[Federal Register Volume 84, Number 220 (Thursday, November 14, 2019)]
[Rules and Regulations]
[Pages 61974-62277]
[FR Doc No: 2019-22695]

Vol. 84

Thursday,

No. 220

November 14, 2019

Part II

Department of Treasury

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Office of the Comptroller of the Currency

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12 CFR Part 44

Federal Reserve System

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12 CFR Part 248

Federal Deposit Insurance Corporation

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12 CFR Part 351

Commodity Futures Trading Commission

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17 CFR Part 75

Securities and Exchange Commission

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17 CFR Part 255

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

Federal Register / Vol. 84 , No. 220 / Thursday, November 14, 2019 /
Rules and Regulations

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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.

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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,<PHONE_NUMBER>; Tabitha Edgens, Counsel; Mark O'Horo, Senior
Attorney, Chief Counsel's Office,<PHONE_NUMBER>; for persons who are
deaf or hearing impaired, TTY,<PHONE_NUMBER>, Office of the
Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219.
    Board: Flora Ahn, Special Counsel,<PHONE_NUMBER>, Gregory
Frischmann, Senior Counsel,<PHONE_NUMBER>, Kirin Walsh, Attorney,
(202) 452-3058, or Sarah Podrygula, Attorney,<PHONE_NUMBER>, Legal
Division, Cecily Boggs, Senior Financial Institution Policy Analyst,
(202) 530-6209, David Lynch, Deputy Associate Director,<PHONE_NUMBER>,
David McArthur, Senior Economist,<PHONE_NUMBER>, 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<EMAIL_ADDRESS>Michael E.
Spencer, Chief, Capital Markets Strategies<EMAIL_ADDRESS>
Andrew D. Carayiannis, Senior Policy Analyst<EMAIL_ADDRESS>or
Brian Cox, Senior Policy Analyst<EMAIL_ADDRESS>Capital Markets
Branch,<PHONE_NUMBER>; Michael B. Phillips, Counsel,
<EMAIL_ADDRESS>Benjamin J. Klein, Counsel, 44262f28212d2a0422202d276a232b32, or
Annmarie H. Boyd, Counsel<EMAIL_ADDRESS>Legal Division, Federal
Deposit Insurance Corporation, 550 17th Street NW, Washington, DC
20429.
    SEC: Andrew R. Bernstein, Senior Special Counsel, Sam Litz,
Attorney-Adviser, Aaron Washington, Special Counsel, or Carol McGee,
Assistant Director, at<PHONE_NUMBER>, 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<PHONE_NUMBER> or<EMAIL_ADDRESS>Division of
Investment Management, U.S. Securities and Exchange Commission, 100 F
Street NE, Washington, DC 20549.
    CFTC: Cantrell Dumas, Special Counsel,<PHONE_NUMBER>,
<EMAIL_ADDRESS>Jeffrey Hasterok, Data and Risk Analyst, (646) 746-
9736<EMAIL_ADDRESS>Division of Swap Dealer and Intermediary
Oversight; Mark Fajfar, Assistant General Counsel,<PHONE_NUMBER>,
<EMAIL_ADDRESS>Office of the General Counsel; Stephen Kane, Research
Economist,<PHONE_NUMBER><EMAIL_ADDRESS>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

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:
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    \1\ 12 U.S.C. 1851.
    \2\ Id.
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     Trading in U.S. government, agency, and municipal
obligations;
     Underwriting and market making-related 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\
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    \3\ 12 U.S.C. 1851(d)(1).
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    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\
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    \4\ E.g., 12 U.S.C. 1851(d)(1)(G).
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    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\
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    \5\ 12 U.S.C. 1851(b)(2).
    \6\ Prohibitions 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).
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    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\
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    \7\ Proposed 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).
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    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.
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    \8\ See 83 FR 33437, 40-42.
    \9\ See 83 FR 33442-46.
    \10\ See 83 FR 33453-54.
    \11\ See 83 FR 33471-82.
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    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.
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    \12\ The 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.
    \13\ See 83 FR 33446-51.
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    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\
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    \14\ See 83 FR 33454-62.
    \15\ See 83 FR 33464-67.
    \16\ See 83 FR 33467-70.
    \17\ See 83 FR 33451-52.
    \18\ See 83 FR 33452-53.
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    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\
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    \19\ See 83 FR 33482-83
    \20\ See 83 FR 33483-86.
    \21\ See 83 FR 33471-82.
    \22\ See 83 FR 33486-87.
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    To enhance compliance efficiencies, the agencies proposed tailoring
the

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.
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    \23\ See 83 FR 33487-89; 33490-94.
    \24\ See 83 FR 33489.
    \25\ See 83 FR 33490.
    \26\ See 83 FR 33454.
    \27\ See 83 FR 33494-514.
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    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.
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    \28\ See, 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.
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    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\
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    \29\ Under 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.
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    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, risk-mitigating 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

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.
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    \30\ 12 U.S.C. 1851(b)(2)(B)(ii).
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    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\
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    \31\ 83 FR 33436.
    \32\ See, 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.
    \33\ See, e.g., ABA; Arvest Bank (Arvest); Credit Suisse; and
Financial Services Forum (FSF).
    \34\ See ABA.
    \35\ See, e.g., ABA; BB&T CCMR; and FSF.
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    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\
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    \36\ See, e.g., AFR; Public Citizen; Volcker Alliance; and CFA.
    \37\ See, e.g., CAP; Merkley; and Public Citizen.
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    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

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.
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    \38\ See, e.g., Public Citizen and CAP.
    \39\ See Public Citizen.
    \40\ See Volcker 2.0 Form Letter.
    \41\ See, e.g., Systemic Risk Council and Oonagh McDonald.
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IV. Section by Section Summary of the Final Rule

A. Subpart A--Authority and Definitions

1. Section __.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\
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    \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).
    \44\ See 2013 rule Sec.  __.2(c).
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    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\
---------------------------------------------------------------------------

    \45\ See final rule Sec.  __.2(r).
    \46\ Public Law 115-174 (May 24, 2018).
    \47\ See 84 FR 35008.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \48\ See 83 FR 33442-446.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \49\ See, 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.
    \51\ See, e.g., IIB and Securities Industry and Financial
Markets Association (SIFMA).
    \52\ See, e.g., Capital One et al.; Credit Suisse; EBF; and
Investment Adviser Association (IAA).
    \53\ See, e.g., ABA; EBF; and Investment Company Institute
(ICI).
---------------------------------------------------------------------------

    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

rulemaking that specifically addresses the fund structures under the
rule, including the treatment of foreign excluded funds.
---------------------------------------------------------------------------

    \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).
    \55\ See Data Boiler Technologies, LLC (Data Boiler).
---------------------------------------------------------------------------

    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 Sec.  __.13(b) of the 2013 rule, as if the qualifying
foreign excluded fund were a covered fund.\57\
---------------------------------------------------------------------------

    \56\ Foreign 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.
    \57\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \58\ See, 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.
    \59\ See https://www.occ.treas.gov/topics/capitalmarkets/financial-markets/trading-volcker-rule/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-volcker-rulesection13.htm (SEC); https://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_28_VolckerRule/index.htm
(CFTC).
    \60\ Id., FAQ 16.
    \61\ Id., FAQ 14.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \62\ The 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \63\ See Bank Policy Institute (BPI).
---------------------------------------------------------------------------

    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 non-consolidated 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\
---------------------------------------------------------------------------

    \64\ See EFAMA.
    \65\ See, e.g., ABA and FSF.
    \66\ See ABA.
    \67\ See, e.g., ABA; BPI; SIFMA; JBA.
    \68\ See BB&T.
    \69\ See 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.
    \70\ See, e.g., EnerBank USA (EnerBank); Marketplace Lending
Association; National Association of Industrial Bankers.
---------------------------------------------------------------------------

    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

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.
---------------------------------------------------------------------------

    \71\ See IIB. This commenter also proposed modifying the manner
in which ``banking entity'' status is determined by disaggregating
separate, independent corporate groups.
    \72\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \73\ See, e.g., EnerBank and Capital One et al. See 12 U.S.C.
1841(a)(2)(C).
    \74\ See Capital One et al.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \75\ 12 U.S.C. 1841(a)(2); 12 CFR 225.2(e).
    \76\ Id.
    \77\ See ``Control and Divestiture Proceedings,'' 84 FR 21634-
666 (May 14, 2019).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \78\ See, e.g., Economic Growth, Regulatory Relief, and Consumer
Protection Act Sec.  203 (excluding community banks from the
definition of ``banking entity'').
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \79\ See proposed rule Sec.  __.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 Sec.
__.2(t)(1), (ff)(2)-(3).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \80\ Proposed rule Sec.  __.2(ff).
    \81\ Proposed rule Sec.  __.2(v).
    \82\ Proposed rule Sec.  __.2(t).
    \83\ Proposed rule Sec.  __.20(h).
    \84\ See 83 FR at 33442 (question 7).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \85\ See final rule Sec.  __.2(s), (u), (ee).
---------------------------------------------------------------------------

    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

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.
---------------------------------------------------------------------------

    \86\ See, e.g., BB&T Corporation; CFA; CCMR; and State Street
Corporation (State Street).
    \87\ See State Street.
    \88\ See, e.g., Bean; Data Boiler Technologies; and Occupy the
SEC.
    \89\ See Occupy the SEC.
    \90\ See, e.g., ABA; Capital One et al.; and KeyCorp and KeyBank
(KeyCorp).
    \91\ See Data Boiler Technologies.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \92\ See, e.g., ABA; Capital One et al.; and BPI.
    \93\ See, 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).
    \94\ See final rule Sec.  __.2(s)(2)-(3).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \95\ See, 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.
    \98\ See, e.g., ABA; Capital One et al.; and SIFMA.
    \99\ See final rule Sec.  __.2(ee)(1)(i).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \100\ See Capital One et al.
    \101\ See, e.g., final rule Sec.  __.2(ee)(1)(i).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \102\ See, e.g., IIB and JBA.
    \103\ See proposed rule Sec.  __.2(t)(1), (ff)(2)-(3).
    \104\ See, e.g., IIB and JBA.
    \105\ Id.
---------------------------------------------------------------------------

    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

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\
---------------------------------------------------------------------------

    \106\ See final rule Sec.  __.2(s)(3), (ee)(3).
    \107\ See Section 13(d)(1)(H), (I) (12 U.S.C. 1851(d)(1)(H),
(I)).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \108\ See JBA.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \109\ See, e.g., ABA; Capital One et al.
    \110\ See, e.g., Data Boiler and John Hoffman.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \111\ See, e.g., BMO Financial Group (BMO); Capital One et al.;
and KeyCorp.
    \112\ See final rule Sec.  __.2(s)(2), (3); see also final rule
Sec.  __.6(a)(1), (2).
---------------------------------------------------------------------------

    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 government-sponsored 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\
---------------------------------------------------------------------------

    \113\ See, e.g., ABA; Arvest; and BOK Financial (BOK).
    \114\ See Insurance Coalition.
    \115\ See JBA.
    \116\ See final rule Sec.  __.2(s)(2)-(3), (ee)(2)-(3).
    \117\ Compliance 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.
---------------------------------------------------------------------------

    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

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\
---------------------------------------------------------------------------

    \118\ See, e.g., Bank of Oklahoma; KeyCorp; BPI; and Capital One
et al Banks.
    \119\ See, e.g., BMO and Capital One et al.
    \120\ See final rule Sec.  __.2(s)(1)(i), (ee)(1)(i).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \121\ See, e.g., ABA; BPI; Custody Banks; Capital One et al.;
and State Street.
    \122\ See State Street.
    \123\ A 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.
---------------------------------------------------------------------------

    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 two-year 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
two-year 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 __.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.
---------------------------------------------------------------------------

    \124\ See BPI.
    \125\ See final rule Sec.  __.20(i).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \126\ 12 U.S.C. 1851(h)(6).
---------------------------------------------------------------------------

1. Section __.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\
---------------------------------------------------------------------------

    \127\ See 2013 rule Sec.  __.3(b)(1)(i).
    \128\ See 2013 rule Sec.  __.3(b)(2).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \129\ See 2013 rule Sec.  __.3(b)(1)(ii).
---------------------------------------------------------------------------

    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 security-based 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.\130\
---------------------------------------------------------------------------

    \130\ See 2013 rule Sec.  __.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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \131\ See final rule Sec.  __.3(b)(4).
    \132\ See 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_Y-9C20190731_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.
    \133\ See final rule Sec.  __.3(b)(2)(i).
    \134\ See final rule Sec.  __.3(b)(2)(ii).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \135\ See proposed rule Sec.  __.3(b)(3); 83 FR at 33447-48.
    \136\ See 83 FR at 33447-48.
---------------------------------------------------------------------------

    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 asset-liability management activities;
\141\ derivative transactions entered into for any purpose and
duration; \142\ long-term holdings of commercial mortgage-backed
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

assets and liabilities under applicable accounting standards is not
indicative of short-term trading intent.\158\
---------------------------------------------------------------------------

    \137\ See, 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.
    \138\ See, e.g., BPI and SIFMA.
    \139\ See, e.g., Capital One et al.; BPI; SIFMA; and CCMR.
    \140\ See, e.g., BPI and ISDA.
    \141\ See, e.g., KeyCorp; BPI; Capital One et al.; FSF; and
Goldman Sachs.
    \142\ See e.g., ISDA and BPI.
    \143\ See MBA.
    \144\ See, e.g., ICI; Capital One et al.; Credit Suisse; FSF;
and SIFMA.
    \145\ See, e.g., Capital One et al. and BPI.
    \146\ See, e.g., Capital One et al. and BPI.
    \147\ See Capital One et al.
    \148\ See Capital One et al.
    \149\ See, e.g., Capital One et al.; CCMC; IAA; ABA; ISDA;
Credit Suisse; CREFC; BPI; FSF; Goldman Sachs; and SIFMA.
    \150\ See, e.g., CCMC; JBA; Structured Finance Industry Group
(SFIG); IIB; American Action Forum; ABA; BPI; ISDA; and SIFMA.
    \151\ See, e.g., BPI and IIB.
    \152\ See BPI.
    \153\ See, e.g., BOK; ABA; and NYCB.
    \154\ See SFIG.
    \155\ See IAA.
    \156\ See IIB.
    \157\ See, e.g., SIFMA; BPI; CCMR; FSF; and BB&T.
    \158\ See, e.g., Capital One et al.; ABA; BPI; FSF; SIFMA; and
Credit Suisse.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \159\ See, e.g., Chatham; BPI; SIFMA; IIB; Credit Suisse; and
Arvest.
    \160\ See BOK.
    \161\ See BOK.
    \162\ See JBA.
    \163\ See Volcker Alliance.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \164\ See, e.g., Public Citizen; CAP; Better Markets; and AFR.
    \165\ See CAP.
    \166\ See Better Markets.
    \167\ See Better Markets.
---------------------------------------------------------------------------

    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 short-term 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.
---------------------------------------------------------------------------

    \168\ See, 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.
    \169\ See 83 FR at 33448.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \170\ See proposed rule Sec.  __.3(c); 83 FR at 33449-51.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \171\ See, e.g., New England Council and CFA.
    \172\ See, e.g., Volcker Alliance; Public Citizen; CAP; Bean;
Feng; AFR; and Better Markets.
    \173\ See, e.g., Volcker Alliance; Public Citizen; CAP; and
Bean.
    \174\ See Public Citizen.
    \175\ See IIB.
    \176\ See, e.g., Bean and CAP.
    \177\ See, e.g., BOK; BPI; IIB; and JBA.
    \178\ See, e.g., BOK; BPI; IIB; and Capital One et al.
    \179\ See, e.g., CFA.
    \180\ See, e.g., Capital One et al.; BPI; FSF; and SIFMA.
---------------------------------------------------------------------------

    After considering the comments, the agencies have decided not to
adopt a trading desk-level presumption of compliance with the
prohibition on

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.
---------------------------------------------------------------------------

    \181\ See 83 FR at 33449.
---------------------------------------------------------------------------

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) 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.\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\
---------------------------------------------------------------------------

    \182\ See 2013 rule Sec.  __.3(b)(1)(i).
    \183\ See 2013 rule Sec.  __.3(b(2).
---------------------------------------------------------------------------

    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 short-term intent prong altogether, as
proposed.\185\ Other commenters stated that, consistent with the
statutory definition of trading account, the agencies should not
eliminate the short-term 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.
---------------------------------------------------------------------------

    \184\ See, e.g., Capital One et al.; BPI; FSF; KeyCorp; and
SIFMA.
    \185\ See, e.g., JBA; Credit Suisse; CREFC; and SIFMA.
    \186\ See AFR and Bean.
    \187\ See Occupy the SEC.
    \188\ See, e.g., SIFMA; BPI; State Street; Chatham; FSF; CCMR;
ABA; KeyCorp; Capital One et al.; Arvest; and IIB.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \189\ See final rule Sec.  __.3(b)(1)(i).
    \190\ See 12 U.S.C. 1851(h)(6).
---------------------------------------------------------------------------

    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\
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    \191\ See final rule Sec.  __.3(b)(2)(i), (ii).
    \192\ See 12 CFR part 3, subpart F; part 217, subpart F; part
324, subpart F.
    \193\ See 79 FR at 5548.
    \194\ A 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.
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    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

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.
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    \195\ See final rule Sec.  __.3(b)(2)(ii).
    \196\ Several 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.
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    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.
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    \197\ See final rule Sec.  __.3(b)(3).
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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 under-inclusive.\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\
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    \198\ See, e.g., State Street; Chatham; BPI; FSF; CCMR; and CFA.
    \199\ See, e.g., ABA; KeyCorp; Capital One et al.; State Street;
and Arvest.
    \200\ See, e.g., ABA; Arvest; BPI; SIFMA; and IIB.
    \201\ See SIFMA.
    \202\ See, e.g., ABA; Arvest; BPI; SIFMA; State Street; and FSF.
    \203\ See, e.g., ABA and Arvest.
    \204\ Id.
    \205\ See Capital One et al.
    \206\ See AFR and Occupy the SEC.
    \207\ See Occupy the SEC.
    \208\ See Bean.
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    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\

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.
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    \209\ For 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).
    \211\ See, e.g., State Street; Chatham; BPI; FSF; CCMR; and CFA.
    \212\ Such 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 with the
intent to resell in order to profit from short-term price
movements).
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    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
short-term 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.
---------------------------------------------------------------------------

    \213\ See 79 FR at 5550; see also ABA; KeyCorp; Capital One et
al.; State Street; Arvest; and SIFMA.
    \214\ See final rule Sec.  __.3(b)(4).
---------------------------------------------------------------------------

    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 short-term 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 home-country 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.
---------------------------------------------------------------------------

    \215\ See proposed rule Sec.  __. 3(b)(1)(ii); 83 FR at 33447.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \216\ See IIB.
    \217\ See id.
---------------------------------------------------------------------------

    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\
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    \218\ See IIB (noting that the scope of some foreign supervisory
market risk capital frameworks may capture positions that are not
held solely for short-term 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \220\ See final rule Sec.  __.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