adopted, the agencies considered acting as principal in providing
exposure to the profits and losses of a covered fund for a customer,
even if hedged by the banking entity with ownership interests of the
covered fund, to constitute a high-risk trading strategy.\589\ One
commenter stated that the proposal did not offer specific examples or
explain why such fund-linked products are necessary.\590\ Another
commenter argued that the exemption for risk-mitigating hedging
involving ownership interests in covered funds should be further
restricted or completely removed from the rule.\591\
---------------------------------------------------------------------------

    \584\ See, e.g., ABA; BPI; FSF; Goldman Sachs; IIB; ISDA; SIFMA;
and IIB.
    \585\ See, e.g., BPI and FSF.
    \586\ See, e.g., FSF and SIFMA.
    \587\ See, e.g., FSF; ISDA; and SIFMA.
    \588\ See FSF.
    \589\ See, e.g., AFR and Volcker Alliance.
    \590\ See AFR.
    \591\ See Occupy the SEC.
---------------------------------------------------------------------------

    The final rule adopts the proposed revision without change. This
exemption is tailored to permit bona fide customer facilitation
activities and to limit the risk incurred directly by the banking
entity. The new exemption in Sec.  __.13(a) extends only to a position
taken by the banking entity when acting as intermediary on behalf of a
customer that is not itself a banking entity to facilitate the
customer's exposure to the profits and losses of the covered fund. The
banking entity's acquisition or retention of the ownership interest as
a hedge must be designed to reduce or otherwise significantly mitigate
one or more specific, identifiable risks arising out of a transaction
conducted solely to accommodate a specific customer request with
respect to the covered fund. As a result, a transaction conducted in
reliance on this exemption must be customer-driven. A banking entity
cannot rely on this exemption to solicit customer transactions in order
to facilitate the banking entity's own exposure to a covered fund.
    As some commenters noted, in the preamble to the 2013 rule, the
agencies stated that they were not adopting an exemption for customer
facilitation activities and related hedging activities involving
ownership interests in covered funds because these activities could
potentially expose a banking entity to the types of risks that section
13 of the BHC Act sought to address. However, in light of other
comments received,\592\ the agencies do not believe that a banking
entity's customer facilitation activities and related hedging
activities involving ownership interests in covered funds necessarily
constitute high-risk trading strategies that could threaten the safety
and soundness of the banking entity. The agencies believe that,
properly monitored and managed, these activities can be conducted
without creating a greater degree of risk to the banking entity than
the other customer facilitation activities permitted by the

final rule.\593\ In particular, these activities remain subject to all
of the final rule's requirements for risk-mitigating hedging
transactions, including requirements that such transactions must:
---------------------------------------------------------------------------

    \592\ See, e.g., FSF; ISDA; and SIFMA.
    \593\ See, e.g., final rule Sec.  __.3(d)(11).
---------------------------------------------------------------------------

     Be designed to reduce or otherwise significantly mitigate
the specific, identifiable risks to the banking entity;
     be made in accordance with the banking entity's written
policies, procedures and internal controls;
     not give rise, at the inception of the hedge, to any
significant new or additional risk that is not itself hedged
contemporaneously in accordance with the risk-mitigating hedging
requirements; and
     be subject to continuing review, monitoring and management
by the banking entity.\594\
---------------------------------------------------------------------------

    \594\ See final rule Sec.  __.13.
---------------------------------------------------------------------------

    In addition, these activities remain subject to Sec.  __.15 of the
final rule and, therefore, to the extent they would in practice
significantly increase the likelihood that the banking entity would
incur a substantial financial loss or would pose a threat to the
financial stability of the United States, they would not be
permissible. The agencies are also adopting without change the
amendment to align Sec.  __.13(a) with Sec.  __.5 by eliminating the
requirement that a risk-mitigating hedging transaction ``demonstrably''
reduces or otherwise significantly mitigates the relevant risks. The
agencies are adopting this amendment to Sec.  __.13(a) for the same
reason the agencies are adopting the amendment to Sec.  __.5.
b. Permitted Covered Fund Activities and Investments Outside of the
United States
    Section 13(d)(1)(I) of the BHC Act permits foreign banking entities
to acquire or retain an ownership interest in, or act as sponsor to, a
covered fund, so long as those activities and investments occur solely
outside the United States and certain other conditions are met (the
foreign fund exemption).\595\ Section 13 of the BHC Act does not
further define ``solely outside of the United States'' (SOTUS).
---------------------------------------------------------------------------

    \595\ Section 13(d)(1)(I) of the BHC Act permits a banking
entity to acquire or retain an ownership interest in, or have
certain relationships with, a covered fund notwithstanding the
restrictions on investments in, and relationships with, a covered
fund, if: (i) Such activity or investment is conducted by a banking
entity pursuant to paragraph (9) or (13) of section 4(c) of the BHC
Act; (ii) the activity occurs solely outside of the United States;
(iii) no ownership interest in such fund is offered for sale or sold
to a resident of the United States; and (iv) the banking entity is
not directly or indirectly controlled by a banking entity that is
organized under the laws of the United States or of one or more
States. See 12 U.S.C. 1851(d)(1)(I).
---------------------------------------------------------------------------

    The 2013 rule established several conditions on the availability of
the foreign fund exemption. Specifically, the 2013 rule provided that
an activity or investment occurs solely outside the United States for
purposes of the foreign fund exemption only if:
     The banking entity acting as sponsor, or engaging as
principal in the acquisition or retention of an ownership interest in
the covered fund, is not itself, and is not controlled directly or
indirectly by, a banking entity that is located in the United States or
organized under the laws of the United States or of any State;
     The banking entity (including relevant personnel) that
makes the decision to acquire or retain the ownership interest or act
as sponsor to the covered fund is not located in the United States or
organized under the laws of the United States or of any State;
     The investment or sponsorship, including any transaction
arising from risk-mitigating hedging related to an ownership interest,
is not accounted for as principal directly or indirectly on a
consolidated basis by any branch or affiliate that is located in the
United States or organized under the laws of the United States or of
any State; and
     No financing for the banking entity's ownership or
sponsorship is provided, directly or indirectly, by any branch or
affiliate that is located in the United States or organized under the
laws of the United States or of any State (the ``financing
prong'').\596\
---------------------------------------------------------------------------

    \596\ See final rule Sec.  __.13(b)(4).
---------------------------------------------------------------------------

    Much like the similar requirement under the exemption for permitted
trading activities of a foreign banking entity, the proposal would have
removed the financing prong of the foreign fund exemption, while
leaving in place the other requirements for an activity or investment
to be considered ``solely outside of the United States.'' Removing the
financing prong was intended to streamline the requirements of the
foreign fund exemption with the intention of improving implementation
of the statutory exemption.
    Several commenters supported removing the financing prong from the
foreign fund exemption.\597\ One commenter argued that this change
would appropriately refocus the foreign fund exemption on the location
of the activities of the banking entity as principal.\598\ Another
commenter argued that the proposed changes to the foreign fund
exemption, including removal of the financing prong, could promote
international regulatory cooperation.\599\ Other commenters argued
against eliminating the financing prong because it could result in a
U.S. branch or affiliate that extends financing to bear some
risks.\600\
---------------------------------------------------------------------------

    \597\ See, e.g., BPI; BVI; EBF; IIB; JBA; and New England
Council.
    \598\ See EBF.
    \599\ See BPI.
    \600\ See, e.g., Better Markets and CAP.
---------------------------------------------------------------------------

    The agencies are adopting the proposal to remove the financing
prong for the same reasons described above in section IV.B.4 for the
trading outside of the United States exemption. This change focuses one
of the key requirements of the foreign fund exemption on the principal
actions and risk of the transaction. Removing the financing prong would
also address concerns that the fungibility of financing has made this
requirement in certain circumstances difficult to apply in practice to
determine whether a particular financing is tied to a particular
activity or investment. Eliminating the financing prong, while
retaining the other prongs of the foreign fund exemption, strikes a
better balance between the risks posed to U.S. banking entities and the
U.S. financial system, on the one hand, and effectuating the statutory
exemption for activities conducted solely outside of the United States,
on the other. The agencies note that a U.S. banking entity's affiliate
lending activities remain subject to other laws and regulations--
including sections 23A and 23B of the Federal Reserve Act and
prudential safety and soundness standards, as applicable.
    One of the restrictions of the statutory exemption for covered fund
activities conducted by foreign banking entities solely outside the
United States is the restriction that ``no ownership interest in such
hedge fund or private equity fund is be offered for sale or sold to a
resident of the United States.\601\ To implement this restriction,
Sec.  __.13(b) of the 2013 rule requires, as one condition of the
foreign fund exemption, that ``no ownership interest in the covered
fund is offered for sale or sold to a resident of the United States''
(the ``marketing restriction'').\602\
---------------------------------------------------------------------------

    \601\ See 12 U.S.C. 1851(d)(1)(I).
    \602\ See final rule Sec.  __.13(b)(1)(iii).
---------------------------------------------------------------------------

    The final rule, like the proposal, clarifies that an ownership
interest in a covered fund is not offered for sale or sold to a
resident of the United States for purposes of the marketing restriction
only if it is not sold and has not been sold pursuant to an offering
that targets residents of the United States in which the banking entity
or any affiliate of the banking entity participates. The final

rule, like the proposal, also clarifies that if the banking entity or
an affiliate sponsors or serves, directly or indirectly, as the
investment manager, investment adviser, commodity pool operator, or
commodity trading advisor to a covered fund, then the banking entity or
affiliate will be deemed for purposes of the marketing restriction to
participate in any offer or sale by the covered fund of ownership
interests in the covered fund.\603\ This revision adopts existing staff
guidance addressing this issue.\604\ Several commenters supported this
clarification.\605\ Some commenters argued that this clarification
appropriately excludes from the marketing restriction those activities
where the risk occurs and remains outside of the United States and
reflects the intended extraterritorial limitations of the section 13 of
the BHC Act.\606\ In addition, commenters stated that codifying the
previously issued staff guidance will provide greater clarity and
certainty for non-U.S. banking entities making investments in third
party funds (i.e., covered funds that the banking entity does not
advise or organize and offer pursuant to Sec.  __.11(a) or (b) of the
final rule) and will enable long-term strategies in reliance on this
provision.\607\
---------------------------------------------------------------------------

    \603\ See proposal Sec.  __.13(b)(3).
    \604\ See supra note 59, FAQ 13.
    \605\ See, e.g., AIC; BPI; BVI; IIB; and EBF.
    \606\ See, e.g., EBF and IIB.
    \607\ See, e.g., AIC; BPI; and BVI.
---------------------------------------------------------------------------

    The agencies are adopting this clarification as proposed to
formally incorporate the existing staff guidance. As staff noted in the
previous staff guidance, the marketing restriction constrains the
foreign banking entity in connection with its own activities with
respect to covered funds rather than the activities of unaffiliated
third parties.\608\ This ensures that the foreign banking entity
seeking to rely on the foreign fund exemption does not engage in an
offering of ownership interests that targets residents of the United
States. This clarification limits the extraterritorial application of
section 13 to foreign banking entities while seeking to ensure that the
risks of covered fund investments by foreign banking entities occur and
remain solely outside of the United States. If the marketing
restriction were applied to the activities of third parties, such as
the sponsor of a third-party covered fund (rather than the foreign
banking entity investing in a third-party covered fund), the foreign
fund exemption may not be available in certain circumstances even
though the risks and activities of a foreign banking entity with
respect to its investment in the covered fund are solely outside the
United States.
---------------------------------------------------------------------------

    \608\ See supra note 59, FAQ 13.
---------------------------------------------------------------------------

    One commenter asked the agencies to clarify that the requirement
that the banking entity (including the relevant personnel) that makes
the decision ``to acquire or retain the ownership interest or act as
sponsor to the covered fund'' must not be located in the United States
does not prohibit non-U.S. investment funds from utilizing the
expertise of U.S. investment advisers under delegation agreements.\609\
This commenter noted that a foreign investment fund may appoint a
qualified U.S. investment adviser for providing investment management
or investment advisory services under delegation but that the ultimate
responsibility for the investment decisions and compliance with
statutory and contractual investment limits remains with the foreign
management company that manages the foreign investment fund. As stated
in the preamble to the 2013 rule, the foreign fund exemption permits
the U.S. personnel and operations of a foreign banking entity to act as
investment adviser to a covered fund in certain circumstances. For
example, the U.S. personnel of a foreign banking entity may provide
investment advice and recommend investment selections to the manager or
general partner of a covered fund so long as the investment advisory
activity in the United States does not result in U.S. personnel
participating in the control of the covered fund or offering or selling
an ownership interest to a resident of the United States.\610\
Consistent with the foreign trading exemption, as discussed above,\611\
the agencies also are confirming that under the final rule, the foreign
fund exemption does not preclude a foreign banking entity from engaging
a non-affiliated U.S. investment adviser as long as the actions and
decisions of the banking entity as principal occur outside of the
United States. The agencies intend to address and request further
comment on additional covered fund issues in a future proposed
rulemaking.
---------------------------------------------------------------------------

    \609\ See BVI.
    \610\ 79 FR at 5741.
    \611\ See supra Part IV.B.4.
---------------------------------------------------------------------------

4. Section __.14: Limitations on Relationships With a Covered Fund
a. Relationships With a Covered Fund
    Section 13(f) of the BHC Act provides that, with limited
exceptions, no banking entity that serves, directly or indirectly, as
the investment manager, investment adviser, or sponsor to a hedge fund
or private equity fund, or that organizes and offers a hedge fund or
private equity fund pursuant to section 13(d)(1)(G), and no affiliate
of such entity, may enter into a transaction with the fund, or with any
other hedge fund or private equity fund that is controlled by such
fund, that would be a ``covered transaction,'' as defined in section
23A of the Federal Reserve Act, as if such banking entity and the
affiliate thereof were a member bank and the hedge fund or private
equity fund were an affiliate thereof.\612\ The 2013 rule includes this
prohibition as well.\613\ The proposal included a request for comment
regarding the restrictions in section 13(f) of the BHC Act and Sec.
__.14 of the 2013 rule. As with the other covered fund issues for which
no specific rule text was proposed, the agencies continue to consider
the prohibition in section 13(f) of the BHC Act and intend to issue a
separate proposed rulemaking that addresses this issue.
---------------------------------------------------------------------------

    \612\ See U.S.C. 1851(f)(1).
    \613\ See final rule Sec.  __.14(a)(1).
---------------------------------------------------------------------------

b. Prime Brokerage Transactions
    Section 13(f) of the BHC Act provides an exemption from the
prohibition on covered transactions with a hedge fund or private equity
fund for any prime brokerage transaction with a hedge fund or private
equity fund in which a hedge fund or private equity fund managed,
sponsored, or advised by a banking entity has taken an ownership
interest (a second-tier fund).\614\ The statute by its terms permits a
banking entity with a relationship to a hedge fund or private equity
fund described in section 13(f) of the BHC Act to engage in prime
brokerage transactions (that are covered transactions) only with
second-tier funds and does not extend to hedge funds or private equity
funds more generally.\615\ Under the statute, the exemption for prime
brokerage transactions is available only so long as certain enumerated
conditions are satisfied.\616\ The 2013 rule included this exemption as
well and similarly required satisfaction of certain enumerated
conditions in order for a banking entity to engage in permissible prime
brokerage transactions.\617\ The

2013 rule's conditions are that (i) the banking entity is in compliance
with each of the limitations set forth in[thinsp]Sec.  __.11 of the
2013 rule with respect to a covered fund organized and offered by the
banking entity or any of its affiliates; (ii) the CEO (or equivalent
officer) of the banking entity certifies in writing annually that the
banking entity does not, directly or indirectly, guarantee, assume, or
otherwise insure the obligations or performance of the covered fund or
of any covered fund in which such covered fund invests; and (iii) the
Board has not determined that such transaction is inconsistent with the
safe and sound operation and condition of the banking entity.
---------------------------------------------------------------------------

    \614\ See U.S.C. 1851(f)(3).
    \615\ Neither the statute nor the proposal limits covered
transactions between a banking entity and a covered fund for which
the banking entity does not serve as investment manager, investment
adviser, or sponsor (as defined in section 13 of the BHC Act) or
have an interest in reliance on section 13(d)(1)(G) of the BHC Act.
Similarly, the final rule does not limit such covered transactions.
    \616\ See 12 U.S.C. 1851(f)(3).
    \617\ See final rule Sec.  __.14(a)(2)(ii).
---------------------------------------------------------------------------

    The proposal retained each of the 2013 rule's conditions for the
prime brokerage exemption described above, including the requirement
that certification be made to the appropriate agency for the banking
entity.\618\ Staffs of the agencies previously issued guidance
explaining when a banking entity was required to provide this
certification during the conformance period.\619\ The proposal
incorporated this guidance into the rule text by requiring banking
entities to provide the CEO certification annually no later than March
31 of the relevant year.\620\ This change was intended to provide
banking entities with certainty about when the required certification
must be provided to the appropriate agency in order to comply with the
prime brokerage exemption. As under the 2013 rule, under the proposal,
the CEO would have a duty to update the certification if the
information in the certification materially changes at any time during
the year when he or she becomes aware of the material change.\621\
---------------------------------------------------------------------------

    \618\ See 83 FR at 33486-87.
    \619\ See supra note 59, FAQ 18.
    \620\ See 83 FR at 33487.
    \621\ This duty to update the certification is required as a
condition of the statutory exemption. See 12 U.S.C.
1851(f)(3)(A)(ii).
---------------------------------------------------------------------------

    One commenter recommended that the agencies expressly state that
the CEO certification for purposes of the prime brokerage exemption is
based on a reasonable review by the CEO and is made based on the
knowledge and reasonable belief of the CEO.\622\ That commenter also
requested that the agencies clarify that the term ``prime brokerage
transaction'' includes transactions and services commonly provided in
connection with prime brokerage transactions, as described under the
2013 rule, including: (1) Lending and borrowing of financial assets,
(2) provision of secured financing collateralized by financial assets,
(3) repurchase and reverse repurchase of financial assets, (4)
derivatives, (5) clearance and settlement of transactions, (6) ``give-
up'' agreements, and (7) purchase and sale of financial assets from
inventory.\623\ Similarly, another commenter requested that the
agencies clarify that the term ``prime brokerage transaction'' applies
to any transaction provided in connection with custody, clearance and
settlement, securities borrowing or lending services, trade execution,
financing, or data, operational, and administrative support regardless
of which business line within the banking entity conducts the
business.\624\ The same commenter suggested that any prime brokerage
transaction with a second-tier covered fund should be presumed to
comply with section __.14 of the rule and the prime brokerage exemption
as long as it is executed in compliance with the requirements of
Section 23B of the Federal Reserve Act.\625\ In addition, one commenter
recommended limiting the prime brokerage exemption by, for instance,
excluding financing and securities lending and borrowing from the prime
brokerage exemption.\626\
---------------------------------------------------------------------------

    \622\ See SIFMA.
    \623\ See id.
    \624\ See ABA.
    \625\ See id.
    \626\ See Occupy the SEC.
---------------------------------------------------------------------------

    The final rule adopts the proposed revision to the prime brokerage
exemption with no changes. The agencies believe that codifying a
deadline for CEO certification with respect to prime brokerage
transactions will provide banking entities with greater certainty and
facilitate supervision and review of the prime brokerage exemption.
With respect to the other issues raised by commenters regarding the
prime brokerage exemption in section 13(f) of the BHC Act, the agencies
continue to consider these issues and intend to issue a separate
proposed rulemaking that specifically addresses these issues.

D. Subpart D--Compliance Program Requirement; Violations

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

    \627\ See 79 FR 5753.
    \628\ Banking entities did not have any compliance program
obligations under the 2013 rule if they do not engage in any covered
activities other than trading in certain government, agency, State
or municipal obligations. Sec.  __20(f)(1). Additionally, banking
entities with $10 billion or less in total consolidated assets could
satisfy the compliance program requirements under the 2013 rule by
including appropriate references to the requirements of section 13
of the BHC Act and the implementing regulations in their existing
policies and procedures. Sec.  __.20(f)(2).
---------------------------------------------------------------------------

    Specifically, the agencies proposed applying the compliance program
requirement to banking entities as follows:
     Banking entities with significant trading assets and
liabilities. Banking entities with significant trading assets and
liabilities would have been subject to the six-pillar compliance
program requirement (Sec.  __.20(b) of the 2013 rule), the metrics
reporting requirements (Sec.  __.20(d) of the 2013 rule),\629\ the
covered fund documentation requirements (Sec.  __.20(e) of the 2013
rule), and the CEO attestation

requirement (Appendix B of the 2013 rule).\630\
---------------------------------------------------------------------------

    \629\ As discussed below, the proposal would have amended the
Appendix A metrics requirements to reduce compliance-related
inefficiencies while allowing for the collection of data to permit
the agencies to better monitor compliance with section 13 of the BHC
Act. In addition, the proposal would have eliminated Appendix B of
the 2013 rule, which would have resulted in Appendix A being re-
designated as the ``Appendix.''
    \630\ Although the proposal would have eliminated Appendix B, as
noted above, it would have continued to apply a modified version of
the CEO attestation to banking entities without limited trading
assets and liabilities.
---------------------------------------------------------------------------

     Banking entities with moderate trading assets and
liabilities. Banking entities with moderate trading assets and
liabilities would have been required to establish the simplified
compliance program (described in Sec.  __.20(f)(2) of the 2013 rule)
and comply with the CEO attestation requirement.
     Banking entities with limited trading assets and
liabilities. Banking entities with limited trading assets and
liabilities would have been presumed to be in compliance with the
proposal and would have had no obligation to demonstrate compliance
with subpart B and subpart C of the implementing regulations on an
ongoing basis. These banking entities would not have been required to
demonstrate compliance with the rule unless and until the appropriate
agency, based upon a review of the banking entity's activities,
determined that the banking entity should have been treated as if it
did not have limited trading assets and liabilities.
    After reviewing all of the comments to this section, the agencies
are finalizing these changes largely as proposed, except for further
tailoring application of the CEO attestation requirement to only
banking entities with significant trading assets and liabilities and
revising the notice and response procedures in subpart D to be more
broadly applicable.
a. Compliance Program Requirements for Banking Entities With
Significant Trading Assets and Liabilities
i. Section 20(b)--Six-Pillar Compliance Program
    Section __.20(b) of the 2013 rule specifies six elements that each
compliance program required under that section must at a minimum
contain.
    The six elements specified in Sec.  __.20(b) are:
     Written policies and procedures reasonably designed to
document, describe, monitor and limit trading activities and covered
fund activities and investments conducted by the banking entity to
ensure that all activities and investments that are subject to section
13 of the BHC Act and the rule comply with section 13 of the BHC Act
and the 2013 rule;
     A system of internal controls reasonably designed to
monitor compliance with section 13 of the BHC Act and the rule and to
prevent the occurrence of activities or investments that are prohibited
by section 13 of the BHC Act and the 2013 rule;
     A management framework that clearly delineates
responsibility and accountability for compliance with section 13 of the
BHC Act and the 2013 rule and includes appropriate management review of
trading limits, strategies, hedging activities, investments, incentive
compensation and other matters identified in the rule or by management
as requiring attention;
     Independent testing and audit of the effectiveness of the
compliance program conducted periodically by qualified personnel of the
banking entity or by a qualified outside party;
     Training for trading personnel and managers, as well as
other appropriate personnel, to effectively implement and enforce the
compliance program; and
     Records sufficient to demonstrate compliance with section
13 of the BHC Act and the 2013 rule, which a banking entity must
promptly provide to the relevant agency upon request and retain for a
period of no less than 5 years.
    Under the 2013 rule, these six elements have to be part of the
required compliance program of each banking entity with total
consolidated assets greater than $10 billion that engages in covered
trading activities and investments subject to section 13 of the BHC Act
and the implementing regulations (excluding trading permitted under
Sec.  __.6(a) of the 2013 rule).
    The agencies proposed further tailoring the compliance program
requirements to make the scale of compliance activity required by the
rule commensurate with a banking entity's size and level of trading
activity. Specifically, the proposal would have applied the six-pillar
compliance program requirements to banking entities with significant
trading assets and liabilities and would have afforded flexibility to
integrate the Sec.  __.20 compliance program requirements into other
compliance programs of the banking entity. The proposal also would have
eliminated the enhanced compliance program requirements found in
Appendix B of the 2013 rule,\631\ except for the CEO attestation
requirement discussed below. The proposal also would have revised the
covered fund documentation requirements in Sec.  __.20(e), which
applied to all banking entities with greater than $10 billion in total
consolidated assets under the 2013 rule, to only apply to firms with
significant trading assets and liabilities.
---------------------------------------------------------------------------

    \631\ The enhanced minimum standards in Appendix B of the 2013
rule required that the firm's compliance program: (1) Be reasonably
designed to identify, document, monitor, and report the trading and
covered fund activities and investments of the banking entity;
identify, monitor and promptly address the risks of these activities
and investments and potential areas of noncompliance; and prevent
activities or investments prohibited by, or that do not comply with,
section 13 of the BHC Act and the 2013 rule; (2) establish and
enforce appropriate limits on the activities and investments of the
banking entity, including limits on the size, scope, complexity, and
risks of the individual activities or investments consistent with
the requirements of section 13 of the BHC Act and the 2013 rule; (3)
subject the effectiveness of the compliance program to periodic
independent review and testing, and ensure that the entity's
internal audit, corporate compliance and internal control functions
involved in review and testing are effective and independent; (4)
make senior management, and others as appropriate, accountable for
the effective implementation of the compliance program, and ensure
that the board of directors and CEO (or equivalent) of the banking
entity review the effectiveness of the compliance program; and (5)
facilitate supervision and examination by the agencies of the
banking entity's trading and covered fund activities and
investments.
---------------------------------------------------------------------------

    Several commenters expressed support for the elimination of the
enhanced compliance program requirements in Appendix B of the 2013
rule.\632\ One commenter requested that the agencies provide greater
discretion to banking entities with significant trading assets and
liabilities to tailor their compliance programs to the size and
complexity of their activities and structure of their business.\633\ A
few commenters opposed the elimination of Appendix B of the 2013
rule.\634\ One asserted that firms have already made investments in
their compliance programs, so there was no justification for the
change.\635\ Another commenter argued that the remaining controls are
not sufficient to ensure compliance with the rule because they lack
specificity.\636\ This commenter also asserted that merging the Volcker
Rule requirements with the safety and soundness compliance framework
would be problematic as the Volcker Rule considers market supply and
demand dynamics while the safety and soundness compliance framework
generally only considers risks.\637\ The concern was that a combined
program might not adequately consider the activities restrictions of
the Volcker Rule.
---------------------------------------------------------------------------

    \632\ See, e.g., Insurance Coalition; Real Estate Associations;
CREFC; Credit Suisse; JBA; FSF; and ABA.
    \633\ See Credit Suisse.
    \634\ See, e.g., Bean; Data Boiler; and AFR.
    \635\ See Bean.
    \636\ See AFR.
    \637\ Id.
---------------------------------------------------------------------------

    The agencies are adopting the six-pillar compliance program
requirements and retaining the covered fund

documentation requirements for banking entities with significant
trading assets and liabilities as proposed. The agencies continue to
believe that these banking entities are engaged in activities at a
scale that warrants the costs of establishing and maintaining the
detailed and comprehensive compliance program elements described in
Sec. Sec.  __.20(b) and __.20(e) of the rule. Accordingly, the agencies
believe it is appropriate to require banking entities with significant
trading assets and liabilities to maintain a six-pillar compliance
program to ensure that banking entities' activities are conducted in
compliance with section 13 of the BHC Act and the implementing
regulations. Based on experience with the six-pillar compliance program
requirements under the 2013 rule, the agencies believe that such
requirements are appropriate and effective for firms with significant
trading assets and liabilities; these standards impose certain minimum
standards, but permit the banking entity flexibility to reasonably
design the program in light of the banking entity's activities. The
agencies also believe that the prescribed six-pillar compliance
requirements are consistent with the standards banking entities use in
their traditional risk management and compliance processes.
    The agencies believe that banking entities should have discretion
to tailor their compliance programs to the structure and activities of
their organizations. The flexibility to build on compliance programs
that already exist at banking entities, including internal limits, risk
management systems, board-level governance protocols, and the level at
which compliance is monitored, may reduce the costs and complexity of
compliance while also enabling a robust compliance mechanism for the
final rule.
    The agencies therefore believe that removal of the specific,
enhanced minimum standards in Appendix B will afford a banking entity
considerable flexibility to satisfy the elements of Sec.  __.20 in a
manner that it determines to be most appropriate given its existing
compliance regimes, organizational structure, and activities. Allowing
banking entities the flexibility to integrate Volcker Rule compliance
requirements into existing compliance programs should increase the
effectiveness of the Sec.  __.20 requirements by eliminating
duplicative governance and oversight structures arising from the
Appendix B requirement for a stand-alone compliance program.
ii. CEO Attestation Requirement
    The 2013 rule included a requirement in its Appendix B that a
banking entity's CEO must review and annually attest in writing to the
appropriate agency that the banking entity has in place processes to
establish, maintain, enforce, review, test, and modify the compliance
program established pursuant to Appendix B and Sec.  __.20 of the 2013
rule in a manner reasonably designed to achieve compliance with section
13 of the BHC Act and the implementing regulations.
    Under the proposal, Appendix B would have been eliminated, and a
modified CEO attestation requirement would have applied to banking
entities with significant trading assets and liabilities or moderate
trading assets and liabilities. The agencies believed that, while the
revisions to the compliance program requirements under the proposal
generally would simplify the compliance program requirements, this
simplification should be balanced against the requirement for all
banking entities to maintain compliance with section 13 of the BHC Act
and the implementing regulations. Accordingly, the agencies believed
that applying the CEO attestation requirement to banking entities with
meaningful trading activities would ensure that the compliance programs
established by these banking entities pursuant to Sec.  __.20(b) or
Sec.  __.20(f)(2) of the proposal would be reasonably designed to
achieve compliance with section 13 of the BHC Act and the implementing
regulations as proposed. The agencies proposed limiting the CEO
attestation requirement to banking entities with moderate trading
assets and liabilities or significant trading assets and liabilities
because, under the proposal, banking entities with limited trading
assets and liabilities would have been subject to a rebuttable
presumption of compliance. Thus, the agencies did not believe it
necessary to require a CEO attestation for banking entities with
limited trading assets and liabilities as those banking entities would
not be subject to the express requirement to maintain a compliance
program pursuant to Sec.  __.20 under the proposal. Further, the
agencies proposed retaining the 2013 rule's language concerning how the
CEO attestation requirement applies to the U.S. operations of a foreign
banking entity. This language states that, in the case of the U.S.
operations of a foreign banking entity, including a U.S. branch or
agency of a foreign banking entity, the attestation may be provided for
the entire U.S. operations of the foreign banking entity by the senior
management officer of the U.S. operations of the foreign banking entity
who is located in the United States.
    Several commenters expressed support for the CEO attestation
requirement and recommended that the agencies make no changes to the
requirement or apply it to all banking entities.\638\ Other commenters
believed that the CEO attestation requirement should not apply to
banking entities with moderate trading assets and liabilities,\639\ as
requiring the development of costly and burdensome internal compliance
efforts would not be consistent with the activities or risks of such
firms.\640\ One commenter argued that the CEO attestation requirement
duplicates existing quarterly reporting process,\641\ and another
commenter asserted that imposing such a requirement for firms with
moderate trading assets and liabilities would negate the tailoring the
agencies proposed for those banking entities.\642\ One commenter urged
the agencies to limit the application of the compliance program and
reporting requirements to only the U.S. operations of foreign banking
entities.\643\ Other requests for modification included streamlining
the CEO attestation requirement,\644\ adding a knowledge
qualifier,\645\ and limiting the scope to only U.S. operations.\646\ A
few commenters requested that the CEO attestation be completely
eliminated.\647\
---------------------------------------------------------------------------

    \638\ See, e.g., AFR; Merkley; Better Markets; and Data Boiler.
    \639\ See, e.g., Capital One et al.; ABA; Arvest; BB&T State
Street; BPI; and IIB.
    \640\ See Capital One et al.
    \641\ See BOK.
    \642\ See Capital One et al.
    \643\ See IIB.
    \644\ See, e.g., ABA and JBA.
    \645\ See, e.g., ABA and FSF.
    \646\ See JBA.
    \647\ See BOK and Capital One et al.
---------------------------------------------------------------------------

    After reviewing the comments, the agencies have decided to retain
the CEO attestation requirement but only for banking entities with
significant trading assets and liabilities. The agencies continue to
believe that incorporating the CEO attestation requirement (which was
previously in Appendix B of the 2013 rule) into Sec.  __.20(c) will
help to ensure that the compliance program established pursuant to that
section is reasonably designed to achieve compliance with section 13 of
the BHC Act and the implementing regulations.
    However, the agencies have decided not to apply the CEO attestation
requirement to banking entities without significant trading assets and
liabilities. Such banking entities will still need to comply with
section 13 of the BHC Act and the implementing regulations;

however, they will not need to provide CEO attestations. This means
that the CEO attestation requirement will not be expanded to cover
banking entities that did not need to provide CEO attestations under
the 2013 rule.\648\ The agencies believe that requiring a CEO
attestation from banking entities with limited or moderate trading
assets and liabilities would result in additional costs and burdens
that would not be commensurate with the type of activities or risks of
these firms.
---------------------------------------------------------------------------

    \648\ The 2013 rule applied the CEO attestation requirement to
all banking entities with total consolidated assets of $50 billion
or more (or, in the case of a foreign banking entity, total U.S.
assets of $50 billion or more). By applying the CEO attestation
requirement to banking entities with moderate trading assets and
liabilities, the proposal would have expanded its applicability to
certain banking entities with less than $50 billion in total U.S.
assets that were not subject to the requirement under the 2013 rule.
---------------------------------------------------------------------------

b. Compliance Program Requirements for Banking Entities With Moderate
Trading Assets and Liabilities
    The 2013 rule provided that a banking entity with total
consolidated assets of $10 billion or less as measured on December 31
of the previous two years that engages in covered activities or
investments pursuant to subpart B or subpart C of the 2013 rule (other
than trading activities permitted under Sec.  __.6(a) of the 2013 rule)
may satisfy the compliance program requirements by including in its
existing compliance policies and procedures appropriate references to
the requirements of section 13 of the BHC Act and subpart D of the
implementing regulations and adjustments as appropriate given the
activities, size, scope, and complexity of the banking entity.\649\
---------------------------------------------------------------------------

    \649\ 2013 rule Sec.  __.20(f)(2).
---------------------------------------------------------------------------

    The agencies proposed extending the availability of this simplified
compliance program to banking entities with moderate trading assets and
liabilities. The agencies believed that streamlining the compliance
program requirements for banking entities with moderate trading assets
and liabilities would be appropriate because the scale and nature of
the activities and investments in which these banking entities are
engaged may not justify the additional costs associated with
establishing the compliance program elements under Sec. Sec.  __.20(b)
and (e) of the 2013 rule. Such activities may be appropriately managed
through an appropriately tailored simplified compliance program. The
agencies noted that banking entities with moderate trading assets and
liabilities would be able to incorporate their simplified compliance
program into existing compliance policies and procedures and tailor
their compliance programs to the size and nature of their activities,
consistent with the approach for banking entities with significant
trading assets and liabilities.
    Other commenters expressed support for a tailored compliance
program for banking entities with moderate trading assets and
liabilities.\650\ The agencies are adopting the compliance program
requirements, as proposed, for banking entities with moderate trading
assets and liabilities, for the aforementioned reasons. Thus, a banking
entity with moderate trading assets and liabilities qualifies for the
simplified compliance program under Sec.  __.20(f)(2) of the final
rule.
---------------------------------------------------------------------------

    \650\ See, e.g., BB&T and JBA.
---------------------------------------------------------------------------

c. Compliance Program Requirements for Banking Entities With Limited
Trading Assets and Liabilities
    Under the proposal, a banking entity with limited trading assets
and liabilities would have been presumed to be in compliance with the
rule. Banking entities with limited trading assets and liabilities
would have had no obligation to demonstrate compliance with subpart B
and subpart C of the implementing regulations on an ongoing basis,
given the limited scale of their trading operations. The agencies
believed, based on experience implementing and supervising compliance
with the 2013 rule, that these banking entities generally engage in
minimal trading and investment activities subject to section 13 of the
BHC Act. Thus, the agencies believed that the limited trading assets
and liabilities of the banking entities qualifying for the presumption
of compliance would be unlikely to warrant the costs of establishing a
compliance program under Sec.  __.20 of the 2013 rule.
    Under the proposed approach, the agencies would not have expected a
banking entity with limited trading assets and liabilities that
qualified for the presumption of compliance to demonstrate compliance
with the proposal on an ongoing basis in conjunction with the agencies'
normal supervisory and examination processes. However, the appropriate
agency would have been able to exercise its authority to treat the
banking entity as if it did not have limited trading assets and
liabilities if, upon review of the banking entity's activities, the
relevant agency determined that the banking entity engaged in
proprietary trading or covered fund activities that were otherwise
prohibited under subpart B or subpart C. A banking entity would have
been expected to remediate any impermissible activity upon being
notified of such determination by the agency within a period of time
deemed appropriate by the agency.
    In addition, irrespective of whether a banking entity had engaged
in activities in violation of subpart B or C, the relevant agency would
have retained its authority to require a banking entity to apply the
compliance program requirements that would otherwise apply if the
banking entity had significant or moderate trading assets and
liabilities if the relevant agency determined that the size or
complexity of the banking entity's trading or investment activities, or
the risk of evasion, did not warrant a presumption of compliance.
    One commenter expressed support for the rebuttable presumption of
compliance for banking entities with limited trading assets and
liabilities.\651\ Another commenter suggested completely exempting
banking entities with limited trading assets and liabilities from
section 13 of the BHC Act.\652\ One commenter requested that the
evidence that an agency would require in response to its attempt to
rebut a presumption should not be greater than what is required of the
banking entity under the presumption.\653\ Another commenter
recommended that the agencies treat inadvertent violations of the rule
as supervisory matters and not as violations.\654\
---------------------------------------------------------------------------

    \651\ See B&F.
    \652\ See JBA.
    \653\ See SIFMA.
    \654\ See ABA.
---------------------------------------------------------------------------

    The final rule adopts the compliance program requirements for
banking entities with limited trading assets and liabilities as
proposed. The agencies note that the removal of the standard compliance
program requirements in Sec.  __.20 for banking entities with limited
trading assets and liabilities does not relieve those banking entities
of the obligation to comply with the prohibitions and other
requirements of the permitted trading activity exemptions, to the
extent that the banking entity engages in such activities, including
RENTD requirements for permitted underwriting and market making, under
the final rule. The agencies believe the presumption of compliance for
banking entities with limited trading assets and liabilities will allow
flexibility for these banking entities to take appropriate actions,
tailored to the individual activities in which the banking entities
engage, to comply with the rule. Such

actions may include, for example, integrating the requirements for
permitted trading activities under the exemptions in Sec.  __.4, __.5,
and __.6 into existing internal policies and procedures (to the extent
the banking entity engages in such activities), or taking other steps
to satisfy the criteria to engage in such activities under the final
rule. Regarding one commenter's proposal that the agencies completely
exempt banking entities with limited trading activities, the agencies
note that section 13 of the BHC Act does not give the agencies
authority to completely exempt banking entities from the requirements
of the Volcker Rule.
d. Notice and Response Procedures
    The proposed rule included notice and response procedures that an
agency would follow when determining whether to treat a banking entity
with limited trading assets and liabilities as if it did not have
limited trading assets and liabilities.\655\ The notice and response
procedures required the relevant agency to provide a written
explanation of its determination and allowed the banking entity the
opportunity to respond to the agency with any matters that the banking
entity would have the agency consider in reaching its determination.
The response procedures would have required the banking entity to
respond within 30 days unless the agency extended the time period for
good cause or if the agency shortened the time period either with the
consent of the banking entity or because the conditions or activities
of the banking entity so required. Failure to respond within the
applicable timeframe would have constituted a waiver of objection to
the agency's determination. After the close of the response period, the
agency would have decided, based on a review of the banking entity's
response and other information concerning the banking entity, whether
to maintain the agency's determination and would have notified the
banking entity of its decision in writing. These notice and response
procedures were similar, but not identical to, notice and response
procedures found elsewhere in the proposed rule.\656\
---------------------------------------------------------------------------

    \655\ See proposed rule Sec.  __.20(g)(2)(ii).
    \656\ See proposed rule Sec. Sec.  __.3(c), __.3(g)(2),
__.4(a)(8)(iv), __.4(b)(6)(iv).
---------------------------------------------------------------------------

    One commenter suggested that there should be a consistent notice
and response process regarding all presumptions in the final rule.\657\
The agencies agree and have modified the notice and response procedures
in subpart D to apply more broadly to several types of determinations
under the final rule, including determinations and rebuttals made under
Sec. Sec.  __.3, __.4, and __.20.\658\ This change will provide
consistency and enhance transparency with respect to the processes that
an agency will follow for certain determinations throughout the final
rule.
---------------------------------------------------------------------------

    \657\ See IIB.
    \658\ See final rule Sec.  __.20(i).
---------------------------------------------------------------------------

E. Subpart E--Metrics: Appendix to Part []--Reporting and
Recordkeeping Requirements

    Under the 2013 rule, a banking entity with substantial trading
activity \659\ must furnish the following quantitative measurements for
each of its trading desks engaged in covered trading activity,
calculated in accordance with Appendix A:
---------------------------------------------------------------------------

    \659\ Appendix A of the 2013 rule applies to U.S. banking
entities with trading assets and liabilities the average gross sum
of which equals or exceeds $10 billion on a worldwide consolidated
basis over the previous four calendar quarters (excluding trading
assets and liabilities involving obligations of or guaranteed by the
United States or any agency of the United States), and to foreign
banking entities with combined U.S. trading assets and liabilities
the average gross sum of which equals or exceeds $10 billion over
the previous four calendar quarters (excluding trading assets and
liabilities involving obligations of or guaranteed by the United
States or any agency of the United States). 2013 rule Sec.
__.20(d)(1).
---------------------------------------------------------------------------

     Risk and position limits and usage;
     Risk factor sensitivities;
     Value-at-risk and stressed VaR;
     Comprehensive profit and loss attribution;
     Inventory turnover;
     Inventory aging; and
     Customer-facing trade ratio.
    The proposal explained that, based on the agencies' evaluation of
the effectiveness of the metrics data in monitoring covered trading
activities for compliance with section 13 of the BHC Act and the
associated reporting costs,\660\ the proposed rule would have amended
Appendix A requirements to reduce compliance-related inefficiencies
while allowing for the collection of data to permit the agencies to
better monitor compliance with section 13 of the BHC Act.\661\
Specifically, the proposed rule would have made the following
modifications to the reporting requirements in Appendix A:
---------------------------------------------------------------------------

    \660\ See 79 FR at 5772.
    \661\ As previously noted in the section entitled ``Enhanced
Minimum Standards for Compliance Programs,'' the Agencies are
proposing to eliminate Appendix B of the 2013 rule. Current Appendix
A is therefore re-designated as the ``Appendix'' in the final rule.
---------------------------------------------------------------------------

     Limit the applicability of certain metrics only to market
making and underwriting desks.
     Replace the Customer-Facing Trade Ratio with a new
Transaction Volumes metric to more precisely cover types of trading
desk transactions with counterparties.
     Replace Inventory Turnover with a new Positions metric,
which measures the value of all securities and derivatives positions.
     Remove the requirement to separately report values that
can be easily calculated from other reported quantitative measurements.
     Streamline and make consistent value calculations for
different product types, using both notional value and market value to
facilitate better comparison of metrics across trading desks and
banking entities.
     Eliminate inventory aging data for derivatives because
aging, as applied to derivatives, does not appear to provide a
meaningful indicator of potential impermissible trading activity or
excessive risk-taking.
     Require banking entities to provide qualitative
information specifying for each trading desk the types of financial
instruments traded, the types of covered trading activity the desk
conducts, and the legal entities into which the trading desk books
trades.
     Require a Narrative Statement describing changes in
calculation methods, trading desk structure, or trading desk
strategies.
     Remove the paragraphs labeled ``General Calculation
Guidance'' from the regulation. The Instructions generally would
provide calculation guidance.\662\
---------------------------------------------------------------------------

    \662\ The Instructions will be available on each agency's
respective website at the addresses specified in the Paperwork
Reduction Act section of this Supplementary Information. For the SEC
and CFTC, this document represents the views of SEC staff and CFTC
staff; neither Commission has approved nor disapproved them. The
Instructions are not a rule, regulation, or statement of the SEC or
the CFTC; and like all SEC or CFTC staff guidance, it has no legal
force or effect, does not alter or amend applicable law, and creates
no new or additional SEC or CFTC obligations for any person.
Consistent with changes elsewhere in the final rule and with the
Federal banking agencies' Interagency Statement Clarifying the Role
of Supervisory Guidance (Sept. 11, 2018; https://www.federalreserve.gov/supervisionreg/srletters/sr1805.htm, https://www.occ.gov/news-issuances/news-releases/2018/nr-ia-2018-97a.pdf,
https://www.fdic.gov/news/news/financial/2018/fil18049.html), the
agencies are removing references to guidance and expectations from
the regulatory text of the metrics reporting requirements.
---------------------------------------------------------------------------

     Remove the requirement that banking entities establish and
report limits on Stressed Value-at-Risk at the trading desk-level
because trading desks do not typically use such limits to manage and
control risk-taking.
     Require banking entities to provide descriptive
information about their reported metrics, including information
uniquely identifying and describing

certain risk measurements and information identifying the relationships
of these measurements within a trading desk and across trading desks.
     Require electronic submission of the Trading Desk
Information, Quantitative Measurements Identifying Information, and
each applicable quantitative measurement in accordance with the XML
Schema specified and published on each agency's website.\663\
---------------------------------------------------------------------------

    \663\ The staff-level Technical Specifications Guidance
describes the XML Schema. The Technical Specifications Guidance and
the XML Schema are available on each agency's respective website at
the addresses specified in the Paperwork Reduction Act section of
this Supplementary Information.
---------------------------------------------------------------------------

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

    \664\ See, e.g., AFR; Better Markets; Occupy the SEC; Public
Citizen; and Volcker Alliance.
    \665\ See, e.g., ABA; FSF; IIB; New England Council; and SIFMA.
    \666\ The agencies anticipate the market risk capital
calculations and the Volcker Rule quantitative measurements will
align particularly closely when the banking agencies adopt a rule
implementing the Basel Committee's market risk capital standard in
the United States. However, the agencies note that certain
anticipated changes resulting from the Basel market risk capital
standards may still result in a mismatch between metrics required
under the market risk capital rule and the final rule. The agencies
are aware of this potential issue and intend to address any such
discrepancies at a future date.
---------------------------------------------------------------------------

1. Purpose
    Paragraph I.c of Appendix A of the 2013 rule provides that the
quantitative measurements that are required to be reported under the
rule are not intended to serve as a dispositive tool for identifying
permissible or impermissible activities. The proposal would have
expanded the qualifying language in paragraph I.c of Appendix A to
apply to all of the information required to be reported pursuant to the
appendix, rather than only to the quantitative measurements themselves.
In addition, the proposed rule would have also removed paragraph I.d.
in Appendix A of the 2013 rule, which provides that the agencies would
review the metrics data and revise the metrics collection requirements
based on that review.
    The agencies received no comments on these proposed changes. The
final rule adopts the changes, as proposed. The agencies believe that
the trading desk information and quantitative measurements identifying
information, coupled with the quantitative measurements, should assist
the agencies in monitoring compliance. This information will be used to
monitor patterns and identify activity that may warrant further review.
Additionally, the final rule removes paragraph I.d. Appendix A of the
2013 rule, as the agencies have conducted this preliminary evaluation
of the effectiveness of the quantitative measurements collected to date
and have adopted modifications based on that review.
2. Definitions
    The proposed rule would have clarified the definition of ``covered
trading activity'' by adding the phrase ``in its covered trading
activity'' to clarify that the term ``covered trading activity,'' as
used in the proposed appendix, may include trading conducted under
Sec.  __.3(d), __.6(c), __.6(d), or __.6(e) of the proposal.\667\ In
addition, the proposed rule defined two additional terms for purposes
of the appendix, ``applicability'' and ``trading day,'' that were not
defined in the 2013 rule. The proposal defined ``applicability'' to
clarify when certain metrics are required to be reported for specific
trading desks and thus make several metrics applicable only to desks
engaged in market making or underwriting. Finally, the proposal defined
``trading day,'' a term used throughout Appendix A of the 2013
rule,\668\ to mean a calendar day on which a trading desk is open for
trading.
---------------------------------------------------------------------------

    \667\ The proposed change would clarify that banking entities
would have the discretion (but not the obligation) to report metrics
with respect to a broader range of activities.
    \668\ Appendix A of the 2013 rule provides that the calculation
period for each quantitative measurement is one trading day, but
does not define ``trading day''.
---------------------------------------------------------------------------

    Commenters supported the proposal to define ``applicability'' in
order to clarify that certain metrics are only applicable to desks
engaged in market making or underwriting.\669\ One commenter suggested
defining the scope of ``covered trading activity'' to align with
activity covered under the Basel Committee's revised standard for
market risk capital.\670\ While the agencies received no comments on
the proposed definition of ``trading day'' in the regulation, several
comments expressed serious concerns with the proposed ``trading day''
definition in the 2018 Instructions,\671\ specifically requiring
banking entities to report metrics for trading days when U.S. markets
are closed but non-U.S. locations may be open.\672\ These commenters
argued that this would impose significant operational costs with no
commensurate benefit to the agencies' oversight ability. However, the
Agencies feel the definition of trading day is appropriate because the
potential for impermissible

trading activity on a desk exists on any day when the desk is open for
trading, regardless of which markets are open. The final rule retains
the definition.
---------------------------------------------------------------------------

    \669\ See, e.g., Credit Suisse; FSF; and JBA.
    \670\ See JBA.
    \671\ The definition in the Instructions require banking
entities to calculate each metric for each calendar day on which a
trading desk is open for trading, even if the desk is closed for
trading in one jurisdiction (for example, due to a national
holiday).
    \672\ See, e.g., ABA; CCMR; FSF; and SIFMA.
---------------------------------------------------------------------------

    The agencies believe that the scope of ``covered trading activity''
in the final rule is appropriate, and note that, due to changes in the
definition of trading account, the scope of ``covered trading
activity'' will align more closely with the scope of activities covered
under the Basel Committee's market risk capital standards for certain
banking entities. Therefore, the final rule adopts these definitions as
proposed.
3. Reporting and Recordkeeping
    Paragraph III.a of Appendix A of the 2013 rule required banking
entities subject to the appendix to furnish seven quantitative metrics
for all trading desks engaged in trading activity conducted pursuant to
Sec.  __.4, Sec.  __.5, or Sec.  __.6(a) (i.e., permitted underwriting,
market making, and risk-mitigating hedging activity and trading in
certain government obligations).\673\
---------------------------------------------------------------------------

    \673\ In addition, the 2013 rule permits banking entities to
optionally include trading under Sec.  __.3(d), Sec.  __.6(c), Sec.
__.6(d), or Sec.  __.6(e).
---------------------------------------------------------------------------

    The proposal would have made several modifications to streamline
the reporting requirements in paragraph III.a of Appendix A of the 2013
rule. Specifically, the proposal would have: (1) Replaced the Inventory
Turnover and Customer-Facing Trade Ratio metrics with the Positions and
Transaction Volumes quantitative measurements, respectively; (2)
limited the Inventory Aging metric to only apply to securities \674\
and changed the name of the quantitative measurement to the Securities
Inventory Aging; (3) added the phrase ``as applicable'' to paragraph
III.a in order to limit application of the Positions, Transaction
Volumes, and Securities Inventory Aging quantitative measurements to
only trading desks that rely on Sec.  __.4(a) or Sec.  __.4(b) to
conduct underwriting activity or market making-related activity,
respectively; and (4) inserted references in paragraph III.a to the new
qualitative information requirements added to the appendix (i.e.,
Trading Desk Information, Quantitative Measurements Identifying
Information, and Narrative Statement requirements).\675\
---------------------------------------------------------------------------

    \674\ Including derivatives or securities that also meet the
2013 rule's definition of a derivative See infra Part III.E.2.i.v
(discussing the Securities Inventory Aging quantitative
measurement). The definition of ``security'' and ``derivative'' are
set forth in Sec.  __.2 of the 2013 rule. See 2013 rule Sec. Sec.
__.2 (h), (y).
    \675\ In addition, the proposed rule would have added to
paragraph III.a. a requirement that banking entities include file
identifying information in each submission to the relevant agency
pursuant to Appendix A of the 2013 rule. Specifically, the proposal
would have required the file identifying information to include the
name of the banking entity, the RSSD ID assigned to the top-tier
banking entity by the Board, the reporting period, and the creation
date and time.
---------------------------------------------------------------------------

    A number of commenters supported the proposed changes to remove or
tailor certain of the metrics provided in Appendix A of the 2013 rule,
but opposed the addition of new metrics reporting requirements (i.e.,
Trading Day definition, Trading Desk Information, Quantitative
Measurements Identifying Information, Narrative Statement).\676\ These
commenters argued that, contrary to the proposal's objective to
streamline compliance requirements, the new reporting requirements
would significantly increase the overall compliance burden and impose
substantial compliance costs on firms.\677\ Three commenters argued
that the agencies did not provide reasoned cost benefit analysis to
justify the inclusion of the new metrics.\678\ A few commenters
recommended that the agencies should further streamline the current
metrics to permit individual supervisors and banking entities to
collaborate on determining which metrics are appropriate for that
specific institution.\679\ One commenter expressed concern that the
agencies intended for the newly added metrics to replace onsite
supervision and review, as the new qualitative information requirements
often duplicate the existing compliance program requirements.\680\
---------------------------------------------------------------------------

    \676\ See, e.g., ABA; CCMR; Credit Suisse; FSF; and Goldman
Sachs.
    \677\ See, e.g., ABA; Credit Suisse; CCMR; and FSF.
    \678\ See, e.g., CCMR; Public Citizen; and SIFMA.
    \679\ See, e.g., Goldman Sachs; JBA; and States Street (on
leveraging current industry practices for FX).
    \680\ See SIFMA.
---------------------------------------------------------------------------

    Other commenters opposed all of the proposed revisions to the
metrics, with certain limited exceptions (e.g., limiting Inventory
Aging to securities).\681\ Some of these commenters argued that the
agencies should adopt an approach focused on further streamlining the
metrics requirements included in Appendix A of the 2013 rule.\682\ A
few of these commenters argued that the proposed changes to the
existing metrics would in effect create entirely new metrics and that
the new metrics would not provide new information that cannot be
obtained through the existing metrics.\683\ Other commenters supported
only retaining the Comprehensive Profit and Loss Attribution and Risk
Management metrics.\684\ Another commenter supported retaining the
current requirements, as any revisions would necessitate changes to
firms' current systems and thus impose considerable operational burdens
and costs.\685\ One commenter stressed the inability of the general
public to provide informed comment on the proposed changes as the
agencies have not publically disclosed any data related to firms'
metrics submissions.\686\ Another commenter noted that disclosing
firms' metrics submissions on an aggregated and/or time-delayed basis
would enable the general public to understand the impact of the Volcker
Rule.\687\ In contrast, other commenters urged the agencies not to
publicly disclose the metrics data because the data is confidential
supervisory information that could be used by competitors and could
create distortions in the capital markets.\688\ Another commenter
recommended replacing the metrics with a utility platform that would
automate and perform trade surveillance in real time.\689\
---------------------------------------------------------------------------

    \681\ See, e.g., Data Boiler; IIB; JBA; SIFMA; and State Street.
    \682\ See, e.g., IIB; New England Council; SIFMA; and State
Street.
    \683\ See, e.g., IIB and SIFMA.
    \684\ See, e.g., New England Council and State Street.
    \685\ See JBA.
    \686\ See Public Citizen.
    \687\ See AFR.
    \688\ See, e.g., SIFMA and IIB.
    \689\ See Data Boiler.
---------------------------------------------------------------------------

    As described in detail below, the final rule focuses on
streamlining the 2013 rule's reporting requirements and only adopts a
limited set of the new qualitative requirements introduced in the
proposal. The agencies believe the remaining metrics are generally
useful tools to help both firms and supervisors identify activities
that potentially involve impermissible proprietary trading. Moreover,
the agencies believe that these items do not pose a special calculation
burden because firms already record these values in the regular course
of business.
    Finally, although the agencies are not including any changes
related to public disclosure of the quantitative measurements in this
final rule, the agencies will continue to consider whether some or all
of the quantitative measurements should be publicly disclosed, taking
into account the need to protect sensitive, confidential information,
as well as restrictions on the agencies relating to the disclosure of
sensitive, confidential business and supervisory information on a firm-
specific basis.
4. Trading Desk Information
    The proposed rule added a new paragraph III.b to Appendix A to
require

banking entities to report certain descriptive information for each
trading desk engaged in covered trading activity, including the trading
desk name and identifier, the type of covered activity conducted by the
desk, a brief description of the trading desk's general strategy (i.e.,
the method for conducting authorized trading activities), the types of
financial instruments purchased and sold by the trading desk, and the
list of legal entities used to book trades including which were the
main booking entities. The proposal also would have required firms to
indicate for each trading desk whether each calendar date is a trading
day or not a trading day and to specify the currency used by a trading
desk as well as the conversion rate to U.S. dollars, if applicable.
    In general, most commenters opposed requiring banking entities to
report any new information outside the scope of the 2013 rule
requirements, including qualitative information for each trading
desk.\690\ These commenters argued that the de minimis benefit to the
agencies' oversight ability did not justify the significant operational
costs associated with the new requirements, in particular identifying
the legal entities used as booking entities by the trading desk as well
as the financial instruments and other products traded by the
desk.\691\
---------------------------------------------------------------------------

    \690\ See, e.g., ABA; Credit Suisse; CCMR; FSF; IIB; JBA; and
SIFMA.
    \691\ See, e.g., ABA; CCMR; and SIFMA.
---------------------------------------------------------------------------

    After considering these comments, the final rule retains a modified
version of the Trading Desk Information. The final rule eliminates the
requirement for each trading desk to identify the financial instruments
and other products traded by the desk. The final rule also replaces the
requirement to identify the legal entities that serve as booking
entities for each trading desk with the simpler requirement that the
banking entity's submission for each trading desk list: (1) Each agency
receiving the submission for the desk; and (2) the exemptions or
exclusions under which the desk conducts trading activity. The
exemption/exclusion identification is particularly necessary in light
of the fact that some of the quantitative measurements identified below
(i.e., the customer-facing activity measurements) are only required for
desks operating under the underwriting or market making exemptions. The
list of the agencies that have received the submission for a desk
should facilitate inter-agency coordination, as generally trading desks
encompass multiple legal entities, for which more than one agency may
be the primary federal regulator. The agencies believe that this
approach appropriately balances the benefit to the agencies and the
cost to firms from the new reporting obligations.
5. Quantitative Measurements Identifying Information
    The proposed rule added a new paragraph III.c. to Appendix A to
require banking entities to prepare and provide five schedules: (i)
Risk and Position Limits Information Schedule; (ii) Risk Factor
Sensitivities Information Schedule; (iii) Risk Factor Attribution
Information Schedule; (iv) Limit/Sensitivity Cross-Reference Schedule;
and (v) Risk factor Sensitivity/Attribution Schedule. The proposed
schedules would have provided descriptive information on the
quantitative measurements on a collective basis for all relevant
trading desks. The new proposed Schedules would have required banking
entities to provide detailed information regarding each limit and risk
factor sensitivity reported in quantitative measurements as well as on
the attribution of existing position profit and loss to the risk factor
reported in the quantitative measurements. In addition, the new Limit/
Sensitivity Cross-Reference Schedule would have required banking
entities to cross-reference, by unique identification label, a limit
reported in the Risk and Position Limits Information Schedule to any
associated risk factor sensitivity reported in the Risk Factor
Sensitivities Information Schedule.
    Many commenters generally opposed requiring banking entities to
report any new information outside the scope of the 2013 rule
requirements, including quantitative measurements identifying
information.\692\ One commenter argued that these new requirements
impose undue costs on firms without providing any new supervisory
benefit as they duplicate existing requirements in Sec.  __.20, which
information the agencies can obtain through the normal supervisory and
examination process.\693\ This commenter further noted that increasing
the scope of the appendix submission may harm the agencies' ability to
effectively supervise Volcker compliance, by increasing the supervisory
resources necessary to review the data at the detriment of performing
normal supervision.
---------------------------------------------------------------------------

    \692\ See, e.g., ABA; CCMR; Credit Suisse; Data Boiler; JBA; and
SIFMA.
    \693\ See SIFMA.
---------------------------------------------------------------------------

    After considering these comments, the final rule retains a modified
version of the Quantitative Measurements Identifying Information that
eliminates the Risk Factor Sensitivities Information Schedule, the
Limit/Sensitivity Cross-Reference Schedule and the Risk-Factor
Sensitivity/Attribution Cross-Reference Schedule. Despite the potential
benefit to the agencies from having a deeper understanding of the
relationship between firms' limits and the risk factor sensitivities,
the agencies agree that the proposed requirements could significantly
increase firms' reporting burden in a way not commensurate with the
potential benefits. The final rule retains the Risk Factor Attribution
Information Schedule and a modified version of the Risk and Position
Limits Information Schedule that includes identification of the
corresponding risk factor attribution for certain limits (``Internal
Limits Information Schedule''). While together these schedules add two
new reporting elements relative to the 2013 Appendix A (i.e., a
description of the limit/risk factor sensitivities and risk factor
attribution for certain limits), the agencies generally expect firms to
realize a net reduction in reporting burden from the elimination of the
duplicative reporting requirements in the current framework. The 2013
rule requires firms report internal limits, including but not limited
to risk and position limits, and risk factor sensitivities established
for each trading desk on a daily basis. As in practice, firms often use
the same limits and risk factors for multiple desks, the 2013 rule
results in firms reporting the same limit on a daily basis for multiple
desks. These two new schedules reduce reporting burden by allowing
firms to submit a comprehensive list of all the internal limits and the
risk factor sensitivities that account for a preponderance of the
profit or loss for the trading desks. Additionally, the final rule
eliminates the requirement to report Risk Factor Sensitivities for each
trading desk on a daily basis. Based on the submissions received to
date, the agencies expect this change alone will reduce the total
volume of data submitted by more than half relative to the 2013 rule.
6. Narrative Statement
    The proposed rule would have added a new paragraph III.d. to
require banking entities to submit a Narrative Statement in a separate
electronic document to the relevant agency that describes any changes
in calculation methods used for its quantitative measurements, or the
trading desk structure (e.g., adding, terminating, or merging pre-
existing desks) or strategies. In addition, in its Narrative Statement,
a banking entity, if applicable, would

have to explain its inability to report a particular quantitative
measurement and to provide notice if a trading desk changes its
approach to including or excluding products that are not financial
instruments in its metrics. The proposed rule would have required that
banking entities that do not have any information to report in a
Narrative Statement to submit an electronic document stating that the
firm does not have any information to report in a Narrative Statement.
    Most commenters generally opposed requiring banking entities to
report any new information outside the scope of the 2013 rule
requirements, including the Narrative Statement.\694\ While recognizing
that currently banking entities voluntarily provide additional
information about their metrics submissions, one commenter argued that
requiring the Narrative Statement would impose undue costs on banking
entities, as the agencies can already obtain this information through
the normal supervisory process.\695\
---------------------------------------------------------------------------

    \694\ See, e.g., ABA; CCMR; Credit Suisse; Data Boiler; JBA; and
SIFMA.
    \695\ See SIFMA.
---------------------------------------------------------------------------

    After considering all comments received, the agencies are not
adopting the narrative statement requirement in the final rule. Rather,
the final rule retains the provision from the 2013 rule's reporting
instructions that permits, but does not require, firms to provide a
narrative statement describing any additional information they believe
would be helpful to the agencies in identifying material events or
changes. Narrative statements may permit the agencies to understand
aspects of the metrics without going back to the banking entities to
ask questions. While the agencies anticipate that many banking entities
will continue to voluntarily provide clarifying information, the
agencies agree that the compliance costs associated with requiring a
separate document are not commensurate with the potential benefit to
the agencies of receiving information in this format from banking
entities that do not wish to provide it.
7. Frequency and Method of Required Calculation and Reporting
    The 2013 rule established a reporting schedule in Sec.  __.20 that
required banking entities with $50 billion or more in trading assets
and liabilities to report the information required by Appendix A of the
2013 rule within 10 days of the end of each calendar month. The
proposed rule would have extended this reporting schedule for firms
with significant trading activities, as defined in the final rule, to
be within 20 days of the end of each calendar month.\696\
---------------------------------------------------------------------------

    \696\ See Sec.  __.20(d) of the proposal.
---------------------------------------------------------------------------

    In general, commenters supported extending the reporting schedule
to be within 20 days of the end of each calendar month.\697\ Two
commenters suggested further extending this to 30 days.\698\ Of these,
one commenter recommended reducing the frequency from monthly to
quarterly in order to better align the metrics reporting with other
regulatory reporting regimes.\699\
---------------------------------------------------------------------------

    \697\ See, e.g., FSF and Goldman Sachs.
    \698\ See, e.g., Credit Suisse and SIFMA.
    \699\ See SIFMA.
---------------------------------------------------------------------------

    Under the final rule, metrics filers must submit metrics on a
quarterly basis. In addition, the final rule retains the reporting
schedule of 30 days after the end of each quarter, consistent with the
reporting schedule for quarterly filers under the 2013 rule.
Supervisory experience has indicated that this will reduce the
incidence of errors and improve the quality of the data in the metrics
submissions.
    Appendix A of the 2013 rule did not specify a format in which
metrics should be reported. To clarify the formatting requirements for
the data submissions and to help ensure the quality and consistency of
data submissions across banking entities, the proposed rule would have
required banking entities to report all the information contained
within the proposed appendix in accordance with an XML Schema to be
specified and published on the relevant agency's website.\700\
---------------------------------------------------------------------------

    \700\ To the extent the XML Schema is updated, the version of
the XML Schema that must be used by banking entities would be
specified on the relevant agency's website. A banking entity must
not use an outdated version of the XML Schema to report the Trading
Desk Information, Quantitative Measurements Identifying Information,
and applicable quantitative measurements to the relevant agency.
---------------------------------------------------------------------------

    Two commenters opposed transitioning to XML format for reporting
due to the costs of changing reporting software to switch formats.\701\
One commenter fully supported the use of XML as a standardized
format.\702\ Another commenter supported XML and estimated the cost of
switching formats to be low compared to other costs involved in
reporting.\703\ Finally, one commenter asserted that reporting in XML
could be useful in certain cases but that it was not clear that
requiring metrics reporting in XML would be useful. The commenter
recommended deferring the decision to adopt the XML until after a final
rule is adopted. The commenter stated that the decision of whether to
adopt the XML Schema requirement should be subject to separate notice
and comment.\704\
---------------------------------------------------------------------------

    \701\ See, e.g., Credit Suisse and JBA.
    \702\ See Goldman Sachs.
    \703\ See Data Boiler.
    \704\ See SIFMA.
---------------------------------------------------------------------------

    The final rule adopts the use of XML for reporting metrics,
following the format specified in XML Schema to be posted on the
relevant agency's website. The agencies acknowledge that any changes to
the metrics will impose some switching costs on banking entities. As a
very common standard for data transmission, XML is expected to be a
less costly format to employ than a bespoke format. Moreover, the XML
Schema allows for clearer specification, which should reduce
miscommunication, errors, inconsistencies, and the need for data
resubmissions. The agencies believe the benefits of standardization
outweigh the one-time switching costs.
8. Recordkeeping
    Under paragraph III.c. of Appendix A of the 2013 rule, a banking
entity's reported quantitative measurements are subject to the record
retention requirements provided in Appendix A. Under the proposed rule,
this provision would have been moved to paragraph III.f. and expanded
to include the new qualitative information requirements added to the
appendix (i.e., Trading Desk Information, Quantitative Measurements
Identifying Information, and Narrative Statement requirements). The
agencies received no comments on these proposed changes. The final
rule's recordkeeping requirement is being adopted largely as
proposed.\705\
---------------------------------------------------------------------------

    \705\ The recordkeeping requirement in the final rule does not
require that banking entities retain a copy of the Narrative
Statement.
---------------------------------------------------------------------------

9. Quantitative Measurements
    Section IV of Appendix A of the 2013 rule sets forth the individual
quantitative measurements required by the appendix. The proposed rule
would have added an ``Applicability'' paragraph to each quantitative
measurement to identify the trading desks for which a banking entity
would be required to calculate and report a particular metric based on
the type of covered trading activity conducted by the desk. The
proposed rule also would have removed the ``General Calculation
Guidance'' paragraphs in section IV of Appendix A of the 2013 rule for
each quantitative measurement, and provided such guidance in the
Instructions.
    As noted above, commenters generally supported the proposal to
define ``applicability'' in order to clarify that certain metrics are
only applicable

to desks engaged in market making or underwriting.\706\ The agencies'
received no comments on providing the metrics calculation guidance in
an Instructions document and removing this guidance from the appendix.
The metrics are not intended to serve as a dispositive tool for
identifying permissible or impermissible activities. Thus, the agencies
believe that providing the metrics calculation guidance in the
Instructions and not within the regulation is more appropriate.\707\
Therefore, the agencies are adopting these changes as proposed.
---------------------------------------------------------------------------

    \706\ See, e.g., Credit Suisse; FSF; and JBA.
    \707\ See supra note 662.
---------------------------------------------------------------------------

a. Risk-Management Measurements
i. Internal Limits and Usage
    Like the 2013 rule, the proposed rule would have applied the Risk
and Position Limits and Usage metric to all trading desks engaged in
covered trading activities. Additionally, the proposed rule would have
removed references to Stressed Value-at-Risk (Stressed VaR) in the Risk
and Position Limits and Usage metric and required banking entities to
report the unique identification label for each limit as listed in the
Risk and Position Limits Information Schedule, the limit size
(distinguishing between the upper bound and lower bound of the limit,
where applicable), and the value of usage of the limit.\708\
---------------------------------------------------------------------------

    \708\ If a limit is introduced or discontinued during a calendar
month, the banking entity must report this information for each
trading day that the trading desk used the limit during the calendar
month.
---------------------------------------------------------------------------

    In general, most commenters supported eliminating requirements to
establish limits on Stressed VaR.\709\ One commenter did not support
this change, as any revisions would necessitate changes to firms'
current systems and thus impose considerable operational burdens and
costs.\710\ Another commenter supported further requiring full
reporting of upper and lower bounds of risk and position limits
usage.\711\
---------------------------------------------------------------------------

    \709\ See, e.g., FSF and Data Boiler.
    \710\ See JBA.
    \711\ See Data Boiler.
---------------------------------------------------------------------------

    The final rule largely adopts these changes as proposed. As noted
above, the agencies believe requiring firms to submit one consolidated
Internal Limits Information Schedule for the entire banking entity's
covered trading activity, rather than multiple times in the Risk and
Position Limits and Usage metric for different trading desks, will
alleviate inefficiencies associated with reporting redundant
information and reduce electronic file submission sizes. The unique
identification label should allow the agencies to efficiently obtain
the descriptive information regarding the limit that is separately
reported in the Internal Limits Information Schedule.\712\ Recognizing
that firms may establish internal limits other than risk and position
limits (e.g., inventory aging limits), the final rule adopts an
Internal Limits Information Schedule and daily Internal Limits and
Usage quantitative metric.
---------------------------------------------------------------------------

    \712\ Such information includes the name of the limit, a
description of the limit, the unit of measurement for the limit, the
type of limit, and identification of the corresponding risk factor
attribution in the particular case that the limit type is a limit on
a risk factor sensitivity and profit and loss attribution to the
same risk factor is reported.
---------------------------------------------------------------------------

    As discussed in more detail below, the final rule removes the
metrics for Risk Factor Sensitivities. Accordingly, the final rule also
removes the cross reference between Risk and Position Limits and Risk
Factor Sensitivities, and the cross-reference between Risk Factor
Sensitivities and Profit and Loss Risk Factor Attributions. These
cross-references would have provided an essential link between the
limits on exposures to risk factors and the factors that are
demonstrably important sources of revenue. In place of these two cross-
references, the final rule adopts an identifier within the Internal
Limits Information Schedule indicating the corresponding Risk Factor
Attribution when a desk measures and imposes a limit on exposure to
that risk factor. This identifier facilitates the agencies' review of
the Internal Limits metric and its relation to gains and losses on the
positions measured by that metric.
ii. Risk Factor Sensitivities
    Like the 2013 rule, the proposed rule would have applied the Risk
Factor Sensitivities metric to all trading desks engaged in covered
trading activities. Under the proposal, a banking entity would have to
report for each trading desk the unique identification label associated
with each risk factor sensitivity of the desk, the magnitude of the
change in the risk factor, and the aggregate change in value across all
positions of the desk given the change in risk factor.
    As discussed above in Quantitative Measurements Identifying
Information, to reduce firms' reporting burden the final rule
eliminates the Risk Factor Sensitivities quantitative measurement.
iii. Value-at-Risk and Stressed Value-at-Risk
    The 2013 rule applies the Value-at-Risk and Stressed Value-at-Risk
metric to all trading desks engaged in covered trading activities. The
proposed rule would have modified the description of Stressed VaR to
align its calculation with that of Value-at-Risk and clarified that
Stressed VaR is not required to be reported for trading desks whose
covered trading activity is conducted exclusively to hedge products
excluded from the definition of financial instrument in Sec.
__.3(d)(2) of the proposal. The proposal would have also revised the
definition of Value-at-Risk to provide that Value-at-Risk is the
measurement of the risk of future financial loss in the value of a
trading desk's aggregated positions at the ninety-nine percent
confidence level over a one-day period, based on current market
conditions.\713\
---------------------------------------------------------------------------

    \713\ Banking entities may base their calculations of Value-at-
Risk on historical observations consistent with other applicable
regulatory requirements relating to the calculation of Value-at-
Risk. See, e.g., 12 CFR part 3 subpart F; 12 CFR part 217 subpart F;
12 CFR part 324 subpart F.
---------------------------------------------------------------------------

    In general, a few commenters supported eliminating Stressed VaR,
including for non-financial instrument hedging.\714\ One commenter did
not support this change, as any revisions would necessitate changes to
firms' current systems and thus impose considerable operational burdens
and costs.\715\ One commenter stated that Stressed VaR was not a
helpful metric because it bears an attenuated relationship to
proprietary trading.\716\
---------------------------------------------------------------------------

    \714\ See, e.g., FSF and Data Boiler.
    \715\ See JBA.
    \716\ See Goldman Sachs.
---------------------------------------------------------------------------

    After considering the comments received, the agencies believe that
eliminating the Stressed VaR metric altogether will reduce burden
without affecting the ability of the agencies to monitor for prohibited
proprietary trading. The agencies believe that the other metrics
retained or adopted in the final rule provide appropriate data to
monitor for prohibited proprietary trading. To avoid duplicative or
unnecessary metrics, the final rule eliminates the Stressed VaR metric.
b. Source-of-Revenue Measurements
i. Comprehensive Profit and Loss Attribution
    The 2013 rule requires banking entities to calculate and report
volatility of comprehensive profit and loss. The proposed rule would
have eliminated this requirement as the measurement can be calculated
from the profit and loss amounts reported under the Comprehensive
Profit and Loss Attribution metric. Additionally, the proposed rule
would have required banking entities to provide, for one or more
factors that explain the

preponderance of the profit or loss changes due to risk factor changes,
a unique identification label for the factor and the profit or loss due
to the factor change. The proposed rule also would have required
banking entities to report a unique identification label for the factor
so the agencies can efficiently obtain the descriptive information
regarding the factor that is separately reported in the Risk Factor
Attribution Information Schedule.\717\
---------------------------------------------------------------------------

    \717\ Such information includes the name of the risk factor or
other factor, a description of the risk factor or other factor, and
the change unit of the risk factor or other factor.
---------------------------------------------------------------------------

    In general, commenters did not support requiring firms to attribute
profit and loss to specific risk factors.\718\ One commenter expressed
concern that this could disrupt firms' current infrastructure projects
to comply with the Basel Committee's revised market risk capital
standards, which also require specific alignment of risk factor
attribution and risk factor sensitivity hierarchies.\719\ This
commenter also noted the limited utility of this information for
horizontal comparisons across firms as each banking organization
defines these metrics at different levels of granularity. Two
commenters supported eliminating the volatility calculation, as
proposed.\720\
---------------------------------------------------------------------------

    \718\ See SIFMA.
    \719\ See SIFMA.
    \720\ See, e.g., Goldman Sachs and FSF.
---------------------------------------------------------------------------

    After considering these comments, the final rule adopts these
changes as proposed. Under the final rule, banking entities will no
longer be required to report volatility for the Comprehensive Profit
and Loss metric. Banking entities will be required to provide certain
information regarding the factors that explain the preponderance of the
profit or loss changes due to risk factor changes when sub-attributing
comprehensive profit and loss from existing positions to specific and
other factors.
    As in the 2013 rule and the proposal, the final rule requires
trading desks to attribute profit and loss into: (i) Profit and loss
attributable to a trading desk's existing positions, and (ii) profit
and loss attributable to new positions. The final rule retains the
category for residual profit and loss,\721\ but clarifies that this is
a sub-category of profit and loss attributable to existing positions.
---------------------------------------------------------------------------

    \721\ As under the 2013 rule, significant unexplained profit and
loss must be escalated for further investigation and analysis under
the final rule.
---------------------------------------------------------------------------

c. Customer-Facing Activity Metrics
i. Replacement of Inventory Turnover With Positions Metric
    The 2013 rule required banking entities to calculate and report
inventory turnover, or the turnover of a trading desk's inventory, over
a 30-day, 60-day, and 90-day reporting period. The proposed rule would
have replaced the Inventory Turnover metric with the daily data
underlying that metric, rather than proposing specific calculation
periods. The proposal would have replaced Inventory Turnover with the
daily Positions quantitative measurement. As noted in the Supplemental
Information to the proposed rule, positions information that is a
component of the Inventory Turnover metric would be more useful to the
agencies, and is already tracked by banking entities as a component of
the Inventory Turnover metric. The proposal would have limited the
scope of applicability of the Positions metric to trading desks that
rely on Sec.  __.4(a) or Sec.  __.4(b) to conduct underwriting activity
or market making-related activity, respectively. As a result, a trading
desk that did not rely on Sec.  __.4(a) or Sec.  __.4(b) would not have
been subject to the proposed Positions metric.\722\
---------------------------------------------------------------------------

    \722\ For example, a trading desk that relies solely on Sec.
__.5 to conduct risk-mitigating hedging activity would not have been
subject to the Positions metric under the proposed rule.
---------------------------------------------------------------------------

    The proposal would have also required banking entities subject to
the appendix to separately report the market value of all long
securities positions, the market value of all short securities
positions, the market value of all derivatives receivables, the market
value of all derivatives payables, the notional value of all
derivatives receivables, and the notional value of all derivatives
payables.\723\ Finally, the proposal also would have clarified that
positions reported as ``derivatives'' need not be reported as
``securities,'' thereby clarifying the treatment of certain positions
that may have met both definitions. This technical change would have
addressed the possibility that a position could have been reported in
both the ``securities'' and ``derivatives'' positions, and thus been
double-counted.
---------------------------------------------------------------------------

    \723\ Under the proposal, banking entities would have been
required to report the effective notional value of derivatives
receivables and derivatives payables for those derivatives whose
stated notional amount is leveraged.
---------------------------------------------------------------------------

    A few commenters recommended that the agencies eliminate the
Positions metric, but retain the inventory turnover metric.\724\ These
commenters expressed concern that the new ``Positions'' metric would
be, in effect, a ``new'' metric that would require reporting banking
entities to modify their systems to generate as a standalone metric and
noted that this metric could create ``false positives'' due to daily
changes in inventory that may be driven by fluctuations in the
expectation of customer demand. Other commenters recommended that the
agencies eliminate inventory turnover metrics reporting requirements
for derivatives, including foreign exchange derivatives.\725\ One
commenter supported the positions metric, but recommended removing the
requirement to report market values for derivative positions--as
notional value measures are sufficient to assess the size of a trading
desk's derivative inventory.\726\
---------------------------------------------------------------------------

    \724\ See, e.g., GFMA and SIFMA.
    \725\ See, e.g., GFMA; Goldman Sachs; and State Street.
    \726\ See e.g., Credit Suisse.
---------------------------------------------------------------------------

    The final rule adopts the ``Positions'' metric and eliminates the
``Inventory Turnover'' metric consistent with the proposal. The
``Positions'' metric is itself a necessary component firms already must
calculate to generate the ``Inventory Turnover'' metric. Therefore,
producing the ``Positions'' metric as a standalone figure would not
require firms to generate additional data not produced internally
today, but will result in a more effective metrics reporting framework.
The agencies are aware that all changes to the metrics reporting
requirements require changes to the underlying systems required to
generate and report metrics to the agencies. However, the Positions
metric will allow both the agencies and the firms themselves to analyze
firms' trading activities over different time horizons, as appropriate;
the Inventory Turnover metric, by contrast, relied on the same
underlying positions data as the final rule requires to be reported,
but aggregated it in a manner (with 30-day, 60-day, and 90-day rolling
averages) that is more complicated than a direct reporting of positions
metrics, and is less effective. The final rule differs from the
proposal in that it eliminates the requirement to report the notional
value of derivatives. Removing the requirement to report notional value
of derivative positions will avoid potential complexity arising from
using different calculation methods for determining the notional value
for different types of derivatives. Additionally, as the definition of
financial instrument in section __.3 lists securities, derivatives and
futures as distinct types of financial instruments, the agencies are
clarifying that futures positions

should be reported as ``derivatives,'' and are not expected to be
broken out separately. The agencies are making this technical change to
avoid confusion as to whether or how to classify futures for this
metric.\727\
---------------------------------------------------------------------------

    \727\ See final rule Sec.  __.3(c)(1) (defining ``financial
instrument'' to mean (i) a security, including an option on a
security; (ii) a derivative, including an option on a derivative; or
(iii) a contract of sale of a commodity for future delivery, or
option on a contract of sale of a commodity for future delivery).
---------------------------------------------------------------------------

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

extra record-keeping costs. The final rule consolidates these two
proposed categories into one category, transactions with trading desks
and other organizational units where the transaction is booked into
either the same banking entity or an affiliated banking entity.
d. Securities Inventory Aging
    The 2013 rule requires all trading desks engaged in covered trading
activities to report Inventory Aging metrics for their securities and
derivative positions. The proposed rule would have only required
trading desks that relied on Sec.  __.4(a) or Sec.  __.4(b) to conduct
underwriting or market making-related activity to report Inventory
Aging and limited the scope of this metric to only securities
positions.\736\ To reflect the revised scope, the proposed rule would
have revised the name of this metric to be Securities Inventory Aging.
Finally, the proposal would have required a banking entity to calculate
and report the Securities Inventory Aging metric according to a
specific set of age ranges. Specifically, banking entities would have
to calculate and report the market value of security assets and
security liabilities over the following holding periods: 0-30 calendar
days; 31-60 calendar days; 61-90 calendar days; 91-180 calendar days;
181-360 calendar days; and greater than 360 calendar days.
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    \736\ The proposed Securities Inventory Aging metric would not
require banking entities to prepare an aging schedule for
derivatives or include in its securities aging schedules those
``securities'' that are also ``derivatives,'' as those terms are
defined under the 2013 rule. See 2013 rule Sec. Sec.  __.2(h), (y).
See also supra Part III.E.2.i (discussing the classification of
securities and derivatives for purposes of the proposed Positions
quantitative measurement).
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    In general, commenters supported reducing the Inventory Aging
metric, as inventory aging data is not readily available or
particularly useful for derivative positions.\737\ After consideration
of comments and in light of the general desire to reduce reporting
burden, the agencies believe that the Inventory Aging metric may be
overly prescriptive as an indicator of compliance with the rule.
Therefore, the final rule no longer requires the Inventory Aging metric
for all desks and position types. For those desks where banking
entities identify inventory aging as a meaningful control, the entities
should report their internal limits on inventory aging under the
Internal Limits and Usage metric and consequently ``Inventory Aging''
has been added as a potential type of limit under the Internal Limits
Information Schedule.
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    \737\ See, e.g., Data Boiler; Credit Suisse; FSF; Goldman Sachs,
GFMA; and State Street.
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V. Administrative Law Matters

A. Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \738\ requires the OCC,
Board, and FDIC (Federal banking agencies) to use plain language in all
proposed and final rules published after January 1, 2000. The Federal
banking agencies have sought to present the proposed rule in a simple
and straightforward manner and did not receive any comments on plain
language.
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    \738\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999).
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B. Paperwork Reduction Act

    Certain provisions of the final rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with
the requirements of the PRA, the agencies may not conduct or sponsor,
and a respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management
and Budget (OMB) control number. The agencies reviewed the final rule
and determined that the final rule revises certain reporting and
recordkeeping requirements that have been previously cleared under
various OMB control numbers. The agencies did not receive any specific
comments on the PRA. The agencies are extending for three years, with
revision, these information collections. The information collection
requirements contained in this final rule have been submitted by the
OCC and FDIC to OMB for review and approval under section 3507(d) of
the PRA (44 U.S.C. 3507(d)) and section 1320.11 of the OMB's
implementing regulations (5 CFR 1320). The Board reviewed the final
rule under the authority delegated to the Board by OMB. The Board will
submit information collection burden estimates to OMB and the
submission will include burden for Federal Reserve-supervised
institutions, as well as burden for OCC-, FDIC-, SEC-, and CFTC-
supervised institutions under a holding company. The OCC and the FDIC
will take burden for banking entities that are not under a holding
company.
Abstract
    Section 13 to the BHC Act generally prohibits any banking entity
from engaging in proprietary trading or from acquiring or retaining an
ownership interest in, sponsoring, or having certain relationships with
a covered fund, subject to certain exemptions. The exemptions allow
certain types of permissible trading activities such as underwriting,
market making, and risk-mitigating hedging, among others. The 2013 rule
implementing section 13 became effective on April 1, 2014. Section
__.20(d) and Appendix A of the 2013 final rule require certain of the
largest banking entities to report to the appropriate agency certain
quantitative measurements.
Current Actions
    This final rule contains requirements subject to the PRA and the