61–90 calendar days; 91– 180 calendar days; 181–360 calendar days; and greater than 360 calendar days. In general, commenters supported reducing the Inventory Aging metric, as inventory aging data is not readily available or particularly useful for derivative positions.737 After consideration of comments and in light of the general desire to reduce reporting burden, the agencies believe that the Inventory Aging metric may be overly prescriptive as an indicator of compliance with the rule. Therefore, the final rule no longer requires the Inventory Aging metric for all desks and position types. For those desks where banking entities identify inventory aging as a meaningful control, the entities should report their internal limits on inventory aging under the Internal Limits and Usage metric and consequently ‘‘Inventory Aging’’ has been added as a potential type of limit under the
Internal Limits Information
Schedule.
V. Administrative Law Matters
A. Use of Plain Language
Section 722 of the Gramm-LeachBliley Act 738 requires the OCC, Board,
and FDIC (Federal banking agencies) to use plain language in all proposed and final rules published after January 1,
2000. The Federal banking agencies
have sought to present the proposed rule in a simple and straightforward manner and did not receive any comments on plain language. B. Paperwork Reduction Act Certain provisions of the final rule contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3501–3521). In accordance with the requirements of the PRA, the agencies may not conduct or sponsor, and a respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number. The agencies reviewed the final rule and determined that the final rule revises certain reporting and recordkeeping requirements that have been previously cleared under various OMB control numbers. The agencies did not receive any specific comments on the PRA. The agencies are extending for three years, with revision, these information collections. The information collection requirements contained in this final rule have been submitted by the OCC and FDIC to OMB for review and approval under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section 1320.11 of the OMB’s implementing regulations (5 CFR 1320). The Board reviewed the final rule under the authority delegated to the Board by OMB. The Board will submit information collection burden estimates to OMB and the submission will include burden for Federal Reservesupervised institutions, as well as burden for OCC-, FDIC-, SEC-, and CFTC-supervised institutions under a holding company. The OCC and the FDIC will take burden for banking entities that are not under a holding company. Abstract
Section 13 to the BHC Act 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 covered fund, subject to certain exemptions. The exemptions allow certain types of permissible trading activities such as underwriting, market making, and riskmitigating hedging, among others. The 2013 rule implementing section 13 became effective on April 1, 2014.
Section ll.20(d) and Appendix A of
the 2013 final rule require certain of the largest banking entities to report to the appropriate agency certain quantitative measurements. Current Actions This final rule contains requirements subject to the PRA and the changes relative to the 2013 rule are discussed herein. The new and modified reporting requirements are found in sections ll.4(c)(3)(i), ll.20(d), ll.20(i), and the Appendix. The new and modified recordkeeping requirements are found in sections, ll.3(d)(3), ll.4(c)(3)(i), ll.5(c), ll.20(b), ll.20(c), ll.20 (d), ll.20(e), ll.20(f), and the
Appendix. The modified information
collection requirements 739 would implement section 13 of the BHC Act. The respondents are for-profit financial institutions, including small businesses. A covered entity must retain these records for a period that is no less than 5 years in a form that allows it to promptly produce such records to the relevant agency on request. Reporting Requirements
Section ll.4(c)(3)(i) requires a
banking entity to make available to the agency upon request records regarding (1) any limit that is exceeded and (2) any temporary or permanent increase to any limit(s), in each case in the form and manner as directed by the primary financial regulatory agency. The agencies estimate that the average time per response would be 15 minutes.
Section ll.20(d) is modified by
extending the reporting period for certain banking entities from within 10 days of the end of each calendar month to 30 days of the end of each calendar quarter. The threshold for reporting under section ll.20(d) is modified from $10 billion or more in trading assets and liabilities to $20 billion or more in trading assets and liabilities. The metrics reporting changes to the
Appendix would impact the reporting
burden under section ll_.20(d). The agencies estimate that the current average hours per response will

decrease by 14 hours (decrease 40 hours for initial set-up). Sections ll.3(b)(4), ll.4(c)(4), ll.20(g)(2), and ll.20(h) would implicate the notice and response procedures pursuant to section ll.20(i) that an agency would follow when rebutting a presumption or exercising a reservation of authority. The agencies estimate that the average hours per response would be 20 hours. Recordkeeping Requirements
Section ll.3(d)(3) would expand the
scope of the recordkeeping to include foreign exchange forward (as that term is defined in section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)), foreign exchange swap (as that term is defined in section 1a(25) of the Commodity Exchange Act (7 U.S.C. 1a(25)), or cross-currency swap. The agencies estimate that the current average hour per response will not change.
Section ll.4(c)(3)(i) requires a
banking entity to maintain records regarding (1) any limit that is exceeded and (2) any temporary or permanent increase to any limit(s), in each case in the form and manner as directed by the primary financial regulatory agency. The agencies estimate that the average time per response would be 15 minutes.
Section ll.5(c) is modified by
reducing the requirements for banking entities that do not have significant trading assets and liabilities and eliminating documentation requirements for certain hedging activities. The agencies estimate that the current average hours per response will decrease by 20 hours (decrease 10 hours for initial set-up).
Section ll.20(b) is modified by
limiting the requirement only to banking entities with significant trading assets and liabilities. The agencies estimate that the current average hour per response will not change.
Section ll.20(c) is modified by
limiting the CEO attestation requirement to a banking entity that has significant trading assets and liabilities. The agencies estimate that the current average hours per response will decrease by 1,100 hours (decrease 3,300 hours for initial set-up).
Section ll.20(d) is modified by
extending the time period for reporting for certain banking entities from within 10 days of the end of each calendar month to 30 days of the end of each calendar quarter. The agencies estimate that the current average hours per response will decrease by 3 hours.
Section ll.20(e) is modified by
limiting the requirement to banking entities with significant trading assets and liabilities. The agencies estimate that the current average hours per response will not change.
Section ll.20(f)(2) is modified by
limiting the requirement to banking entities with moderate trading assets and liabilities. The agencies estimate that the current average hours per response will not change. The Instructions for Preparing and Submitting Quantitative Measurement Information, Technical Specifications Guidance, and XML Schema will be available on each agency’s public website:

OCC: http://www.occ.treas.gov/
topics/capital-markets/financialmarkets/trading/volcker-ruleimplementation/index-volcker-ruleimplementation.html;
Board: https://www.federal
reserve.gov/apps/reportforms/ review.aspx;
FDIC: https://www.fdic.gov/
regulations/reform/volcker/index.html;
CFTC: https://www.cftc.gov/
LawRegulation/DoddFrankAct/ Rulemakings/DF_28_VolckerRule/ index.htm; and
SEC: https://www.sec.gov/
structureddata/dera_taxonomies.
Proposed Revision, With Extension, of the Following Information Collections Estimated average hours per response:
Reporting
Section ll.4(c)(3)(i)—0.25 hours for
an average of 20 times per year.
Section ll.12(e)—20 hours (Initial
set-up 50 hours) for an average of 10 times per year.
Section ll.20(d)—41 hours (Initial
set-up 125 hours) quarterly.
Section ll.20(i)—20 hours.
Recordkeeping
Section ll.3(d)(3)—1 hour (Initial
set-up 3 hours).
Section ll.4(b)(3)(i)(A)—2 hours
quarterly.
Section ll.4(c)(3)(i)—0.25 hours for
an average of 40 times per year.
Section ll.5(c)—80 hours (Initial
setup 40 hours).
Section ll.11(a)(2)—10 hours.
Section ll.20(b)—265 hours (Initial
set-up 795 hours).
Section ll.20(c)—100 hours (Initial
set-up 300 hours).
Section ll.20(d)– 10 hours.
Section ll.20(e)—200 hours.
Section ll.20(f)(1)—8 hours.
Section ll.20(f)(2)—40 hours
(Initial set-up 100 hours).
Disclosure
Section ll.11(a)(8)(i)—0.1 hours for
an average of 26 times per year.
OCC
Title of Information Collection:
Reporting, Recordkeeping, and Disclosure Requirements Associated with Restrictions on Proprietary Trading and Certain Relationships with Hedge Funds and Private Equity Funds. Frequency: Annual, quarterly, and event driven. Affected Public: Businesses or other for-profit. Respondents: National banks, state member banks, state nonmember banks, and state and federal savings associations. OMB control number: 1557–0309. Estimated number of respondents: 39. Proposed revisions estimated annual burden: ¥3,503 hours. Estimated annual burden hours:
19,823 hours (3,482 hours for initial setup and 16,341 hours for ongoing). Board Title of Information Collection:
Reporting, Recordkeeping, and Disclosure Requirements Associated with Regulation VV. Frequency: Annual, quarterly, and event driven. Affected Public: Businesses or other for-profit. Respondents: State member banks, bank holding companies, savings and loan holding companies, foreign banking organizations, U.S. State branches or agencies of foreign banks, and other holding companies that control an insured depository institution and any subsidiary of the foregoing other than a subsidiary for which the OCC, FDIC, CFTC, or SEC is the primary financial regulatory agency. The Board will take burden for all institutions under a holding company including:
OCC-supervised institutions,
FDIC-supervised institutions,
Banking entities for which the
CFTC is the primary financial regulatory agency, as defined in section 2(12)(C) of the Dodd-Frank Act, and
Banking entities for which the SEC
is the primary financial regulatory agency, as defined in section 2(12)(B) of the Dodd-Frank Act. Legal authorization and confidentiality: This information collection is authorized by section 13 of the BHC Act (12 U.S.C. 1851(b)(2) and 12 U.S.C. 1851(e)(1)). The information collection is required in order for covered entities to obtain the benefit of engaging in certain types of proprietary trading or investing in, sponsoring, or having certain relationships with a hedge fund or private equity fund, under the restrictions set forth in

740The number of small entities supervised by the OCC is determined using the SBA’s size thresholds for commercial banks and savings institutions, and trust companies, which are $600 million and $41.5 million, respectively. Consistent with the General Principles of Affiliation 13 CFR 121.103(a), the OCC counts the assets of affiliated financial institutions when determining if the OCC should classify an OCC-supervised institution a small entity. The OCC used December 31, 2018, to determine size because a ‘‘financial institution’s assets are determined by averaging the assets reported on its four quarterly financial statements for the preceding year.’’ See footnote 8 of the U.S. Small Business Administration’s Table of Size Standards. 741U.S. SBA, Table of Small Business Size Standards Matched to North American Industry Classification System Codes, available at https:// www.sba.gov/sites/default/files/files/Size_ Standards_Table.pdf. 742See id. Pursuant to SBA regulations, the asset size of a concern includes the assets of the concern whose size is at issue and all of its domestic and foreign affiliates. 13 CFR 121.103(6). 743 12 U.S.C. 1851(b)(2). 744Under EGRRCPA, a community bank and its affiliates are generally excluded from the definition of banking entity, and thus section 13 of the BHC Act, if the bank and all companies that control the bank have total consolidated assets equal to $10 billion or less and trading assets and liabilities equal to 5 percent or less of total consolidated assets. 745 5 U.S.C. 601 et seq. 746The SBA defines a small banking organization as having $600 million or less in assets, where an organization’s ‘‘assets are determined by averaging the assets reported on its four quarterly financial statements for the preceding year.’’ See 13 CFR
121.201 (as amended by 84 FR 34261, effective
August 19, 2019). In its determination, the ‘‘SBA counts the receipts, employees, or other measure of size of the concern whose size is at issue and all of its domestic and foreign affiliates.’’ See 13 CFR
121.103. Following these regulations, the FDIC uses
Continued
section 13 and the final rule. If a
respondent considers the information to be trade secrets and/or privileged such information could be withheld from the public under the authority of the Freedom of Information Act (5 U.S.C. 552(b)(4)). Additionally, to the extent that such information may be contained in an examination report such information could also be withheld from the public (5 U.S.C. 552 (b)(8)). Agency form number: FR VV. OMB control number: 7100–0360. Estimated number of respondents:
255.
Proposed revisions estimated annual burden: ¥169,466 hours. Estimated annual burden hours:
31,044 hours (4,035 hours for initial setup and 27,009 hours for ongoing). FDIC Title of Information Collection:
Volcker Rule Restrictions on Proprietary Trading and Relationships with Hedge Funds and Private Equity Funds. Frequency: Annual, quarterly, and event driven. Affected Public: Businesses or other for-profit. Respondents: State nonmember banks, state savings associations, and certain subsidiaries of those entities. OMB control number: 3064–0184. Estimated number of respondents: 13. Proposed revisions estimated annual burden: ¥15,172 hours. Estimated annual burden hours: 3,115 hours (1,656 hours for initial set-up and 1,459 hours for ongoing).
C. Regulatory Flexibility Act Analysis
OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA), requires an agency, in connection with a final rule, to prepare a Final Regulatory Flexibility Analysis describing the impact of the rule on small entities (defined by the SBA for purposes of the RFA to include commercial banks and savings institutions with total assets of $600 million or less and trust companies with total assets of $41.5 million or less) or to certify that the rule will not have a significant economic impact on a substantial number of small entities. The OCC currently supervises approximately 782 small entities.740 Under the EGRRCPA, banking entities with total consolidated assets of $10 billion or less generally are not ‘‘banking entities’’ within the scope of
Section 13 of the BHCA if their trading
assets and trading liabilities do not exceed 5 percent of their total consolidated assets. Thus, the final rule will not impact any OCC-supervised small entities. Therefore, the OCC certifies that the final rule will not have a significant impact on a substantial number of OCC-supervised small entities. Board: The RFA requires an agency to either provide a regulatory flexibility analysis with a rule or certify that the rule will not have a significant economic impact on a substantial number of small entities. The U.S. Small Business Administration (SBA) establishes size standards that define which entities are small businesses for purposes of the RFA.741 Except as otherwise specified below, the size standard to be considered a small business for banking entities subject to the proposal is $600 million or less in consolidated assets.742 The Board has considered the potential impact of the proposed rule on small entities in accordance with the RFA. Based on the Board’s analysis, and for the reasons stated below, the Board believes that this proposed rule will not have a significant economic impact on a substantial of number of small entities. No comments were received related to the Board’s initial RFA analysis, which was published with the proposal. As discussed in the SUPPLEMENTARY INFORMATION, the agencies are revising the 2013 rule in order to provide clarity to banking entities about what activities are prohibited, reduce compliance costs, and improve the ability of the agencies to make supervisory assessments regarding compliance relative to the 2013 rule. The agencies are explicitly authorized under section 13(b)(2) of the BHC Act to adopt rules implementing
section 13.743
The Board’s rule generally applies to state-chartered banks that are members of the Federal Reserve System, bank holding companies, foreign banking organizations, and nonbank financial companies supervised by the Board (collectively, Board-regulated entities). However, EGRRCPA, which was enacted on May 24, 2018, amended
section 13 of the BHC Act and modified
the scope of the definition of banking entity by amending the term ‘‘insured depository institution’’ to exclude certain community banks.744 The Board is not aware of any Board-regulated entities that meet the SBA’s definition of ‘‘small entity’’ that are subject to
section 13 of the BHC Act and the rule
following the enactment of EGRRCPA. Furthermore, to the extent that any Board-regulated entities that meet the definition of ‘‘small entity’’ are or become subject to section 13 of the BHC Act and the rule, the Board does not expect the total number of such entities to be substantial. Accordingly, the Board’s rule is not expected to have a significant economic impact on a substantial number of small entities. The Board has not identified any federal statutes or regulations that would duplicate, overlap, or conflict with the proposed revisions, and the Board is not aware of any significant alternatives to the rule that would reduce the economic impact on Boardregulated small entities. FDIC (a) Regulatory Flexibility Analysis The RFA generally requires an agency, in connection with a final rule, to prepare and make available for public comment a final regulatory flexibility analysis that describes the impact of a rule on small entities.745 However, a regulatory flexibility analysis is not required if the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. The SBA has defined ‘‘small entities’’ to include banking organizations with total assets of less than or equal to $600 million.746

a covered entity’s affiliated and acquired assets, averaged over the preceding four quarters, to determine whether the covered entity is ‘‘small’’ for the purposes of RFA. 747Categories of FDIC-supervised depository institutions are set forth in 12 U.S.C. 1813(q)(2). 748FDIC Call Report, March 31, 2019. 749The revisions may also apply to other types of CFTC registrants that are banking entities, such as introducing brokers, but the CFTC believes it is unlikely that such other registrants will have significant activities that would implicate the revisions. See 2013 final rule (CFTC), 79 FR 5808 at 5813 (Jan. 31, 2014). 750See Policy Statement and Establishment of Definitions of ‘‘Small Entities’’ for Purposes of the Regulatory Flexibility Act, 47 FR 18618 (Apr. 30,
1982) (futures commission merchants and
commodity pool operators); and Registration of Swap Dealers and Major Swap Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (swap dealers and major swap participants). 751See Policy Statement and Establishment of Definitions of ‘‘Small Entities’’ for Purposes of the Regulatory Flexibility Act, 47 FR 18618, 18620 (Apr. 30, 1982). 752 In this regard, the CFTC notes that the agencies recently revised the 2013 final rule in Generally, the FDIC considers a significant effect to be a quantified effect in excess of 5 percent of total annual salaries and benefits per institution, or
2.5 percent of total noninterest
expenses. The FDIC believes that effects in excess of these thresholds typically represent significant effects for FDICsupervised institutions. As discussed further below, the FDIC certifies that this final rule will not have a significant economic impact on a substantial number of FDIC-supervised small entities. (b) Reasons for and Policy Objectives of the Final Rule The agencies are issuing this final rule to amend the 2013 rule in order to provide banking entities with additional clarity and certainty about what activities are prohibited and seek to improve the efficacy of the regulations where possible. The agencies acknowledge that many banking entities have found certain aspects of the 2013 rule to be complex or difficult to apply in practice. This final rule amends the 2013 rule to make its requirements more efficient. (c) Description of the Rule First, the FDIC is amending its regulations to tailor the application of the final rule based on the size and scope of a banking entity’s trading activities. In particular, the FDIC aims to further reduce compliance obligations for firms that do not have large trading operations and therefore reduce costs and uncertainty faced by firms in complying with the final rule, relative to their amount of trading activity. In addition to tailoring the application of the final rule, the FDIC is also streamlining and clarifying for all banking entities certain definitions and requirements related to the proprietary trading prohibition and limitations on covered fund activities and investments. Finally, the FDIC is reducing reporting, recordkeeping, and compliance program requirements for all banking entities and expanding tailoring to make the scale of compliance activity required by the rule commensurate with a banking entity’s size and level of trading activity. (d) Other Statutes and Federal Rules On May 24, 2018, EGRRCPA was enacted, which, among other things, amends section 13 of the BHC Act. As a result, section 13 excludes from the definition of ‘‘banking entity’’ any institution that, together with their affiliates and subsidiaries, has: (1) Total assets of $10 billion or less, and (2) trading assets and liabilities that comprise 5 percent or less of total assets. The FDIC has not otherwise identified any likely duplication, overlap, and/or potential conflict between this final rule and any other federal rule. (e) Small Entities Affected The FDIC supervises 3,465 depository institutions,747 of which, 2,705 are defined as small banking organizations according to the RFA.748 Almost all FDIC-supervised small banking entities are exempt from the requirements of
section 13 of the BHC Act, pursuant to
EGRRCPA, and hence the final rule does not affect them. Only one FDIC-supervised small banking entity is not exempt from the requirements of section 13 of the BHC Act under EGRRCPA because it has trading assets and liabilities greater than five percent of total consolidated assets. This bank has trading activity at levels that would place it in the final rule’s limited trading assets and liabilities compliance category, and it thus could benefit from the final rule which contains a rebuttable presumption of compliance for such banking entities. The FDIC estimates that banks with limited trading will save, on average, $115,233 from the reduced burden of this rule. This amount is far less than 5 percent of total salaries and 2.5 percent of total non-interest expenses for this one institution. Consequently, the FDIC does not believe that this rule will have a significant economic impact on a substantial number of small entities. (f) Certification Statement
Section 13 of the BHC Act, as
amended by EGRRCPA, exempts all but one of the 2,705 FDIC-supervised small banking entities from compliance with
section 13 of the BHC Act. Therefore,
the FDIC certifies that this final rule will not have a significant economic impact on a substantial number of FDICsupervised small banking entities. CFTC: Pursuant to 5 U.S.C. 605(b), the CFTC hereby certifies that the amendments to the 2013 final rule will not have a significant economic impact on a substantial number of small entities for which the CFTC is the primary financial regulatory agency. As discussed in this SUPPLEMENTARY INFORMATION, the Agencies are revising the 2013 final rule in order to provide clarity to banking entities about what activities are prohibited, reduce compliance costs, and improve the ability of the Agencies to make assessments regarding compliance relative to the 2013 final rule. To minimize the costs associated with the 2013 final rule, the Agencies are simplifying and tailoring the rule to allow banking entities to more efficiently provide financial services in a manner that is consistent with the requirements of section 13 of the BHC Act. The revisions will generally apply to banking entities, including certain CFTC-registered entities. These entities include bank-affiliated CFTC-registered swap dealers, futures commission merchants, commodity trading advisors and commodity pool operators.749 The CFTC has previously determined that swap dealers, futures commission merchants and commodity pool operators are not small entities for purposes of the RFA and, therefore, the requirements of the RFA do not apply to those entities.750 As for commodity trading advisors, the CFTC has found it appropriate to consider whether such registrants should be deemed small entities for purposes of the RFA on a case-by-case basis, in the context of the particular regulation at issue.751 In the context of the revisions to the 2013 final rule, the CFTC believes it is unlikely that a substantial number of the commodity trading advisors that are potentially affected are small entities for purposes of the RFA. In this regard, the CFTC notes that only commodity trading advisors that are registered with the CFTC are covered by the 2013 final rule, and generally those that are registered have larger businesses. Similarly, the 2013 final rule applies to only those commodity trading advisors that are affiliated with banks that are within the scope of the Volcker Rule, which the CFTC expects are larger businesses.752

order to be consistent with statutory amendments made by EGRRCPA to section 13 of the BHC Act. The general result of one of these statutory revisions was to exclude community banks and their affiliates and subsidiaries from the scope of the Volcker Rule. See 84 FR 35008. The CFTC believes this exclusion lessens the likelihood that any commodity trading advisors that remain within the scope of the Volcker Rule are small entities. 753The SEC’s Economic Analysis, below, discusses the economic effects of the final amendments. See SEC Economic Analysis, supra
Part V.F.
754See 2013 rule § _.2(c) (definition of banking entity); 2013 rule § _.2(r) as amended (definition of insured depository institution). 755For the purposes of an SEC rulemaking in connection with the RFA, an investment adviser generally is a small entity if it: (1) Has assets under management having a total value of less than $25 million; (2) did not have total assets of $5 million or more on the last day of the most recent fiscal year; and (3) does not control, is not controlled by, and is not under common control with another investment adviser that has assets under management of $25 million or more, or any person (other than a natural person) that had total assets of $5 million or more on the last day of its most recent fiscal year. See 17 CFR 275.0–7. 756For the purposes of an SEC rulemaking in connection with the RFA, a broker-dealer will be deemed a small entity if it: (1) Had total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to 17 CFR 240.17a–5(d), or, if not required to file such statements, had total capital (net worth plus subordinated liabilities) of less than $500,000 on the last day of the preceding fiscal year (or in the time that it has been in business, if shorter); and (2) is not affiliated with any person (other than a natural person) that is not a small business or small organization. See 17 CFR 240.0– 10(c). Under the standards adopted by the SBA, small entities also include entities engaged in financial investments and related activities with $38.5 million or less in annual receipts. See 13 CFR
121.201 (Subsector 523).
757Based on SEC analysis of Form ADV data, the SEC believes that there are not a substantial number of registered investment advisers affected by the proposal that qualify as small entities under RFA. Based on SEC analysis of broker-dealer FOCUS filings and NIC relationship data, the SEC believes that there are no SEC-registered broker-dealers affected by the proposal that qualify as small entities under RFA. With respect to security-based swap dealers and major security-based swap participants, based on feedback from market participants and information about the securitybased swap markets, the Commission believes that the types of entities that would engage in more than a de minimis amount of dealing activity involving security-based swaps—which generally would be large financial institutions—would not be ‘‘small entities’’ for purposes of the RFA. See Regulation SBSR—Reporting and Dissemination of SecurityBased Swap Information, 81 FR 53546, 53553 (Aug. 12, 2016). 758 12 U.S.C. 4802(a). 759 12 U.S.C. 4802(b). 760Additionally, the Administrative Procedure Act generally requires that the effective date of a rule be no less than 30 days after publication in the Federal Register. 5 U.S.C. 553(d)(1). The effective date, January 1, 2020, will be more than 30 days after publication in the Federal Register. The CFTC requested that commenters address whether any CFTC registrants covered by the proposed revisions to the 2013 final rule are small entities for purposes of the RFA. The CFTC did not receive any public comments on this or any other aspect of the RFA as it relates to the rule. Because the CFTC believes there are not a substantial number of commodity trading advisors within the scope of the Volcker Rule that are small entities for purposes of the RFA, and the other CFTC registrants that may be affected by the proposed revisions have been determined not to be small entities, the CFTC believes that the revisions to the 2013 final rule will not have a significant economic impact on a substantial number of small entities for which the CFTC is the primary financial regulatory agency. SEC: In the proposal, the SEC certified that, pursuant to 5 U.S.C. 605(b), the proposal would not, if adopted, have a significant economic impact on a substantial number of small entities. Although the SEC solicited written comments regarding this certification, no commenters responded to this request. As discussed in the SUPPLEMENTARY INFORMATION, the Agencies are adopting revisions to the 2013 rule that are intended to provide banking entities with clarity about what activities are prohibited and improve supervision and implementation of section 13 of the BHC Act. The revisions the agencies are adopting today will generally apply to banking entities, including certain SECregistered entities.753 These entities include SEC-registered broker-dealers, investment advisers, security-based swap dealers, and major security-based swap participants that are affiliates or
subsidiaries of an insured depository institution.754 Based on information in filings submitted by these entities, the SEC believes that there are no banking entity registered investment advisers,755 broker-dealers,756 security-based swap dealers, or major security-based swap participants that are small entities for purposes of the RFA.757 For this reason, the SEC certifies that the rule, as adopted, will not have a significant economic impact on a substantial number of small entities. D. Riegle Community Development and Regulatory Improvement Act
Section 302(a) of the Riegle
Community Development and Regulatory Improvement Act of 1994 (RCDRIA) 758 requires that each Federal banking agency, in determining the effective date and administrative compliance requirements for new regulations that impose additional reporting, disclosure, or other requirements on insured depository institutions, consider, consistent with principles of safety and soundness and the public interest, any administrative burdens that such regulations would place on depository institutions, including small depository institutions, and customers of depository institutions, as well as the benefits of such regulations. The agencies have considered comment on these matters in other parts of this SUPPLEMENTARY INFORMATION. In addition, under section 302(b) of the RCDRIA, new regulations that impose additional reporting, disclosures, or other new requirements on insured depository institutions generally must take effect on the first day of a calendar quarter that begins on or after the date on which the regulations are published in final form.759 Therefore, the effective date for the OCC, Board, and FDIC is January 1, 2020, the first day of the calendar quarter.760 E. OCC Unfunded Mandates Reform Act Determination The OCC has analyzed the rule under the factors set forth in the Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this analysis, the OCC considered whether the rule includes a Federal mandate that may result in the expenditure by State, local, and Tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year (adjusted for inflation). The cost estimate for the final rule is approximately $4.1 million in the first year. Therefore, the OCC finds that the final rule does not trigger the UMRA cost threshold. Accordingly, the OCC has not prepared the written statement described in section 202 of the UMRA. F. SEC Economic Analysis

Broad Economic Considerations
a. Scope
As discussed above, section 13 of the Bank Holding Company (BHC) Act generally prohibits banking entities from engaging in proprietary trading and from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund (covered funds), subject to certain exemptions. Section 13(h)(1) of the BHC Act defines the term ‘‘banking entity’’ to include (i) any insured depository institution (as defined by statute), (ii) any company that controls an insured depository institution, (iii) any company that is treated as a bank holding company for purposes of section 8 of the

761See 12 U.S.C. 1851(h)(1).
762These and other aspects of the regulatory baseline against which the SEC is assessing the economic effects of the final rule on SEC banking entities are discussed in the economic baseline. On July 22, 2019, the agencies adopted a final rule amending the definition of ‘‘insured depository institution’’ in a manner consistent with EGRRCPA. 763Throughout this economic analysis, the term ‘‘banking entity’’ generally refers only to banking entities for which the SEC is the primary financial regulatory agency unless otherwise noted. While
section 13 of the BHC Act and its associated rules
apply to a broader set of banking entities, this economic analysis is limited to those banking entities for which the SEC is the primary financial regulatory agency as defined in Section 2(12)(B) of the Dodd-Frank Act. See 12 U.S.C. 1851(b)(2); 12 U.S.C. 5301(12)(B). Compliance with SBSD registration requirements is not yet required and there are currently no registered SBSDs. However, the SEC has previously estimated that as many as 50 entities may potentially register as SBSDs and that as many as 16 of these entities may already be SEC-registered broker-dealers. See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers, Exchange Act Release No. 86175 (June 21, 2019), 84 FR at 43872 (Aug. 22, 2019), (henceforth ‘‘Capital, Margin, and Segregation Adopting Release’’). For the purposes of this economic analysis, the term ‘‘dealer’’ generally refers to SEC-registered broker-dealers and SBSDs. 764See 83 FR at 33520–33552. 765See, e.g., 83 FR at 33521. 766See, e.g., 83 FR at 33532. 767 Id. 768See, e.g., 83 FR at 33522. 769 Id. 770See, e.g., Occupy the SEC; Better Markets; SIFMA and Center for American Entrepreneurship. 771See 83 FR at 33520–33521. International Banking Act of 1978, and (iv) any affiliate or subsidiary of such an entity.761 In addition, as discussed above, the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), enacted on May 24, 2018, amended section 13 of the BHC Act to exclude from the definition of ‘‘insured depository institution’’ any institution that does not have and is not controlled by a company that has (1) more than $10 billion in total consolidated assets; and (2) total trading assets and trading liabilities, as reported on the most recent applicable regulatory filing filed by the institution, that are more than 5% of total consolidated assets.762 Certain SEC-regulated entities, such as broker-dealers, security-based swap dealers (SBSDs), and registered investment advisers (RIAs) affiliated with a banking entity, fall under the definition of ‘‘banking entity’’ and are subject to the prohibitions of section 13 of the BHC Act.763 This economic analysis is limited to areas within the scope of the SEC’s function as the primary securities markets regulator in the United States. In particular, the SEC’s economic analysis is focused on the potential effects of the final rule on SEC registrants, in their capacity as such, the functioning and efficiency of the securities markets, investor protection, and capital formation. SEC registrants affected by the final rule include SEC-registered broker-dealers, SBSDs, and RIAs. Thus, the below analysis does not consider brokerdealers, SBSDs, and investment advisers that are not banking entities, or banking entities that are not SEC registrants, in either case for purposes of section 13 of the BHC Act, beyond the potential spillover effects
on these entities and effects on efficiency, competition, investor protection, and capital formation in securities markets. Other sections of this SUPPLEMENTARY INFORMATION discuss the effects of the final rule on banking entities not overseen by the SEC for purposes of
section 13 of the BHC Act.
In the proposal, the SEC solicited comment on all aspects of the costs and benefits associated with the proposed amendments for SEC registrants, including any spillover effects the proposed amendments may have on efficiency, competition, and capital formation in securities markets. The SEC has considered these comments, as discussed in greater detail in the sections that follow. b. Economic Effects and Justification As stated in the proposal, in implementing section 13 of the BHC Act, the agencies sought to increase the safety and soundness of banking entities, promote financial stability, and reduce conflicts of interest between banking entities and their customers. In the proposal, the SEC recognized a number of effects of the 2013 rule.764 The SEC continues to recognize that distinguishing between permissible and prohibited activities may be complex and costly for some firms,765 which may impede the conduct of permissible activities.766 The SEC continues to believe that the 2013 rule may have resulted in a complex and costly compliance regime that is unduly restrictive and burdensome for some banking entities, particularly smaller firms that do not qualify for the simplified compliance regime.767 Since the 2013 rule became effective, new estimates regarding compliance burdens and new information about the various effects of the 2013 rule have become available.768 The passage of time has also enabled an assessment of the value of individual requirements that enable SEC oversight, such as the requirement to report certain quantitative metrics, relative to reporting and other compliance burdens.769 As discussed below, a number of commenters have indicated that the proposed amendments would have altered the scope of permissible activities and compliance requirements of the 2013 rule in a way that significantly affects the economic costs and benefits of the 2013 rule. In addition, commenters offered a variety of views on the baseline economic effects, which include section 13 of the BHC Act, the 2013 rule, sections 203 and 204 of EGRRCPA and conforming amendments, and current practices of banking entities aimed at compliance with these regulations.770 As part of the proposal’s economic baseline, the SEC discussed the effects of the agencies’ 2013 rule.771 The economic baseline
section below discusses these effects in
greater detail.
The final rule includes amendments that impact the scope of permitted activities for all or a subset of banking entities (e.g., trading account definition, underwriting and market making, and trading and investing activities by foreign banking entities), and amendments that simplify, tailor, or eliminate the application of certain aspects of the 2013 rule intended to reduce compliance and reporting burdens while preserving and, in some cases, enhancing the effectiveness of the 2013 rule. Many of the final amendments seek to provide greater clarity and certainty about which activities are permitted under the 2013 rule, which may increase the ability and willingness of banking entities to engage in permitted activities, and to promote the effective allocation of compliance resources. Broadly, the SEC believes that a greater ability and willingness to engage in permitted activities would benefit the parties to those transactions and capital markets as a whole. Reduced compliance costs may translate into increased willingness of banking entities to engage in activities that facilitate risk-sharing and capital formation, such as underwriting securities and making markets. Accordingly, the rule may also benefit clients, customers, and counterparties in the form of an increased ability to transact with banking entities. The SEC continues to recognize that some of these changes may also, in certain circumstances, increase activities involving risk exposure or increase the incidence of conflicts of interest among some market participants. The returns and risks from

772See, e.g., sections IV.B.2 and IV.D.1. 773See, e.g., 79 FR 5541. 774See Sec. & Exch. Comm’n, Access To Capital And Market Liquidity, (2017) [hereinafter SEC Report 2017]. the activities of banking entities may flow through to their investors. In general, to the extent that the final rule increases or decreases the scope of permissible activities, the final rule may dampen or magnify some of the economic tensions inherent in this rulemaking. As discussed above, various aspects of the final rule are designed to ensure that the prudential objectives of the rule are not diminished. Moreover, amendments adopted as part of the final rule that redefine the scope of entities subject to certain provisions of the 2013 rule may have an effect on competition, allocative efficiency, and capital formation. Where the final rule reduces burdens on some groups of market participants (e.g., on banking entities without significant trading assets and liabilities and certain foreign banking entities), the final rule is expected to increase competition and trading activity in related market segments. Other amendments to the 2013 rule reduce compliance program, reporting, and documentation requirements for some banking entities. The SEC believes that these amendments may reduce the compliance burdens of SEC-regulated banking entities, which may enhance competition, trading activity, and capital formation. The SEC recognizes that these amendments may alter the mix of tools available for regulatory oversight and supervision. However, the SEC believes that the final rule as a whole is unlikely to reduce the efficacy of the agencies’ regulatory oversight.772 Further, under the final rule, banking entities (other than banking entities with limited trading assets and liabilities for which the presumption of compliance has not been rebutted) are still required to develop and provide for the continued administration of a compliance program that is reasonably designed to ensure and monitor compliance with the prohibitions and restrictions set forth in section 13 of the BHC Act. Finally, the final rule does not change the scope of entities subject to the statutory obligations and prohibitions of section 13 of the BHC Act.
c. Analytical Approach
The SEC’s economic analysis is informed by research on the effects of
section 13 of the BHC Act and the 2013
rule and on related incentives conflicts, by comments received by the agencies from a variety of interested parties, and by the agencies’ experience administering the 2013 rule since its adoption. Throughout this economic analysis, the SEC discusses how different market participants may respond to various aspects of the final rule and considers the potential effects of the final rule on activities by banking entities that involve risk, on their willingness and ability to engage in client-facilitation activities, and on competition, market quality, and capital formation, as informed, among other things, by research and comment letters. The SEC’s analysis also recognizes that the overall risk exposure of banking entities may arise out of a combination of activities, including proprietary trading, market making, and traditional banking, as well as the volume and structure of hedging and other riskmitigating activities. As discussed further below, the SEC recognizes the complex baseline effects of section 13 of the BHC Act, as amended by sections 203 and 204 of EGRRCPA, and implementing rules, on overall levels and structure of banking entity risk exposures. The SEC also considered the investor protection implications of the final rule. Broadly, the SEC notes that market liquidity can be important to investors as it may enable investors to exit (in a timely manner and at an acceptable price) from their positions in instruments, products, and portfolios. At the same time, excessive risk exposures of banking entities can adversely affect markets and, therefore, investors. The final rule tailors, removes, or alters the scope of various requirements in the 2013 rule and adds certain new requirements. Since section 13 of the BHC Act and the 2013 rule combined a number of different requirements, and, as discussed above, the type and level of risk exposure of a banking entity is the result of a combination of activities,773 it is difficult to attribute the observed effects to a specific provision or set of requirements. In addition, analysis of the effects of the implementation of the 2013 rule is confounded by macroeconomic factors, other policy interventions, and postcrisis changes to market participants’ risk aversion and return expectations. Because of the extended timeline of implementation of section 13 of the BHC Act and the overlap of the 2013 rule period with other post-crisis changes affecting the same group or certain sub-groups of SEC registrants, the SEC cannot rely on typical quantitative methods that might otherwise enable causal attribution and quantification of the effects of section 13 of the BHC Act and the 2013 rule on measures of capital formation, liquidity, competition, and informational or allocative efficiency. Moreover, empirical measures of capital formation or liquidity do not reflect issuance and transaction activity that does not occur as a result of the 2013 rule. Accordingly, it is difficult to quantify the primary issuance
and secondary market liquidity that would have been observed following the financial crisis absent various provisions of Section 13 of the BHC Act and the 2013 final rule. Importantly, the existing securities markets—including market participants, their business models, market structure, etc.—differ in significant ways from the securities markets that existed prior to enactment of Section 13 of the BHC Act and the implementation of the 2013 rule. For example, the role of dealers in intermediating trading activity has changed in important ways, including the following: In recent years, on both an absolute and relative basis bankdealers generally committed less capital to intermediation activities while nonbanking dealers generally committed more; the volume and profitability of certain trading activities after the financial crisis may have decreased for bank-dealers while it may have increased for other intermediaries, including nonbanking entities that provide intraday liquidity using sophisticated electronic trading algorithms and high speed access to data and trading venues; and the introduction of alternative credit markets may have contributed to liquidity fragmentation across markets while potentially increasing access to capital.774 Where possible, this analysis attempts to quantify the costs and benefits expected to result from the final rule. In many cases, however, the SEC is unable to quantify these potential economic effects. Some of the primary economic effects, such as the effect on incentives that may give rise to conflicts of interest in various regulated entities and the efficacy of regulatory oversight under various compliance regimes, are inherently difficult to quantify. Moreover, some of the benefits of the 2013 rule’s prohibitions that are being amended here, such as potential benefits for resilience during a crisis, are less readily observable under strong economic conditions and cannot be isolated from the effects of other postcrisis regulatory efforts intended to enhance resilience. Lastly, because of overlapping implementation periods of various post-crisis regulations affecting

775See https://www.sec.gov/divisions/marketreg/ faq-volcker-rule-section13.htm, originally published on June 10, 2014, and most recently updated on March 4, 2016. 776See Statement regarding Treatment of Certain Foreign Funds under the Rules Implementing
Section 13 of the Bank Holding Company Act (July
17, 2019), available at https:// www.federalreserve.gov/newsevents/pressreleases/ files/bcreg20190717a1.pdf. This policy statement continued the position of the Federal banking agencies that was released on July 21, 2017, and the position that the agencies expressed in the proposal. See 83 FR 33444. 777This aspect of the baseline is discussed in
section V.F.3.b.
778This aspect of the baseline is discussed in
section IV.B.1.b.i.
779See 2013 rule §§ll.4, ll.5, App. A., App. B; final rule §§ll.4, ll.5, App. A. 780See 2013 rule §ll.4 (a). 781See 2013 rule §ll.4 (b). 782See 2013 rule §ll.4 (b)(3)(i). the same group or certain sub-groups of SEC registrants, the long implementation timeline of the 2013 rule, and the fact that many market participants changed their behavior in anticipation of future changes in regulation, it is difficult to quantify the net economic effects of individual amendments to the 2013 rule adopted here. In some instances, the SEC lacks the information or data necessary to provide reasonable estimates for the economic effects of the final rule. For example, the SEC lacks information and data, and commenters have not provided such information or data, to allow a quantification of (1) the volume of trading activity that does not occur because of uncertainty about how to demonstrate that underwriting or market making activities satisfy the reasonably expected near-term demand (RENTD) requirement; (2) the extent to which internal limits may capture expected customer demand; (3) how accurately correlation analysis reflects underlying exposures of banking entities with, and without, significant trading assets and liabilities in normal times and in times of market stress; (4) the feasibility and costs of reorganization that may enable some U.S. banking entities to become foreign banking entities for the purposes of relying on the foreign trading exemption; and (5) the extent of the overall risk reduction (if any) caused by the 2013 rule. Where the SEC cannot quantify the relevant economic effects, the SEC discusses them in qualitative terms.
2. Baseline
The baseline against which the SEC is assessing the economic effects of the final rule includes the legal and regulatory framework as it exists at the time of this release and current practices aimed at compliance with these regulations. a. Regulation The regulatory baseline includes
section 13 of the BHC Act, as amended
by EGRRCPA, and the 2013 rule, as amended by the agencies’ amendments conforming to EGRRCPA. Further, the baseline accounts for the fact that since the adoption of the 2013 rule, the staffs of the agencies have provided FAQ responses to questions about the 2013 rule.775 In addition, the federal banking agencies released a 2019 policy statement with respect to foreign excluded funds.776 The subsections below discuss in greater detail the legal and regulatory baseline applicable to entities that are registered with the SEC and that the SEC oversees for purposes of section 13 of the BHC Act. In particular, the SEC discusses the exemptions for permissible underwriting and market making-related activities, risk-mitigating hedging, and foreign trading; requirements and exemptions related to covered funds; compliance and metrics reporting requirements; and sections of EGRRCPA and conforming amendments that exempt certain banking entities from section 13 of the BHC Act and the 2013 rule.
i. The 2013 Rule
(1) Definition of the Trading Account The scope of prohibited proprietary trading activity is determined by the definition of ‘‘trading account’’ and related exclusions.777 As discussed in detail in section IV.B.1.a, the 2013 rule’s definition of trading account includes three prongs: The short-term intent prong, the market risk capital rule prong, and the dealer prong. In addition, the 2013 rule includes a rebuttable presumption, under which a purchase (or sale) of a financial instrument is presumed to be for the trading account under the short-term intent prong if the banking entity holds the financial instrument for fewer than 60 days or substantially transfers the risk of the financial instrument within 60 days of the purchase (or sale). The 2013 rule provides several exclusions from the definition of proprietary trading in section § ll.3(d). In particular, under certain conditions, the 2013 rule excludes from the definition of proprietary trading any purchases or sales that arise under a repurchase or reverse repurchase agreement or under a transaction in which the banking entity lends or borrows a security temporarily, any purchase or sale of a security for the purpose of liquidity management in accordance with a documented liquidity management plan,778 any purchase or sale by a banking entity that is a derivatives clearing organization or a clearing agency in connection with clearing financial instruments, any excluded clearing activities, any purchase or sale that satisfies an existing delivery obligation or an obligation in connection with a judicial, administrative, self-regulatory organization, or arbitration proceeding, any purchase or sale by a banking entity that is acting solely as agent, broker, or custodian, any purchase or sale through a deferred compensation, stock-bonus, profit-sharing, or pension plan, and any purchase or sale in the ordinary course of collecting a debt previously contracted in good faith. In addition, section §ll.3(e)(13) of the 2013 rule defines ‘‘trading desk’’ as the smallest discrete unit of organization of a banking entity that purchases or sells financial instruments for the trading account of the banking entity or an affiliate thereof, and applies certain requirements at the ‘‘trading desk’’-level of organization.779 (2) Exemption for Underwriting and Market Making-Related Activity
Section 13(d)(1)(B) of the BHC Act
contains an exemption from the prohibition on proprietary trading for underwriting and market making-related activities. Under the 2013 rule, all banking entities with covered activities must satisfy several requirements with respect to their underwriting activities to qualify for the exemption for underwriting activities, discussed in detail in section IV.B.2.a above.780 In addition, under the current baseline, all banking entities with covered activities must satisfy six requirements with respect to their market making-related activities to qualify for the exemption for market making-related activities, as discussed in section IV.B.2.a.781 The SEC also notes that, under the baseline, an organizational unit or a trading desk of another banking entity that has consolidated trading assets and liabilities of $50 billion or more is generally not considered a client, customer, or counterparty for the purposes of the RENTD requirement.782 Thus, such demand does not contribute to RENTD unless such demand is affected through an anonymous trading facility or unless the trading desk documents how and why the organizational unit of said large banking entity should be treated as a client,

783See 2013 rule §ll.5.
784See 79 FR 5631.
785See 83 FR at 33534 citing to note 18 regarding Notice Seeking Public Input on the Volcker Rule (August 2017), available at https://www.occ.gov/ news-issuances/news-releases/2017/nr-occ-2017- 89a.pdf. Corresponding comment letters are available at https://www.regulations.gov/docket Browser?rpp=25&so=DESC&sb=comment DueDate&po=0&dct=PS&D=OCC-2017-0014. Letter from BOK Financial can be accessed directly at https://www.regulations.gov/document?D=OCC2017-0014-0016. 786See 2013 rule §ll.5(b)(2)(ii). 787See 2013 rule §ll.5(c)(1). 788See 2013 rule §ll.5(c)(3). See also 2013 rule §ll.20(b)(6). 789See 2013 rule §ll.6(e). customer, or counterparty. To the extent that such documentation requirements increase the cost of intermediating interdealer transactions, this requirement may affect the volume and cost of interdealer trading. (3) Exemption for Risk-Mitigating Hedging Under the baseline, certain riskmitigating hedging activities may be exempt from the restriction on proprietary trading under the riskmitigating hedging exemption. To make use of this exemption, the 2013 rule requires all banking entities to comply with a comprehensive and multi-faceted set of requirements, including (1) the establishment, implementation, and maintenance of an internal compliance program; (2) satisfaction of various criteria for hedging activities; and (3) the existence of compensation arrangements for persons performing risk-mitigating hedging activities that are designed not to reward or incentivize prohibited proprietary trading. In addition, certain activities under the exemption for risk-mitigating hedging are subject to documentation requirements.783 Specifically, the 2013 rule requires that a banking entity seeking to rely on the exemption for risk-mitigating hedging must establish, implement, maintain, and enforce an internal compliance program that includes reasonably designed written policies and procedures regarding the positions, techniques, and strategies that may be used for hedging, including documentation indicating what positions, contracts, or other holdings a particular trading desk may use in its risk-mitigating hedging activities, as well as position and aging limits with respect to such positions, contracts, or other holdings. The compliance program must also provide for internal controls and ongoing monitoring, management, and authorization procedures, including relevant escalation procedures. In addition, the 2013 rule requires that all banking entities, as part of their compliance program, must conduct analysis, including correlation analysis, and independent testing designed to ensure that the positions, techniques, and strategies that may be used for hedging are designed to reduce or otherwise significantly mitigate and demonstrably reduce or otherwise significantly mitigate the specific, identifiable risk(s) being hedged. The 2013 rule does not require a banking entity to prove correlation mathematically—rather, the nature and extent of the
correlation analysis should be dependent on the facts and circumstances of the hedge and the underlying risks targeted. Moreover, if correlation cannot be demonstrated, the analysis needs to state the reason and explain how the proposed hedging position, technique, or strategy is designed to reduce or significantly mitigate risk and how that reduction or mitigation can be demonstrated without correlation.784 In the proposal, the SEC referenced market participants’ estimate that the inability to perform correlation analysis, for instance, for non-trading assets such as mortgage servicing assets, can add as much as 2% of the asset value to the cost of hedging.785 To qualify for the exemption for riskmitigating hedging, the hedging activity, both at inception and at the time of any adjustment to the hedging activity, must be designed to reduce or otherwise significantly mitigate and demonstrably reduce or significantly mitigate one or more specific identifiable risks.786 Hedging activities also must not give rise, at the inception of the hedge, to any significant new or additional risk that is not itself hedged contemporaneously. Additionally, the hedging activity must be subject to continuing review, monitoring, and management by the banking entity, including ongoing recalibration of the hedging activity to ensure that the hedging activity satisfies the requirements for the exemption and does not constitute prohibited proprietary trading. Finally, the 2013 rule requires banking entities to document and retain information related to the purchase or sale of hedging instruments that are either (1) established by a trading desk that is different from the trading desk establishing or responsible for the risks being hedged; (2) established by the specific trading desk establishing or responsible for the risks being hedged but that are effected through means not specifically identified in the trading desk’s written policies and procedures; or (3) established to hedge aggregate positions across two or more trading desks. 787 The documentation must include the specific identifiable risks being hedged, the specific riskmitigating strategy that is being implemented, and the trading desk that is establishing and responsible for the hedge. These records must be retained for a period of not less than 5 years in a form that allows them to be promptly produced if requested.788 (4) Exemption for Foreign Trading Under the 2013 rule, a foreign banking entity that has a branch, agency, or subsidiary located in the United States (and is not itself located in the United States) is subject to the proprietary trading prohibitions and related compliance requirements unless the transaction meets five criteria.789 First, a branch, agency, or subsidiary of a foreign banking organization that is located in the United States or organized under the laws of the United States or of any state may not engage as principal in the purchase or sale of financial instruments (including
any personnel that arrange, negotiate, or execute a purchase or sale). Second, the banking entity (including relevant personnel) that makes the decision to engage in the transaction must not be located in the United States or organized under the laws of the United States or of any state. Third, the transaction, including any transaction arising from risk-mitigating hedging related to the transaction, must not be accounted for as principal directly or on a consolidated basis by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any state. Fourth, no financing for the transaction can be provided by any branch or affiliate of a foreign banking entity that is located in the United States or organized under the laws of the United States or of any state (the financing prong). Fifth, the transaction must generally not be conducted with or through any U.S. entity (the counterparty prong), unless (1) no personnel of a U.S. entity that are located in the United States are involved in the arrangement, negotiation, or execution of such transaction; (2) the transaction is with an unaffiliated U.S. market intermediary acting as principal and is promptly cleared and settled through a central counterparty; or (3) the transaction is executed through an unaffiliated U.S. market intermediary acting as agent, conducted anonymously through an

790See 2013 rule §ll.6(e)(3). 791See 2013 rule §ll.12(a)(2)(ii); see also §ll.11(c)(2). 792See 2013 rule §ll.12(a)(2)(iii); see also §ll.11(c)(3). 793See 2013 rule §ll.13(a). 794See Responses to Frequently Asked Questions Regarding the Commission’s Rule under Section 13 of the Bank Holding Company Act, June 10, 2014, updated March 4, 2016, available at https:// www.sec.gov/divisions/marketreg/faq-volcker-rulesection13.htm. 795See 2013 rule §ll.20(a). 796See 2013 rule §ll.20(f). Note that if an entity does not have any covered activities, it is not required to establish a compliance program until it begins to engage in covered activity. exchange or similar trading facility, and is promptly cleared and settled through a central counterparty.790 (5) Covered Funds The 2013 rule generally defines covered funds as issuers that would be investment companies but for section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 and then excludes specific types of entities from the definition. As described above, the 2013 rule provides for market making and hedging exemptions to the prohibition on proprietary trading. However, the 2013 rule places additional restrictions on the amount of underwriting, market making, and hedging a banking entity can engage in when those transactions involve covered funds. For underwriting and market making transactions in covered funds, if the banking entity sponsors or advises a covered fund, or acts in any of the other capacities specified in § ll.11(c)(2) of the 2013 rule, then any ownership interests acquired or retained by the banking entity and its affiliates in connection with underwriting and market makingrelated activities for that particular covered fund must be included in the per-fund and aggregate covered fund investment limits in §ll.12 of the 2013 rule and is subject to the capital deduction provided in §ll.12(d) of the 2013 rule.791 Additionally, a banking entity’s aggregate investment in all covered funds is limited to 3% of a banking entity’s tier 1 capital, and banking entities must include all ownership interests in covered funds acquired or retained in connection with underwriting and market making-related activities for purposes of this calculation.792 Moreover, under the 2013 rule, the exemption for riskmitigating hedging activities related to covered funds is available only for transactions that mitigate risks associated with the compensation of a banking entity employee or an affiliate that provides advisory or other services to the covered fund.793 Under the 2013 rule, foreign banking entities can acquire or retain an ownership interest in, or act as sponsor to, a covered fund, so long as those activities and investments occur solely outside of the United States, no ownership interest in such fund is offered for sale or sold to a resident of the United States (the marketing restriction), and certain other conditions are met. Under the 2013 rule, an activity or investment occurs solely outside
of the United States if (1) the banking entity is not itself, and is not controlled directly or indirectly by, a banking entity that is located in the United States or established under the laws of the United States or of any state; (2) the banking entity (and relevant personnel) that makes the decision to acquire or retain the ownership interest or act as sponsor to the covered fund is not located in the United States or organized under the laws of the United States or of any state; (3) the investment or sponsorship, including any riskmitigating hedging transaction related to an ownership interest, is not accounted for as principal by any U.S. branch or affiliate; and (4) no financing is provided, directly or indirectly, by any U.S. branch or affiliate. In addition, the staffs of the agencies have issued FAQs concerning the requirement that no ownership interest in such fund is offered for sale or sold to a resident of the United States.794 (6) Compliance Program For compliance purposes, the 2013 rule differentiates banking entities on the basis of certain thresholds, including the amount of the banking entity’s consolidated trading assets and liabilities and total consolidated assets. More specifically, U.S. banking entities that have, together with affiliates and subsidiaries, trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) the average gross sum of which—on a worldwide consolidated basis, over the previous consecutive four quarters, as measured as of the last day of each of the four prior calendar quarters—equals $10 billion or more are subject to reporting requirements of Appendix A under the 2013 rule. Banking entities that have $50 billion or more in total consolidated assets as of the previous calendar year end and banking entities with over $10 billion in consolidated trading assets and liabilities are subject to the requirement to adopt an enhanced compliance program pursuant to
Appendix B of the 2013 rule.
Additionally, banking entities that engage in covered activities and that have total consolidated assets of $10 billion or less as reported on December 31 of the previous 2 calendar years qualify for the simplified compliance regime. The 2013 rule emphasized the importance of a strong compliance program and sought to tailor the compliance program to the size of banking entities and the size of their trading activity. As noted in the preamble to the 2013 rule, the agencies believed it was necessary to balance compliance burdens posed on smaller banking entities with specificity and rigor necessary for large and complex banking organizations facing high compliance risks. As a result, the compliance regime under the 2013 rule is progressively more stringent with the size of covered activities and/or balance sheet of banking entities. Under the 2013 rule, all banking entities with covered activities must develop and maintain a compliance program that is reasonably designed to ensure and monitor compliance with
section 13 of the BHC Act and the
implementing regulations. The terms, scope, and detail of the compliance program depend on the types, size, scope, and complexity of activities and business structure of the banking entity.795 Under the 2013 rule, banking entities that qualify for the simplified compliance program (banking entities that have total consolidated assets of less than $10 billion) are able to incorporate compliance with the 2013 rule into their regular compliance policies and procedures by reference, adjusting as appropriate given the entities’ activities, size, scope, and complexity.796 All other banking entities with covered activities are, at a minimum, required to implement a six-pillar compliance program. The six pillars include (1) written policies and procedures reasonably designed to document, describe, monitor and limit proprietary trading and covered fund activities and investments for compliance; (2) a system of internal controls reasonably designed to monitor compliance; (3) a management framework that clearly delineates responsibility and accountability for compliance, including management review of trading limits, strategies, hedging activities, investments, and incentive compensation; (4) independent testing and audit of the effectiveness of the compliance program; (5) training for personnel to

797See 2013 rule §ll.20(b).
798See 2013 rule §ll.20(c) and Appendix B. 799See 2013 rule §ll.20(e). 800See 2013 rule §ll.20(d) and Appendix A. 801See 2013 rule §ll.20 and Appendix A. 802See 2013 rule §ll.20(d)(3). 803Specifically, section 203 of EGRRCPA provides that the term ‘‘insured depository institution,’’ for purposes of the definition of ‘‘banking entity’’ in section 13(h)(1) of the BHC Act (12 U.S.C. 1851(h)(1)), does not include an insured depository institution that does not have, and is not controlled by a company that has (1) more than $10 billion in total consolidated assets; and (2) total trading assets and trading liabilities, as reported on the most recent applicable regulatory filing filed by the institution, that are more than 5% of total consolidated assets. 804See EGRRCPA Conforming Amendments Adopting Release, 84 FR at 35008. effectively implement and enforce the compliance program; and (6) recordkeeping sufficient to demonstrate compliance.797 In addition, under the 2013 rule, banking entities with covered activities that do not qualify as those with modest activity (banking entities that have total consolidated assets in excess of $10 billion) and that are either subject to the reporting requirements of Appendix A or have more than $50 billion in total consolidated total assets as of the previous calendar year end are required to comply with the enhanced minimum standards for compliance as specified in
Appendix B of the 2013 rule.798
Appendix B requires the compliance
program of the banking entities that are subject to it to (1) be reasonably designed to supervise the permitted trading and covered fund activities and investments, identify and monitor the risks of those activities and potential areas of noncompliance, and prevent prohibited activities and investments; (2) establish and enforce appropriate limits on the covered activities and investments, including limits on the size, scope, complexity, and risks of the individual activities or investments consistent with the requirements of
section 13 of the BHC Act and the 2013
rule; (3) subject the compliance program to periodic independent review and testing and ensure the entity’s internal audit, compliance, and internal control functions are effective and independent; (4) make senior management and others accountable for the effective implementation of the compliance program, and ensure that the chief executive officer and board of directors review the program; and (5) facilitate supervision and examination by the agencies. Additionally, under the 2013 rule, any banking entity that has more than $10 billion in total consolidated assets as reported in the previous 2 calendar years is required to maintain additional records related to covered funds. In particular, a banking entity must document the exclusions or exemptions relied on by each fund sponsored by the banking entity (including all subsidiaries and affiliates) in determining that such fund is not a covered fund, including documentation that supports such determination; for each seeding vehicle that will become a registered investment company or SECregulated business development company, a written plan documenting the banking entity’s determination that the seeding vehicle will become a registered investment company or SECregulated business development company, the period of time during which the vehicle will operate as a seeding vehicle, and the banking entity’s plan to market the vehicle to third-party investors and convert it into a registered investment company or SEC-regulated business development company within the time period specified.799 (7) Metrics Under Appendix A of the 2013 rule, banking entities with trading assets and liabilities (excluding trading assets and liabilities involving obligations of or guaranteed by the United States or any agency of the United States) the average gross sum of which—on a worldwide consolidated basis, over the four previous quarters, as measured by the last day of each of the four prior calendar quarters—equals or exceeds $10 billion to meet requirements concerning recording and reporting certain measurements for each trading desk engaged in covered trading activity.800 Banking entities subject to
Appendix A are required to record and
report the following quantitative measurements for each trading day and for each trading desk engaged in covered trading activities: (i) Risk and Position Limits and Usage; (ii) Risk Factor Sensitivities; (iii) Value-at-Risk and Stress Value-at-Risk; (iv) Comprehensive Profit and Loss Attribution; (v) Inventory Turnover; (vi) Inventory Aging; and (vii) CustomerFacing Trade Ratio. The metrics reporting requirements are intended to assist banking entities, the SEC, and other regulators in achieving the following: A better understanding of the scope, type, and profile of covered trading activities; identification of covered trading activities that warrant further review or examination by the banking entity to verify compliance with the rule’s proprietary trading restrictions; evaluation of whether the covered trading activities of trading desks engaged in permitted activities are consistent with the provisions of the permitted activity exemptions; evaluation of whether the covered trading activities of trading desks that are engaged in permitted trading activities (i.e., underwriting and market making-related activity, risk-mitigating hedging, or trading in certain government obligations) are consistent with the requirement that such activity not result, directly or indirectly, in a material exposure to high-risk assets or high-risk trading strategies; identification of the profile of particular covered trading activities of the banking entity, and its individual trading desks, to help establish the appropriate frequency and scope of the SEC’s examinations of such activity; and the assessment and addressing of the risks associated with the banking entity’s covered trading activities.801 Under the 2013 rule, banking entities with significant trading assets and liabilities (Group A entities) and with moderate trading assets and liabilities (Group B entities) that have less than $50 billion in consolidated trading assets and liabilities are required to report metrics for each quarter within 30 days of the end of that quarter. In contrast, Group A and Group B banking entities with total trading assets and liabilities equal to or above $50 billion are required to report metrics more frequently—each month within 10 days of the end of that month.802
ii. EGRRCPA and Conforming
Amendments
In accordance with section 203 of EGRRCPA,803 the agencies amended the definition of ‘‘insured depository institution’’ in § ll.2(r) of the 2013 rule to exclude an institution if it, and every entity that controls it, has both (1) $10 billion or less in total consolidated assets and (2) total consolidated trading assets and liabilities that are 5% or less of its total consolidated assets. The agencies also amended the 2013 rule to reflect the changes made by section 204 of EGRRCPA. That provision modified
section 13 of the BHC Act to permit, in
certain circumstances, bank-affiliated investment advisers to share their name with the hedge funds or private equity funds they organize and offer. As discussed elsewhere,804 certain SEC-regulated entities, such as dealers and RIAs, fell under the definition of ‘‘banking entity’’ for the purposes of
section 13 of the BHC Act before the
enactment of EGRRCPA and qualified for the final amendments implementing

805The SEC continues to believe that all bankaffiliated entities that may register with the SEC as security-based swap dealers and major securitybased swap participants were unaffected by section 203 of EGRRCPA or the conforming amendments because of the size of their balance sheets and the amount of trading activity of their affiliated banking entities. The SEC’s analysis was based on DTCC Derivatives Repository Limited Trade Information Warehouse (TIW) data on single-name creditdefault swaps. 806See EGRRCPA Conforming Amendments Adopting Release, 84 FR at 35008. 807See 83 FR at 33520–33521. 808See 83 FR at 33521. 809 Id. 810See, e.g., Occupy the SEC, Better Markets, SIFMA, Center for American Entrepreneurship. 811See, e.g., 79 FR at 5666, 79 FR at 5574, 79 FR at 5541. 812See, e.g., 79 FR at 5659. 813See, e.g., 79 FR at 5541. 814See, e.g., 79 FR at 5541, 79 FR at 5584, 79 FR at 5616, 79 FR at 5671, 79 FR at 5673, 79 FR at 5675, 79 FR at 5713. 815See CCMC; Oonagh McDonald; JBA; Occupy the SEC and Systemic Risk Council. 816See, e.g., 79 FR at 5666, 79 FR at 5574, 79 FR at 5541, 79 FR at 5659. See also Senators Merkley et al. 817See, e.g., 83 FR at 33520. 818See, e.g., Occupy the SEC. 819 Id. 820See, e.g., Better Markets and NAFCU. 821See, e.g., Volcker Alliance. 822See, e.g., CAP. 823See, e.g., American Action Forum. sections 203 and 204 of EGRRCPA.805 Therefore, the economic baseline against which the SEC is assessing the final rule incorporates the economic effects of sections 203 and 204 of EGRRCPA, as analyzed in the agencies’ release adopting the conforming amendments.806 b. Response to Commenters Regarding Economic Baseline and Effects of
Section 13 of the BHC Act and the 2013
Rule
In the proposal, the SEC described the baseline effects of the 2013 rule 807 and recognized that amendments that increase or decrease the scope of permissible activities may magnify or attenuate the baseline economic effects of the 2013 rule.808 The SEC also noted that amendments that decrease (or increase) compliance program and reporting obligations could alter the economic effects toward (or away from) competition, trading activity, and capital formation on the one hand, and against (or in favor of) regulatory and internal oversight on the other. However, the SEC noted that the proposed amendments may enhance trading liquidity and capital formation and that some of the proposed changes need not reduce the efficacy of the regulation or the agencies’ regulatory oversight.809 A number of commenters, however, have indicated that the proposed amendments would have changed the scope of permissible activities and the compliance regime in the 2013 rule in a manner that significantly alters the costs and benefits of that rule and offered a variety of assessments of the baseline economic effects of section 13 of the BHC Act and the 2013 rule.810 In response to those comments, this
section expands the discussion of the
baseline and supplements the analysis in the proposal with a discussion of the comments received by the agencies and, in response to comments, recent research on that topic. In the 2013 rule, the agencies sought to increase the safety and soundness of banking entities and to promote financial stability,811 and to reduce conflicts of interest between banking entities and their customers, clients, and counterparties,812 while preserving the provision of valuable client-oriented services 813 and mitigating unnecessary compliance burdens and related competitive effects.814 Accordingly, the sections that follow address the SEC’s understanding of the baseline effects of
section 13 of the BHC Act and the 2013
rule on (a) risk exposures, (b) conflicts of interest between banking entities and their customers and counterparties, (c) client-oriented financial services and market quality, and (d) compliance burdens and competition. The SEC’s analysis of these various effects reflects comments received, academic research, and the SEC’s experience overseeing registered entities for purposes of section 13 of the BHC Act. Importantly, research studies cited below are limited to their specific settings and are subject to various methodological and measurement limitations, as discussed in the sections that follow. Moreover, as described below, some studies empirically examine the relevant effects around the implementation of the 2013 rule, while others focus on the anticipatory response of market participants around the enactment of section 13 of the BHC Act and prior to the effective date of the 2013 rule. As a result, the SEC recognizes that these findings may have limited generalizability and may or may not extend to various groups of SEC registrants. As discussed below, some research suggests that section 13 of the BHC Act and the 2013 rule may have reduced risk exposures of banking entities related to trading, but may not have reduced the overall exposure to risk of some banking entities. Other research suggests that the 2013 rule may have partly mitigated certain conflicts of interest between banking entities and clients in a limited set of banking entityclient relationships. Moreover, some research suggests that the 2013 rule imposed large compliance costs that may have disproportionately affected smaller banking entities and may have decreased the willingness and ability of banking entities to engage in certain client facilitation activities. In addition, commenters suggested that the agencies must consider the effects of the 2013 rule and proposed amendments in light of the overall effects of new requirements on banking entities, including Basel III, regulations of systemically important financial institutions, the SEC’s money market reform, and the liquidity coverage ratio.815 Where relevant, the analysis that follows discusses the direct effects of section 13 of the BHC Act, the 2013 rule, sections 203 and 204 of EGRRCPA and conforming amendments, and the final rule, as well as how they may interact with the effects of other related financial regulations.
i. Risk Exposure
As discussed in the proposal, in implementing section 13 of the BHC Act, the agencies sought to increase the safety and soundness of banking entities and to promote financial stability, among other things.816 The regulatory regime created by the 2013 rule was intended to enhance regulatory oversight and compliance with the substantive prohibitions in section 13 of the BHC Act.817 In response to the proposal, some commenters indicated that the benefits from the statutory prohibition in section 13 of the BHC Act and implementing rules on proprietary trading include reduced banking profits resulting from proprietary trading and corresponding reductions in the costs associated with bailouts; 818 prudent risk management that makes job-creating functions of banks more viable; 819 greater financial stability; 820 dampened bubbles in products such as synthetic collateralized debt obligations,821 and reduced highly risky bank trading activities and hedge fund and private equity investments that can threaten financial stability.822 Other commenters stated that proprietary trading was not the cause of the 2007–2008 financial crisis and that almost every financial crisis in history has been driven by classic extensions of credit; 823 that rather than reducing systemic risk,
section 13 of the BHC Act and the
implementing rules harm the healthy functioning of the financial services

824See, e.g., American Action Forum and CAP. 825See Oonagh McDonald. See also infra note 849. 826A classic definition of moral hazard is ‘‘the loss exposure of an insurer (the FDIC) that results from the character or circumstances of the insured’’ (here, the banking entity). See Anthony Saunders & Marcia Cornett, Financial Institutions Management:
A Risk Management Approach, 573 (8th ed. 2014) p. 573. 827Saunders and Cornett (2014) discusses how deposit insurance reduces the risks of depositors or other liability holders engaging in a run on a banking entity and the related costs of a banking entity’s failure. However, if the risk of bank failure is not adequately priced in the insurance premium paid by the banking entity, deposit insurance can create incentives to engage in more risky activities. Moreover, even absent deposit insurance, the limited liability of a banking entity’s shareholders still creates incentives to risk shift at the expense of depositors, bondholders, and other fixed claimants. See Saunders and Cornett (2014), ch. 19. 828 Deposit insurance and implicit bailout guarantees may give rise to risk taking incentives that are not specific to proprietary trading. In other words, even in the absence of proprietary trading, both deposit insurance and implicit bailout guarantees may create incentives for banking entities to increase risk exposures from permissible activities such as lending, underwriting, and market making. Thus, a prohibition of proprietary trading need not by itself reduce moral hazard or overall risk exposures of banking entities if banking entities increase risk exposures from other activities during the same time. 829For a literature review, see, e.g., Sylvain, Benoit et al., Where the Risks Lie: A Survey on Systemic Risk, 21 Rev. Fin. 109 (2017). See also 83 FR 33533 note 350. 830See Alexander Scha¨fer et al., Financial Sector Reform after the Subprime Crisis: Has Anything Happened?, 20 Rev. Fin. 77 (2016). 831Specifically, the paper performs an event study around January 21, 2010, when President Obama announced support for Volcker Rule-type restrictions on proprietary trading by banking entities. See Remarks by the President on Financial Reform, Office of the Press Secretary, The White House, January 21, 2010, available at https:// obamawhitehouse.archives.gov/the-press-office/ remarks-president-financial-reform, last accessed 6/ 27/2019. 832Specifically, the paper measured systemic importance on the basis of the Financial Stability Board’s list of 29 global systemically important financial institutions published on November 4,
2011. See Financial Stability Board Identifies 29
Global SIFIs and Announces Agreed Policy Measures, Mondaq, November 4, 2011, last accessed 7/9/2013. 833Another study by Gropp et al. (2011) finds that government guarantees can increase risk-taking incentives in competitor, but not in protected, banks. See Reint Gropp et al., Competition, RiskShifting, and Public Bailout Policies, 24 Rev. Fin. Stud. 2084 (2011). 834See Fayez Elayan et al., The Impact of the Volcker Rule on Targeted Banks, Systemic Risk, Liquidity, and Financial Reporting Quality, 96 J. Econ. & Bus. 69 (2018). 835The paper defines targeted banks as banks that issued or had exposure to mortgage-backed securities or other securitized products or had other asset write-downs reported in news sources. 836See Amihud Yakov, Illiquidity and Stock Returns: Cross-section and Time Series Effects, 5 J. Fin Markets 31 (2002). industry; 824 and that section 13 of the BHC Act and the implementing rules are no longer necessary given Basel III capital requirements, stress testing, and liquidity coverage ratio rules that promote short-term resilience of bank risk profiles.825 In response to the comments discussed above, the SEC has analyzed relevant academic research on these issues. Most existing qualitative analysis and quantitative research on moral hazard,826 incentives to increase risk exposures that arise out of deposit insurance 827 and implicit bailout guarantees,828 and systemic risk implications of proprietary trading do not explicitly analyze the effects of
section 13 of the BHC Act or of the 2013
rule.829
Several recent academic studies examined the baseline effects of section 13 of the BHC Act and implementing regulations on activities by banking entities that involve market risk. As discussed in detail below, this research suggests that, although section 13 of the BHC Act and the 2013 rule may have reduced risk exposure related to trading, it is not clear that the 2013 rule reduced the overall risk of individual banking entities and potentially of banking entities as a whole. For example, one study 830 compares changes in equity returns and CDS spreads of 93 U.S. listed banks affected by post-crisis financial reforms and of those that were not. Specifically, the study finds that news concerning the potential enactment of substantive prohibitions in section 13 of the BHC Act 831 led to a rise in credit default swap (CDS) spreads (by as much as 17– 18 basis points) and to a decrease in equity prices (statistically significant in most specifications). The paper interprets the results as an indication that the proprietary trading prohibition reduced bank profitability because of the spinoffs of profitable trading and swap desks. In an additional analysis, the paper finds that these effects were more significant for investment banks, for banks that are more likely to be systemically important,832 and for banks that are closer to default. Notably, the paper does not examine changes in specific types of risky activities, so it is possible that the observed effects may have occurred for reasons unrelated to the proprietary trading prohibitions.833 While the paper concludes that the reforms reduced bail-out expectations, the rise in CDS spreads and the decrease in equity prices are also consistent with the interpretation that market participants reacted to the event as a change increasing the risk to banking entities, for instance because of the expected shift to risk taking through lending or reduced hedging of lending activities with trading activities. For instance, a shift away from trading activity and toward more illiquid and potentially less diversified lending or trading activities may have increased banking entities’ exposure to liquidity and counterparty risks, and this risk may have been priced in higher CDS spreads of banking entities. In contrast, another paper 834 examines the cumulative market reaction to 15 events related to section 13 of the BHC Act using a sample of 784 listed banks and seeks to distinguish the events from announcements surrounding Orderly Liquidation Authority events. The paper finds significant negative cumulative abnormal equity returns (¥11.97%) for targeted banks,835 consistent with targeted banks losing out on profitable opportunities, and positive cumulative abnormal returns (7.1%) for nontargeted banks. Similarly, the paper estimates that targeted banks experienced a 0.021% increase in CDS spreads, consistent with the changes making targeted banks riskier, whereas non-targeted banks experienced a decline in CDS
spreads of ¥0.049%. In addition, banks with a higher measure of systemic risk (marginal expected shortfall), higher illiquidity (Amihud (2002) 836 measure and the bid-ask spread), and worse reporting quality (abnormal loan loss provisions) experienced more negative market reactions to events surrounding section 13 of the BHC Act and the 2013 rule. On aggregate, the paper finds that equity returns rose and CDS spreads declined for sample banks, and concludes that the rule targeted larger institutions and enhanced the relative position of smaller banks. Four factors limit the interpretation of this paper’s results. First, the validity of inference from event studies is affected by the presence of confounding events on announcement days. While a study of a greater number of event days may provide a more complete picture of market responses to even minor announcements concerning the reform of interest, it increases the likelihood of confounding events occurring on event days, ceteris paribus. Second, the proprietary trading prohibitions scoped in all, not just a subset of, banking entities, while the paper hypothesizes differential effects of the proprietary trading prohibition on targeted and nontargeted banks. As a result, the measurement of targeted banks may simply be capturing prior performance of an institution during times of severe

837For example, see the below discussion of a study by Keppo and Korte (2018) examining changes in bank risk taking over a 10 quarter period and finding that banks did not decrease risk-taking. 838See Antonio Falato et al., ‘‘Banks as Regulated Traders,’’ Finance Fin. & Econ. Discussion Series 2019–005, Washington: Board of Governors of the Fed. Reserve System (2019), available at https:// doi.org/10.17016/FEDS.2019.005, last accessed 5/ 20/2019. 839See Begenau, 2019, Discussion of ‘‘Banks as Regulated Traders,’’ NBER CF Spring meeting, April 12, available at https:// begenau.people.stanford.edu/sites/g/files/ sbiybj1926/f/nber_cfspring2019_begenau_disc.pdf, last accessed 07/15/2019. See also Juliane Begenau et al., Banks’ Risk Exposures, (Nat’l Bureau of Econ. Research, Working Paper No. 21334, 2015) available at http://www.nber.org/papers/w21334, last accessed 07/15/2019. 840This effect is commonly known as the ‘‘riskreturn tradeoff’’: If an investor is willing to take on risk, there is a reward of higher expected returns. See ZVI Bodie et al., Investments, G–11 (9th ed. 2011). 841See Jussi Keppo & Josef Korte, Risk Targeting and Policy Illusions—Evidence from the Announcement of the Volcker Rule, 64 Mgmt. Sci. 215 (2018). Also cited as an example of ‘‘pathbreaking work assessing the many costs and benefits of the Rule’’ in Robert J. Jackson Jr., ‘‘Proposed Amendments to the Volcker Rule,’’ Securities and Exchange Commission, June 5, 2018, note 21 available at https://www.sec.gov/news/ public-statement/jackson-statement-proposedamendments-volcker-rule. 842The z-score is one of the most popular multiple discriminant analysis models of bankruptcy, originally developed by Altman (1968) and updated frequently since. Multiple discriminant analysis consists of identifying a linear combination of accounting measures that provides the best fit for the observed default and non-default outcomes in a particular sample of firms. The variables that enter into the z-score include: The ratio of working capital to total assets; retained earnings to total assets; earnings before interest and taxes to total assets; market value of equity to total liabilities; and net sales to total assets. While the weights on these components of the z-score are periodically recalibrated using more recent samples, all components enter with a positive sign, such that an increase in each of the variables decreases the probability of bankruptcy. See Phillippe Jorion, GARP Financial Risk Manager Handbook: Frm Part I/Part II, 475 (2011). 843 In another context, Keppo and Korte (2018) also find that, after the passage of the GrammLeach-Bliley Act that repealed the Glass-Steagall Act, the overall risk (measured by the z-score) of affected banks relative to unaffected banks did not change. In that context, the paper finds that affected banks did significantly increase their trading risk and decrease the risk of their banking book. 844See Sohhyun Chung et al., The Impact of Volcker
Rule on Bank Profits and Default Probabilities, (SSRN Working Paper, Feb. 27, 2019), available at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2167773, last accessed 4/ 23/2019 Also cited in Robert J. Jackson Jr., ‘‘Proposed Amendments to the Volcker Rule,’’ Securities and Exchange Commission, June 5, 2018, note 22 available at https://www.sec.gov/news/publicstatement/jackson-statement-proposedamendments-volcker-rule. stress or the likelihood of an institution being affected by other regulatory restrictions or sanctions and not necessarily the degree of exposure to the proprietary trading prohibition. Third, since the management of bank balance sheets and risk exposures can take several quarters, narrow event windows may reflect market participants’ expectations but may not be informative about ex-post changes in risky bank activities in response to the event.837 Finally, all but one event considered in this study relate to the substantive prohibitions in section 13 of the BHC Act (and not the agencies’ implementing rules), and all of the events examined in this study precede the adoption of the 2013 rule. A recent paper uses regulatory data on net trading profits reported by bank holding companies to the Federal Reserve under the Market Risk Capital Rule and examines the risk-taking of U.S. banks via trading books before and after the 2013 rule.838 The paper finds that, prior to 2014, U.S. banks had significant exposures to equity risk factors through their trading books, but that such trading exposures declined after the implementing regulations. The paper also finds that, in response to the 2013 rule, the trading desks of U.S. banks have decreased their exposures to interest rate risk but not to credit risk. Consistent with bank reliance on certain exemptions with respect to commodities, foreign exchange, and currency trading, U.S. banks also continue to be exposed to currency risk. Importantly, post-2013 rule credit and dollar risk exposures are far less significant in magnitude compared to pre-2013 rule exposure to equity risk factors. The paper concludes that the ban on proprietary trading was effective in curtailing large exposures. These results seem to suggest that holding companies significantly reduced their exposure to risk from trading activities. Four considerations limit the interpretation of these results. First, the paper’s tests focus on data aggregated to the weekly frequency, and it is not clear if the results would continue to hold using daily, monthly, or quarterly frequencies. For example, the results appear inconsistent with other research analyzing FR Y–9C data on trends in quarterly trading positions and trading revenues, which does not find significant changes in equity profits and losses after the 2013 rule.839 Second, anticipatory compliance and confounding regulatory and macroeconomic events (unaccounted for in the paper) complicate definitive causal inference. Third, the paper does not examine the
possibility that, since higher risk is generally compensated with higher expected returns,840 banking entities may have offset risk reductions in their trading books by shifting risk into illiquid banking books. Fourth, the paper also does not test changes in the total amount of risk on bank balance sheets before and after the relevant regulatory shocks or consider the effects of the implementing regulations on the overall risk of U.S. banking entities. Another study empirically examines the effects of the substantive prohibitions of section 13 of the BHC Act on the returns and overall risk of publicly traded U.S. bank holding companies before and after the third quarter of 2010.841 Consistent with the papers discussed above, this paper finds that most affected bank holding companies, i.e. those with the largest trading books before 2010, reduced trading books relative to total assets by 2.34% more than other bank holding companies. However, this result is generally consistent with mean reversion in trading activity by banks that may have suffered the greatest trading losses during the crisis. In addition, the paper does not directly distinguish between proprietary trading and client facilitation trading or hedging trading. Although the paper finds a decline in trading activity and a general decline in overall bank risk (measured by the z-score),842 the paper does not find a pronounced effect on most affected bank holding companies; in fact, some of the results suggest that most affected banks became riskier than less affected banks. The paper finds that the channel for this effect on overall risk is an increase in asset return volatility of affected bank holding companies. In addition, the paper finds no significant differences in the volatility of bank stock prices and liquidity ratios of affected and unaffected entities. The paper concludes that the risk taking incentives of banking entities have not changed and that affected banks have been able to maintain their levels of risk taking by becoming less likely to use remaining trading assets to hedge banking book returns.843 The SEC notes that the sample period of the paper ends prior to the full effective date of the 2013 final rule, which may partly limit the interpretation of these results. Another recent paper 844 uses structural methods to isolate and estimate the effects of the limitation of bank proprietary trading in section 13 of the BHC Act on the probability of bank defaults, earnings, and the value of their equity. Using a model calibrated to the data from a sample of 34 of the most affected U.S. banks, this paper finds that banks—and particularly banks most affected by section 13 of the BHC Act—

845The estimate of ¥0.04% was obtained using parameters for ‘‘median hedge fund banks,’’ calculated as the median of the 34 sample banks, for which the drift and volatility of the trading earnings were estimated from Credit Suisse Long/ Short Equity Hedge Fund Index data for 2000 through the beginning of 2010. The estimate of 0.73% was obtained using drift and trading earnings volatility for an asset-weighted mean of sample banks. 846See Christina Bui and Talis Putnins, The Intended and Unintended Effects of the Volcker Rule, (Aug. 31, 2018) (working paper), available at http://fmaconferences.org/SanDiego/Papers/ Volcker_SubmissionFMA.pdf, last accessed 4/23/ 2019. 847Acharya et al. (2017) finds that a bank’s impact on systemic expected shortfall is affected by its marginal expected shortfall and leverage. See Viral Acharya et al., Measuring Systemic Risk, 30 Rev. Fin. Stud. 2 (2017). 848See Ran Duchin and Denis Sosyura, Safer Ratios, Riskier Portfolios: Banks’ Response to Government Aid, 113 J. Fin. Econ. 1 (2014). 849For example, Sundaresan and Xiao (2019) show that the interaction of liquidity requirements of Basel III and the money market fund reform may have increased the reliance of private financial institutions on liquidity provided by Federal Home Loan Banks that enjoy an implicit government guarantee. The paper concludes that the rules increased the role of a government-sponsored enterprise in the aggregate liquidity transformation and the reliance of private institutions on public liquidity backstops. In another context, Baghai et al. (2019) finds that following the money market fund reforms, safer funds exited the industry, the remaining funds increased their portfolio risk, and issuers with lower credit risk experienced a reduced access to money market funding. See Suresh Sundaresan and Kairong Xiao, Unintended Consequences of Post-Crisis Liquidity Regulation (Aug. 9, 2019) (working paper) last accessed 8/29/
2019. See also Ramin Baghai et al., Liability
Structure and Risk-Taking: Evidence from the Money Market Fund Industry, (Aug. 18, 2019) (working paper) last accessed 8/29/2019. 850See, e.g., CAP and Public Citizen, citing Robert J. Jackson Jr., ‘‘Proposed Amendments to the Volcker Rule,’’ Securities and Exchange Commission, June 5, 2018, available at https:// www.sec.gov/news/public-statement/jacksonstatement-proposed-amendments-volcker-rule on potential effects of pay practices on proprietary trading. 851See, e.g., Jonathan Berk & Peter DeMarzo, Corporate Finance, 552–53 (3rd ed. 2014), discussing how leverage can (1) incentivize shareholders to shift from lower-risk to higher-risk assets (the ‘‘asset substitution’’ problem); and (2) induce shareholders to undertake negative net present value, but sufficiently risky projects (the ‘‘over-investment’’ problem). See also Michael Jensen and William Meckling, Theory of the Firm:
Managerial Behavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305 (1976). 852See, e.g., 79 FR at 5659. may have become riskier after the statutory change. In the model, the key mechanism behind this effect is the banks’ ability to respond to shocks:
Since the rule leads to a reduction in the size of the trading book and increases the relative weight of an illiquid banking book, banks face greater difficulties scaling down the bank book when faced with negative earnings shocks after the rule. The model assumes no implementation costs, as the costs were sunk when the statutory prohibition came into effect and yields an estimate of between ¥0.72% and 56.72% increase in average bank default probability after the law. This estimate range may suggest that the overall risk of some banks may have increased, in some cases, after the law. In the model, banks for which a small trading book is optimal, banks with a profitable and low-risk bank book, and banks that take more risk through leverage, do not experience this rise in the default risk after the proprietary trading prohibition. Because the banking book is more profitable and volatile than the trading book for most affected banks, the paper actually estimates no significant decrease and, in some cases, an increase in banks’ expected earnings and earnings volatility (a range of ¥0.04% to 0.73% depending on calibration).845 An important caveat for the interpretation of these results is the sensitivity of the estimates to modeling assumptions, the limited sample used in model calibration, and the extremely broad range of estimates of an increase in average bank default probability after the law. Finally, a recent paper 846 identified three potential channels behind the effects of section 13 of the BHC Act and the 2013 rule on risky activities of bank holding companies: (i) Risks from proprietary trading activity itself, (ii) risk from a lack of diversification of bank revenue (trading and non-trading revenue), and (iii) risk from similarity among banks. The paper measures overall risk with the z-score (as well as volatility in returns, revenues, and returns on assets) and systemic risk with marginal expected shortfall (average stock return of each bank holding company during bottom 5th percentile shocks to 1-year market returns; it also measures marginal expected shortfall for the financial industry, and tail beta) 847 and documents two main results. First, an index of bank revenue diversification reduces measures of bank and systemic risk, while similarity across banks increases systemic risk, and trading activity increases both. Second, the 2013 rule reduced risks from trading activity of affected banks, reduced the diversification of bank revenue of affected banks, and increased similarity across banks. The interpretation of these results may be limited because of respective methodologies, measurement, identifying assumptions, and residual confounding, as well as the general limitations noted at the outset. However, these results are broadly consistent with other research that finds that banking entities can respond to regulations by risk shifting within an asset class while remaining in compliance 848 and that the implementation of other
financial reforms can create effects inconsistent with the regulators’ intentions.849 Some commenters indicated that restricting pay practices of banking entities may effectively reduce proprietary trading cross-subsidized by taxpayers and accordingly lower the risks of banking entities.850 While the final rule does not amend existing requirements or impose new requirements related to compensation practices of banking entities, the SEC notes two incentive effects relevant for the consideration of these issues. First, as discussed above, proprietary trading is one of many activities through which a banking entity can take risk. Both deposit insurance and implicit government bailout guarantees incentivize risk taking that is not specific to proprietary trading. Even in the absence of proprietary trading, deposit insurance and implicit bailout guarantees may lead banking entities to take greater risks through lending and permitted underwriting and market making, among other things. As a result, a prohibition on proprietary trading need not by itself reduce the overall risk of banking entities if banking entities increase risk through other activities during the same time. Second, the incentives to take on greater risks described above are those of both a banking entity’s shareholders who are residual claimants on the banking entity’s assets and management. Under limited liability, all shareholders enjoy a limited downside (at worst, shareholders stand to lose their investment) and an unlimited upside if the firm performs well (the value of shareholders’ equity depends on the value of the assets net of the value of fixed claims, such as claims of debtholders, depositors, and employees).851 Thus, the incentives of banking entities to take on greater risks discussed above may persist so long as any restrictions on pay practices leave the incentives of a banking entity’s management and employees even partly aligned with those of shareholders.
ii. Conflicts of Interest
As discussed in the proposal, in implementing section 13 of the BHC Act, the agencies also sought to reduce conflicts of interest between banking entities and their customers.852 Some commenters indicated that bank trading activities and interests in hedge funds and private equity funds resulted in

853See, e.g., CAP.
854See SIFMA.
855See Michelle Lowry et al., Informed Trading By Advisor Banks: Evidence from Options Holdings, 32 Rev. Fin. Stud 605 (2018). 856To the degree that some advisor banks may have an underlying (long) risk exposure to acquirer firms’ equity, buying put options is also consistent with risk-mitigating hedging. 857See Sureyya Avci et al., Eliminating Conflicts of Interests in Banks: The Significance of the Volcker Rule, 35 Yale J. Reg. 343 (2017). Also cited in Robert J. Jackson Jr., ‘‘Proposed Amendments to the Volcker Rule,’’ Securities and Exchange Commission, June 5, 2018, note 20, available at https://www.sec.gov/news/public-statement/ jackson-statement-proposed-amendments-volckerrule. 858See Andriy Bodnaruk et al., Investment Banks as Insiders and the Market for Corporate Control, 22 Rev. Fin. Stud. 4989 (2009). 859See Yao-Min Chiang et al., The Information Advantage of Underwriters in IPOs, Mgmt. Sci. (forthcoming 2019). 860See Semi Kedia and Xing Zhou, Informed Trading Around Acquisitions: Evidence From Corporate Bonds, 18 J. Fin. Mkt. 182 (2014). 861See John M. Griffin et al., Examining the Dark Side of Financial Markets: Do Institutions Trade on Information from Investment Bank Connections, 25 J. Fin. Econ. 2155 (2012). significant conflicts of interest between banks and their customers.853 One commenter also indicated that the agencies should amend the provisions concerning material conflicts of interest by permitting banking entities to rely on information barriers under certain circumstances.854 In response to these comments, the SEC reviewed relevant research on conflicts of interest between banking entities and their customers. As discussed below, related research generally examines trading of banking entities in stocks, bonds, or options of their advisory and underwriting clients. While the findings are somewhat mixed and limited to their specific empirical settings, this research is consistent with the presence of such conflicts in certain groups of merger and acquisition (M&A) deals. In addition, one study finds that a narrow type of conflicts of interest between banking entities and their clients may have decreased after the implementation of the 2013 rule. Specifically, a recent study 855 examines both the presence of conflicts of interest between advisor banks and their customers based on banks’ options holdings, and changes in such trading activity around the implementation of the Volcker Rule. The paper documents three main results. First, the paper finds that merger advisors tend to increase their holdings in call options relative to put options in merger targets during the quarter before the announcement. Second, merger advisors are significantly more likely to increase put option holdings in the acquirer firm.856 In combination with the literature’s general finding of average negative announcement returns in acquirer firms and positive announcement returns in target firms, the paper argues that these results are suggestive of
informed trading by advisor banks on client firms. Third, within the subsample of affected deals (deals in which one or more advisor banks ceased proprietary trading operations around the enactment of
section 13 of the BHC Act) after 2011,
the paper finds that advisors did not increase their net call option holdings on target firms before merger announcements. The paper concludes that, in this narrow setting, the Volcker Rule may have decreased banks’ options trading on client information. Importantly, the paper finds that some of this bank activity was replaced by hedge fund activity: Specifically, hedge funds increased their informed trading in options of M&A client firms around the same time in the same subsample of deals. The SEC is also aware of a broader body of research that empirically tests the existence and magnitude of conflicts of interest between banks and their customers in the context of advising and underwriting relationships and that does not directly empirically test the effects of section 13 of the BHC Act or the 2013 rule on the presence or magnitude of such conflicts. One article in the legal literature 857 empirically measures the profitability of trading by banks that have advisory clients and are subject to reporting requirements as temporary insiders. They document that such trading by banks in the stocks of advisory clients is profitable (with an estimated average 25% return on their trades), that the trading centers around adverse events, and that the elimination of Glass-Steagall restrictions in 2002 was associated with more frequent and more profitable trading. However, the paper does not empirically test the effects of section 13 of the BHC Act or of the 2013 rule. Finance research on this type of conflict of interest between banks and their customers finds mixed effects. One of the earlier papers 858 examines trading in M&A target firms by the advisor banks of bidders and links advisor pre-announcement stakes in target firms with the probability of deal success and with the target premium. They document positive returns of this trading strategy and conclude that advisors acquire positions in deals of their advisory clients, as well as influence deal outcomes. Since such advisor behavior benefits the bidder, the authors recognize that they cannot rule out the alternative explanation that the bidder’s board retains the advisor with strong incentives for deal completion. Outside of the M&A context, other work 859 explores the trading activity of IPO underwriters and finds that lead underwriter trades in IPO firms are associated with subsequent IPO abnormal returns. Another study 860 focuses on bond trading and uses a sample covering 1994 through 2006 to examine the trading of bond dealers affiliated with M&A advisory banks with insurance companies. The study finds weak evidence that when affiliated dealers are one side of a bond transaction, they earn higher bond returns than unaffiliated dealers, and that affiliated dealers sell more of the bonds that may lose value ahead of bad news than unaffiliated dealers. The paper observes only a subset of such dealer trades with insurance companies and is unable to evaluate whether affiliated dealers are net
buyers or sellers of affected bonds before bad news. The study concludes that there is weak and suggestive evidence that transfer of information within financial institutions is one of the potential information sources before public announcements. Similarly, another paper 861 finds no evidence of information leakage because of investment bank M&A advisory, underwriting, or lending relationships from 1997 through 2002. Specifically, the paper finds no evidence that investment bank clients buy shares in takeover targets in advised deals. Similarly, bank clients with previous underwriter or lending relationships do not trade or earn abnormal returns before earnings announcements. The paper also examines market making imbalances and investment returns by connected brokerage houses and finds that they do not trade profitably ahead of earnings announcements by their IPO, SEO, M&A client, or borrower firms. The paper concludes that neither brokerage houses nor their clients trade on inside information available to the brokerage because of their market making or advising roles. The SEC continues to note that the above studies are limited to their specific empirical settings and, as can be seen above, different empirical design, measurement, and identification approaches limit inference in each of the papers discussed above. Moreover, the SEC continues to note that the scope of this economic analysis is limited to SEC registrants, investors in securities markets, and the functioning of securities markets. While the research discussed above does not focus

862See, e.g., 79 FR at 5541, 79 FR at 5546, 79 FR at 5561. 863See, e.g., 83 FR at 33532. 864 Dealers can trade as agents, matching customer buys to customer sells, or as principals, absorbing customer buys and customer sells into inventory and committing the necessary capital. 865See, e.g., 83 FR at 33532. 866See, e.g., ABA. 867See, e.g., 83 FR at 33465. 868 Id. 869See, e.g., JBA and SIFMA. 870See, e.g., 83 FR at 33535. 871 Id. 872See, e.g., NAFCU and CAP. 873See, e.g., AFR and Occupy the SEC. 874See, e.g., Public Citizen. 875See, e.g., SIFMA and American Action Forum. 876See, e.g., FSF and SIFMA. 877See, e.g., Coalition for Derivative End Users. 878See SEC Report 2017, supra note 774, for a detailed data analysis and literature survey. 879See, e.g., Francesco Trebbi and Kairong Xiao, 2018, Regulation and Market Liquidity, 6 Mgmt. Sci. 1949 (2019). The generalizability of the paper’s result is limited by the sample period, which ends in December 2014 and before the full implementation of the 2013 rule. For more methodological limitations of this paper, such as heuristic choices of parameters, and crucial assumptions, as well as other issues, see SEC Report 2017, supra note 774, at 118–119. See also Tobias Adrian et al., Liquidity, Leverage, and Regulation 10 Years After the Global Financial Crisis, 10 Ann. Rev. Fin. Econ. 1 (2018). 880 Id. See also 83 FR at 33520–33522, 33532– 33533. specifically on banking entities that are SEC registrants, some of the incentive effects and conflicts of interest discussed above may extend to banking entities overseen by the SEC.
iii. Client-Oriented Services and Market
Quality
In the 2013 rule, the agencies recognized that client-oriented financial services, such as underwriting and market making, are critical to capital formation and can facilitate the provision of market liquidity and that the ability to hedge is fundamental to prudent risk management as well as capital formation.862 In the proposal, the agencies stated that compliance with the conditions of the underwriting and market making exemptions under the 2013 rule, such as RENTD, creates ambiguity for some market participants, is over-reliant on historical demand, and necessitates an accurate calibration of RENTD for different asset classes, time periods, and market conditions.863 Since forecasting future customer demand involves uncertainty, particularly in less liquid and more volatile instruments and products, banking entity affiliated dealers face uncertainty about the ability to rely on the underwriting and market making exemptions. This uncertainty can reduce a banking entity’s willingness to engage in principal transactions 864 with customers, which, along with reducing profits, may reduce the volume of transactions intermediated by banking entities.865 Moreover, consistent with the views of some commenters,866 the SEC believes that, as a baseline matter, the 2013 rule creates significant uncertainty among market participants regarding their ability to rely on the riskmitigating hedging exemption. For example, there may be considerable uncertainty regarding whether a potential hedging activity will continue to demonstrably reduce or significantly mitigate an identifiable risk after it is implemented.867 Unforeseeable changes in market conditions and other factors could reduce or eliminate the intended risk-mitigating effect of the hedging activity, making it difficult for a banking entity to comply with the continuous requirement that the hedging activity demonstrably reduce or significantly mitigate specific, identifiable risks.868 According to commenters, uncertainty and compliance burdens related to the risk-mitigating hedging exemption are leading to less timely, less flexible, and less efficient hedging.869 The SEC continues to recognize that SEC-regulated entities routinely engage in both static and dynamic hedging at the portfolio (not the transaction) level and monitor and reevaluate on an ongoing basis aggregate portfolio risk exposures, rather than the risk exposure of individual transactions.870 Dynamic hedging may be particularly common among dealers with large derivative portfolios, especially when the values of these portfolios are nonlinear functions of the prices of the underlying assets (e.g., gamma hedging of options).871 As a baseline matter, the SEC notes that the 2013 rule permits dynamic hedging. However, the 2013 rule requires the banking entity to document and support its decisions regarding individual hedging transactions, strategies, and techniques for ongoing activity in the same manner as for its initial activities, rather
than permitting a banking entity to provide documentation for the hedging decisions regarding a portfolio as a whole. The agencies have received a number of comments concerning the baseline effects of section 13 of the BHC Act and the 2013 rule on client facilitation activities, hedging, and market quality. The agencies received comments that the 2013 rule maintains the depth and liquidity of U.S. capital markets and that market liquidity remains within historical norms; 872 that there is no clear evidence that the 2013 rule has affected liquidity at a level that should cause concern; 873 and that liquidity may signal a bubble and should not be a key or even a major metric in assessing the effects of reforms.874 Other commenters stated that the 2013 rule has imperiled valuable market making and risk-mitigating hedging and reduced market liquidity; 875 that the prescriptive nature of the 2013 rule has raised costs of providing liquidity, which has been passed along to investors and may have exacerbated dislocations,876 and that less liquid capital markets have made it difficult for derivative end-users to raise capital in times of stress.877 The role of dealers in market making and client facilitation may be more significant in dealer markets, such as derivative and corporate bond markets. The SEC has elsewhere discussed several key changes in liquidity in bond markets and security-based swaps after the financial crisis. For example, the SEC found that, in corporate bond markets, although estimated average transaction costs have decreased, trading activity has become more concentrated in less complex bonds and bonds with large issue sizes; that transaction costs have increased for some subgroups of corporate bonds; and that dealers have, in aggregate, reduced their capital commitment since its 2007 peak, consistent with the claim that the Volcker Rule and other reforms potentially reduced the liquidity provision in corporate bonds.878 The SEC recognizes difficulties in causal attribution of the various provisions of
section 13 of the BHC Act and the 2013
rule and notes that some studies do not find significant structural breaks associated with post-crisis financial regulations in several measures of market liquidity.879 However, the SEC continues to be informed by both comments discussed above and a body of research drawing causal inference concerning the adverse effects of section 13 of the BHC Act and the 2013 rule on dealer provision of liquidity and on the risk of market dislocations in times of stress.880 Importantly, the 2013 rule included a large number of requirements and provisions, and aspects of the 2013 rule most likely to affect banking entities’ client facilitation activity (such as the RENTD requirement for the underwriting and market making exemptions) are not quantifiable or subject to public or regulatory reporting. As a result, existing research primarily seeks to document trends in various aspects of market liquidity in general and the effects of section 13 of the BHC

881See Hendrik Bessembinder et al., Capital Commitment and Illiquidity in Corporate Bonds, 73 J. Fin. 1615 (2018). For a more detailed discussion of the paper’s limitations and caveats, see SEC Report 2017, supra note 774, at 101–104. 882See Jens Dick-Nielsen and Marco Rossi, The Cost of Immediacy for Corporate Bonds, 32 Rev. Fin. Stud 1 (2019). For a more detailed discussion, see SEC Report 2017, supra note 774, at 112–13. 883See, e.g., SEC Report 2017, supra note 774, at 100–105. 884See Michael Goldstein and Edith Hotchkiss, Providing Liquidity in an Illiquid Market: Dealer Behavior in U.S. Corporate Bonds, J. Fin. Econ. (2019) (in press) (accepted manuscript). See also, e.g., SEC Report 2017, supra note 774, at 106–107. 885See Jaewon Choi and Yesol Huh, Customer Liquidity Provision: Implications for Corporate Bond Transaction Costs, (Aug. 1, 2019) (working paper), last accessed 8/27/2019). For a more detailed discussion, see, e.g., SEC Report 2017, supra note 774, at 117. 886 In contrast, Bessembinder et al. (2016) focuses on dealer-to-customer principal trades and finds the average transaction cost, particularly for small trades (less than $100,000) and large trades (over $1,000,000), is lowest in the pre-crisis and regulation periods. As the SEC stated elsewhere, the difference between these two results may stem from different proxies for transaction costs and the measurement of principal trading activity. 887See Meraj Allahrakha et al., The Effects of the Volcker Rule on Corporate Bond Trading: Evidence from the Underwriting Exemption (Off. of Fin. Research Working Paper 19–02, 2019) available at https://www.financialresearch.gov/working-papers/ files/OFRwp-19-02_the-effects-of-the-volcker-ruleon-corporate-bond-trading.pdf, last accessed 8/9/ 2019. Act and the 2013 rule on dimensions of market liquidity in particular. However, the most likely channels for the below effects of section 13 of the BHC Act and the 2013 rule on client facilitation activities are the requirements for the exemptions (such as RENTD) and uncertainty around the ability to rely on exemptions for client facilitation activities. As discussed below, several studies show significant declines in various measures of liquidity after the financial crisis and post-crisis reforms, including a recent study that ties the effects to the underwriting exemption of the 2013 rule. In addition, some research that reconciles the deterioration in dealer liquidity provision with improvements in price-based measures of liquidity attributes those effects to the reduced willingness of dealers to provide liquidity on a principal basis after implementation of the 2013 rule. Further, existing research suggests that the 2013 rule resulted in reduced liquidity during times of stress, with an increase in liquidity provision by dealers unaffiliated with banks failing to fully offset the reduction in liquidity provision by bank-affiliated dealers. Moreover, some research suggests that post-crisis
financial reforms led to persistent deviations from no-arbitrage conditions across markets, with the effect driven by banking entities and levered nonbanking entities that rely on systemically important banking entities for funding liquidity. Finally, new evidence indicates that post-crisis financial regulations may also be having effects on the co-movement in liquidity metrics across markets. Though the research discussed below is unable to attribute observed trends to specific provisions of the 2013 rule, these findings are largely consistent with the claim that the 2013 rule had adverse effects on certain aspects of client facilitation activity by banking entities, as discussed below. A number of studies documented declines in several dimensions of liquidity after the financial crisis and post-crisis reforms. For example, one study 881 finds that the willingness of dealers to commit capital overnight, turnover, the frequency of block trades, and average trade size have all declined after the financial crisis. Importantly, the paper finds that the shift away from market-makers absorbing customer imbalances and toward agency trading was most acute when banks were required to comply with the proprietary trading prohibition. Further, the paper finds that these declines in dealer provision of liquidity stem from bankaffiliated dealers. The paper concludes that post-crisis banking regulations, including the 2013 rule, contributed to the reductions in turnover, trade size, frequency of block trades, and the willingness of dealers to commit capital. Another paper 882 examines the cost of immediacy in corporate bonds, using index exclusions as a setting in which uninformed traders exogenously demand immediacy. The paper finds that the cost of immediacy has more than doubled and that dealers revert back to target inventory far more quickly after the 2007–2008 financial crisis. The paper finds that this post-crisis dealer behavior is most severe for bank dealers and concludes that such changes are consistent with the effects of the Volcker Rule. Research on changes in liquidity around the post-crisis reforms, including the 2013 rule, presents two seemingly contradictory results: On the one hand, price-based measures of liquidity (such as the bid-ask spread) have improved; on the other hand, measures of dealer liquidity supply have significantly worsened.883 A few studies seek to reconcile these two effects. One paper 884 focuses on dealers’ willingness to provide liquidity in certain types of bonds out of inventory. The paper finds that, when transacting in riskier and less liquid bonds, dealers are significantly more likely to offset trades on the same day instead of committing capital overnight. Specifically, the paper documents that dealers offset approximately 75% of trades in the lowest-rated, least-activelytraded bonds, but only 55% of trades in the highest-credit-quality, most-activelytraded bonds. In addition, liquidity provision out of
inventory involves risk to the dealer—a risk that is priced in higher transaction costs. As a result, a decline in transaction costs in observed trades may be a reflection of the decline in dealers’ willingness to take certain groups of bonds into inventory. Another study 885 finds that, after the post-crisis banking regulations, including the 2013 rule, customer provision of liquidity has increased and, as a result, the paper posits that bid-ask spread measures will necessarily underestimate the cost of dealer liquidity provision. The paper estimates that, for a subset of large liquidity demanding customer trades in which dealers provide liquidity from their inventory, customers pay between 35% and 65% higher spreads after the crisis than before the crisis.886 The paper concludes that a large portion of liquidity provision has moved from dealers to large asset managers and that the effect is consistent with the effects of tighter banking regulations. A recent paper 887 focuses on the effects of the underwriting exemption of the 2013 rule on trading by affected dealers. Specifically, the paper examines changes in the trading and liquidity of newly issued bonds that affected dealers have underwritten relative to bonds that the dealers have not underwritten around the implementation and conformance of the 2013 rule. This empirical design accounts for potentially confounding dealer effects (as dealers trade in bonds that they both underwrite and bonds that they do not) and bond effects (as both underwriters and non-underwriters trade in a given bond), and isolates the effects of the underwriting exemption in the 2013 rule from the effects of other bank regulations during the implementation period of the 2013 rule. The paper estimates that dealer markups have increased by between 42 and 43 basis points for fast roundtrip trades (15 minutes or less) after April 2014, but finds that the effect is transitional and disappears after August of 2015. However, the paper estimates that the adverse effects on dealer markups for slower roundtrip trades of between 15 minutes and 1 day—trades that involve dealers absorbing trades into inventory—are both economically significant and persist past the

888The paper also finds an increase of between 8% and 14% in dealer markups on trades around the 60-day cutoff for the rebuttable presumption in the 2013 rule. The paper acknowledges that this result could be consistent with dealers conducting profitable proprietary trades and holding positions past the 60-day rebuttable presumption window but is cautious in interpreting the result given the methodological limitations of its empirical design and very small sample size that does not allow conclusive inference. 889See Jack Bao et al., The Volcker Rule and Corporate Bond Market Making in Times of Stress, 130 J. Fin. Econ. 95 (2018). 890For a fulsome discussion of this and other issues and limitations, see SEC Report 2017, supra note 774, at 109–11. 891See Mike Anderson & Rene´ Stulz, Is PostCrisis Bond Liquidity Lower? (Dice Ctr. Working Paper 2017–09, 2017) last accessed 6/3/2019. 892Consistent with these results, Goldstein and Hotchkiss (2019) finds that on days with large VIX increases, dealers tend to offset trades more quickly even for highly rated bonds that they normally would take into inventory. For a more detailed discussion, see SEC Report 2017, supra note 774, at 114–15. 893See OICU–IOSCO, 2019, Liquidity in Corporate Bond Markets Under Stressed Conditions, FR079/2019, May. Available at https:// www.iosco.org/library/pubdocs/pdf/ IOSCOPD634.pdf, last accessed 7/1/2019. 894As discussed above, when examining informed trading of advisor banks in options on the stocks of client firms, Lowry et al. (2018) finds that informed trading by hedge funds increases simultaneously with a decrease in informed trading by banks around the enactment of section 13 of the BHC Act. See Michelle Lowry et al., Informed Trading By Advisor Banks: Evidence from Options Holdings, 32 Rev. Fin. Stud 605 (2018). 895See Boyarchenko, Eisenbach, Gupta, Shachar, and Van Tassel, 2018, ‘‘Bank Intermediated Arbitrage,’’ Federal Reserve Bank of New York Staff Report No. 858, last accessed 6/3/2019. implementation period (a range of 27– 43 bps increase between April 2014 and July 2015, and a range of 18–35 basis point effect after July 2015).888 To rule out the selection explanation (that dealers post-2013 rule simply prearrange more trades so the nonprearranged trades become costlier), the paper tests changes in short-term, noninventory trades. The paper finds an increase in such trades around the effective date of the 2013 rule, but no differences when conditioning on dealer underwriting activity, and concludes that endogenous selection of time in inventory cannot explain the above results. Moreover, the paper finds that nonbanking dealers enjoy a significant increase in market share after the conformance period, while bankaffiliated dealers lose market share. Finally, the paper concludes that the 2013 rule increased dealer trading risk on short round-trip trades (15 minutes or less), estimating that the standard deviation of covered dealers’ markups on corporate bonds
has risen by between 0.09 and 0.1. These results are subject to three primary caveats. First, the paper relies on a relatively narrow measure of risk (the standard deviation of dealer profits at the bond-month level). Unlike other research discussed in this section, the paper does not examine changes in the overall volume of trading activity, measures of downside risk at the individual banking entity level, or commonality of risk exposures among affected and unaffected dealers. Second, some of the paper’s tests are affected by small sample sizes, limiting inference related to transitional and permanent effects of the 2013 rule in certain trades (including the 15 minute–1 day subsample and the 60–90 day subsample). Third, the paper recognizes that these results are specific to dealer provision of liquidity in the corporate bond market, and may not extend to trading by affected firms in other asset classes. Other research helps inform the SEC’s understanding of the effects of section 13 of the BHC Act and the 2013 rule on liquidity in times of stress. Specifically, there is growing evidence that liquidity provision in times of stress may be adversely affected by post-crisis reforms in general and the Volcker Rule in particular. Two studies directly test the effects of the Volcker Rule on market making by dealers in times of stress. One of the papers 889 examines liquidity during corporate bond downgrades that result in selling by certain institutions. The paper suggests that dealers affected by the Volcker Rule decreased market making in newly downgraded bonds, and that unaffected dealers have not fully offset this decline. Moreover, the paper rules out the alternative explanation that these changes are attributable to other financial reforms, finding that the same effects are present for dealers affected by the Volcker Rule but not constrained by Basel III and Comprehensive Capital Analysis and Review (CCAR) regulations. The paper isolates the effect in a relatively small sample of bonds experiencing relatively large stress events (under normal aggregate conditions). This methodological design reflects the common tradeoff between a narrower empirical setting that enables causal inference, and a larger sample that is less amenable to causal interpretations.890 A related study 891 compares liquidity during times of stress before and after the crisis, and defines times of stress on the basis of extreme increases in marketwide volatility (measured by the VIX index), bond yield drops, and credit rating downgrades from investment grade to speculative grade. While the study does not find that price-based liquidity measures decreased around idiosyncratic shocks, the study does find that the price impact of large trades surrounding market-wide shocks has increased after the post-crisis financial reforms relative to the pre-crisis period.892 A recent report by the International Organization of Securities Commissions (IOSCO)’s Committee on Emerging Risks
examined changes in bond market liquidity focusing on stressed conditions.893 The report notes that the most significant effect of post-crisis financial reforms and reduction in dealer risk appetite is the decline in the capacity of dealers to intermediate transactions on a principal basis, combined with a drastic increase in the size of the market. The report concludes that such effects mean the lack of liquidity in times of stress is likely to be more acute than in past episodes of stressed conditions. One of the important results identified in this literature is the finding that nonbank dealers may step in but may not fully offset the decline in the liquidity provision of bank dealers caused by section 13 of the BHC Act and the 2013 rule.894 New research suggests that the fundamental mechanism behind this result may be the effect of other post-crisis regulations on the ability of bank dealers to provide funding liquidity to nonbank intermediaries.895 Specifically, the paper examines the interplay between post-crisis bank regulations, including the Volcker Rule, the supplementary leverage ratio, the liquidity coverage ratio, and the net stable funding ratio, and their effects on the ability of nonbank intermediaries to arbitrage away mispricing. The paper finds that the profitability of classic arbitrage trades (on-the-run/off-the-run, Treasury-interest swap, CDS-bond basis, and single name-index CDS arbitrage trades) is significantly lower under the supplementary leverage ratio, liquidity coverage ratio, and net stable funding ratio components of Basel III compared with Basel II. In addition, using a differences-in-differences estimation, the paper finds that levered hedge funds relying on prime brokers that are identified in the paper as globally systemically important banks experience lower abnormal returns and a decline in assets under management. The paper concludes that the effects of post-crisis regulations affect not only bank intermediation but also the ability of private funds to rely on banks for funding liquidity supporting arbitrage strategies. The paper notes that the supplementary leverage ratio and the net stable funding ratio disincentivize

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