[Federal Register Volume 79, Number 21 (Friday, January 31, 2014)]
[Rules and Regulations]
[Pages 5535-5806]
[FR Doc No: 2013-31511]

Vol. 79

Friday,

No. 21

January 31, 2014

Part II

Department of the Treasury

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Office of the Comptroller of the Currency

Board of Governors of the Federal Reserve System

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Federal Deposit Insurance Corporation

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Securities and Exchange Commission

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12 CFR Parts 44, 248, and 351

17 CFR Part 255

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

Federal Register / Vol. 79, No. 21 / Friday, January 31, 2014 / Rules
and Regulations

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 44

[Docket No. OCC-2011-0014]
RIN 1557-AD44

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

12 CFR Part 248

[Docket No. R-1432]
RIN 7100 AD82

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 351

RIN 3064-AD85

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 255

[Release No. BHCA-1; File No. S7-41-11]
RIN 3235-AL07

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

AGENCY: Office of the Comptroller of the Currency, Treasury (``OCC'');
Board of Governors of the Federal Reserve System (``Board''); Federal
Deposit Insurance Corporation (``FDIC''); and Securities and Exchange
Commission (``SEC'').

ACTION: Final rule.

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SUMMARY: The OCC, Board, FDIC, and SEC (individually, an ``Agency,''
and collectively, ``the Agencies'') are adopting a rule that would
implement section 13 of the BHC Act, which was added by section 619 of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-
Frank Act''). Section 13 contains certain prohibitions and restrictions
on the ability of a banking entity and nonbank financial company
supervised by the Board to engage in proprietary trading and have
certain interests in, or relationships with, a hedge fund or private
equity fund.

DATES: The final rule is effective April 1, 2014.

FOR FURTHER INFORMATION CONTACT:
    OCC: Ursula Pfeil, Counsel, or Deborah Katz, Assistant Director,
Legislative and Regulatory Activities Division,<PHONE_NUMBER>; Ted
Dowd, Assistant Director, or Roman Goldstein, Senior Attorney,
Securities and Corporate Practices Division,<PHONE_NUMBER>; Kurt
Wilhelm, Director for Financial Markets Group,<PHONE_NUMBER>;
Stephanie Boccio, Technical Expert for Credit and Market Risk Group,
(202) 649-6360, Office of the Comptroller of the Currency, 250 E Street
SW., Washington, DC 20219.
    Board: Christopher M. Paridon, Counsel,<PHONE_NUMBER>, or Anna M.
Harrington, Senior Attorney, Legal Division,<PHONE_NUMBER>; Mark E.
Van Der Weide, Deputy Director, Division of Bank Supervision and
Regulation,<PHONE_NUMBER>; or Sean D. Campbell, Deputy Associate
Director, Division of Research and Statistics,<PHONE_NUMBER>, Board of
Governors of the Federal Reserve System, 20th and C Streets NW.,
Washington, DC 20551.
    FDIC: Bobby R. Bean, Associate Director<EMAIL_ADDRESS>or Karl R.
Reitz, Chief, Capital Markets Strategies Section<EMAIL_ADDRESS>
Capital Markets Branch, Division of Risk Management Supervision, (202)
898-6888; Michael B. Phillips, Counsel<EMAIL_ADDRESS>or Gregory
S. Feder, Counsel<EMAIL_ADDRESS>Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street NW., Washington, DC 20429.
    SEC: Josephine J. Tao, Assistant Director, Angela R. Moudy, Branch
Chief, John Guidroz, Branch Chief, Jennifer Palmer or Lisa Skrzycki,
Attorney Advisors, Office of Trading Practices, Catherine McGuire,
Counsel, Division of Trading and Markets,<PHONE_NUMBER>; W. Danforth
Townley, Attorney Fellow, Jane H. Kim, Brian McLaughlin Johnson or
Marian Fowler, Senior Counsels, Division of Investment Management,
(202) 551-6787; David Beaning, Special Counsel, Office of Structured
Finance, Division of Corporation Finance,<PHONE_NUMBER>; John Cross,
Office of Municipal Securities,<PHONE_NUMBER>; or Adam Yonce,
Assistant Director, or Matthew Kozora, Financial Economist, Division of
Economic and Risk Analysis,<PHONE_NUMBER>, U.S. Securities and
Exchange Commission, 100 F Street NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Notice of Proposed Rulemaking
III. Overview of Final Rule
    A. General Approach and Summary of Final Rule
    B. Proprietary Trading Restrictions
    C. Restrictions on Covered Fund Activities and Investments
    D. Metrics Reporting Requirement
    E. Compliance Program Requirement
IV. Final Rule
    A. Subpart B--Proprietary Trading Restrictions
    1. Section ----.3: Prohibition on Proprietary Trading and
Related Definitions
    a. Definition of ``Trading Account''
    b. Rebuttable Presumption for the Short-Term Trading Account
    c. Definition of ``Financial Instrument''
    d. Proprietary Trading Exclusions
    1. Repurchase and Reverse Repurchase Arrangements and Securities
Lending
    2. Liquidity Management Activities
    3. Transactions of Derivatives Clearing Organizations and
Clearing Agencies
    4. Excluded Clearing-Related Activities of Clearinghouse Members
    5. Satisfying an Existing Delivery Obligation
    6. Satisfying an Obligation in Connection With a Judicial,
Administrative, Self-Regulatory Organization, or Arbitration
Proceeding
    7. Acting Solely as Agent, Broker, or Custodian
    8. Purchases or Sales Through a Deferred Compensation or Similar
Plan
    9. Collecting a Debt Previously Contracted
    10. Other Requested Exclusions
    2. Section ----.4(a): Underwriting Exemption
    a. Introduction
    b. Overview
    1. Proposed Underwriting Exemption
    2. Comments on Proposed Underwriting Exemption
    3. Final Underwriting Exemption
    c. Detailed Explanation of the Underwriting Exemption
    1. Acting as an Underwriter for a Distribution of Securities
    a. Proposed Requirements That the Purchase or Sale Be Effected
Solely in Connection With a Distribution of Securities for Which the
Banking Entity Acts as an Underwriter and That the Covered Financial
Position be a Security
    i. Proposed Definition of ``Distribution''
    ii. Proposed Definition of ``Underwriter''
    iii. Proposed Requirement That the Covered Financial Position Be
a Security
    b. Comments on the Proposed Requirements That the Trade Be
Effected Solely in Connection With a Distribution for Which the
Banking Entity Is Acting as an Underwriter and That the Covered
Financial Position Be a Security
    i. Definition of ``Distribution''
    ii. Definition of ``Underwriter''
    iii. ``Solely in Connection With'' Standard
    c. Final Requirement That the Banking Entity Act as an
Underwriter for a Distribution of Securities and the Trading Desk's
Underwriting Position Be Related to Such Distribution
    i. Definition of ``Underwriting Position''
    ii. Definition of ``Trading Desk''
    iii. Definition of ``Distribution''
    iv. Definition of ``Underwriter''
    v. Activities Conducted ``in Connection With'' a Distribution
    2. Near Term Customer Demand Requirement

    a. Proposed Near Term Customer Demand Requirement
    b. Comments Regarding the Proposed Near Term Customer Demand
Requirement
    c. Final Near Term Customer Demand Requirement
    3. Compliance Program Requirement
    a. Proposed Compliance Program Requirement
    b. Comments on the Proposed Compliance Program Requirement
    c. Final Compliance Program Requirement
    4. Compensation Requirement
    a. Proposed Compensation Requirement
    b. Comments on the Proposed Compensation Requirement
    c. Final Compensation Requirement
    5. Registration Requirement
    a. Proposed Registration Requirement
    b. Comments on Proposed Registration Requirement
    c. Final Registration Requirement
    6. Source of Revenue Requirement
    a. Proposed Source of Revenue Requirement
    b. Comments on the Proposed Source of Revenue Requirement
    c. Final Rule's Approach to Assessing Source of Revenue
    3. Section ----.4(b): Market-Making Exemption
    a. Introduction
    b. Overview
    1. Proposed Market-Making Exemption
    2. Comments on the Proposed Market-Making Exemption
    a. Comments on the Overall Scope of the Proposed Exemption
    b. Comments Regarding the Potential Market Impact of the
Proposed Exemption
    3. Final Market-Making Exemption
    c. Detailed Explanation of the Market-Making Exemption
    1. Requirement to Routinely Stand Ready To Purchase And Sell
    a. Proposed Requirement To Hold Self Out
    b. Comments on the Proposed Requirement To Hold Self Out
    i. The Proposed Indicia
    ii. Treatment of Block Positioning Activity
    iii. Treatment of Anticipatory Market Making
    iv. High-Frequency Trading
    c. Final Requirement To Routinely Stand Ready To Purchase And
Sell
    i. Definition of ``Trading Desk''
    ii. Definitions of ``Financial Exposure'' and ``Market-Maker
Inventory''
    iii. Routinely Standing Ready To Buy and Sell
    2. Near Term Customer Demand Requirement
    a. Proposed Near Term Customer Demand Requirement
    b. Comments Regarding the Proposed Near Term Customer Demand
Requirement
    i. The Proposed Guidance for Determining Compliance With the
Near Term Customer Demand Requirement
    ii. Potential Inventory Restrictions and Differences Across
Asset Classes
    iii. Predicting Near Term Customer Demand
    iv. Potential Definitions of ``Client,'' ``Customer,'' or
``Counterparty''
    v. Interdealer Trading and Trading for Price Discovery or To
Test Market Depth
    vi. Inventory Management
    vii. Acting as an Authorized Participant or Market Maker in
Exchange-Traded Funds
    viii. Arbitrage or Other Activities That Promote Price
Transparency and Liquidity
    ix. Primary Dealer Activities
    x. New or Bespoke Products or Customized Hedging Contracts
    c. Final Near Term Customer Demand Requirement
    i. Definition of ``Client,'' ``Customer,'' and ``Counterparty''
    ii. Impact of the Liquidity, Maturity, and Depth of the Market
on the Analysis
    iii. Demonstrable Analysis of Certain Factors
    iv. Relationship to Required Limits
    3. Compliance Program Requirement
    a. Proposed Compliance Program Requirement
    b. Comments on the Proposed Compliance Program Requirement
    c. Final Compliance Program Requirement
    4. Market Making-Related Hedging
    a. Proposed Treatment of Market Making-Related Hedging
    b. Comments on the Proposed Treatment of Market Making-Related
Hedging
    c. Treatment of Market Making-Related Hedging in the Final Rule
    5. Compensation Requirement
    a. Proposed Compensation Requirement
    b. Comments Regarding the Proposed Compensation Requirement
    c. Final Compensation Requirement
    6. Registration Requirement
    a. Proposed Registration Requirement
    b. Comments on the Proposed Registration Requirement
    c. Final Registration Requirement
    7. Source of Revenue Analysis
    a. Proposed Source of Revenue Requirement
    b. Comments Regarding the Proposed Source of Revenue Requirement
    i. Potential Restrictions on Inventory, Increased Costs for
customers, and Other Changes To Market-Making Services
    ii. Certain Price Appreciation-Related Profits Are an Inevitable
or Important Component of Market Making
    iii. Concerns Regarding the Workability of the Proposed Standard
in Certain Markets or Asset Classes
    iv. Suggested Modifications to the Proposed Requirement
    v. General Support for the Proposed Requirement or for Placing
Greater Restrictions on a Market Maker's Sources of Revenue
    c. Final Rule's Approach To Assessing Revenues
    8. Appendix B of the Proposed Rule
    a. Proposed Appendix B Requirement
    b. Comments on Proposed Appendix B
    c. Determination To Not Adopt Proposed Appendix B
    9. Use of Quantitative Measurements
    4. Section ----.5: Permitted Risk-Mitigating Hedging Activities
    a. Summary of Proposal's Approach to Implementing the Hedging
Exemption
    b. Manner of Evaluating Compliance With the Hedging Exemption
    c. Comments on the Proposed Rule and Approach to Implementing
the Hedging Exemption
    d. Final Rule
    1. Compliance Program Requirement
    2. Hedging of Specific Risks and Demonstrable Reduction Of Risk
    3. Compensation
    4. Documentation Requirement
    5. Section ----.6(a)-(b): Permitted Trading in Certain
Government and Municipal Obligations
    a. Permitted Trading in U.S. Government Obligations
    b. Permitted Trading in Foreign Government Obligations
    c. Permitted Trading in Municipal Securities
    d. Determination To Not Exempt Proprietary Trading in
Multilateral Development Bank Obligations
    6. Section ----.6(c): Permitted Trading on Behalf of Customers
    a. Proposed Exemption for Trading on Behalf of Customers
    b. Comments on the Proposed Rule
    c. Final Exemption for Trading on Behalf of Customers
    7. Section ----.6(d): Permitted Trading by a Regulated Insurance
Company
    8. Section ----.6(e): Permitted Trading Activities of a Foreign
Banking Entity
    a. Foreign Banking Entities Eligible for the Exemption
    b. Permitted Trading Activities of a Foreign Banking Entity
    9. Section ----.7: Limitations on Permitted Trading Activities
    a. Scope of ``Material Conflict of Interest''
    1. Proposed Rule
    2. Comments on the Proposed Limitation on Material Conflicts of
Interest
    a. Disclosure
    b. Information Barriers
    3. Final Rule
    b. Definition of ``High-Risk Asset'' and ``High-Risk Trading
Strategy''
    1. Proposed Rule
    2. Comments on Proposed Limitations on High-Risk Assets and
Trading Strategies
    3. Final Rule
    c. Limitations on Permitted Activities That Pose a Threat to
Safety and Soundness of the Banking Entity or the Financial
Stability of the United States
    B. Subpart C--Covered Fund Activities and Investments
    1. Section ----.10: Prohibition on Acquisition or Retention of
Ownership Interests in, and Certain Relationships With, a Covered
Fund
    a. Prohibition Regarding Covered Fund Activities and Investments
    b. ``Covered Fund'' Definition
    1. Foreign Covered Funds
    2. Commodity Pools
    3. Entities Regulated Under the Investment Company Act
    c. Entities Excluded From Definition of Covered Fund
    1. Foreign Public Funds
    2. Wholly-Owned Subsidiaries
    3. Joint Ventures
    4. Acquisition Vehicles

    5. Foreign Pension or Retirement Funds
    6. Insurance Company Separate Accounts
    7. Bank Owned Life Insurance Separate Accounts
    8. Exclusion for Loan Securitizations and Definition of Loan
    a. Definition of Loan
    b. Loan Securitizations
    i. Loans
    ii. Contractual Rights Or Assets
    iii. Derivatives
    iv. SUBIs and Collateral Certificates
    v. Impermissible Assets
    9. Asset-Backed Commercial Paper Conduits
    10. Covered Bonds
    11. Certain Permissible Public Welfare and Similar Funds
    12. Registered Investment Companies and Excluded Entities
    13. Other Excluded Entities
    d. Entities Not Specifically Excluded From the Definition of
Covered Fund
    1. Financial Market Utilities
    2. Cash Collateral Pools
    3. Pass-Through REITS
    4. Municipal Securities Tender Option Bond Transactions
    5. Venture Capital Funds
    6. Credit Funds
    7. Employee Securities Companies
    e. Definition of ``Ownership Interest''
    f. Definition of ``Resident of the United States''
    g. Definition of ``Sponsor''
    2. Section ----.11: Activities Permitted in Connection With
Organizing and Offering a Covered Fund
    a. Scope of Exemption
    1. Fiduciary Services
    2. Compliance With Investment Limitations
    3. Compliance With Section 13(f) of the BHC Act
    4. No Guarantees or Insurance of Fund Performance
    5. Limitation on Name Sharing With a Covered Fund
    6. Limitation on Ownership By Directors and Employees
    7. Disclosure Requirements
    b. Organizing and Offering an Issuing Entity of Asset-Backed
Securities
    c. Underwriting and Market Making for a Covered Fund
    3. Section ----.12: Permitted Investment in a Covered Fund
    a. Proposed Rule
    b. Duration of Seeding Period for New Covered Funds
    c. Limitations on Investments in a Single Covered Fund (``Per-
Fund Limitation'')
    d. Limitation on Aggregate Permitted Investments in All Covered
funds (``Aggregate Funds Limitation'')
    e. Capital Treatment of an Investment in a Covered Fund
    f. Attribution of Ownership Interests to a Banking Entity
    g. Calculation of Tier 1 Capital
    h. Extension of Time to Divest Ownership Interest in a Single
Fund
    4. Section ----.13: Other Permitted Covered Fund Activities
    a. Permitted Risk-Mitigating Hedging Activities
    b. Permitted Covered Fund Activities and Investments Outside of
the United States
    1. Foreign Banking Entities Eligible for the Exemption
    2. Activities or Investments Solely Outside of the United States
    3. Offered for Sale or Sold to a Resident of the United States
    4. Definition of ``Resident of the United States''
    c. Permitted Covered Fund Interests and Activities by a
Regulated Insurance Company
    5. Section ----.14: Limitations on Relationships With a Covered
Fund
    a. Scope of Application
    b. Transactions That Would Be a ``Covered Transaction''
    c. Certain Transactions and Relationships Permitted
    1. Permitted Investments and Ownerships Interests
    2. Prime Brokerage Transactions
    d. Restrictions on Transactions With Any Permitted Covered Fund
    6. Section ----.15: Other Limitations on Permitted Covered Fund
Activities
    C. Subpart D and Appendices A and B--Compliance Program,
Reporting, and Violations
    1. Section ----.20: Compliance Program Mandate
    a. Program Requirement
    b. Compliance Program Elements
    c. Simplified Programs for Less Active Banking Entities
    d. Threshold for Application of Enhanced Minimum Standards
    2. Appendix B: Enhanced Minimum Standards for Compliance
Programs
    a. Proprietary Trading Activities
    b. Covered Fund Activities or Investments
    c. Enterprise-Wide Programs
    d. Responsibility and Accountability
    e. Independent Testing
    f. Training
    g. Recordkeeping
    3. Section ----.20(d) and Appendix A: Reporting and
Recordkeeping Requirements Applicable to Trading Activities
    a. Approach to Reporting and Recordkeeping Requirements Under
the Proposal
    b. General Comments on the Proposed Metrics
    c. Approach of the Final Rule
    d. Proposed Quantitative Measurements and Comments on Specific
Metrics
    4. Section ----.21: Termination of Activities or Investments;
Authorities for Violations
    V. Administrative Law Matters
    A. Use of Plain Language
    B. Paperwork Reduction Act Analysis
    C. Regulatory Flexibility Act Analysis
    D. OCC Unfunded Mandates Reform Act of 1995 Determination

I. Background

    The Dodd-Frank Act was enacted on July 21, 2010.\1\ Section 619 of
the Dodd-Frank Act added a new section 13 to the Bank Holding Company
Act of 1956 (``BHC Act'') (codified at 12 U.S.C. 1851) that generally
prohibits any banking entity from engaging in proprietary trading or
from acquiring or retaining an ownership interest in, sponsoring, or
having certain relationships with a hedge fund or private equity fund
(``covered fund''), subject to certain exemptions.\2\ New section 13 of
the BHC Act also provides that a nonbank financial company designated
by the Financial Stability Oversight Council (``FSOC'') for supervision
by the Board (while not a banking entity under section 13 of the BHC
Act) would be subject to additional capital requirements, quantitative
limits, or other restrictions if the company engages in certain
proprietary trading or covered fund activities.\3\
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    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ See 12 U.S.C. 1851.
    \3\ See 12 U.S.C. 1851(a)(2) and (f)(4). The Agencies note that
two of the three companies currently designated by FSOC for
supervision by the Board are affiliated with insured depository
institutions, and are therefore currently banking entities for
purposes of section 13 of the BHC Act. The Agencies are continuing
to review whether the remaining company engages in any activity
subject to section 13 of the BHC Act and what, if any, requirements
apply under section 13.
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    Section 13 of the BHC Act generally prohibits banking entities from
engaging as principal in proprietary trading for the purpose of selling
financial instruments in the near term or otherwise with the intent to
resell in order to profit from short-term price movements.\4\ Section
13(d)(1) expressly exempts from this prohibition, subject to
conditions, certain activities, including:
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    \4\ See 12 U.S.C. 1851(a)(1)(A) and (B).
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     Trading in U.S. government, agency and municipal
obligations;
     Underwriting and market making-related activities;
     Risk-mitigating hedging activities;
     Trading on behalf of customers;
     Trading for the general account of insurance companies;
and
     Foreign trading by non-U.S. banking entities.\5\
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    \5\ See id. at 1851(d)(1).
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    Section 13 of the BHC Act also generally prohibits banking entities
from acquiring or retaining an ownership interest in, or sponsoring, a
hedge fund or private equity fund. Section 13 contains several
exemptions that permit banking entities to make limited investments in
hedge funds and private equity funds, subject to a number of
restrictions designed to ensure that banking entities do not rescue
investors in these funds from loss and are not themselves exposed to

significant losses from investments or other relationships with these
funds.
    Section 13 of the BHC Act does not prohibit a nonbank financial
company supervised by the Board from engaging in proprietary trading,
or from having the types of ownership interests in or relationships
with a covered fund that a banking entity is prohibited or restricted
from having under section 13 of the BHC Act. However, section 13 of the
BHC Act provides that these activities be subject to additional capital
charges, quantitative limits, or other restrictions.\6\
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    \6\ See 12 U.S.C. 1851(a)(2) and (d)(4).
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II. Notice of Proposed Rulemaking: Summary of General Comments

    Authority for developing and adopting regulations to implement the
prohibitions and restrictions of section 13 of the BHC Act is divided
among the Board, the Federal Deposit Insurance Corporation (``FDIC''),
the Office of the Comptroller of the Currency (``OCC''), the Securities
and Exchange Commission (``SEC''), and the Commodity Futures Trading
Commission (``CFTC'').\7\ As required by section 13(b)(2) of the BHC
Act, the Board, OCC, FDIC, and SEC in October 2011 invited the public
to comment on proposed rules implementing that section's
requirements.\8\ The period for filing public comments on this proposal
was extended for an additional 30 days, until February 13, 2012.\9\ In
January 2012, the CFTC requested comment on a proposal for the same
common rule to implement section 13 with respect to those entities for
which it is the primary financial regulatory agency and invited public
comment on its proposed implementing rule through April 16, 2012.\10\
The statute requires the Agencies, in developing and issuing
implementing rules, to consult and coordinate with each other, as
appropriate, for the purposes of assuring, to the extent possible, that
such rules are comparable and provide for consistent application and
implementation of the applicable provisions of section 13 of the BHC
Act.\11\
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    \7\ See 12 U.S.C. 1851(b)(2). Under section 13(b)(2)(B) of the
BHC Act, rules implementing section 13's prohibitions and
restrictions must be issued by: (i) The appropriate Federal banking
agencies (i.e., the Board, the OCC, and the FDIC), jointly, with
respect to insured depository institutions; (ii) the Board, with
respect to any company that controls an insured depository
institution, or that is treated as a bank holding company for
purposes of section 8 of the International Banking Act, any nonbank
financial company supervised by the Board, and any subsidiary of any
of the foregoing (other than a subsidiary for which an appropriate
Federal banking agency, the SEC, or the CFTC is the primary
financial regulatory agency); (iii) the CFTC with respect to any
entity for which it is the primary financial regulatory agency, as
defined in section 2 of the Dodd-Frank Act; and (iv) the SEC with
respect to any entity for which it is the primary financial
regulatory agency, as defined in section 2 of the Dodd-Frank Act.
See id.
    \8\ See 76 FR 68846 (Nov. 7, 2011) (``Joint Proposal'').
    \9\ See 77 FR 23 (Jan. 23, 2012) (extending the comment period
to February 13, 2012).
    \10\ See 77 FR 8332 (Feb. 14, 2012) (``CFTC Proposal'').
    \11\ See 12 U.S.C. 1851(b)(2)(B)(ii). The Secretary of the
Treasury, as Chairperson of the FSOC, is responsible for
coordinating the Agencies' rulemakings under section 13 of the BHC
Act. See id.
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    The proposed rules invited comment on a multi-faceted regulatory
framework to implement section 13 consistent with the statutory
language. In addition, the Agencies invited comments on the potential
economic impacts of the proposed rule and posed a number of questions
seeking information on the costs and benefits associated with each
aspect of the proposal, as well as on any significant alternatives that
would minimize the burdens or amplify the benefits of the proposal in a
manner consistent with the statute. The Agencies also encouraged
commenters to provide quantitative information and data about the
impact of the proposal on entities subject to section 13, as well as on
their clients, customers, and counterparties, specific markets or asset
classes, and any other entities potentially affected by the proposed
rule, including non-financial small and mid-size businesses.
    The Agencies received over 18,000 comments addressing a wide
variety of aspects of the proposal, including definitions used by the
proposal and the exemptions for market making-related activities, risk-
mitigating hedging activities, covered fund activities and investments,
the use of quantitative metrics, and the reporting proposals. The vast
majority of these comments were from individuals using a version of a
short form letter to express support for the proposed rule. More than
600 comment letters were unique comment letters, including from members
of Congress, domestic and foreign banking entities and other financial
services firms, trade groups representing banking, insurance, and the
broader financial services industry, U.S. state and foreign
governments, consumer and public interest groups, and individuals. To
improve understanding of the issues raised by commenters, the Agencies
met with a number of these commenters to discuss issues relating to the
proposed rule, and summaries of these meetings are available on each of
the Agency's public Web sites.\12\ The CFTC staff also hosted a public
roundtable on the proposed rule.\13\ Many of the commenters generally
expressed support for the broader goals of the proposed rule. At the
same time, many commenters expressed concerns about various aspects of
the proposed rule. Many of these commenters requested that one or more
aspects of the proposed rule be modified in some manner in order to
reflect their viewpoints and to better accommodate the scope of
activities that they argued were encompassed within section 13 of the
BHC Act. The comments addressed all major sections of the proposed
rule.
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    \12\ See http://www.regulations.gov/#!docketDetail;D=OCC-2011-
0014 (OCC); http://www.federalreserve.gov/newsevents/reform_systemic.htm (Board); http://www.fdic.gov/regulations/laws/federal/2011/11comAD85.html (FDIC); http://www.sec.gov/comments/s7-41-11/s74111.shtml (SEC); and http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_28_VolckerRule/index.htm (CFTC).
    \13\ See Commodity Futures Trading Commission, CFTC Staff to
Host a Public Roundtable to Discuss the Proposed Volcker Rule (May
24, 2012), available at http://www.cftc.gov/PressRoom/PressReleases/pr6263-12; transcript available at<EMAIL_ADDRESS>---------------------------------------------------------------------------

    Section 13 of the BHC Act also required the FSOC to conduct a study
(``FSOC study'') and make recommendations to the Agencies by January
21, 2011 on the implementation of section 13 of the BHC Act. The FSOC
study was issued on January 18, 2011. The FSOC study included a
detailed discussion of key issues related to implementation of section
13 and recommended that the Agencies consider taking a number of
specified actions in issuing rules under section 13 of the BHC Act.\14\
The FSOC study also recommended that the Agencies adopt a four-part
implementation and supervisory framework for identifying and preventing
prohibited proprietary trading, which included a programmatic
compliance regime requirement for banking entities, analysis and
reporting of quantitative metrics by banking entities, supervisory
review and oversight by the Agencies, and

enforcement procedures for violations.\15\ The Agencies carefully
considered the FSOC study and its recommendations.
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    \14\ See Financial Stability Oversight Counsel, Study and
Recommendations on Prohibitions on Proprietary Trading and Certain
Relationships with Hedge Funds and Private Equity Funds (Jan. 18,
2011), available at http://www.treasury.gov/initiatives/Documents/Volcker%20sec%20619%20study%20final%201%2018%2011%20rg.pdf. (``FSOC
study''). See 12 U.S.C. 1851(b)(1). Prior to publishing its study,
FSOC requested public comment on a number of issues to assist in
conducting its study. See 75 FR 61,758 (Oct. 6, 2010). Approximately
8,000 comments were received from the public, including from members
of Congress, trade associations, individual banking entities,
consumer groups, and individuals.
    \15\ See FSOC study at 5-6.
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    In formulating this final rule, the Agencies carefully reviewed all
comments submitted in connection with the rulemaking and considered the
suggestions and issues they raise in light of the statutory
restrictions and provisions as well as the FSOC study. The Agencies
have sought to reasonably respond to all of the significant issues
commenters raised. The Agencies believe they have succeeded in doing so
notwithstanding the complexities involved. The Agencies also carefully
considered different options suggested by commenters in light of
potential costs and benefits in order to effectively implement section
13 of the BHC Act. The Agencies made numerous changes to the final rule
in response to the issues and information provided by commenters. These
modifications to the rule and explanations that address comments are
described in more detail in the section-by-section description of the
final rule. To enhance uniformity in both rules that implement section
13 and administration of the requirements of that section, the Agencies
have been regularly consulting with each other in the development of
this final rule.
    Some commenters requested that the Agencies repropose the rule and/
or delay adoption pending the collection of additional information.\16\
As described in part above, the Agencies have provided many and various
types of opportunities for commenters to provide input on
implementation of section 13 of the BHC Act and have collected
substantial information in the process. In addition to the official
comment process described above, members of the public submitted
comment letters in advance of the official comment period for the
proposed rules and met with staff of the Agencies to explain issues of
concern; the public also provided substantial comment in response to a
request for comment from the FSOC regarding its findings and
recommendations for implementing section 13.\17\ The Agencies provided
a detailed proposal and posed numerous questions in the preamble to the
proposal to solicit and explore alternative approaches in many areas.
In addition, the Agencies have continued to receive comment letters
after the extended comment period deadline, which the Agencies have
considered. Thus, the Agencies believe interested parties have had
ample opportunity to review the proposed rules, as well as the comments
made by others, and to provide views on the proposal, other comment
letters, and data to inform our consideration of the final rules.
---------------------------------------------------------------------------

    \16\ See, e.g., SIFMA et al. (Prop. Trading) (Feb. 2012); ABA
(Keating); Chamber (Nov. 2011); Chamber (Nov. 2013); Members of
Congress (Dec. 2011); IIAC; Real Estate Roundtable; Ass'n. of German
Banks; Allen & Overy (Clearing); JPMC; Goldman (Prop. Trading); BNY
Mellon et al.; State Street (Feb. 2012); ICI Global; Chamber (Feb.
2012); Soci[eacute]t[eacute] G[eacute]n[eacute]rale; HSBC; Western
Asset Mgmt.; Abbott Labs et al. (Feb. 2012); PUC Texas; Columbia
Mgmt.; ICI (Feb. 2012); IIB/EBF; British Bankers' Ass'n.; ISDA (Feb.
2012); Comm. on Capital Markets Regulation; Ralph Saul (Apr. 2012);
BPC.
    \17\ See 75 FR 61,758 (Oct. 6, 2010).
---------------------------------------------------------------------------

    In addition, the Agencies have been mindful of the importance of
providing certainty to banking entities and financial markets and of
providing sufficient time for banking entities to understand the
requirements of the final rule and to design, test, and implement
compliance and reporting systems. The further substantial delay that
would necessarily be entailed by reproposing the rule would extend the
uncertainty that banking entities would face, which could prove
disruptive to banking entities and the financial markets.
    The Agencies note, as discussed more fully below, that the final
rule incorporates a number of modifications designed to address the
issues raised by commenters in a manner consistent with the statute.
The preamble below also discusses many of the issues raised by
commenters and explains the Agencies' response to those comments.
    To achieve the purpose of the statute, without imposing unnecessary
costs, the final rule builds on the multi-faceted approach in the
proposal, which includes development and implementation of a compliance
program at each banking entity engaged in trading activities or that
makes investments subject to section 13 of the BHC Act; the collection
and evaluation of data regarding these activities as an indicator of
areas meriting additional attention by the banking entity and the
relevant agency; appropriate limits on trading, hedging, investment and
other activities; and supervision by the Agencies. To allow banking
entities sufficient time to develop appropriate systems, the Agencies
have provided for a phased-in schedule for the collection of data,
limited data reporting requirements only to banking entities that
engage in significant trading activity, and agreed to review the merits
of the data collected and revise the data collection as appropriate
over the next 21 months. Importantly, as explained in detail below, the
Agencies have also reduced the compliance burden for banking entities
with total assets of less than $10 billion. The final rule also
eliminates compliance burden for firms that do not engage in covered
activities or investments beyond investing in U.S. government
obligations, agency guaranteed obligations, or municipal obligations.
    Moreover, the Agencies believe the data that will be collected in
connection with the final rule, as well as the compliance efforts made
by banking entities and the supervisory experience that will be gained
by the Agencies in reviewing trading and investment activity under the
final rule, will provide valuable insights into the effectiveness of
the final rule in achieving the purpose of section 13 of the BHC Act.
The Agencies remain committed to implementing the final rule, and
revisiting and revising the rule as appropriate, in a manner designed
to ensure that the final rule faithfully implements the requirements
and purposes of the statute.\18\
---------------------------------------------------------------------------

    \18\ If any provision of this rule, or the application thereof
to any person or circumstance, is held to be invalid, such
invalidity shall not affect other provisions or application of such
provisions to other persons or circumstances that can be given
effect without the invalid provision or application.
---------------------------------------------------------------------------

    Finally, the Board has determined, in accordance with section 13 of
the BHC Act, to provide banking entities with additional time to
conform their activities and investments to the statute and the final
rule. The restrictions and prohibitions of section 13 of the BHC Act
became effective on July 21, 2012.\19\ The statute provided banking
entities a period of two years to conform their activities and
investments to the requirement of the statute, until July 21, 2014.
Section 13 also permits the Board to extend this conformance period,
one year at a time, for a total of no more than three additional
years.\20\ Pursuant to this authority and in connection with this
rulemaking, the Board has in a separate action extended the conformance
period for an additional year until July 21, 2015.\21\ The Board will
continue to monitor developments to determine whether additional
extensions of the conformance period are in the public interest,
consistent with the statute. Accordingly, the Agencies do not believe
that a reproposal or further delay is necessary or appropriate.
---------------------------------------------------------------------------

    \19\ See 12 U.S.C. 1851(c)(1).
    \20\ See 12 U.S.C. 1851(c)(2); See also, A Conformance Period
for Entities Engaged in Prohibited Proprietary Trading or Private
Equity Fund or Hedge Fund Activities, 76 FR 8265 (Feb. 14, 2011)
(citing 156 Cong. Rec. S5898 (daily ed. July 15, 2010) (statement of
Sen. Merkley)).
    \21\ See, Board Order Approving Extension of Conformance Period,
available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210b1.pdf.
---------------------------------------------------------------------------

    Commenters have differing views on the overall economic impacts of
section 13 of the BHC Act.

    Some commenters remarked that proprietary trading restrictions will
have detrimental impacts on the economy such as: reduction in
efficiency of markets, economic growth, and in employment due to a loss
in liquidity.\22\ In particular, a commenter expressed concern that
there may be high transition costs as non-banking entities replace some
of the trading activities currently performed by banking entities.\23\
Another commenter focused on commodity markets remarked about the
potential reduction in commercial output and curtailed resource
exploration due to a lack of hedging counterparties.\24\ Several
commenters stated that section 13 of the BHC Act will reduce access to
debt markets--especially for smaller companies--raising the costs of
capital for firms and lowering the returns on certain investments.\25\
Further, some commenters mentioned that U.S. banks may be competitively
disadvantaged relative to foreign banks due to proprietary trading
restrictions and compliance costs.\26\
---------------------------------------------------------------------------

    \22\ See, e.g., Oliver Wyman (Dec. 2011); Chamber (Dec. 2011);
Thakor Study; Prof. Duffie; IHS.
    \23\ See Prof. Duffie.
    \24\ See IHS.
    \25\ See, e.g., Chamber (Dec. 2011); Thakor Study; Oliver Wyman
(Dec. 2011); IHS.
    \26\ See, e.g., RBC; Citigroup (Feb. 2012); Goldman (Covered
Funds).
---------------------------------------------------------------------------

    On the other hand, other commenters stated that restricting
proprietary trading activity by banking entities may reduce systemic
risk emanating from the financial system and help to lower the
probability of the occurrence of another financial crisis.\27\ One
commenter contended that large banking entities may have a moral hazard
incentive to engage in risky activities without allocating sufficient
capital to them, especially if market participants believe these
institutions will not be allowed to fail.\28\ Commenters argued that
large banking entities may engage in activities that increase the
upside return at the expense of downside loss exposure which may
ultimately be borne by Federal taxpayers \29\ and that subsidies
associated with bank funding may create distorted economic
outcomes.\30\ Furthermore, some commenters remarked that non-banking
entities may fill much of the void in liquidity provision left by
banking entities if banking entities reduce their current trading
activities.\31\ Finally, some commenters mentioned that hyper-liquidity
that arises from, for instance, speculative bubbles, may harm the
efficiency and price discovery function of markets.\32\
---------------------------------------------------------------------------

    \27\ See, e.g., Profs. Admati & Pfleiderer; AFR (Nov. 2012);
Better Markets (Dec. 2011); Better Markets (Feb. 2012); Occupy;
Johnson & Prof. Stiglitz; Paul Volcker.
    \28\ See Occupy.
    \29\ See Profs. Admati & Pfleiderer; Better Markets (Feb. 2012);
Occupy; Johnson & Prof. Stiglitz; Paul Volcker.
    \30\ See Profs. Admati & Pfleiderer; Johnson & Prof. Stiglitz.
    \31\ See AFR et al. (Feb. 2012); Better Markets (Apr. 16, 2012);
David McClean; Public Citizen; Occupy.
    \32\ See Johnson & Prof. Stiglitz (citing Thomas Phillipon
(2011)); AFR et al. (Feb. 2012); Occupy.
---------------------------------------------------------------------------

    The Agencies have taken these concerns into account in the final
rule. As described below with respect to particular aspects of the
final rule, the Agencies have addressed these issues by reducing
burdens where appropriate, while at the same time ensuring that the
final rule serves its purpose of promoting healthy economic activity.
In that regard, the Agencies have sought to achieve the balance
intended by Congress under section 13 of the BHC Act. Several comments
suggested that a costs and benefits analysis be performed by the
Agencies.\33\ On the other hand, some commenters \34\ correctly stated
that a costs and benefits analysis is not legally required.\35\
However, the Agencies find certain of the information submitted by
commenters concerning costs and benefits and economic effects to be
relevant to consideration of the rule, and so have considered this
information as appropriate, and, on the basis of these and other
considerations, sought to achieve the balance intended by Congress in
section 619 of the Dodd-Frank Act. The relevant comments are addressed
therein.
---------------------------------------------------------------------------

    \33\ See SIFMA et al. (Covered Funds) (Feb. 2012); BoA; ABA
(Keating); Chamber (Feb. 2012); Soci[eacute]t[eacute]
G[eacute]n[eacute]rale; FTN; SVB; ISDA (Feb. 2012); Comm. on Capital
Market Regulation; Real Estate Roundtable.
    \34\ See, e.g., Better Markets (Feb. 2012); Randel Pilo.
    \35\ For example, with respect to the CFTC, Section 15(a) of the
CEA requires such consideration only when ``promulgating a
regulation under this [Commodity Exchange] Act.'' This final rule is
not promulgated under the CEA, but under the BHC Act. CEA section
15(a), therefore, does not apply.
---------------------------------------------------------------------------

III. Overview of Final Rule

    The Agencies are adopting this final rule to implement section 13
of the BHC Act with a number of changes to the proposal, as described
further below. The final rule adopts a risk-based approach to
implementation that relies on a set of clearly articulated
characteristics of both prohibited and permitted activities and
investments and is designed to effectively accomplish the statutory
purpose of reducing risks posed to banking entities by proprietary
trading activities and investments in or relationships with covered
funds. As explained more fully below in the section-by-section
analysis, the final rule has been designed to ensure that banking
entities do not engage in prohibited activities or investments and to
ensure that banking entities engage in permitted trading and investment
activities in a manner designed to identify, monitor and limit the
risks posed by these activities and investments. For instance, the
final rule requires that any banking entity that is engaged in activity
subject to section 13 develop and administer a compliance program that
is appropriate to the size, scope and risk of its activities and
investments. The rule requires the largest firms engaged in these
activities to develop and implement enhanced compliance programs and
regularly report data on trading activities to the Agencies. The
Agencies believe this will permit banking entities to effectively
engage in permitted activities, and the Agencies to enforce compliance
with section 13 of the BHC Act. In addition, the enhanced compliance
programs will help both the banking entities and the Agencies identify,
monitor, and limit risks of activities permitted under section 13,
particularly involving banking entities posing the greatest risk to
financial stability.

A. General Approach and Summary of Final Rule

    The Agencies have designed the final rule to achieve the purposes
of section 13 of the BHC Act, which include prohibiting banking
entities from engaging in proprietary trading or acquiring or retaining
an ownership interest in, or having certain relationships with, a
covered fund, while permitting banking entities to continue to provide,
and to manage and limit the risks associated with providing, client-
oriented financial services that are critical to capital generation for
businesses of all sizes, households and individuals, and that
facilitate liquid markets. These client-oriented financial services,
which include underwriting, market making, and asset management
services, are important to the U.S. financial markets and the
participants in those markets. At the same time, providing appropriate
latitude to banking entities to provide such client-oriented services
need not and should not conflict with clear, robust, and effective
implementation of the statute's prohibitions and restrictions.
    As noted above, the final rule takes a multi-faceted approach to
implementing section 13 of the BHC Act. In particular, the final rule
includes a framework that clearly describes the key characteristics of
both prohibited and permitted

activities. The final rule also requires banking entities to establish
a comprehensive compliance program designed to ensure compliance with
the requirements of the statute and rule in a way that takes into
account and reflects the banking entity's activities, size, scope and
complexity. With respect to proprietary trading, the final rule also
requires the large firms that are active participants in trading
activities to calculate and report meaningful quantitative data that
will assist both banking entities and the Agencies in identifying
particular activity that warrants additional scrutiny to distinguish
prohibited proprietary trading from otherwise permissible activities.
    As a matter of structure, the final rule is generally divided into
four subparts and contains two appendices, as follows:
     Subpart A of the final rule describes the authority,
scope, purpose, and relationship to other authorities of the rule and
defines terms used commonly throughout the rule;
     Subpart B of the final rule prohibits proprietary trading,
defines terms relevant to covered trading activity, establishes
exemptions from the prohibition on proprietary trading and limitations
on those exemptions, and requires certain banking entities to report
quantitative measurements with respect to their trading activities;
     Subpart C of the final rule prohibits or restricts
acquiring or retaining an ownership interest in, and certain
relationships with, a covered fund, defines terms relevant to covered
fund activities and investments, as well as establishes exemptions from
the restrictions on covered fund activities and investments and
limitations on those exemptions;
     Subpart D of the final rule generally requires banking
entities to establish a compliance program regarding compliance with
section 13 of the BHC Act and the final rule, including written
policies and procedures, internal controls, a management framework,
independent testing of the compliance program, training, and
recordkeeping;
     Appendix A of the final rule details the quantitative
measurements that certain banking entities may be required to compute
and report with respect to certain trading activities;
     Appendix B of the final rule details the enhanced minimum
standards for programmatic compliance that certain banking entities
must meet with respect to their compliance program, as required under
subpart D.

B. Proprietary Trading Restrictions

    Subpart B of the final rule implements the statutory prohibition on
proprietary trading and the various exemptions to this prohibition
included in the statute. Section ----.3 of the final rule contains the
core prohibition on proprietary trading and defines a number of related
terms, including ``proprietary trading'' and ``trading account.'' The
final rule's definition of proprietary trading generally parallels the
statutory definition and covers engaging as principal for the trading
account of a banking entity in any transaction to purchase or sell
specified types of financial instruments.\36\
---------------------------------------------------------------------------

    \36\ See final rule Sec.  ----.3(a).
---------------------------------------------------------------------------

    The final rule's definition of trading account also is consistent
with the statutory definition.\37\ In particular, the definition of
trading account in the final rule includes three classes of positions.
First, the definition includes the purchase or sale of one or more
financial instruments taken principally for the purpose of short-term
resale, benefitting from short-term price movements, realizing short-
term arbitrage profits, or hedging another trading account
position.\38\ For purposes of this part of the definition, the final
rule also contains a rebuttable presumption that the purchase or sale
of a financial instrument by a banking entity is for the trading
account of the banking entity if the banking entity holds the financial
instrument for fewer than 60 days or substantially transfers the risk
of the financial instrument within 60 days of purchase (or sale).\39\
Second, with respect to a banking entity subject to the Federal banking
agencies' Market Risk Capital Rules, the definition includes the
purchase or sale of one or more financial instruments subject to the
prohibition on proprietary trading that are treated as ``covered
positions and trading positions'' (or hedges of other market risk
capital rule covered positions) under those capital rules, other than
certain foreign exchange and commodities positions.\40\ Third, the
definition includes the purchase or sale of one or more financial
instruments by a banking entity that is licensed or registered or
required to be licensed or registered to engage in the business of a
dealer, swap dealer, or security-based swap dealer to the extent the
instrument is purchased or sold in connection with the activities that
require the banking entity to be licensed or registered as such or is
engaged in those businesses outside of the United States, to the extent
the instrument is purchased or sold in connection with the activities
of such business.\41\
---------------------------------------------------------------------------

    \37\ See final rule Sec.  ----.3(b).
    \38\ See final rule Sec.  ----.3(b)(1)(i).
    \39\ See final rule Sec.  ----.3(b)(2).
    \40\ See final rule Sec.  ----.3(b)(1)(ii).
    \41\ See final rule Sec.  ----.3(b)(1)(iii).
---------------------------------------------------------------------------

    The definition of proprietary trading also contains clarifying
exclusions for certain purchases and sales of financial instruments
that generally do not involve the requisite short-term trading intent,
such as the purchase and sale of financial instruments arising under
certain repurchase and reverse repurchase arrangements or securities
lending transactions and securities acquired or taken for bona fide
liquidity management purposes.\42\
---------------------------------------------------------------------------

    \42\ See final rule Sec.  ----.3(d).
---------------------------------------------------------------------------

    In Section ----.3, the final rule also defines a number of other
relevant terms, including the term ``financial instrument.'' This term
is used to define the scope of financial instruments subject to the
prohibition on proprietary trading. Consistent with the statutory
language, such financial instruments include securities, derivatives,
commodity futures, and options on such instruments, but do not include
loans, spot foreign exchange or spot physical commodities.\43\
---------------------------------------------------------------------------

    \43\ See final rule Sec.  ----.3(c).
---------------------------------------------------------------------------

    In Section ----.4, the final rule implements the statutory
exemptions for underwriting and market making-related activities. For
each of these permitted activities, the final rule defines the exempt
activity and provides a number of requirements that must be met in
order for a banking entity to rely on the applicable exemption. As more
fully discussed below, these include establishment and enforcement of a
compliance program targeted to the activity; limits on positions,
inventory and risk exposure addressing the requirement that activities
be designed not to exceed the reasonably expected near term demands of
clients, customers, or counterparties; limits on the duration of
holdings and positions; defined escalation procedures to change or
exceed limits; analysis justifying established limits; internal
controls and independent testing of compliance with limits; senior
management accountability and limits on incentive compensation. In
addition, the final rule requires firms with significant market-making
or underwriting activities to report data involving several metrics
that may be used by the banking entity and the Agencies to identify
trading activity that may warrant more detailed compliance review.
    These requirements are generally designed to ensure that the
banking

entity's trading activity is limited to underwriting and market making-
related activities and does not include prohibited proprietary
trading.\44\ These requirements are also intended to work together to
ensure that banking entities identify, monitor and limit the risks
associated with these activities.
---------------------------------------------------------------------------

    \44\ See final rule Sec.  ----.4(a), (b).
---------------------------------------------------------------------------

    In Section ----.5, the final rule implements the statutory
exemption for risk-mitigating hedging. As with the underwriting and
market-making exemptions, Sec.  ----.5 of the final rule contains a
number of requirements that must be met in order for a banking entity
to rely on the exemption. These requirements are generally designed to
ensure that the banking entity's hedging activity is limited to risk-
mitigating hedging in purpose and effect.\45\ Section ----.5 also
requires banking entities to document, at the time the transaction is
executed, the hedging rationale for certain transactions that present
heightened compliance risks.\46\ As with the exemptions for
underwriting and market making-related activity, these requirements
form part of a broader implementation approach that also includes the
compliance program requirement and the reporting of quantitative
measurements.
---------------------------------------------------------------------------

    \45\ See final rule Sec.  ----.5.
    \46\ See final rule Sec.  ----.5(c).
---------------------------------------------------------------------------

    In Section ----.6, the final rule implements statutory exemptions
for trading in certain government obligations, trading on behalf of
customers, trading by a regulated insurance company, and trading by
certain foreign banking entities outside of the United States. Section
----.6(a) of the final rule describes the government obligations in
which a banking entity may trade, which include U.S. government and
agency obligations, obligations and other instruments of specified
government sponsored entities, and State and municipal obligations.\47\
Section ----.6(b) of the final rule permits trading in certain foreign
government obligations by affiliates of foreign banking entities in the
United State and foreign affiliates of a U.S. banking entity
abroad.\48\ Section ----.6(c) of the final rule describes permitted
trading on behalf of customers and identifies the types of transactions
that would qualify for the exemption.\49\ Section ----.6(d) of the
final rule describes permitted trading by a regulated insurance company
or an affiliate thereof for the general account of the insurance
company, and also permits those entities to trade for a separate
account of the insurance company.\50\ Finally, Sec.  ----.6(e) of the
final rule describes trading permitted outside of the United States by
a foreign banking entity.\51\ The exemption in the final rule clarifies
when a foreign banking entity will qualify to engage in such trading
pursuant to sections 4(c)(9) or 4(c)(13) of the BHC Act, as required by
the statute, including with respect to a foreign banking entity not
currently subject to the BHC Act. As explained in detail below, the
exemption also provides that the risk as principal, the decision-
making, and the accounting for this activity must occur solely outside
of the United States, consistent with the statute.
---------------------------------------------------------------------------

    \47\ See final rule Sec.  ----.6(a).
    \48\ See final rule Sec.  ----.6(b).
    \49\ See final rule Sec.  ----.6(c).
    \50\ See final rule Sec.  ----.6(d).
    \51\ See final rule Sec.  ----.6(e).
---------------------------------------------------------------------------

    In Section ----.7, the final rule prohibits a banking entity from
relying on any exemption to the prohibition on proprietary trading if
the permitted activity would involve or result in a material conflict
of interest, result in a material exposure to high-risk assets or high-
risk trading strategies, or pose a threat to the safety and soundness
of the banking entity or to the financial stability of the United
States.\52\ This section also describes the terms material conflict of
interest, high-risk asset, and high-risk trading strategy for these
purposes.
---------------------------------------------------------------------------

    \52\ See final rule Sec.  ----.7.
---------------------------------------------------------------------------

C. Restrictions on Covered Fund Activities and Investments

    Subpart C of the final rule implements the statutory prohibition
on, directly or indirectly, acquiring and retaining an ownership
interest in, or having certain relationships with, a covered fund, as
well as the various exemptions to this prohibition included in the
statute. Section ----.10 of the final rule contains the core
prohibition on covered fund activities and investments and defines a
number of related terms, including ``covered fund'' and ``ownership
interest.'' \53\ The definition of covered fund contains a number of
exclusions for entities that may rely on exclusions from the Investment
Company Act of 1940 contained in section 3(c)(1) or 3(c)(7) of that Act
but that are not engaged in investment activities of the type
contemplated by section 13 of the BHC Act. These include, for example,
exclusions for wholly owned subsidiaries, joint ventures, foreign
pension or retirement funds, insurance company separate accounts, and
public welfare investment funds. The final rule also implements the
statutory rule of construction in section 13(g)(2) and provides that a
securitization of loans, which would include loan securitization,
qualifying asset backed commercial paper conduit, and qualifying
covered bonds, is not covered by section 13 or the final rule.\54\
---------------------------------------------------------------------------

    \53\ See final rule Sec.  ----.10(b).
    \54\ The Agencies believe that most securitization transactions
are currently structured so that the issuing entity with respect to
the securitization is not an affiliate of a banking entity under the
BHC Act. However, with respect to any securitization that is an
affiliate of a banking entity and that does not meet the
requirements of the loan securitization exclusion, the related
banking entity will need to determine how to bring the
securitization into compliance with this rule.
---------------------------------------------------------------------------

    The definition of ``ownership interest'' in the final rule provides
further guidance regarding the types of interests that would be
considered to be an ownership interest in a covered fund.\55\ As
described in this Supplementary Information, these interests may take
various forms. The definition of ownership interest also explicitly
excludes from the definition ``restricted profit interest'' that is
solely performance compensation for services provided to the covered
fund by the banking entity (or an employee or former employee thereof),
under certain circumstances.\56\ Section ----.10 of the final rule also
defines a number of other relevant terms, including the terms ``prime
brokerage transaction,'' ``sponsor,'' and ``trustee.''
---------------------------------------------------------------------------

    \55\ See final rule Sec.  ----.10(d)(6).
    \56\ See final rule Sec.  ----.10(b)(6)(ii).
---------------------------------------------------------------------------

    Section ----.11 of the final rule implements the exemption for
organizing and offering a covered fund provided for under section
13(d)(1)(G) of the BHC Act. Section ----.11(a) of the final rule
outlines the conditions that must be met in order for a banking entity
to organize and offer a covered fund under this authority. These
requirements are contained in the statute and are intended to allow a
banking entity to engage in certain traditional asset management and
advisory businesses, subject to certain limits contained in section 13
of the BHC Act.\57\ The requirements are discussed in detail in Part
IV.B.2. of this Supplementary Information. Section ----.11 also
explains how these requirements apply to covered funds that are issuing
entities of asset-backed securities, as well as implements the
statutory exemption for underwriting and market-making ownership
interests of a covered fund, including explaining the limitations
imposed on such activities under the final rule.
---------------------------------------------------------------------------

    \57\ See 156 Cong. Rec. S5889 (daily ed. July 15, 2010)
(statement of Sen. Hagan).
---------------------------------------------------------------------------

    In Section ----.12, the final rule permits a banking entity to
acquire and

retain, as an investment in a covered fund, an ownership interest in a
covered fund that the banking entity organizes and offers or holds
pursuant to other authority under Sec.  ----.11.\58\ This section
implements section 13(d)(4) of the BHC Act and related provisions.
Section 13(d)(4)(A) of the BHC Act permits a banking entity to make an
investment in a covered fund that the banking entity organizes and
offers, or for which it acts as sponsor, for the purposes of (i)
establishing the covered fund and providing the fund with sufficient
initial equity for investment to permit the fund to attract
unaffiliated investors, or (ii) making a de minimis investment in the
covered fund in compliance with applicable requirements. Section --
--.12 of the final rule implements this authority and related
limitations, including limitations regarding the amount and value of
any individual per-fund investment and the aggregate value of all such
permitted investments. In addition, Sec.  ----.12 requires that the
aggregate value of all investments in covered funds, plus any earnings
on these investments, be deducted from the capital of the banking
entity for purposes of the regulatory capital requirements, and
explains how that deduction must occur. Section ----.12 of the final
rule also clarifies how a banking entity must calculate its compliance
with these investment limitations (including by deducting such
investments from applicable capital, as relevant), and sets forth how a
banking entity may request an extension of the period of time within
which it must conform an investment in a single covered fund. This
section also explains how a banking entity must apply the covered fund
investment limits to a covered fund that is an issuing entity of asset
backed securities or a covered fund that is part of a master-feeder or
fund-of-funds structure.
---------------------------------------------------------------------------

    \58\ See final rule Sec.  ----.12.
---------------------------------------------------------------------------

    In Section ----.13, the final rule implements the statutory
exemptions described in sections 13(d)(1)(C), (D), (F), and (I) of the
BHC Act that permit a banking entity: (i) to acquire and retain an
ownership interest in a covered fund as a risk-mitigating hedging
activity related to employee compensation; (ii) in the case of a non-
U.S. banking entity, to acquire and retain an ownership interest in, or
act as sponsor to, a covered fund solely outside the United States; and
(iii) to acquire and retain an ownership interest in, or act as sponsor
to, a covered fund by an insurance company for its general or separate
accounts.\59\
---------------------------------------------------------------------------

    \59\ See final rule Sec.  ----.13(a)-(c).
---------------------------------------------------------------------------

    In Section ----.14, the final rule implements section 13(f) of the
BHC Act and generally prohibits a banking entity from entering into
certain transactions with a covered fund that would be a covered
transaction as defined in section 23A of the Federal Reserve Act.\60\
Section ----.14(a)(2) of the final rule describes the transactions
between a banking entity and a covered fund that remain permissible
under the statute and the final rule. Section ----.14(b) of the final
rule implements the statute's requirement that any transaction
permitted under section 13(f) of the BHC Act (including a prime
brokerage transaction) between the banking entity and a covered fund is
subject to section 23B of the Federal Reserve Act,\61\ which, in
general, requires that the transaction be on market terms or on terms
at least as favorable to the banking entity as a comparable transaction
by the banking entity with an unaffiliated third party.
---------------------------------------------------------------------------

    \60\ See 12 U.S.C. 371c; see also final rule Sec.  ----.14.
    \61\ 12 U.S.C. 371c-1.
---------------------------------------------------------------------------

    In Section ----.15, the final rule prohibits a banking entity from
relying on any exemption to the prohibition on acquiring and retaining
an ownership interest in, acting as sponsor to, or having certain
relationships with, a covered fund, if the permitted activity or
investment would involve or result in a material conflict of interest,
result in a material exposure to high-risk assets or high-risk trading
strategies, or pose a threat to the safety and soundness of the banking
entity or to the financial stability of the United States.\62\ This
section also describes material conflict of interest, high-risk asset,
and high-risk trading strategy for these purposes.
---------------------------------------------------------------------------

    \62\ See final rule Sec.  ----.15.
---------------------------------------------------------------------------

D. Metrics Reporting Requirement

    Under the final rule, a banking entity that meets relevant
thresholds specified in the rule must furnish the following
quantitative measurements for each of its trading desks engaged in
covered trading activity calculated in accordance with Appendix A:
     Risk and Position Limits and Usage;
     Risk Factor Sensitivities;
     Value-at-Risk and Stress VaR;
     Comprehensive Profit and Loss Attribution;
     Inventory Turnover;
     Inventory Aging; and
     Customer Facing Trade Ratio.
    The final rule raises the threshold for metrics reporting from the
proposal to capture only firms that engage in significant trading
activity, identified at specified aggregate trading asset and liability
thresholds, and delays the dates for reporting metrics through a
phased-in approach based on the size of trading assets and liabilities.
Specifically, the Agencies have delayed the reporting of metrics until
June 30, 2014 for the largest banking entities that, together with
their affiliates and subsidiaries, have trading assets and liabilities
the average gross sum of which equal or exceed $50 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).
Banking entities with $25 billion or more in trading assets and
liabilities and banking entities with $10 billion or more in trading
assets and liabilities would also be required to report these metrics
beginning on April 30, 2016, and December 31, 2016, respectively.
    Under the final rule, a banking entity required to report metrics
must calculate any applicable quantitative measurement for each trading
day. Each banking entity required to report must report each applicable
quantitative measurement to its primary supervisory Agency on the
reporting schedule established in the final rule unless otherwise
requested by the primary supervisory Agency for the entity. The largest
banking entities with $50 billion in consolidated trading assets and
liabilities must report the metrics on a monthly basis. Other banking
entities required to report metrics must do so on a quarterly basis.
All quantitative measurements for any calendar month must be reported
no later than 10 days after the end of the calendar month required by
the final rule unless another time is requested by the primary
supervisory Agency for the entity except for a transitional six month
period during which reporting will be required no later than 30 days
after the end of the calendar month. Banking entities subject to
quarterly reporting will be required to report quantitative
measurements within 30 days of the end of the quarter, unless another
time is requested by the primary supervisory Agency for the entity in
writing.\63\
---------------------------------------------------------------------------

    \63\ See final rule Sec.  ----.20(d)(3). The final rule includes
a shorter period of time for reporting quantitative measurements
than was proposed for the largest banking entities. Like the monthly
reporting requirement for these firms, this is intended to allow for
more effective supervision of their large-scale trading operations.

---------------------------------------------------------------------------

E. Compliance Program Requirement

    Subpart D of the final rule requires a banking entity engaged in
covered trading activities or covered fund activities to develop and
implement a program reasonably designed to ensure and monitor
compliance with the prohibitions and restrictions on covered trading
activities and covered fund activities and investments set forth in
section 13 of the BHC Act and the final rule.\64\ To reduce the overall
burden of the rule, the final rule provides that a banking entity that
does not engage in covered trading activities (other than trading in
U.S. government or agency obligations, obligations of specified
government sponsored entities, and state and municipal obligations) or
covered fund activities and investments need only establish a
compliance program prior to becoming engaged in such activities or
making such investments.\65\ In addition, to reduce the burden on
smaller banking entities, a banking entity with total consolidated
assets of $10 billion or less that engages in covered trading
activities and/or covered fund activities or investments may satisfy
the requirements of the final rule by including in its existing
compliance policies and procedures appropriate references to the
requirements of section 13 and the final rule and adjustments as
appropriate given the activities, size, scope and complexity of the
banking entity.\66\
---------------------------------------------------------------------------

    \64\ See final rule Sec.  ----.20.
    \65\ See final rule Sec.  ----.20(f)(1).
    \66\ See final rule Sec.  ----.20(f)(2).
---------------------------------------------------------------------------

    For banking entities with total assets greater than $10 billion and
less than $50 billion, the final rule specifies six elements that each
compliance program established under subpart D must, at a minimum,
include. These requirements focus on written policies and procedures
reasonably designed to ensure compliance with the final rules,
including limits on underwriting and market-making; a system of
internal controls; clear accountability for compliance and review of
limits, hedging, incentive compensation, and other matters; independent
testing and audits; additional documentation for covered funds;
training; and recordkeeping requirements.
    A banking entity with $50 billion or more total consolidated assets
(or a foreign banking entity that has total U.S. assets of $50 billion
or more) or that is required to report metrics under Appendix A is
required to adopt an enhanced compliance program with more detailed
policies, limits, governance processes, independent testing and
reporting. In addition, the Chief Executive Officer of these larger
banking entities must attest that the banking entity has in place a
program reasonably designed to achieve compliance with the requirements
of section 13 of the BHC Act and the final rule.
    The application of detailed minimum standards for these types of
banking entities is intended to reflect the heightened compliance risks
of large covered trading activities and covered fund activities and
investments and to provide clear, specific guidance to such banking
entities regarding the compliance measures that would be required for
purposes of the final rule.

IV. Final Rule

A. Subpart B--Proprietary Trading Restrictions

1. Section ----.3: Prohibition on Proprietary Trading and Related
Definitions
    Section 13(a)(1)(A) of the BHC Act prohibits a banking entity from
engaging in proprietary trading unless otherwise permitted in section
13.\67\ Section 13(h)(4) of the BHC Act defines proprietary trading, in
relevant part, as engaging as principal for the trading account of the
banking entity in any transaction to purchase or sell, or otherwise
acquire or dispose of, a security, derivative, contract of sale of a
commodity for future delivery, or other financial instrument that the
Agencies include by rule.\68\
---------------------------------------------------------------------------

    \67\ 12 U.S.C. 1851(a)(1)(A).
    \68\ 12 U.S.C. 1851(h)(4).
---------------------------------------------------------------------------

    Section ----.3(a) of the proposed rule implemented section
13(a)(1)(A) of the BHC Act by prohibiting a banking entity from
engaging in proprietary trading unless otherwise permitted under
Sec. Sec.  ----.4 through ----.6 of the proposed rule. Section --
--.3(b)(1) of the proposed rule defined proprietary trading in
accordance with section 13(h)(4) of the BHC Act and clarified that
proprietary trading does not include acting solely as agent, broker, or
custodian for an unaffiliated third party. The preamble to the proposed
rule explained that acting in these types of capacities does not
involve trading as principal.\69\
---------------------------------------------------------------------------

    \69\ See Joint Proposal, 76 FR 68,857.
---------------------------------------------------------------------------

    Several commenters expressed concern about the breadth of the ban
on proprietary trading.\70\ Some of these commenters stated that
proprietary trading must be carefully and narrowly defined to avoid
prohibiting activities that Congress did not intend to limit and to
preclude significant, unintended consequences for capital markets,
capital formation, and the broader economy.\71\ Some commenters
asserted that the proposed definition could result in banking entities
being unwilling to take principal risk to provide liquidity for
institutional investors; could unnecessarily constrain liquidity in
secondary markets, forcing asset managers to service client needs
through alternative non-U.S. markets; could impose substantial costs
for all institutions, especially smaller and mid-size institutions; and
could drive risk-taking to the shadow banking system.\72\ Others urged
the Agencies to determine that trading as agent, broker, or custodian
for an affiliate was not proprietary trading.\73\
---------------------------------------------------------------------------

    \70\ See, e.g., Ass'n. of Institutional Investors (Feb. 2012);
Capital Group; Comm. on Capital Markets Regulation; IAA; SIFMA et
al. (Prop. Trading) (Feb. 2012); SVB; Chamber (Feb. 2012);
Wellington.
    \71\ See Ass'n. of Institutional Investors (Feb. 2012); GE (Feb.
2012); Invesco; Sen. Corker; Chamber (Feb. 2012).
    \72\ See Chamber (Feb. 2012).
    \73\ See Japanese Bankers Ass'n.
---------------------------------------------------------------------------

    Commenters also suggested alternative approaches for defining
proprietary trading. In general, these approaches sought to provide a
bright-line definition to provide increased certainty to banking
entities\74\ or make the prohibition easier to apply in practice.\75\
One commenter stated the Agencies should focus on the economics of
banking entities' transactions and ban trading if the banking entity is
exposed to market risk for a significant period of time or is profiting
from changes in the value of the asset.\76\ Several commenters,
including individual members of the public, urged the Agencies to
prohibit banking entities from engaging in any kind of proprietary
trading and require separation of trading from traditional banking
activities.\77\ After carefully considering comments, the Agencies are
defining proprietary trading as engaging as principal for the trading
account of the banking entity in any purchase or sale of one or more

financial instruments.\78\ The Agencies believe this effectively
restates the statutory definition. The Agencies are not adopting
commenters' suggested modifications to the proposed definition of
proprietary trading or the general prohibition on proprietary trading
because they generally appear to be inconsistent with Congressional
intent. For instance, some commenters appeared to suggest an approach
to defining proprietary trading that would capture only bright-line,
speculative proprietary trading and treat the activities covered by the
statutory exemptions as completely outside the rule.\79\ However, such
an approach would appear to be inconsistent with Congressional intent
because, for instance, it would not give effect to the limitations on
permitted activities in section 13(d) of the BHC Act.\80\ For similar
reasons, the Agencies are not adopting a bright-line definition of
proprietary trading.\81\
---------------------------------------------------------------------------

    \74\ See, e.g., ABA (Keating); Ass'n. of Institutional Investors
(Feb. 2012); BOK; George Bollenbacher; Credit Suisse (Seidel); NAIB
et al.; SSgA (Feb. 2012); JPMC.
    \75\ See Public Citizen.
    \76\ See Sens. Merkley & Levin (Feb. 2012).
    \77\ See generally Occupy; Public Citizen; AFR et al. (Feb.
2012). The Agencies received over fifteen thousand form letters in
support of a rule with few exemptions, many of which expressed a
desire to return to the regulatory scheme as governed by the Glass-
Steagall affiliation provisions of the U.S. Banking Act of 1933, as
repealed through the Graham-Leach-Bliley Act of 1999. See generally
Sarah McGee; Christopher Wilson; Michael Itlis; Barry Rein; Edward
Bright. Congress rejected such an approach, however, opting instead
for the more narrowly tailored regulatory approach embodied in
section 13 of the BHC Act.
    \78\ See final rule Sec.  ----.3(a). The final rule also
replaces all references to the proposed term ``covered financial
position'' with the term ``financial instrument.'' This change has
no substantive impact because the definition of ``financial
instrument'' is substantially identical to the proposed definition
of ``covered financial position.'' Consistent with this change, the
final rule replaces the undefined verbs ``acquire'' or ``take'' with
the defined terms ``purchase'' or ``sale'' and ``sell.'' See final
rule Sec. Sec.  ----.3(c), ----.2(u), (x).
    \79\ See, e.g., Ass'n. of Institutional Investors (Feb. 2012);
GE (Feb. 2012); Invesco; Sen. Corker; Chamber (Feb. 2012); JPMC.
    \80\ See 156 Cong. Rec. S5895-96 (daily ed. July 15, 2010)
(statement of Sen. Merkley) (stating the statute ``permits
underwriting and market-making-related transactions that are
technically trading for the account of the firm but, in fact,
facilitate the provision of near-term client-oriented financial
services.'').
    \81\ See ABA (Keating); Ass'n. of Institutional Investors (Feb.
2012); BOK; George Bollenbacher; Credit Suisse (Seidel); NAIB et
al.; SSgA (Feb. 2012); JPMC.
---------------------------------------------------------------------------

    A number of commenters expressed concern that, as a whole, the
proposed rule may result in certain negative economic impacts,
including: (i) Reduced market liquidity; \82\ (ii) wider spreads or
otherwise increased trading costs; \83\ (iii) higher borrowing costs
for businesses or increased cost of capital; \84\ and/or (iv) greater
market volatility.\85\ The Agencies have carefully considered
commenters' concerns about the proposed rule's potential impact on
overall market liquidity and quality. As discussed in more detail in
Parts IV.A.2. and IV.A.3., the final rule will permit banking entities
to continue to provide beneficial market-making and underwriting
services to customers, and therefore provide liquidity to customers and
facilitate capital-raising. However, the statute upon which the final
rule is based prohibits proprietary trading activity that is not
exempted. As such, the termination of non-exempt proprietary trading
activities of banking entities may lead to some general reductions in
liquidity of certain asset classes. Although the Agencies cannot say
with any certainty, there is good reason to believe that to a
significant extent the liquidity reductions of this type may be
temporary since the statute does not restrict proprietary trading
activities of other market participants.\86\ Thus, over time, non-
banking entities may provide much of the liquidity that is lost by
restrictions on banking entities' trading activities. If so,
eventually, the detrimental effects of increased trading costs, higher
costs of capital, and greater market volatility should be mitigated.
---------------------------------------------------------------------------

    \82\ See, e.g., AllianceBernstein; Obaid Syed; Rep. Bachus et
al.; EMTA; NASP; Sen. Hagan; Investure; Lord Abbett; Sumitomo Trust;
EFAMA; Morgan Stanley; Barclays; BoA; Citigroup (Feb. 2012); STANY;
ABA (Keating); ICE; ICSA; SIFMA (Asset Mgmt.) (Feb. 2012); Putnam;
ACLI (Feb. 2012); Wells Fargo (Prop. Trading); Capital Group; RBC;
Columbia Mgmt.; SSgA (Feb. 2012); Fidelity; ICI (Feb. 2012); ISDA
(Feb. 2012); Comm. on Capital Markets Regulation; Clearing House
Ass'n.; Thakor Study. See also CalPERS (acknowledging that the
systemic protections afforded by the Volcker Rule come at a price,
including reduced liquidity to all markets).
    \83\ See, e.g., AllianceBernstein; Obaid Syed; NASP; Investure;
Lord Abbett; CalPERS; Credit Suisse (Seidel); Citigroup (Feb. 2012);
ABA (Keating); SIFMA (Asset Mgmt.) (Feb. 2012); Putnam; Wells Fargo
(Prop. Trading); Comm. on Capital Markets Regulation.
    \84\ See, e.g., Rep. Bachus et al.; Members of Congress (Dec.
2011); Lord Abbett; Morgan Stanley; Barclays; BoA; Citigroup (Feb.
2012); ABA (Abernathy); ICSA; SIFMA (Asset Mgmt.) (Feb. 2012);
Chamber (Feb. 2012); Putnam; ACLI (Feb. 2012); UBS; Wells Fargo
(Prop. Trading); Capital Group; Sen. Carper et al.; Fidelity;
Invesco; Clearing House Ass'n.; Thakor Study.
    \85\ See, e.g., CalPERS (expressing the belief that a decline in
banking entity proprietary trading will increase the volatility of
the corporate bond market, especially during times of economic
weakness or periods where risk taking declines, but noting that
portfolio managers have experienced many different periods of market
illiquidity and stating that the market will adapt post-
implementation (e.g., portfolio managers will increase their use of
CDS to reduce economic risk to specific bond positions as the
liquidation process of cash bonds takes more time, alternative
market matching networks will be developed)); Morgan Stanley;
Capital Group; Fidelity; British Bankers' Ass'n.; Invesco.
    \86\ See David McClean; Public Citizen; Occupy. In response to
commenters who expressed concern about risks associated with
proprietary trading activities moving to non-banking entities, the
Agencies note that section 13's prohibition on proprietary trading
and related exemptions apply only to banking entities. See, e.g.,
Chamber (Feb. 2012).
---------------------------------------------------------------------------

    To respond to concerns raised by commenters while remaining
consistent with Congressional intent, the final rule has been modified
to provide that certain purchases and sales are not proprietary trading
as described in more detail below.\87\
---------------------------------------------------------------------------

    \87\ See final rule Sec.  ----.3(d).
---------------------------------------------------------------------------

a. Definition of ``Trading Account''
    As explained above, section 13 defines proprietary trading as
engaging as principal ``for the trading account of the banking entity''
in certain types of transactions. Section 13(h)(6) of the BHC Act
defines trading account as any account used for acquiring or taking
positions in financial instruments principally for the purpose of
selling in the near-term (or otherwise with the intent to resell in
order to profit from short-term price movements), and any such other
accounts as the Agencies may, by rule, determine.\88\
---------------------------------------------------------------------------

    \88\ See 12 U.S.C. 1851(h)(6).
---------------------------------------------------------------------------

    The proposed rule defined trading account to include three separate
accounts. First, the proposed definition of trading account included,
consistent with the statute, any account that is used by a banking
entity to acquire or take one or more covered financial positions for
short-term trading purposes (the ``short-term trading account'').\89\
The proposed rule identified four purposes that would indicate short-
term trading intent: (i) Short-term resale; (ii) benefitting from
actual or expected short-term price movements; (iii) realizing short-
term arbitrage profits; or (iv) hedging one or more positions described
in (i), (ii) or (iii). The proposed rule presumed that an account is a
trading account if it is used to acquire or take a covered financial
position (other than a position in the market risk rule trading account
or the dealer trading account) that the banking entity holds for 60
days or less.\90\
---------------------------------------------------------------------------

    \89\ See proposed rule Sec.  ----.3(b)(2)(i)(A).
    \90\ See proposed rule Sec.  ----.3(b)(2)(ii).
---------------------------------------------------------------------------

    Second, the proposed definition of trading account included, for
certain entities, any account that contains positions that qualify for
trading book capital treatment under the banking agencies' market risk
capital rules other than positions that are foreign exchange
derivatives, commodity derivatives or contracts of sale of a commodity
for delivery (the ``market risk rule trading account'').\91\ ``Covered
positions'' under the banking agencies' market-risk capital rules are
positions that are generally held with the intent of sale in the short-
term.
---------------------------------------------------------------------------

    \91\ See proposed rule Sec. Sec.  ----.3(b)(2)(i)(B); --
--.3(b)(3).
---------------------------------------------------------------------------

    Third, the proposed definition of trading account included any
account used by a banking entity that is a securities dealer, swap
dealer, or

security-based swap dealer to acquire or take positions in connection
with its dealing activities (the ``dealer trading account'').\92\ The
proposed rule also included as a trading account any account used to
acquire or take any covered financial position by a banking entity in
connection with the activities of a dealer, swap dealer, or security-
based swap dealer outside of the United States.\93\ Covered financial
positions held by banking entities that register or file notice as
securities or derivatives dealers as part of their dealing activity
were included because such positions are generally held for sale to
customers upon request or otherwise support the firm's trading
activities (e.g., by hedging its dealing positions).\94\
---------------------------------------------------------------------------

    \92\ See proposed rule Sec.  ----.3(b)(2)(i)(C).
    \93\ See proposed rule Sec.  ----.3(b)(2)(i)(C)(5).
    \94\ See Joint Proposal, 76 FR 68,860.
---------------------------------------------------------------------------

    The proposed rule also set forth four clarifying exclusions from
the definition of trading account. The proposed rule provided that no
account is a trading account to the extent that it is used to acquire
or take certain positions under repurchase or reverse repurchase
arrangements, positions under securities lending transactions,
positions for bona fide liquidity management purposes, or positions
held by derivatives clearing organizations or clearing agencies.\95\
---------------------------------------------------------------------------

    \95\ See proposed rule Sec.  ----.3(b)(2)(iii).
---------------------------------------------------------------------------

    Overall, commenters did not raise significant concerns with or
objections to the short-term trading account. Several commenters argued
that the definition of trading account should be limited to only this
portion of the proposed definition of trading account.\96\ However, a
few commenters raised concerns regarding the treatment of arbitrage
trading under the proposed rule.\97\ Several commenters asserted that
the proposed definition of trading account was too broad and covered
trading not intended to be covered by the statute.\98\ Some of these
commenters maintained that the Agencies exceeded their statutory
authority under section 13 of the BHC Act in defining trading account
to include the market risk rule trading account and dealer trading
account, and argued that the definition should be limited to the short-
term trading account definition.\99\ Commenters argued, for example,
that an overly broad definition of trading account may cause
traditional bank activities important to safety and soundness of a
banking entity to fall within the prohibition on proprietary trading to
the detriment of banking organizations, customers, and financial
markets.\100\ A number of commenters suggested modifying and narrowing
the trading account definition to remove the implicit negative
presumption that any position creates a trading account, or that all
principal trading constitutes prohibited proprietary trading unless it
qualifies for a narrowly tailored exemption, and to clearly exempt
activities important to safety and soundness.\101\ For example, one
commenter recommended that a covered financial position be considered a
trading account position only if it qualifies as a GAAP trading
position.\102\ A few commenters requested the Agencies define the
phrase ``short term'' in the rule.\103\
---------------------------------------------------------------------------

    \96\ See ABA (Keating); JPMC.
    \97\ See AFR et al. (Feb. 2012); Paul Volcker; Credit Suisse
(Seidel); ISDA (Feb. 2012); Japanese Bankers Ass'n.
    \98\ See ABA (Keating); Allen & Overy (on behalf of Large Int'l
Banks with U.S. Operations); Am. Express; BoA; Goldman (Prop.
Trading); ISDA (Feb. 2012); Japanese Bankers Ass'n.; JPMC; SIFMA et
al. (Prop.Trading) (Feb. 2012); State Street (Feb. 2012).
    \99\ See ABA (Keating); JPMC; SIFMA et al. (Prop.Trading) (Feb.
2012); State Street (Feb. 2012).
    \100\ See ABA (Keating); Credit Suisse (Seidel).
    \101\ See ABA (Keating); Ass'n. of Institutional Investors (Feb.
2012); BoA; Capital Group; IAA; Credit Suisse (Seidel); ICI (Feb.
2012); ISDA (Feb. 2012); NAIB et al.; SIFMA et al. (Prop.Trading)
(Feb. 2012); SVB; Wellington.
    \102\ See ABA (Keating).
    \103\ See NAIB et al.; Occupy; but See Alfred Brock.
---------------------------------------------------------------------------

    Several commenters argued that the market risk rule should not be
referenced as part of the definition of trading account.\104\ A few of
these commenters argued instead that the capital treatment of a
position be used only as an indicative factor rather than a dispositive
test.\105\ One commenter thought that the market risk rule trading
account was redundant because it includes only positions that have
short-term trading intent.\106\ Commenters also contended that it was
difficult to consider and comment on this aspect of the proposal
because the market risk capital rules had not been finalized.\107\
---------------------------------------------------------------------------

    \104\ See ABA; BoA; Goldman (Prop. Trading); ISDA (Feb. 2012);
JPMC; SIFMA et al. (Prop.Trading) (Feb. 2012).
    \105\ See BoA; SIFMA et al. (Prop.Trading) (Feb. 2012).
    \106\ See ISDA (Feb. 2012).
    \107\ See ABA (Keating); BoA; Goldman (Prop. Trading); ISDA
(Feb. 2012); JPMC. The banking agencies adopted a final rule that
amends their respective market risk capital rules on August 30,
2012. See 77 FR 53,060 (Aug. 30, 2012). The Agencies continued to
receive and consider comments on the proposed rule to implement
section 13 of the BHC Act after that time.
---------------------------------------------------------------------------

    A number of commenters objected to the dealer trading account prong
of the definition.\108\ Commenters asserted that this prong was an
unnecessary and unhelpful addition that went beyond the requirements of
section 13 of the BHC Act, and that it made the trading account
determination more complex and difficult.\109\ In particular,
commenters argued that the dealer trading account was too broad and
introduced uncertainty because it presumed that dealers always enter
into positions with short-term intent.\110\ Commenters also expressed
concern about the difficulty of applying this test outside the United
States and requested that, if this account is retained, the final rule
be explicit about how it applies to a swap dealer outside the United
States and treat U.S. swap dealers consistently.\111\
---------------------------------------------------------------------------

    \108\ See ABA (Keating); Allen & Overy (on behalf of Large Int'l
Banks with U.S. Operations); Am. Express; Goldman (Prop. Trading);
ISDA (Feb. 2012); Japanese Bankers Ass'n.; JPMC; SIFMA et al.
(Prop.Trading) (Feb. 2012).
    \109\ See ABA (Keating); Allen & Overy (on behalf of Large Int'l
Banks with U.S. Operations); JPMC; State Street (Feb. 2012); ISDA
(Feb. 2012); SIFMA et al. (Prop.Trading) (Feb. 2012).
    \110\ See ABA (Keating); Am. Express; Goldman (Prop. Trading);
ISDA (Feb. 2012); JPMC.
    \111\ See Allen & Overy (on behalf of Large Int'l Banks with
U.S. Operations); Am. Express; JPMC.
---------------------------------------------------------------------------

    In contrast, other commenters contended that the proposed rule's
definition of trading account was too narrow, particularly in its focus
on short-term positions,\112\ or should be simplified.\113\ One
commenter argued that the breadth of the trading account definition was
critical because positions excluded from the trading account definition
would not be subject to the proposed rule.\114\ One commenter supported
the proposed definition of trading account.\115\ Other commenters
believed that reference to the market-risk rule was an important
addition to the definition of trading account. Some expressed the view
that it should include all market risk capital rule covered positions
and not just those requiring short-term trading intent.\116\
---------------------------------------------------------------------------

    \112\ See Sens. Merkley & Levin (Feb. 2012); Occupy.
    \113\ See, e.g., Public Citizen.
    \114\ See AFR et al. (Feb. 2012).
    \115\ See Alfred Brock.
    \116\ See AFR et al. (Feb. 2012).
---------------------------------------------------------------------------

    Certain commenters proposed alternate definitions. Several
commenters argued against using the term ``account'' and instead
advocated applying the prohibition on proprietary trading to trading
positions.\117\ Foreign banks recommended applying the definition of
trading account applicable to such banks in their home country, if the
home country provided a clear definition of this term.\118\ These
commenters argued that new definitions in the proposed rule, like
trading account, would require foreign banking

entities to develop new and complex procedures and expensive
systems.\119\
---------------------------------------------------------------------------

    \117\ See ABA (Keating); Goldman (Prop. Trading); NAIB et al.
    \118\ See Japanese Bankers Ass'n.; Norinchukin.
    \119\ See Japanese Bankers Ass'n.
---------------------------------------------------------------------------

    Commenters also argued that various types of trading activities
should be excluded from the trading account definition. For example,
one commenter asserted that arbitrage trading should not be considered
trading account activity,\120\ while other commenters argued that
arbitrage positions and strategies are proprietary trading and should
be included in the definition of trading account and prohibited by the
final rule.\121\ Another commenter argued that the trading account
should include only positions primarily intended, when the position is
entered into, to profit from short-term changes in the value of the
assets, and that liquidity investments that do not have price changes
and that can be sold whenever the banking entity needs cash should be
excluded from the trading account definition.\122\
---------------------------------------------------------------------------

    \120\ See Alfred Brock.
    \121\ See AFR et al. (Feb. 2012); Paul Volcker.
    \122\ See NAIB et al. See infra Part IV.A.1.d.2. (discussing the
liquidity management exclusion).
---------------------------------------------------------------------------

    After carefully reviewing the comments, the Agencies have
determined to retain in the final rule the proposed approach for
defining trading account that includes the short-term, market risk
rule, and dealer trading accounts with modifications to address issues
raised by commenters. The Agencies believe that this multi-prong
approach is consistent with both the language and intent of section 13
of the BHC Act, including the express statutory authority to include
``any such other account'' as determined by the Agencies.\123\ The
final definition effectuates Congress's purpose to generally focus on
short-term trading while addressing commenters' desire for greater
certainty regarding the definition of the trading account.\124\ In
addition, the Agencies believe commenters' concerns about the scope of
the proposed definition of trading account are substantially addressed
by the refined exemptions in the final rule for customer-oriented
activities, such as market making-related activities, and the
exclusions from proprietary trading.\125\ Moreover, the Agencies
believe that it is appropriate to focus on the economics of a banking
entity's trading activity to help determine whether it is engaged in
proprietary trading, as discussed further below.\126\
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    \123\ 12 U.S.C. 1851(h)(6).
    \124\ In response to commenters' concerns about the meaning of
account, the Agencies note the term ``trading account'' is a
statutory concept and does not necessarily refer to an actual
account. Trading account is simply nomenclature for the set of
transactions that are subject to the final rule's restrictions on
proprietary trading. See ABA (Keating); Goldman (Prop. Trading);
NAIB et al.
    \125\ For example, several commenters' concerns about the
potential impact of the proposed definition of trading account were
tied to the perceived narrowness of the proposed exemptions. See ABA
(Keating); Ass'n. of Institutional Investors (Feb. 2012); BoA;
Capital Group; IAA; Credit Suisse (Seidel); ICI (Feb. 2012); ISDA
(Feb. 2012); NAIB et al.; SIFMA et al. (Prop. Trading) (Feb. 2012);
SVB; Wellington.
    \126\ See Sens. Merkley & Levin (Feb. 2012). However, as
discussed in this SUPPLEMENTARY INFORMATION, the Agencies are not
prohibiting any trading that involves profiting from changes in the
value of the asset, as suggested by this commenter, because
permitted activities, such as market making, can involve price
appreciation-related revenues. See infra Part IV.A.3. (discussing
the final market-making exemption).
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    As explained above, the short-term trading prong of the definition
largely incorporates the statutory provisions. This prong covers
trading involving short-term resale, price movements, and arbitrage
profits, and hedging positions that result from these activities.
Specifically, the reference to short-term resale is taken from the
statute's definition of trading account. The Agencies continue to
believe it is also appropriate to include in the short-term trading
prong an account that is used by a banking entity to purchase or sell
one or more financial instruments principally for the purpose of
benefitting from actual or expected short-term price movements,
realizing short-term arbitrage profits, or hedging one or more
positions captured by the short-term trading prong. The provisions
regarding price movements and arbitrage focus on the intent to engage
in transactions to benefit from short-term price movements (e.g.,
entering into a subsequent transaction in the near term to offset or
close out, rather than sell, the risks of a position held by the
banking entity to benefit from a price movement occurring between the
acquisition of the underlying position and the subsequent offsetting
transaction) or to benefit from differences in multiple market prices,
including scenarios where movement in those prices is not necessary to
realize the intended profit.\127\ These types of transactions are
economically equivalent to transactions that are principally for the
purpose of selling in the near term or with the intent to resell to
profit from short-term price movements, which are expressly covered by
the statute's definition of trading account. Thus, the Agencies believe
it is necessary to include these provisions in the final rule's short-
term trading prong to provide clarity about the scope of the definition
and to prevent evasion of the statute and final rule.\128\ In addition,
like the proposed rule, the final rule's short-term trading prong
includes hedging one or more of the positions captured by this prong
because the Agencies assume that a banking entity generally intends to
hold the hedging position for only so long as the underlying position
is held.
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    \127\ See Joint Proposal, 76 FR 68,857-68,858.
    \128\ As a result, the Agencies are not excluding arbitrage
trading from the trading account definition, as suggested by at
least one commenter. See, e.g., Alfred Brock.
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    The remaining two prongs to the trading account definition apply to
types of entities that engage actively in trading activities. Each
prong focuses on analogous or parallel short-term trading activities. A
few commenters stated these prongs were duplicative of the short-term
trading prong, and argued the Agencies should not include these prongs
in the definition of trading account, or should only consider them as
non-determinative factors.\129\ To the extent that an overlap exists
between the prongs of this definition, the Agencies believe they are
mutually reinforcing, strengthen the rule's effectiveness, and may help
simplify the analysis of whether a purchase or sale is conducted for
the trading account.\130\
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    \129\ See ISDA (Feb. 2012); JPMC; ABA (Keating); BoA; SIFMA et
al. (Prop. Trading) (Feb. 2012).
    \130\ See Occupy.
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    The market risk capital prong covers trading positions that are
covered positions for purposes of the banking agency market-risk
capital rules, as well as hedges of those positions. Trading positions
under those rules are positions held by the covered entity ``for the
purpose of short-term resale or with the intent of benefitting from
actual or expected short-term price movements, or to lock-in arbitrage
profits.'' \131\ This definition largely parallels the provisions of
section 13(h)(4) of the BHC Act and mirrors the short-term trading
account prong of both the proposed and final rules. Covered positions
are trading positions under the rule that subject the covered entity to
risks and exposures that must be actively managed and limited--a
requirement consistent with the purposes of the section 13 of the BHC
Act.
---------------------------------------------------------------------------

    \131\ 12 CFR part 225, Appendix E.
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    Incorporating this prong into the trading account definition
reinforces the consistency between governance of the types of positions
that banking entities identify as ``trading'' for purposes of the
market risk capital rules and those that are trading for purposes of
the final rule under section 13 of the BHC Act. Moreover, this aspect
of the final rule reduces the compliance burden on banking entities
with substantial trading

activities by establishing a clear, bright-line rule for determining
that a trade is within the trading account.\132\
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    \132\ Accordingly, the Agencies are not using a position's
capital treatment as merely an indicative factor, as suggested by a
few commenters.
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    After reviewing comments, the Agencies also continue to believe
that financial instruments purchased or sold by registered dealers in
connection with their dealing activity are generally held with short-
term intent and should be captured within the trading account. The
Agencies believe the scope of the dealer prong is appropriate because,
as noted in the proposal, positions held by a registered dealer in
connection with its dealing activity are generally held for sale to
customers upon request or otherwise support the firm's trading
activities (e.g., by hedging its dealing positions), which is
indicative of short-term intent.\133\ Moreover, the final rule includes
a number of exemptions for the activities in which securities dealers,
swap dealers, and security-based swap dealers typically engage, such as
market making, hedging, and underwriting. Thus, the Agencies believe
the broad scope of the dealer trading account is balanced by the
exemptions that are designed to permit dealer entities to continue to
engage in customer-oriented trading activities, consistent with the
statute. This approach is designed to ensure that registered dealer
entities are engaged in permitted trading activities, rather than
prohibited proprietary trading.
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    \133\ See Joint Proposal, 76 FR 68,860.
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    The final rule adopts the dealer trading account substantially as
proposed,\134\ with streamlining that eliminates the specific
references to different types of securities and derivatives dealers.
The final rule adopts the proposed approach to covering trading
accounts of banking entities that regularly engage in the business of a
dealer, swap dealer, or security-based swap dealer outside of the
United States. In the case of both domestic and foreign entities, this
provision applies only to financial instruments purchased or sold in
connection with the activities that require the banking entity to be
licensed or registered to engage in the business of dealing, which is
not necessarily all of the activities of that banking entity.\135\
Activities of a banking entity that are not covered by the dealer prong
may, however, be covered by the short-term or market risk rule trading
accounts if the purchase or sale satisfies the requirements of
Sec. Sec.  ----.3(b)(1)(i) or (ii).\136\
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    \134\ See final rule Sec.  ----.3(b)(1)(iii).
    \135\ An insured depository institution may be registered as a
swap dealer, but only the swap dealing activities that require it to
be so registered are covered by the dealer trading account. If an
insured depository institution purchases or sells a financial
instrument in connection with activities of the insured depository
institution that do not trigger registration as a swap dealer, such
as lending, deposit-taking, the hedging of business risks, or other
end-user activity, the financial instrument is included in the
trading account only if the instrument falls within the statutory
trading account under Sec.  ----.3(b)(1)(i) or the market risk rule
trading account under Sec.  ----.3(b)(1)(ii) of the final rule.
    \136\ See final rule Sec. Sec.  ----.3(b)(1)(i) and (ii).
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    A few commenters stated that they do not currently analyze whether
a particular activity would require dealer registration, so the dealer
prong of the trading account definition would require banking entities
to engage in a new type of analysis.\137\ The Agencies recognize that
banking entities that are registered dealers may not currently engage
in such an analysis with respect to their current trading activities
and, thus, this may represent a new regulatory requirement for these
entities. If the regulatory analysis otherwise engaged in by banking
entities is substantially similar to the dealer prong analysis required
under the trading account definition, then any increased compliance
burden could be small or insubstantial.\138\
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    \137\ See, e.g., SIFMA et al. (Prop. Trading) (Feb. 2012);
Goldman (Prop. Trading).
    \138\ See, e.g., Goldman (Prop. Trading) (``For instance, a
banking entity's market making-related activities with respect to
credit trading may involve making a market in bonds (traded in a
broker-dealer), single-name CDSs (in a security-based swap dealer)
and CDS indexes (in a swap dealer). For regulatory or other reasons,
these transactions could take place in different legal entities. .
.'').
---------------------------------------------------------------------------

    In response to commenters' concerns regarding the application of
this prong to banking entities acting as dealers in jurisdictions
outside the United States,\139\ the Agencies continue to believe
including the activities of a banking entity engaged in the business of
a dealer, swap dealer, or security-based swap dealer outside of the
United States, to the extent the instrument is purchased or sold in
connection with the activities of such business, is appropriate. As
noted above, dealer activity generally involves short-term trading.
Further, the Agencies are concerned that differing requirements for
U.S. and foreign dealers may lead to regulatory arbitrage. For foreign
banking entities acting as dealers outside of the United States that
are eligible for the exemption for trading conducted by foreign banking
entities, the Agencies believe the risk-based approach to this
exemption in the final rule should help address the concerns about the
scope of this prong of the definition.\140\
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    \139\ See SIFMA et al. (Prop. Trading) (Feb. 2012); JPMC; Allen
& Overy (on behalf of Large Int'l Banks with U.S. Operations).
    \140\ See final rule Sec.  ----.6(e).
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    In response to one commenter's suggestion that the Agencies define
the term trading account to allow a foreign banking entity to use of
the relevant foreign regulator's definition of this term, where
available, the Agencies are concerned such an approach could lead to
regulatory arbitrage and otherwise inconsistent applications of the
rule.\141\ The Agencies believe this commenter's general concern about
the impact of the statute and rule on foreign banking entities'
activities outside the United States should be substantially addressed
by the exemption for trading conducted by foreign banking entities
under Sec.  ----.6(e) of the final rule.
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    \141\ See Japanese Bankers Ass'n.
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    Finally, the Agencies have declined to adopt one commenter's
recommendation that a position in a financial instrument be considered
a trading account position only if it qualifies as a GAAP trading
position.\142\ The Agencies continue to believe that formally
incorporating accounting standards governing trading securities is not
appropriate because: (i) The statutory proprietary trading provisions
under section 13 of the BHC Act applies to financial instruments, such
as derivatives, to which the trading security accounting standards may
not apply; (ii) these accounting standards permit companies to
classify, at their discretion, assets as trading securities, even where
the assets would not otherwise meet the definition of trading
securities; and (iii) these accounting standards could change in the
future without consideration of the potential impact on section 13 of
the BHC Act and these rules.\143\
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    \142\ See ABA (Keating).
    \143\ See Joint Proposal, 76 FR 68,859.
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b. Rebuttable Presumption for the Short-Term Trading Account
    The proposed rule included a rebuttable presumption clarifying when
a covered financial position, by reason of its holding period, is
traded with short-term intent for purposes of the short-term trading
account. The Agencies proposed this presumption primarily to provide
guidance to banking entities that are not subject to the market risk
capital rules or are not covered dealers or swap entities and
accordingly may not have experience evaluating short-term trading
intent. In particular, Sec.  ----.3(b)(2)(ii) of the proposed rule
provided that an account would be presumed to be a short-term trading
account if it was used to acquire

or take a covered financial position that the banking entity held for a
period of 60 days or less.
    Several commenters supported the rebuttable presumption, but
suggested either shortening the holding period to 30 days or less,\144\
or extending the period to 90 days,\145\ to several months,\146\ or to
one year.\147\ Some of these commenters argued that specifying an
overly short holding period would be contrary to the statute, invite
gamesmanship,\148\ and miss speculative positions held for longer than
the specified period.\149\ Commenters also suggested turning the
presumption into a safe harbor \150\ or into guidance.\151\
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    \144\ See Japanese Bankers Ass'n.
    \145\ See Capital Group.
    \146\ See AFR et al. (Feb. 2012).
    \147\ See Sens. Merkley & Levin (Feb. 2012); Public Citizen
(arguing that one-year demarks tax law covering short term capital
gains).
    \148\ See Sens. Merkley & Levin (Feb. 2012).
    \149\ See Occupy.
    \150\ See Capital Group.
    \151\ See SIFMA et al. (Prop. Trading) (Feb. 2012).
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    Other commenters opposed the inclusion of the rebuttable
presumption for a number of reasons and requested that it be
removed.\152\ For example, these commenters argued that the presumption
had no statutory basis; \153\ was arbitrary; \154\ was not supported by
data, facts, or analysis; \155\ would dampen market-making and
underwriting activity; \156\ or did not take into account the nature of
trading in different types of securities.\157\ Some commenters also
questioned whether the Agencies would interpret rebuttals of the
presumption consistently,\158\ and stressed the difficulty and
costliness of rebutting the presumption,\159\ such as enhanced
documentation or other administrative burdens.\160\ One foreign banking
association also argued that requiring foreign banking entities to
rebut a U.S. regulatory requirement would be costly and inappropriate
given that the trading activities of the banking entity are already
reviewed by home country supervisors.\161\ This commenter also
contended that the presumption could be problematic for financial
instruments purchased for long-term investment purposes that are closed
within 60 days due to market fluctuations or other changed
circumstances.\162\
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    \152\ See ABA (Keating); Am. Express; Business Roundtable;
Capital Group; ICI (Feb. 2012); Investure; JPMC; Liberty Global;
STANY; Chamber (Feb. 2012).
    \153\ See ABA (Keating); JPMC; Chamber (Feb. 2012).
    \154\ See Am. Express; ICI (Feb. 2012).
    \155\ See ABA (Keating); Chamber (Feb. 2012).
    \156\ See AllianceBernstein; Business Roundtable; ICI (Feb.
2012); Investure; Liberty Global; STANY. Because the rebuttable
presumption does not impact the availability of the exemptions for
underwriting, market making, and other permitted activities, the
Agencies do not believe this provision creates any additional
burdens on permissible activities.
    \157\ See Am. Express (noting that most foreign exchange forward
transactions settle in less than one week and are used as commercial
payment instruments, and not speculative trades); Capital Group.
    \158\ See ABA (Keating). As discussed below in Part IV.C., the
Agencies expect to continue to coordinate their supervisory efforts
related to section 13 of the BHC Act and to share information as
appropriate in order to effectively implement the requirements of
that section and the final rule.
    \159\ See ABA (Keating); AllianceBernstein; Capital Group;
Japanese Bankers Ass'n.; Liberty Global; JPMC.
    \160\ See NAIB et al.; Capital Group.
    \161\ See Japanese Bankers Ass'n. As noted above, the Agencies
believe concerns about the impacts of the definition of trading
account on foreign banking entity trading activity outside of the
United States are substantially addressed by the final rule's
exemption for proprietary trading conducted by foreign banking
entities in final rule Sec.  .6(e).
    \162\ Id.
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    After carefully considering the comments received, the Agencies
continue to believe the rebuttable presumption is appropriate to
generally define the meaning of ``short-term'' for purposes of the
short-term trading account, especially for small and regional banking
entities that are not subject to the market risk capital rules and are
not registered dealers or swap entities. The range of comments the
Agencies received on what ``short-term'' should mean--from 30 days to
one year--suggests that a clear presumption would ensure consistency in
interpretation and create a level playing field for all banking
entities with covered trading activities subject to the short-term
trading account. Based on their supervisory experience, the Agencies
find that 60 days is an appropriate cut off for a regulatory
presumption.\163\ Further, because the purpose of the rebuttable
presumption is to simplify the process of evaluating whether individual
positions are included in the trading account, the Agencies believe
that implementing different holding periods based on the type of
financial instrument would insert unnecessary complexity into the
presumption.\164\ The Agencies are not providing a safe harbor or a
reverse presumption (i.e., a presumption for positions that are outside
of the trading account), as suggested by some commenters, in
recognition that some proprietary trading could occur outside of the 60
day period.\165\
---------------------------------------------------------------------------

    \163\ See final rule Sec.  .3(b)(2). Commenters did not provide
persuasive evidence of the benefits associated with a rebuttable
presumption for positions held for greater or fewer than 60 days.
    \164\ See, e.g., Am. Express; Capital Group; Sens. Merkley &
Levin (Feb. 2012).
    \165\ See Capital Group; AFR et al. (Feb. 2012); Sens. Merkley &
Levin (Feb. 2012); Public Citizen; Occupy.
---------------------------------------------------------------------------

    Adopting a presumption allows the Agencies and affected banking
entities to evaluate all the facts and circumstances surrounding
trading activity in determining whether the activity implicates the
purpose of the statute. For example, trading in a financial instrument
for long-term investment that is disposed of within 60 days because of
unexpected developments (e.g., an unexpected increase in the financial
instrument's volatility or a need to liquidate the instrument to meet
unexpected liquidity demands) may not be trading activity covered by
the statute. To reduce the costs and burdens of rebutting the
presumption, the Agencies will allow a banking entity to rebut the
presumption for a group of related positions.\166\
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