Consistent with this heuristic approach, the proposed rule included
a large number of potential quantitative measurements on which public
comment was sought, many of which overlap to some degree in terms of
their informational value. The proposal explained that not all of these
quantitative measurements may ultimately be adopted in the final rule,
depending on their relative strengths, weaknesses, costs, and benefits.
The Agencies noted that some of the proposed quantitative measurements
may not be relevant to all types of trading activities or may provide
only limited benefits, relative to cost, when applied to certain types
of trading activities. In addition, certain quantitative measurements
may be difficult or impracticable to calculate for a specific covered
trading activity due to differences between asset classes, market
structure, or other factors. The Agencies therefore requested comment
on a large number of issues related to the relevance, practicability,
costs, and benefits of the quantitative measurements proposed. The
Agencies also sought comment on whether the quantitative measurements
described in the proposal were appropriate to use to help assess
compliance with section 13 of the BHC Act.
    In addition to the proposed quantitative measurements, the proposal
explained that a banking entity may itself develop and implement other
quantitative measurements in order to effectively monitor its covered
trading activities for compliance with section 13 of the BHC Act and
the proposed rule and to establish, maintain, and enforce an effective
compliance program, as required by Sec.  ----.20 of the proposed rule
and Appendix C. The Agencies noted that the proposed quantitative
measurements in Appendix A were intended to assist banking entities and
Agencies in monitoring compliance with the proprietary trading
restrictions and would not necessarily provide all the data necessary
for the banking entity to establish an effective compliance program.
The Agencies also recognized that appropriate and effective
quantitative measurements may differ based on the profile of the
banking entity's businesses in general and, more specifically, of the
particular trading unit, including types of instruments traded, trading
activities and strategies, and history and experience (e.g., whether
the trading desk is an established, successful market maker or a new
entrant to a competitive market). In all cases, banking entities needed
to ensure that they have robust measures in place to identify and
monitor the risks taken in their trading activities, to ensure the
activities are within risk tolerances established by the banking
entity, and to monitor for compliance with the proprietary trading
restrictions in the proposed rule.
    To the extent that data regarding measurements, as set forth in the
proposed rule, are collected, the Agencies proposed to utilize the
conformance period provided in section 13 of the BHC Act to carefully
review that data, further study the design and utility of these
measurements, and if necessary, propose changes to the reporting
requirements as the Agencies believe are needed to ensure that these
measurements are as effective as possible.\2623\ This heuristic,
gradual approach to implementing reporting requirements for
quantitative measurements was intended to ensure that the requirements
are formulated in a manner that maximizes their utility for identifying
trading activity that warrants additional scrutiny in assessing
compliance with the prohibition on proprietary trading, while limiting
the risk that the use of quantitative measurements could inadvertently
curtail permissible market making-related activities that provide an
important service to market participants and the capital markets at
large.
---------------------------------------------------------------------------

    \2623\ See 12 U.S.C. 1851(c)(2); Joint Proposal, 76 FR 68,883.
---------------------------------------------------------------------------

    In addition, the Agencies requested comment on the use of numerical
thresholds for certain quantitative measurements that, if reported by a
banking entity, would require the banking entity to review its trading
activities for compliance and summarize that review to the relevant
Agency. The Agencies did not propose specific numerical thresholds in
the proposal because substantial public comment and analysis would be
beneficial prior to formulating and proposing specific numerical
thresholds. Instead, the Agencies intended to carefully consider public
comments provided on this issue and to separately determine whether it
would be appropriate to propose, subsequent to finalizing the current
proposal, such numerical thresholds.
    Part III of proposed Appendix A defined the scope of the reporting
requirements. The proposed rule adopted a tiered approach that required
banking entities with the most extensive trading activities to report
the largest number of quantitative measurements, while banking entities
with smaller trading activities had fewer or no reporting requirements.
This tiered approach was intended to reflect the heightened compliance
risks of banking entities with extensive trading activities and limit
the regulatory burden imposed on banking entities with relatively small
or no trading activities, which appear to pose significantly less
compliance risk.
    Under the proposal, any banking entity that had, together with its
affiliates and subsidiaries, trading assets and liabilities the average
gross sum of which (on a worldwide consolidated basis), as measured as
of the last day of each of the four prior calendar quarters, equals or
exceeds $5 billion would be required the banking entity to furnish
quantitative measurements for all trading units of the banking entity
engaged in trading activity subject to Sec. Sec.  ----.4, ----.5, or --
--.6(a) of the proposed rule (i.e., permitted underwriting and market
making-related activity, risk-mitigated hedging, and trading in certain
government obligations). The scope of data to be furnished depended on
the activity in which the trading unit was engaged. First, for the
trading units of such a banking entity that are engaged in market
making-related activity pursuant to Sec.  ----.4(b) of the proposed
rule, proposed Appendix A required that a banking entity furnish
seventeen quantitative measurements.\2624\ Second, all trading units of
such a banking entity engaged in trading activity subject to Sec. Sec.
----.4(a), ----.5, or ----.6(a) of the proposed rule were required to
report five quantitative measurements designed to measure the general
risk and profitability of the trading unit.\2625\ The Agencies expected
that each of these general types of measurements would be useful in
assessing the extent to which any permitted trading activity involves
exposure to high-risk assets or high-risk trading strategies. These
requirements would apply to all type of trading units engaged in
underwriting and market making-related activity, risk-mitigated
hedging, and trading in certain government obligations. These
additional measurements applicable only to trading units engaged in
market making-related activities were designed to help evaluate the
extent to which the quantitative profile of a trading unit's

activities is consistent with permissible market making-related
activities.
---------------------------------------------------------------------------

    \2624\ See proposed rule Appendix A.III.A. These seventeen
quantitative measurements are discussed further below.
    \2625\ See proposed rule Appendix A.III.A. These five
quantitative measurements are: (i) Comprehensive Profit and Loss;
(ii) Comprehensive Profit and Loss Attribution; (iii) VaR and Stress
VaR; (iv) Risk Factor Sensitivities; and (v) Risk and Position
Limits. Each of these and other quantitative measurements discussed
in proposed Appendix A are discussed in detail below.
---------------------------------------------------------------------------

    Under the proposal, any banking entity that had, together with its
affiliates and subsidiaries, trading assets and liabilities the average
gross sum of which (on a worldwide consolidated basis), as measured as
of the last day of each of the four prior calendar quarters, equals or
exceeds $1 billion but is less than $5 billion would be required to
provide quantitative measurements to be furnished for trading units
that engaged in market making-related activity subject to Sec.  --
--.4(b) of the proposed rule. Trading units of such banking entities
that engaged in market making-related activities needed to report eight
quantitative measurements designed to help evaluate the extent to which
the quantitative profile of a trading unit's activities is consistent
with permissible market making-related activities.\2626\ The proposal
applied a smaller number of measurements to a smaller universe of
trading units for this class of banking entities because they are
likely to pose lesser compliance risk and fewer supervisory and
examination challenges. The Agencies noted in the proposal that a less
burdensome reporting regime, coupled with other elements of the
proposal (e.g., the compliance program requirement), was likely to be
equally as effective in ensuring compliance with section 13 of the BHC
Act and the proposed rule for banking entities with smaller trading
operations.
---------------------------------------------------------------------------

    \2626\ See proposed rule Appendix A.III.A. These eight
quantitative measurements are: (i) Comprehensive Profit and Loss;
(ii) Comprehensive Profit and Loss Attribution; (iii) Portfolio
Profit and Loss; (iv) Fee Income and Expense; (v) Spread Profit and
Loss; (vi) VaR; (vii) Volatility of Comprehensive Profit and Loss
and Volatility of Portfolio Profit and Loss; and (viii)
Comprehensive Profit and Loss to Volatility Ratio and Portfolio
Profit and Loss to Volatility Ratio.
---------------------------------------------------------------------------

    Section III.B of proposed Appendix A specified the frequency of
required calculation and reporting of quantitative measurements. Under
the proposed rule, each required quantitative measurement needed to be
calculated for each trading day. Required quantitative measurements
were required to be reported to the relevant Agency on a monthly basis,
within 30 days of the end of the relevant calendar month, or on such
other reporting schedule as the relevant Agency may require. Section
III.C of proposed Appendix A required a banking entity to create and
retain records documenting the preparation and content of any
quantitative measurement furnished by the banking entity, as well as
such information as is necessary to permit the relevant Agency to
verify the accuracy of such measurements, for a period of 5 years. This
included records for each trade and position.
b. General Comments on the Proposed Metrics
    A number of commenters were supportive of metrics. A few commenters
argued that the metrics could reveal prohibited proprietary trading
activity and be an appropriate and valuable tool in analyzing
positions.\2627\ One commenter argued that metrics are the single most
valuable tool available to the Agencies for distinguishing between
prohibited and permitted activities and recommended the compliance
program be structured around metrics.\2628\ Another commenter stated
that the identification of metrics is one of the strengths of the
proposed rule and offered great promise for successful implementation
of the rule.\2629\ One commenter expressed support for the metrics and
argued that there would be substantial evasion of the rule without
reporting of these measurements.\2630\ Some commenters proposed a
presumption of compliance so long as trading activity is conducted in a
manner consistent with tailored quantitative metrics and related
specific thresholds as coordinated and agreed with the relevant
Agency.\2631\ A few of commenters suggested that metrics not be used as
a bright-line trigger and recommended flexibility in the application of
metrics for assessing market-making activities.\2632\ Two commenters
supported metrics as part of a bright lines approach.\2633\
---------------------------------------------------------------------------

    \2627\ See, e.g., Paul Volcker; SIFMA et al. (Prop.Trading)
(Feb. 2012); Invesco; Comm. on Capital Markets Regulation.
    \2628\ See Goldman (Prop. Trading).
    \2629\ See Sens. Merkley & Levin (Feb. 2012).
    \2630\ See Occupy.
    \2631\ See Barclays; See also BoA; Invesco; ISDA (Feb. 2012);
JPMC; Morgan Stanley; SIFMA et al. (Prop.Trading) (Feb. 2012).
    \2632\ See SIFMA et al. (Prop.Trading) (Feb. 2012); Wells Fargo
(Prop. Trading); NYSE Euronext; Oliver Wyman (Feb. 2012); UBS;
Western Asset Mgmt.; Goldman (Prop. Trading); Northern Trust.
    \2633\ See John Reed; Public Citizen.
---------------------------------------------------------------------------

    A number of commenters felt that some metrics might be more
relevant than others, depending upon the particular asset class,
activity, particular market, and unique characteristics of each banking
entity.\2634\ These commenters advocated an approach where banking
entities and examiners would determine over time the usefulness and
relevance of particular metrics.\2635\ One commenter expressed support
for the 5 metrics required for trading in U.S. government
obligations.\2636\ A number of commenters recommended that metrics be
tailored to different asset classes and markets, to avoid the drawbacks
of a one-size-fits-all approach.\2637\ One commenter argued that
application of metrics to market-making activities at different firms
may produce very different results, all of which might reflect
legitimate market-making.\2638\ Commenters also indicated that not all
metrics are meaningful and calculable for all trading units and some
would be unnecessarily burdensome.\2639\
---------------------------------------------------------------------------

    \2634\ See Morgan Stanley; SIFMA et al. (Prop.Trading) (Feb.
2012); Stephen Roach.
    \2635\ See Wells Fargo (Prop. Trading); Morgan Stanley; SIFMA et
al. (Prop.Trading) (Feb. 2012); Stephen Roach.
    \2636\ See UBS.
    \2637\ See Goldman (Prop. Trading); Northern Trust; See also
UBS.
    \2638\ See Comm. on Capital Markets Regulation.
    \2639\ See Morgan Stanley; See also ISDA (Feb. 2012).
---------------------------------------------------------------------------

    Other commenters did not support the use of metrics. These
commenters argued that metrics reporting was one aspect of the
complexity of the proposal that increased the cost and difficulty of
distinguishing market-making from prohibited proprietary trading.\2640\
One commenter argued that banking entities may avoid legitimate market
making activities that would produce ``worse'' metrics results.\2641\
---------------------------------------------------------------------------

    \2640\ See ABA (Keating); Barclays; Citigroup (Feb. 2012); ISDA
(Feb. 2012); UBS; Oliver Wyman (Feb. 2012); Prof. Duffie;
Wellington.
    \2641\ See Oliver Wyman (Feb. 2012).
---------------------------------------------------------------------------

    Several commenters expressed concern that the costs exceeded the
benefits of the required quantitative metrics in the proposal. In
particular, commenters argued that the 17 metrics in the proposal
calculated at each trading unit was excessive, would generate an
unmanageable amount of data, would yield numerous false positives, and
would require the construction and programming of highly sophisticated
systems that are not currently employed.\2642\ A few commenters
suggested that a more limited set of metrics would reduce compliance
complexity.\2643\ Some commenters noted that many of these metrics have
not been historically reported by banking entities and some of the
metrics would require substantial resources and investment
infrastructure to produce some of the metrics without a clear
functional purpose.\2644\ According to other commenters, however,
banking entities currently use

all or nearly all of the proposed metrics.\2645\ One commenter urged
that it would be good to make metrics consistent with the banking
entities' internal reporting and control systems.\2646\ Some commenters
argued it was critical for the Agencies to get the metrics right,\2647\
while others indicated it was unclear how the Agencies could analyze
such information to draw useful conclusions.\2648\
---------------------------------------------------------------------------

    \2642\ See BoA (expressing concern about the need for new
systems to distinguish bid-ask spreads from price appreciation);
UBS; Wellington.
    \2643\ See BoA; Barclays; Citigroup (Feb. 2012).
    \2644\ See Credit Suisse (Seidel); Morgan Stanley; UBS; Wells
Fargo (Prop. Trading); Soci[eacute]t[eacute] G[eacute]n[eacute]rale
(arguing that many calculation questions need to be resolved before
banking entities can create necessary systems to measure metrics).
    \2645\ See Occupy; AFR et al. (Feb. 2012); Western Asset Mgmt.;
Public Citizen. For example, one commenter cited a study finding
that 14 out of 17 of the proposed metrics are either in wide use
today or are possible to implement fairly easily using data already
collected for internal risk management and profit and loss purposes.
See AFR et al. (Feb. 2012) (citing John Lester and Dylan Walsh,
``The Volcker Rule Ban On Prop Trading: A Step Closer to Reality,
Point of View,'' Oliver Wyman Company (Oct. 2011)).
    \2646\ See Paul Volcker.
    \2647\ See, e.g., UBS.
    \2648\ See BoA; UBS; Wellington.
---------------------------------------------------------------------------

    Some commenters expressed concern that metrics were vulnerable to
manipulation and arbitrage.\2649\ These commenters generally felt that
the quantitative measurements were only appropriate for certain liquid
and transparent trading activities but not meaningful for illiquid
markets, including opaque securities and derivatives.\2650\ These
commenters also argued that the vast majority of proprietary trading
would not be differentiable through analysis of the data.\2651\ Other
commenters expressed concern that the use of metrics not replace
regulatory review of actual specific trading positions held by banking
entities.\2652\ One commenter argued that in relying on metrics to be
elaborated upon and discussed in the examination process, the proposed
rule did not meet the fundamental fair notice goal of regulation.\2653\
---------------------------------------------------------------------------

    \2649\ See AFR (Nov. 2012); See also Occupy; Public Citizen.
    \2650\ See Occupy; AFR (Nov. 2012); Wells Fargo (Prop. Trading).
    \2651\ See Occupy.
    \2652\ See Sens. Merkley & Levin (Feb. 2012).
    \2653\ See ISDA (Feb. 2012) (citing Mason v. Florida Bar, 208
F.3d 952, 958-59 (11th Cir. 2000)).
---------------------------------------------------------------------------

    A few commenters also recommended creation of a central data
repository or data sharing protocol that would promote consistency and
accountability in oversight and regulation and suggested the Office of
Financial Research (``OFR'') be given access to this data so that it
can provide centralized analysis and monitoring to identify any trends
that give rise to systemic risk.\2654\ These commenters generally
supported compliance benefits that would result from increased public
disclosure of banking entities' trading and funds activities, including
all of their trading positions, their valuation models, and their
compliance metrics.\2655\
---------------------------------------------------------------------------

    \2654\ See Sens. Merkley & Levin (Feb. 2012); See also Occupy;
Public Citizen.
    \2655\ See Sens. Merkley & Levin (Feb. 2012); See also Public
Citizen; John Reed.
---------------------------------------------------------------------------

    Some commenters expressed support for the reporting thresholds
contained in Appendix A.\2656\ One commenter suggested that all banking
entities that engage in any trading (regardless of threshold) report
certain metrics.\2657\ Other commenters supported metrics reporting,
but recommended the threshold for trading assets and liabilities be
increased from $1 billion to $10 billion to mitigate any cost and
burden impact on smaller banking entities.\2658\ These commenters
pointed out that even if the minimum dollar threshold were raised to
$10 billion, an overwhelming percentage of trading assets and
liabilities in the banking industry (approximately 98 percent) would
still remain subject to heightened compliance requirements including
Appendix A.\2659\ One commenter suggested the threshold be raised to
$50 billion in combined trading assets and liabilities.\2660\
---------------------------------------------------------------------------

    \2656\ See ICBA; Occupy.
    \2657\ See Occupy (suggesting all banking entities that engage
in trading be required to provide VaR Exceedance, Risk Factor
Sensitivities and Risk and Position Limits).
    \2658\ See PNC et al.; M&T Bank; See also ABA (Abernathy).
    \2659\ See ABA (Keating); M&T Bank; PNC et al.
    \2660\ See State Street (Feb. 2012).
---------------------------------------------------------------------------

    Commenters also offered a number of suggestions for modifying the
activity that would be considered in meeting the thresholds for
determining which reporting requirements apply to a banking entity.
Several commenters argued that certain types of trading assets or fund
investments should not be included for purposes of determining whether
the relevant dollar threshold for compliance was met, particularly
those that are not prohibited activities or investments. For instance,
some commenters urged that trading in U.S. government obligations
should not count toward the calculation of whether a banking
organization meets the trading threshold triggering metrics
reporting.\2661\ These commenters also argued that other positions or
transactions that do not involve financial instruments and that may
constitute trading assets and liabilities, such as loans, should be
excluded from the thresholds because exempt activities should not
determine the type of compliance program a banking entity must
implement.\2662\ One commenter urged that foreign exchange swaps and
forwards be excluded from the definition of a ``derivative'' and not be
subject to compliance requirements as a result.\2663\ Conversely, one
commenter urged that all assets and liabilities defined as trading
assets for purposes of the Market Risk Capital Rule should be included
in the $1 billion standard for becoming subject to any reporting and
record-keeping requirements under the final rule.\2664\
---------------------------------------------------------------------------

    \2661\ See PNC et al.
    \2662\ See PNC et al.
    \2663\ See Northern Trust.
    \2664\ See Occupy at 60.
---------------------------------------------------------------------------

    A number of commenters argued that monthly reporting was too
frequent because of the complexity of the process that surrounds
generation of regulatory reports and suggested that the frequency of
reporting should be quarterly.\2665\ One commenter supported the
reporting frequency as extremely effective and said it should not be
reduced in any way.\2666\
---------------------------------------------------------------------------

    \2665\ See JPMC; See also Stephen Roach.
    \2666\ See Occupy.
---------------------------------------------------------------------------

    A number of comments were received on the implementation timeframe
for metrics reporting. Several commenters urged allowing banking
entities the use of the full conformance period for creating the
systems and processes to capture and report the quantitative
metrics.\2667\ Some commenters suggested that metrics should not be
required to be reported until one year after adoption of final
regulations.\2668\ A different commenter suggested that the Agencies
provide a one-year period during which they determine which metrics
will be employed for different asset classes and an additional one-year
period during which such metrics could be reviewed so metrics would be
a required component of a banking entity's compliance program no sooner
than 2 years after issuance of the final rule.\2669\ Another commenter
suggested that banking entities and regulators use the first year of
the conformance period to consult with one another and determine the
usefulness and relevance of individual metrics for different
activities, asset classes, and markets and the second year of the
conformance period to test the metrics systems to validate the accuracy
and relevance of metrics that are agreed upon the first year.\2670\ One
commenter suggested a subset of metrics be rolled out gradually

across trading units before implementing the full suite of metrics that
are ultimately adopted or metrics could be rolled out one trading unit
at a time.\2671\ Another commenter said the Agencies should identify
key metrics that are clearly workable across all ranges of trading
activity and most likely to provide useful data and require those
metrics be implemented first and require other metrics to be phased in
over time in consultation with the banking entity's primary federal
regulator.\2672\ One commenter supported the heuristic approach of the
proposal and suggested the Agencies should draw on resources and
comment from the public and the industry in continuing the process of
developing and building out metrics.\2673\
---------------------------------------------------------------------------

    \2667\ See BoA; Barclays; Citigroup (Feb. 2012); Goldman (Prop.
Trading); JPMC; Morgan Stanley; SIFMA et al. (Prop.Trading) (Feb.
2012); UBS; Stephen Roach.
    \2668\ See Credit Suisse (Seidel); JPMC; Wells Fargo (Prop.
Trading).
    \2669\ See BoA.
    \2670\ See Morgan Stanley; See also SIFMA et al. (Prop.Trading)
(Feb. 2012).
    \2671\ See Goldman (Prop. Trading).
    \2672\ See Wells Fargo (Prop. Trading).
    \2673\ See AFR et al. (Feb. 2012).
---------------------------------------------------------------------------

    Another commenter requested that the final rule specify how trading
assets and liabilities should be reported for savings and loan holding
companies.\2674\ This commenter requested clarification that positions
held for hedging or liquidity management purposes should not count as
trading assets or liabilities for the $5 billion threshold in Appendix
A. Another commenter expressed concern that derivatives valuation may
value derivatives substantially lower than their notional exposure and
thereby make high reporting thresholds not meaningful or reflective of
inherent risk.\2675\
---------------------------------------------------------------------------

    \2674\ See GE (Feb. 2012).
    \2675\ See Occupy.
---------------------------------------------------------------------------

    Many commenters expressed concern that the smallest trading unit
level was too low a level for collecting metrics data and suggested the
final rule provide a higher reporting level.\2676\ These commenters
stated that calculating at too low of a level would be more likely to
generate false positives \2677\ and would be burdensome, particularly
for firms with large trading operations.\2678\ In addition, some
commenters indicated that it would be problematic if the definition of
``trading unit'' is applied at a legal entity level and cannot be
applied across multiple legal entities within the same affiliate
group.\2679\ By contrast, two commenters supported the collection of
metrics at the trading desk level and appropriate levels above the
trading desk.\2680\ One of these commenters expressed concern that the
rule allowed for an inappropriately large trading desk unit that could
combine significantly unrelated trading desks, which would impede
detection of proprietary trading and supported measurements at multiple
levels of organization to combat evasion concerns.
---------------------------------------------------------------------------

    \2676\ See, e.g., BoA; Goldman (Prop.Trading); JPMC; SIFMA et
al. (Prop.Trading) (Feb. 2012); Morgan Stanley; RBC.
    \2677\ See JPMC; Goldman (Prop.Trading); SIFMA et al.
(Prop.Trading) (Feb. 2012); BoA. See also Sen. Gillibrand.
    \2678\ See Goldman (Prop.Trading); SIFMA et al. (Prop.Trading)
(Feb. 2012); BoA.
    \2679\ See Goldman (Prop.Trading); SIFMA et al. (Prop.Trading)
(Feb. 2012).
    \2680\ See Sens. Merkley & Levin (Feb. 2012); Occupy.
---------------------------------------------------------------------------

    In response to questions in the proposal about whether the Agencies
should establish numerical thresholds for some or all of the proposed
quantitative measurements, a number of commenters expressed opposition
to establishing numerical thresholds for purposes of the rule,\2681\
while others stated that thresholds should be established over
time.\2682\ In opposition of thresholds, one commenter expressed
concern that numerical thresholds could be easily abused and evaded and
may need to be constantly revised and updated as financial markets
evolve.\2683\ In addition, another commenter stated that numerical
thresholds should not be imposed because metric levels will differ by
asset class and type of activity.\2684\ A few commenters suggested that
numerical thresholds, based on the specific asset class or market,
would be useful to provide clarity or consistency about the types of
activity that are permitted under the rule.\2685\ Two commenters
expressed support for banking entities establishing numerical
thresholds, in consultation with the relevant regulator, for different
trading units based on differences between markets and asset
classes.\2686\
---------------------------------------------------------------------------

    \2681\ See SIFMA et al. (Prop.Trading) (Feb. 2012); Occupy;
Alfred Brock.
    \2682\ See Wellington; Barclays; Goldman (Prop. Trading);
CalPERS; John Reed.
    \2683\ See Occupy.
    \2684\ See SIFMA et al. (Prop.Trading) (Feb. 2012).
    \2685\ See Wellington; CalPERS; John Reed.
    \2686\ See Goldman (Prop. Trading); Barclays.
---------------------------------------------------------------------------

c. Approach of the Final Rule
    As explained below, the Agencies have reduced the number of metrics
that banking entities must report under Appendix A from the 17 metrics
in the proposal to 7 metrics in the final rule. The final rule also
increases the level of activity that is required to trigger mandatory
reporting of metrics data and phases in the reporting requirement over
time.
    Under the final rule, a banking entity engaged in significant
trading activity as defined by Sec.  ----.20 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.
    In response to comments, 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.\2687\ Banking entities that meet the
relevant thresholds must collect and report metrics for all trading
desks engaged in covered trading activity beginning on the dates
established in Sec.  ----.20 of the final rule. 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 less than
$50 billion and greater than or equal to $25 billion in trading assets
and liabilities and banking entities with less than $25 billion and
greater than or equal to $10

billion in trading assets and liabilities would also be required to
report these metrics beginning on April 30, 2016, and December 31,
2016, respectively. The Agencies believe that these delayed dates for
reporting metrics should allow firms adequate time to develop systems
to calculate and report the quantitative metrics. The Agencies will
review the data collected and revise this collection requirement as
appropriate based on a review of the data collected prior to September
30, 2015.
---------------------------------------------------------------------------

    \2687\ As noted above, a number of commenters suggested setting
a higher threshold than the proposed $1 billion and $5 billion
trading asset and liability thresholds because even thresholds of
$10 billion to $50 billion would capture a significant percentage of
the total trading assets and liabilities in the banking system. See
ABA (Keating); M&T Bank; PNC et al.; State Street (Feb. 2012). The
Agencies believe that the phase-in approach to the metrics
requirement established in the final rule should generally address
commenters' concerns about the implementation timeframe by providing
time for analysis, development of systems (if needed), and
implementation of the quantitative measurements requirement. See,
e.g., BoA; Barclays; Citigroup (Feb. 2012); Goldman (Prop. Trading);
JPMC; Morgan Stanley; SIFMA et al. (Prop.Trading) (Feb. 2012); UBS;
Stephen Roach; Credit Suisse (Seidel); Wells Fargo (Prop. Trading).
The Agencies are establishing a phase-in approach, rather than
requiring all banking entities above the $10 billion threshold to
report metrics within the same timeframe, to strike a balance
between the benefits of receiving data to help monitor compliance
with the rule against the need for time to assess the effectiveness
and usefulness of the quantitative measurements in practice and for
some firms to develop additional systems for purposes of this
requirement.
---------------------------------------------------------------------------

    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 Sec.  ----.20 unless otherwise
requested by the primary supervisory Agency for the entity. The largest
banking entities with $50 billion or greater in 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.\2688\ All quantitative measurements for any calendar month must
be reported no later than 10 days after the end of the calendar month
required by Sec.  ----.20, unless another time is requested by the
primary supervisory Agency for the entity except for a preliminary
period when 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.\2689\
---------------------------------------------------------------------------

    \2688\ Consistent with certain commenters' requests, the final
rule generally requires less frequent reporting than was proposed.
However, the Agencies continue to believe that monthly reporting is
appropriate for the largest banking entities above the $50 billion
threshold. More frequent reporting for these firms is appropriate to
allow for more effective supervision of their large-scale trading
operations. See JPMC; Stephen Roach.
    \2689\ See final rule Sec.  ----.20(d)(3). The final rule
includes a shorter period of time for reporting quantitative
measurements after the end of the relevant period 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.
---------------------------------------------------------------------------

    The Agencies believe that together the reduced number of metrics,
the higher thresholds for reporting metrics, delayed reporting dates,
and modified reporting frequency reduce the costs and burden from the
proposal while allowing collection of data to permit better monitoring
of compliance with section 13 of the BHC Act. The Agencies also believe
that the delayed dates for reporting quantitative metrics will provide
banking entities with the time to develop systems to calculate and
report these metrics. The Agencies are not applying these reporting and
recordkeeping requirements to banking entities with smaller amounts of
trading activity, as it appears that the more limited benefits of
applying these requirements to banking entities with lower levels of
trading activities, which represent entities that are typically small,
less complex, and easier to supervise, would not justify the burden
associated with complying with the reporting and recordkeeping
requirements of Appendix A.
    The final rule defines ``trading desk'' to replace the concept of
``trading unit'' in the proposal.\2690\ Under the final rule, trading
desk means the smallest discrete unit of organization of a banking
entity that buys or sells financial instruments for the trading account
of the banking entity or an affiliate thereof. The Agencies believe
that applying quantitative measurements to a level that aggregates a
variety of distinct trading activities may obscure or ``smooth''
differences between distinct lines of business, asset categories and
risk management processes in a way that renders the measurement
relatively uninformative because it does not adequately reflect the
specific characteristics of the trading activities being conducted.
---------------------------------------------------------------------------

    \2690\ See final rule Sec.  ----.3(e)(13); See also supra Parts
IV.A.2.c.1.c.ii. and IV.A.3.c.1.c.i.
---------------------------------------------------------------------------

    While the Agencies recognize that applying quantitative
measurements at the trading desk level may result in some ``noise'' in
the data and false positives, the Agencies believe it is necessary to
apply the quantitative measurements at the trading desk level to
enhance consistency with other provisions of the final rule. For
example, because the requirements of the market-making exemption apply
at the trading desk level of organization, the Agencies believe
quantitative measurements used to monitor a banking entity's market
making-related activities should also calculated, reported, and
recorded at the trading desk level. In response to commenters' concerns
that trading desk level measurements are more likely to generate false
positives, the Agencies emphasize that quantitative measurements will
not be used as a dispositive tool for determining compliance and,
rather, will be used to monitor patterns and identify activity that may
warrant further review.
    Like the proposal, the final rule does not include specific
numerical thresholds. Commenters did not suggest specific thresholds
for particular metrics or provide data and analysis that would support
particular thresholds.\2691\ Given the range of financial instruments
and trading activity covered by the final rule, as well as potential
differences among banking entities' organizational structures, trading
strategies, and level of presence in a particular market, the Agencies
are concerned that numerical thresholds for specific metrics would not
account for these differences and could inappropriately constrain
legitimate activity.\2692\ Further, mandated thresholds for the metrics
would not recognize the impact changing market conditions may have on a
given trading desk's quantitative measurements. Consistent with two
commenters' suggested approach, banking entities will be required to
establish their own numerical thresholds for quantitative measurements
under the enhanced compliance program requirement in Appendix B.\2693\
---------------------------------------------------------------------------

    \2691\ See Wellington; CalPERS; John Reed.
    \2692\ See SIFMA et al. (Prop.Trading) (Feb. 2012).
    \2693\ See Goldman (Prop. Trading); Barclays. See also final
rule Appendix B.
---------------------------------------------------------------------------

d. Proposed Quantitative Measurements and Comments on Specific Metrics
    Section IV of proposed Appendix A described, in detail, the
individual quantitative measurements that must be furnished. These
measurements were grouped into the following five broad categories,
each of which is described in more detail below:

     Risk-management measurements--VaR, Stress VaR, VaR
Exceedance, Risk Factor Sensitivities, and Risk and Position Limits;
     Source-of-revenue measurements--Comprehensive Profit
and Loss, Portfolio Profit and Loss, Fee Income and Expense, Spread
Profit and Loss, and Comprehensive Profit and Loss Attribution;
     Revenues-relative-to-risk measurements--Volatility of
Comprehensive Profit and Loss, Volatility of Portfolio Profit and
Loss, Comprehensive Profit and Loss to Volatility Ratio, Portfolio
Profit and Loss to Volatility Ratio, Unprofitable Trading Days based
on Comprehensive Profit and Loss, Unprofitable Trading Days based on
Portfolio Profit and Loss, Skewness of Portfolio Profit and Loss,
and Kurtosis of Portfolio Profit and Loss;
     Customer-facing activity measurements--Inventory
Turnover, Inventory Aging, and Customer-facing Trade Ratio; and
     Payment of fees, commissions, and spreads
measurements--Pay-to-Receive Spread Ratio.

    The Agencies proposed these quantitative measurements because,
taken together, these measurements appeared useful for understanding
the context in which trading activities occur and identifying
activities that may warrant additional scrutiny to determine whether
these activities involve prohibited proprietary trading because the
trading activity either is inconsistent with permitted market making-
related activities or presents a material exposure to high-risk assets
or high-risk trading strategies. As described below, different
quantitative measurements were proposed to identify different aspects
and characteristics of trading activity for the purpose of helping to
identify prohibited proprietary trading, and the Agencies stated in the
proposal that they expected that the quantitative measurements would be
most useful for this purpose when implemented and reviewed
collectively, rather than in isolation. The Agencies stated in the
proposal that they believed that, in the aggregate, many banking
entities already collect and review many of these measurements as part
of their risk management activities, and stated that they expected that
many of the quantitative measurements proposed would be readily
computed and monitored at the multiple levels of organization included
in proposed Appendix A's definition of ``trading unit,'' to which they
would apply.
    Under the proposal, the first set of quantitative measurements
related to risk management, and included VaR, Stress VaR, VaR
Exceedance, Risk Factor Sensitivities, and Risk and Position Limits.
Commenters generally supported the use of risk-management metrics as
the most important measure of compliance, indicating that these metrics
could potentially provide useful supervisory information.\2694\
---------------------------------------------------------------------------

    \2694\ See, e.g., AFR et al. (Feb. 2012); Barclays; Citigroup
(Feb. 2012); Prof. Duffie; Goldman (Prop. Trading); Invesco; JPMC;
Occupy; Public Citizen; See also BNY Mellon et al. (suggesting the
use of VaR measures for foreign exchange trading activity).
---------------------------------------------------------------------------

    In general, commenters supported the use of the VaR metric.\2695\
One of these commenters argued that VaR was not particularly indicative
of proprietary trading, but could be helpful to reveal a trading unit's
overall size and risk profile.\2696\ Another commenter indicated that
significant, abrupt or inconsistent changes to VaR may need to be
absorbed by market makers who absorb large demand and supply shocks
into their inventories.\2697\ This commenter contended that the six
largest bank holding companies had proprietary trading losses that
frequently exceeded their VaR estimates and the design and supervision
of such risk measures should be revisited.
---------------------------------------------------------------------------

    \2695\ See, e.g., Citigroup (Feb. 2012); Prof. Duffie; Goldman
(Prop. Trading); Invesco; Public Citizen.
    \2696\ See Goldman (Prop. Trading).
    \2697\ See Prof. Duffie.
---------------------------------------------------------------------------

    One commenter argued that the definition of VaR was not made clear
in the proposal and was missing some important information regarding
methodology as VaR methodologies tend to vary among banking
entities.\2698\ This commenter recommended the development of a
standard methodology by the OFR including a central repository for
historical calculation data for each asset for the purpose of ensuring
standard calculation across the industry. This commenter also expressed
concern that VaR calculations are heavily reliant on the quality of
input data and stated that many markets are unable to provide
sufficient information such that VaR calculations are meaningful,
including markets for illiquid products for which accurate historical
price and market information is sparse and could severely under
represent true potential losses under VaR calculations.\2699\
---------------------------------------------------------------------------

    \2698\ See Occupy.
    \2699\ See Occupy.
---------------------------------------------------------------------------

    A few commenters expressed concern about the applicability of VaR
when applied to ALM activities.\2700\ These commenters argued that risk
management metrics such as VaR would not help to distinguish ALM and
valid risk mitigating hedging activities from prohibited proprietary
trading. For instance, one of these commenters stated that the proposed
reliance on VaR and Stress VaR to demonstrate bona fide hedging is
misleading for ALM activities due to the typical accounting asymmetry
in ALM where, for example, managed liabilities such as deposits are not
marked to market but the corresponding hedge may be.
---------------------------------------------------------------------------

    \2700\ See JPMC; State Street (Feb. 2012); See also BoA; CH/
ABASA. For instance, one of these commenters stated that the
proposed reliance on VaR and Stress VaR to demonstrate bona fide
hedging is misleading for ALM activities due to the typical
accounting asymmetry in ALM where, for example, managed liabilities
such as deposits are not mark-to-market but the corresponding hedge
may be. See State Street (Feb. 2012).
---------------------------------------------------------------------------

    One commenter argued that the use of stress VaR would be important
to guard against excessive risk taking.\2701\ A few commenters
suggested that additional guidance be provided for Stress VaR including
linking it to the broader stress testing regime and based on extreme
conditions that are not based on historic precedent.\2702\ These
commenters also argued that a one-day holding period assumption is
inadequate, especially for less liquid asset classes, and recommended
that stress be measured over a longer period. One commenter argued that
Stress VaR should be removed from the list of required metrics as it is
not in regular use for day-to-day risk management and provides little
relevant information about the intent or proportionality between risk
assumed and client demands.\2703\
---------------------------------------------------------------------------

    \2701\ See Public Citizen.
    \2702\ See AFR et al. (Feb. 2012); Public Citizen.
    \2703\ See JPMC.
---------------------------------------------------------------------------

    A number of commenters requested that VaR Exceedance be removed
from the list of metrics. These commenters argued that the primary
function of VaR Exceedance is to analyze the quality of a VaR model and
that VaR backtesting is already reported to regulators as part of the
supervisory process. These commenters argued that VaR Exceedance does
not reveal trading intent or actual risk taken.\2704\ One commenter
argued that VaR Exceedance may be useful to the Agencies as an
indicator of the quality of the VaR measure relative to the profit and
loss of the trading unit but that a more rigorous back-testing process
would serve as a better analytical tool than VaR Exceedance to evaluate
the quality of the VaR model result and should be included as an
additional metric.\2705\ One commenter suggested that risk-based
metrics should measure risk as a function of capital.\2706\ Another
commenter warned that risk metrics could be significantly higher during
times of market stress and volatility than during normal times.\2707\
---------------------------------------------------------------------------

    \2704\ See ABA (Keating); Barclays; Goldman (Prop. Trading);
SIFMA et al. (Prop.Trading) (Feb. 2012); Wells Fargo (Prop.
Trading); UBS.
    \2705\ See Occupy.
    \2706\ See Citigroup (Feb. 2012).
    \2707\ See SIFMA et al. (Prop. Trading) (Feb. 2012).
---------------------------------------------------------------------------

    A few commenters expressed support for risk factor sensitivities as
useful, supervisory information.\2708\ One of these commenters
suggested that risk factor sensitivities could orient regulators to a
trading unit's overall size and risk profile,\2709\ while another
commenter stated that risk factor sensitivities would be the most
useful tool for identifying the accumulation of market risk in
different areas of a banking entity.\2710\ One commenter suggested that
several risk factor sensitivity snapshots be taken throughout the day
with an average

value reported at the end of day.\2711\ This commenter also recommended
that trading strategies that rely heavily on models to calculate risk
exposures (e.g., correlation trading portfolios), should trigger
additional disclosures in risk factor sensitivity reporting.\2712\
---------------------------------------------------------------------------

    \2708\ See Citigroup (Feb. 2012); Prof. Duffie; Occupy.
    \2709\ See Goldman (Prop. Trading).
    \2710\ See Occupy.
    \2711\ See Occupy.
    \2712\ See Occupy.
---------------------------------------------------------------------------

    Commenters also supported risk and position limits as providing
useful, supervisory information. Several commenters indicated that
these limits could be helpful to orient regulators to a trading unit's
overall size and risk profile.\2713\ Another commenter expressed the
view risk and position limits are the most comprehensive measures of
risk taking and incorporate VaR, Stress VaR, and Risk Factor
Sensitivities.\2714\ A different commenter argued it was unclear how
position limits are in fact a quantitative metric and not a description
of a banking entity's internal risk policies.\2715\
---------------------------------------------------------------------------

    \2713\ See, e.g., Barclays; Citigroup (Feb. 2012); Prof. Duffie;
Goldman (Prop. Trading).
    \2714\ See Barclays.
    \2715\ See Occupy.
---------------------------------------------------------------------------

    After carefully considering the comments received, the final rule
retains the risk-management metrics other than VaR Exceedance. The
collection of information regarding Risk and Position Limits, VaR,
Stress VaR, and Risk Factor Sensitivities is consistent with the aim of
providing a means of characterizing the overall risk profile of the
trading activities of each trading desk and evaluating the extent to
which the quantitative profile of a trading desk's activities is
consistent with permissible activities. Moreover, a number of
commenters indicated that the risk management measures would be
effective at achieving these goals.\2716\ The risk management measure
that was not retained in the final rule, VaR Exceedance, was
considered, in light of the comments, as not offering significant
additional information on the overall risk profile and activities of
the trading desk relative to the burden associated with computing,
auditing and reporting it on an ongoing basis.\2717\
---------------------------------------------------------------------------

    \2716\ See, e.g., AFR et al. (Feb. 2012); Barclays; Citigroup
(Feb. 2012); Prof. Duffie; Goldman (Prop. Trading); Invesco; JPMC;
Occupy; Public Citizen; See also Northern Trust; State Street (Feb.
2012).
    \2717\ See ABA (Keating); Barclays; Goldman (Prop. Trading);
SIFMA et al. (Prop.Trading) (Feb. 2012); Wells Fargo (Prop.
Trading); UBS.
---------------------------------------------------------------------------

    The risk-management measurements included in the final rule are
widely used by banking entities to measure and manage trading risks and
activities.\2718\ VaR, Stress VaR, and Risk Factor Sensitivities
provide internal, model-based assessments of overall risk, stated in
terms of large but plausible losses that may occur or changes in
revenue that would be expected to result from movements in underlying
risk factors. The provided description and calculation guidance for
each of these measures is consistent with both current market practice
and regulatory capital requirements for banks. The final rule does not
provide a prescriptive definition of each of these measurements as
these measures must be flexible enough to be tailored to the specific
trading activities of each trading desk. Supervisory guidance and
comparisons of these measures across similarly situated trading desks
at a given entity as well as across entities will be used to ensure
that the provided measurements conform to the description and
calculation guidance provided in Appendix A. Risk and Position Limits
and Usage provide an explicit assessment of management's expectation of
how much risk is required to perform permitted market-making,
underwriting and hedging activities. The final rule requires that the
usage of each risk and position limit be reported so that the risk
taking by each trading desk can be monitored and assessed on an ongoing
basis.\2719\
---------------------------------------------------------------------------

    \2718\ See Joint Proposal, 76 FR 68,887.
    \2719\ The Agencies believe this clarification responds to one
commenter's question regarding how risk and position limits will be
used and assessed for purposes of the rule. See Occupy.
---------------------------------------------------------------------------

    With the exception of Stress VaR, each of these measurements are
routinely used to manage and control risk taking activities, and are
also used by some banking entities for purposes of calculating
regulatory capital and allocating capital internally.\2720\ In the
context of permitted market making-related activities, these risk
management measures are useful in assessing whether the actual risk
taken is consistent with the level of principal risk that a banking
entity must retain in order to service the near-term demands of
customers. Significant, abrupt or inconsistent changes to key risk
management measures, such as VaR, that are inconsistent with prior
experience, the experience of similarly situated trading desks and
management's stated expectations for such measures may indicate
impermissible proprietary trading, and may warrant further review. In
addition, indicators of unanticipated or unusual levels of risk taken,
such as breaches of internal Risk and Position Limits, may suggest
behavior that is inconsistent with appropriate levels of risk and may
warrant further scrutiny. The limits required under Sec.  --
--.4(b)(2)(iii) and Sec.  ----.5(b)(1)(i) must meet the applicable
requirements under Sec.  ----.4(b)(2)(iii) and Sec.  ----.5(b)(1)(i)
and also must include appropriate metrics for the trading desk limits
including, at a minimum, the ``Risk Factor Sensitivities'' and ``Value-
at-Risk and Stress Value-at-Risk'' metrics except to the extent any of
the ``Risk Factor Sensitivities'' or ``Value-at-Risk and Stress Value-
at-Risk'' metrics are demonstrably ineffective for measuring and
monitoring the risks of a trading desk based on the types of positions
traded by, and risk exposures of, that desk.
---------------------------------------------------------------------------

    \2720\ See Joint Proposal, 76 FR 68,887.
---------------------------------------------------------------------------

    Under the proposal, the second set of quantitative measurements
related to the source of revenues, and included Comprehensive Profit
and Loss, Portfolio Profit and Loss, Fee Income, Spread Profit and
Loss, and Comprehensive Profit and Loss Attribution. A few commenters
expressed support for Comprehensive Profit and Loss as a reasonable
contextual metric and contended that the metric could inform the
analysis of whether market-making revenues are from customer
transactions.\2721\
---------------------------------------------------------------------------

    \2721\ See Goldman (Prop.Trading); Japanese Bankers Ass'n;
Occupy; See also Barclays.
---------------------------------------------------------------------------

    As described above, a number of commenters expressed concern about
a focus on revenues as part of evaluating market-making.\2722\ For
instance, one commenter argued that the rule should not require, even
in guidance, that market making-related permitted activities be
``designed to generate revenues from fees, commissions, bid-asks
spreads or other income,'' arguing that this prejudges appropriate
results for revenue metrics and implies that a bona fide market maker
is not permitted to benefit from revenues from market movements.\2723\
One commenter expressed concern that the source-of-revenue metrics are
subject to manipulation as these metrics depend on correctly
classifying revenue into market bid-ask spreads as opposed to other
sources of revenue.\2724\ One commenter stated that this metric should
serve as a secondary indication of risk levels because it could be
subject to manipulation.\2725\ Another commenter recommended use of the
sub-metric in Comprehensive P&L Attribution.\2726\ A different
commenter recommended the adoption of clearer metrics to distinguish
customer revenues from revenues from price

movements.\2727\ One commenter indicated that after-the-fact
application of quantitative measurements such as Comprehensive Profit
and Loss may cause firms to reconsider their commitment to market
making and recommended that, to the extent this metric is used, it
should be applied flexibly in light of market conditions prevailing
during the relevant time period, and as one of many factors relevant to
an overall assessment of bona fide market making.\2728\
---------------------------------------------------------------------------

    \2722\ See supra Part IV.A.3.c.7.b.
    \2723\ See SIFMA (May 2012).
    \2724\ See AFR (Nov. 2012).
    \2725\ See Occupy.
    \2726\ See Barclays.
    \2727\ See Public Citizen.
    \2728\ See NYSE Euronext.
---------------------------------------------------------------------------

    A few commenters supported Portfolio Profit and Loss as a
reasonable contextual metric to inform whether revenues from market-
making transactions are from customer transactions.\2729\ However, one
of these commenters argued that this metric would not necessarily be
indicative of prohibited proprietary trading and profits may reflect
bona fide market making-related, underwriting, and hedging
activities.\2730\ Another commenter argued that this metric should
serve as a secondary indication of risk levels and may be subject to
manipulation.\2731\
---------------------------------------------------------------------------

    \2729\ See Goldman (Prop. Trading); Japanese Bankers Ass'n;
Occupy.
    \2730\ See Goldman (Prop. Trading).
    \2731\ See Occupy.
---------------------------------------------------------------------------

    Some commenters felt that Fee Income and Expense was a useful
metric.\2732\ One of these commenters argued this metric has the
potential to help distinguish permitted activities from prohibited
proprietary trading.\2733\ Another commenter felt this metric would be
useful in liquid markets that trade with the convention of fees and
commissions but less useful, but still indicative, in other markets
that use inter-dealer brokers to conduct client-related
activities.\2734\ One commenter argued that it would be impracticable
to produce Fee Income and Expense data for foreign exchange trading,
which is predominantly based on bid/offer spread.\2735\
---------------------------------------------------------------------------

    \2732\ See Goldman (Prop. Trading); Japanese Bankers Ass'n;
Occupy.
    \2733\ See Goldman (Prop. Trading). This commenter urged that
fee income and expense should be considered together with Spread P&L
arguing that these two both measures of customer revenues and, in
practice, may function as substitutes for each other.
    \2734\ See Occupy.
    \2735\ See Northern Trust.
---------------------------------------------------------------------------

    A few commenters thought that Spread P&L could be useful.\2736\ One
of these commenters argued that Spread P&L has the potential to help
distinguish permitted activities from prohibited proprietary
trading.\2737\ This commenter suggested that the final rule remove the
proposal's revenue requirement as part of market-making and instead
rely on revenue metrics such as Spread P&L.\2738\ This commenter
argued, however, that it will not always be clear how to best calculate
Spread P&L and it would be critical for the Agencies to be flexible and
work with banking entities to determine the appropriate proxies for
spreads on an asset-class-by-asset class and trading desk-by-trading-
desk basis. One commenter contended that the proposed implementation in
the proposal was more difficult than necessary and suggested End of Day
Spread Proxy is sufficient. Another commenter suggested expanding the
flexibility offered in choosing a bid-offer source to calculate Spread
P&L.\2739\
---------------------------------------------------------------------------

    \2736\ See, e.g., Goldman (Prop. Trading); JPMC; UBS.
    \2737\ See Goldman (Prop. Trading).
    \2738\ See Goldman (Prop. Trading); See also Paul Volcker
(supporting a metric considering the extent to which earnings are
generated by pricing spreads rather than changes in price).
    \2739\ See JPMC; UBS; See also SIFMA et al. (Prop. Trading)
(Feb. 2012).
---------------------------------------------------------------------------

    However, the majority of commenters recommended removal of Spread
P&L as a metric.\2740\ These commenters argued that a meaningful
measure for Spread P&L cannot be calculated in the absence of a
continuous bid-ask spread, making this metric misleading especially for
illiquid positions and shallow markets.
---------------------------------------------------------------------------

    \2740\ See ABA et al.; BoA; Barclays; Credit Suisse (Seidel);
Japanese Bankers Ass'n; Northern Trust; SIFMA et al. (Prop. Trading)
(Feb. 2012); Wells Fargo (Prop.Trading); See also AFR et al. (Feb.
2012); Occupy.
---------------------------------------------------------------------------

    A few commenters generally expressed support for the inclusion of
Comprehensive Profit and Loss Attribution.\2741\ One of these
commenters stated that this metric was the most comprehensive metric
for measuring sources of revenue and included other metrics as sub-
metrics, such as Comprehensive Profit and Loss, Portfolio Profit and
Loss, and Fee Income and Expense. Another commenter contended the
mention of ``customer spreads'' and ``bid-ask spreads'' was unclear and
that both of these terms should be removed from the calculation
guidance. Other commenters argued that the benefits of this metric do
not justify the costs of generating a report of Comprehensive P&L
Attribution on a daily basis.\2742\ One commenter urged the Agencies to
ensure that each institution be permitted to calculate this metric in a
way that reflects the institution's unique characteristics.\2743\
---------------------------------------------------------------------------

    \2741\ See Barclays; Occupy.
    \2742\ See BOK; Goldman (Prop. Trading); SIFMA et al. (Prop
Trading) (Feb. 2012); Wells Fargo (Prop. Trading).
    \2743\ See SIFMA et al. (Prop Trading) (Feb. 2012).
---------------------------------------------------------------------------

    After carefully considering the comments received, the final rule
maintains only a modified version of Comprehensive P&L Attribution
metric and does not retain the proposed Comprehensive Profit and Loss,
Portfolio Profit and Loss, Fee Income, or Spread Profit and Loss
metrics. The final rule also requires volatility of comprehensive
profit and loss to be reported. As pointed out by a number of
commenters, Comprehensive Profit and Loss Attribution provides a
holistic attribution of each trading desk's profit and loss and
contains much of the information content that is provided by many of
the other metrics, such as Fee Income and Expense.\2744\ Accordingly,
the use of Comprehensive Profit and Loss Attribution in the final rule
greatly simplifies the metric reporting requirement and reduces burden
while retaining much of the information and analysis that was provided
in the full set of five metrics that were contained in the proposal. In
addition, in response to commenters' concerns about the burdens of
separately identifying specific revenue sources (e.g., revenues from
bid-ask spreads, revenues from price appreciation), the Agencies have
modified the focus of the proposed source of revenue metrics to focus
on when revenues are generated, rather than the specific sources of
revenue.\2745\ This approach should also help address one commenter's
concern about the need for new, sophisticated systems to differentiate
bid-ask spreads from price appreciation.\2746\ The utility of this
modified approach is discussed in more detail in the discussion of the
market-making exemption.\2747\ Finally, the Comprehensive Profit and
Loss Attribution metric will ensure that all components of a trading
desk's profit and loss are measured in a consistent and comprehensive
fashion so that each individual component can be reliably compared
against other components of a trading desk's profit and loss without
being considered in isolation or taken out of context.
---------------------------------------------------------------------------

    \2744\ See Barclays.
    \2745\ See JPMC; UBS; SIFMA et al. (Prop Trading) (Feb. 2012);
ABA (Keating); BoA; Barclays; Credit Suisse (Seidel).
    \2746\ See BoA.
    \2747\ See supra Part IV.A.3.c.7.c.
---------------------------------------------------------------------------

    This measurement is intended to capture the extent, scope, and type
of profits and losses generated by trading activities and provide
important context for understanding how revenue is generated by trading
activities. Because permitted market making-related

activities seek to generate profits by providing customers with
intermediation and related services while, managing, and to the extent
practicable minimizing, the risks associated with any asset or risk
inventory required to meet customer demands, these revenue measurements
would appear to provide helpful information to banking entities and the
Agencies regarding whether actual revenues are consistent with these
expectations.
    Under the proposal, the third set of measurements related to
realized risks and revenue relative to realized risks, and includes
Volatility of Profit and Loss, Comprehensive Profit and Loss to
Volatility Ratio and Portfolio Profit and Loss to Volatility Ratio,
Unprofitable Trading Days based on Comprehensive Profit and Loss and
Unprofitable Trading Days based on Portfolio Profit and Loss, and
Skewness of Portfolio Profit and Loss and Kurtosis of Portfolio Profit
and Loss.
    A few commenters indicated support for these metrics as
appropriate, contextual metrics.\2748\ These commenters indicated that
these metrics may serve to highlight areas requiring further
investigation, since high P&L volatility may indicate a deviation from
traditional client related activities and that a well-structured
trading operation should be able to obtain relatively high ratios of
revenue-to-risk (as measured by various metrics), low volatility, and
relatively high turnover.\2749\ One commenter recommended that New
Trades P&L be substituted for Portfolio P&L for purposes of computing
Volatility of P&L because New Trades P&L captures customer revenues
more completely and is therefore more useful for distinguishing market
making from proprietary trading.\2750\ Another commenter indicated that
Skewness of Portfolio Profit and Loss and Kurtosis of Portfolio Profit
and Loss incorporates (and therefore obviates the need for a separate
calculation of) the metric Volatility of Portfolio Profit and
Loss.\2751\
---------------------------------------------------------------------------

    \2748\ See, e.g., Goldman (Prop. Trading); Volcker; John S.
Reed; See also AFR et al. (Feb. 2012); Sen. Merkley; Occupy; Public
Citizen.
    \2749\ See Occupy; Public Citizen; Sen. Merkley.
    \2750\ See Goldman (Prop. Trading) (also suggesting that New
Trades P&L be substituted for Portfolio P&L in Comprehensive Profit
and Loss to Volatility Ratio and Portfolio Profit and Loss to
Volatility Ratio and Unprofitable Trading Days based on
Comprehensive Profit and Loss and Unprofitable Trading Days based on
Portfolio Profit and Loss).
    \2751\ See Barclays.
---------------------------------------------------------------------------

    One commenter urged that after-the-fact application of
Comprehensive Profit and Loss to Volatility Ratio may cause firms to
reconsider their commitment to market making and argued that this
metric should be applied flexibly in light of market conditions
prevailing during the relevant time period and as one of many factors
relevant to an assessment of overall bona fide market making.\2752\ One
commenter supported monitoring Portfolio Profit and Loss to Volatility
Ratio and argued that the Agencies should establish a clear pattern of
profit and loss results of individual trading units through iterative
application of the metrics.\2753\
---------------------------------------------------------------------------

    \2752\ See NYSE Euronext.
    \2753\ See AFR et al. (Feb. 2012).
---------------------------------------------------------------------------

    One commenter expressed support for Unprofitable Trading Days based
on Comprehensive Profit and Loss and Unprofitable Trading Days based on
Portfolio Profit and Loss indicating that these metrics may serve to
highlight areas requiring further investigation, since a significant
number of unprofitable trading days may indicate a deviation from
traditional client-related activities.\2754\ Another commenter
suggested that these metrics be removed as they would result in market
makers being less likely to take client-facing positions due to
reluctance to incur unprofitable trading days that could indicate the
presence of impermissible activity despite the utility of such trades
in providing liquidity to customers.\2755\
---------------------------------------------------------------------------

    \2754\ See Occupy.
    \2755\ See Barclays.
---------------------------------------------------------------------------

    One commenter requested including Skewness of Portfolio Profit and
Loss and Kurtosis of Portfolio Profit and Loss in the metrics set as
the most comprehensive metric in the revenue-relative-to-risk category
making other metrics unnecessary in this area.\2756\ Another commenter
argued that this metric would produce inconsistent results within and
across trading units and would generally not support any meaningful
conclusions regarding the permissibility or risk of trading
activities.\2757\
---------------------------------------------------------------------------

    \2756\ See Barclays.
    \2757\ See Goldman (Prop. Trading).
---------------------------------------------------------------------------

    After carefully considering the comments received, the final rule
does not include any of the proposed revenue-relative-to-risk
measurements. Each of these measures provides information that may
generally be useful for characterizing the overall risk profile of the
trading activities of each trading unit and evaluating the extent to
which the quantitative profile of a trading unit's activities is
consistent with permissible trading activities. The broad information
content of these measures, however, can largely be reproduced from
transformations of information that will be provided in the
Comprehensive Profit and Loss Attribution and, as noted above,
volatility of comprehensive profit and loss must be reported. Analogs
to the other metrics such as Skewness of Portfolio Profit and Loss and
Kurtosis of Portfolio Profit and Loss can be computed similarly from
information that will be provided in the Comprehensive Profit and Loss
Attribution. Accordingly, the information contained in these metrics is
retained in the final rule while the burden associated with computing,
auditing and reporting these additional metrics on an ongoing basis has
been eliminated.
    Under the proposal, the fourth set of quantitative measurements
related to customer-facing activity measurements. These metrics include
Inventory Risk Turnover, Inventory Aging, and Customer-facing Trade
Ratio.
    A few commenters supported the proposal's Inventory Risk Turnover
metric though some of these commenters suggested modifications to the
metric.\2758\ One commenter argued that this metric could indicate
whether a given trading unit holds risk and inventory consistently with
the asset class in which such trading unit deals, the types of trading
activity in which the trading unit engages, and the scale and scope of
the client activity that such trading unit serves.\2759\ Another
commenter argued that the final rule should explicitly state that a
trading unit's inventory management practices will be evaluated using
this metric.\2760\ Some commenters expressed the view that this metric
might be useful in the case of liquid positions but not in the case of
illiquid or difficult-to-hedge products, which naturally have lower
risk turnover. Others noted support for this metric tailored on an
asset-by-asset basis.\2761\
---------------------------------------------------------------------------

    \2758\ See Goldman (Prop. Trading); Barclays; John Reed; JPMC;
SIFMA et al. (Prop. Trading) (Feb. 2012); Wells Fargo (Prop.
Trading).
    \2759\ See Barclays.
    \2760\ See Goldman (Prop. Trading).
    \2761\ See, e.g., Barclays; Goldman (Prop. Trading); JPMC; John
Reed.
---------------------------------------------------------------------------

    A few commenters requested that the final rule clarify that this
metric will not be required to be calculated for every possible Risk
Factor Sensitivity measurement for the applicable portfolio and that a
banking entity and its regulator should determine one or two core risk
factors per asset classes with respect to which this metric that will
be calculated to strike a reasonable balance between costs of
calculations

and benefits of this metric.\2762\ Other commenters argued the
Inventory Risk Turnover Metric was difficult to measure, burdensome,
and would create uncertainty for derivatives counterparties.\2763\
---------------------------------------------------------------------------

    \2762\ See Goldman (Prop. Trading); JPMC; SIFMA et al. (Prop.
Trading) (Feb. 2012); See also Morgan Stanley.
    \2763\ See Japanese Bankers Ass'n; SIFMA (Asset Mgmt.) (Feb.
2012); Morgan Stanley.
---------------------------------------------------------------------------

    A few commenters supported the Inventory Aging metric. One
commenter argued it should be included in the metrics set to indicate
whether a given trading desk holds risk and inventory consistently
within the asset class in which such trading desk deals, the type of
trading activity in which the trading unit engages, and the scale and
scope of the client activity that such trading desk serves.\2764\ This
commenter suggested tailoring the metric based on the market for a
particular asset class and market conditions because aging levels may
be higher in less liquid markets. A number of commenters argued that
application of the Inventory Aging metric is only appropriate for cash
products and should not be used for trading units engaged in
transactions in financial instruments such as derivatives.\2765\
Another commenter argued that the Inventory Aging metric is generally
not useful for derivatives, and for non-derivatives it provides
essentially similar information to Inventory Risk Turnover.\2766\ One
commenter requested additional guidance on how to calculate this
metric.\2767\
---------------------------------------------------------------------------

    \2764\ See Barclays; See also Invesco.
    \2765\ See Barclays; Goldman (Prop. Trading); Japanese Bankers
Ass'n; Morgan Stanley; SIFMA (Prop. Trading) (Feb. 2012).
    \2766\ See Goldman (Prop. Trading).
    \2767\ See Soci[eacute]t[eacute] G[eacute]n[eacute]rale.
---------------------------------------------------------------------------

    A few commenters indicated that the Customer-Facing Trade Ratio
could be helpful in distinguishing prohibited proprietary trading from
market making and would be more effective than the proposal's negative
presumption against interdealer trading to evaluate the amount of
interdealer trading that is consistent with market making-related or
hedging activity in a particular business.\2768\ Some commenters
suggested that the metric could be improved and argued that the number
of transactions executed over a calculation period does not provide an
adequate measure for the level of customer-facing trading because it
does not reflect the size of transactions or the amount of risk. These
commenters suggested replacing the metric with a more risk-sensitive
metric or defining the ratio so that it measures notional principal
risk associated with customer transactions and is appropriately
tailored to the relevant asset class or market.\2769\
---------------------------------------------------------------------------

    \2768\ See Goldman (Prop. Trading); See also Invesco.
    \2769\ See Barclays; Goldman (Prop. Trading); JPMC; SIFMA (Prop.
Trading) (Feb. 2012); UBS.
---------------------------------------------------------------------------

    A number of commenters raised concerns about the definition of
customer for purposes of this metric. One commenter argued that a
failure to define ``customer'' to differentiate between customers and
non-customers would render this metric meaningless.\2770\ Another
commenter contended that the metric would be appropriate as long as
banking entities have the flexibility to determine who is a
customer.\2771\ One commenter argued that using a definition of
``customer'' that is different between the market making-related
activity and the reported metric could make legitimate market making-
related activity with customers appear to be prohibited proprietary
trading.\2772\ This commenter argued that other dealers and other
registered market participants should be recognized as customers of the
banking entity. A few commenters contended that this metric would be
burdensome if it required a banking entity to tag individual trades as
customer or non-customer.\2773\ A few commenters argued that
interdealer trading should be allowed as part of market making and
argued this metric would not provide a useful measure of customer-
facing activity.\2774\ Some commenters also expressed concern about the
implications of such a metric for hedging activity, which may involve
relatively less customer-facing activity.\2775\
---------------------------------------------------------------------------

    \2770\ See Occupy.
    \2771\ See Wells Fargo (Prop. Trading).
    \2772\ See SIFMA (Prop. Trading) (Feb. 2012).
    \2773\ See SIFMA (Prop. Trading) (Feb. 2012); See also Goldman
(Prop Trading).
    \2774\ See Barclays; Japanese Bankers Ass'n; Oliver Wyman (Dec.
2011); SIFMA (Prop. Trading) (Feb. 2012).
    \2775\ See Barclays; Wells Fargo (Prop. Trading).
---------------------------------------------------------------------------

    After carefully considering the comments received, the final rule
retains all three of the customer-facing activity measurements from the
proposal, though each measure has been modified. A number of commenters
raised issues regarding the complexities associated with computing the
Inventory Risk Turnover metric. In particular, as noted above, some
commenters argued that computing the metric for every reported risk
factor sensitivity would be burdensome and would not be
informative.\2776\ The inventory metric required in the final rule,
Inventory Turnover, is applied at the transaction level and not at the
risk factor sensitivity level. Accordingly, for a given trading desk
and calculation period, e.g., 30 days, there is only one value of the
Inventory Turnover metric rather than one value for each risk factor
sensitivity that is managed and reported by the trading desk. In this
sense, the turnover metric required in the final rule is similar to
more traditional and common measures of inventory turnover. Moreover,
the required turnover metric is simpler and less costly to track and
record while still providing banking entities and Agencies with
meaningful information regarding the extent to which the size and
volume of trading activities are directed at servicing the demands of
customers. In addition, the description of Inventory Turnover in the
final rule provides explicit guidance on how to apply the metric to
derivative positions.\2777\
---------------------------------------------------------------------------

    \2776\ See Goldman (Prop. Trading); JPMC; SIFMA (Prop. Trading)
(Feb. 2012).
    \2777\ The Agencies believe that this should address commenters'
uncertainty with respect to how the Inventory Risk Turnover metric
would work for derivatives. See Japanese Bankers Ass'n; SIFMA (Asset
Mgmt.) (Feb. 2012); Morgan Stanley.
---------------------------------------------------------------------------

    Inventory Aging provides banking entities and Agencies with
meaningful information regarding the extent to which the size and
volume of trading activities are directed at servicing the demands of
customers. In the case of Inventory Aging, the proposal required that
the aging schedule be organized according to a specific set of age
ranges (i.e., 0-30 days, 30-60 days, 60-90 days, 90-180 days, 180-360
days, and more than 360 days). This requirement has not been adopted in
the final rule in order to provide greater flexibility and to recognize
that specific age ranges that may be relevant for one asset class may
be less relevant for another asset class. Also, to address commenters'
uncertainty about how this metric would apply to derivatives, the final
rule's description of the Inventory Aging metric provides guidance on
how to apply the metric to derivative positions.\2778\
---------------------------------------------------------------------------

    \2778\ See Barclays; Goldman (Prop.Trading); Japanese Bankers
Ass'n; Morgan Stanley; SIFMA (Prop. Trading) (Feb. 2012).
---------------------------------------------------------------------------

    The Customer Facing Trade Ratio provides directionally useful
information regarding the extent to which trading transactions are
conducted with customers. In the case of the Customer Facing Trade
Ratio, the proposal required that customer trades be measured on a
trade count basis. The final rule requires that the Customer Facing
Trade Ratio be computed in two ways. As in the proposal, the metric
must be computed by measuring trades on a trade count basis.
Additionally, as suggested by some commenters, the

final rule requires that the metric be computed by measuring trades on
a notional value basis. The value based approach is required to reflect
the fact noted by some commenters, that a trade count based measure may
not accurately represent the amount of customer facing activity if
customer trade sizes systematically differ from the sizes of non-
customer trades. In addition, the term ``customer'' for purposes of the
Customer-Facing Trade Ratio is defined in the same manner as the terms
client, customer, and counterparty used for purposes of the market-
making exemption. This will ensure that the information provided by
this metric is useful for purposes of monitoring compliance with the
market-making exemption.\2779\
---------------------------------------------------------------------------

    \2779\ See SIFMA (Prop. Trading) (Feb. 2012).
---------------------------------------------------------------------------

    The fifth set of quantitative measurements relates to the payment
of fees, commissions, and spreads, and includes the Pay-to-Receive
Spread Ratio. This measurement was intended to measure the extent to
which trading activities generate revenues for providing intermediation
services, rather than generate expenses paid to other intermediaries
for such services. Because market making-related activities ultimately
focus on servicing customer demands, they typically generate
substantially more fees, spreads and other sources of customer revenue
than must be paid to other intermediaries to support customer
transactions. Proprietary trading activities, however, that generate
almost no customer facing revenue will typically pay a significant
amount of fees, spreads and commissions in the execution of trading
strategies that are expected to benefit from short-term price
movements. Accordingly, the Agencies expected that the proposed Pay-to-
Receive Spread Ratio measurement would be useful in assessing whether
permitted market making-related activities are primarily generating,
rather than paying, fees, spreads and other transactional revenues or
expenses. A level of fees, commissions, and spreads paid that is
inconsistent with prior experience, the experience of similarly
situated trading desks and management's stated expectations for such
measures could indicate impermissible proprietary trading.
    One commenter expressed concern that after-the-fact application of
the Pay-to-Receive Spread Ratio could cause firms to reconsider their
commitment to market making. This commenter suggested that if this
measure is used, it be applied flexibly, in light of market conditions
prevailing during the relevant time period, and as one of many factors
relevant to an overall assessment of bona fide market making.\2780\
Another commenter suggested expanding the flexibility offered in
choosing a bid-offer source to the entire process of calculating Pay-
to-Receive Spread Ratio.\2781\ A number of commenters argued for
removing this metric because its calculation incorporates the Spread
P&L metric.\2782\ Some of these commenters argued that the metric
requires a trade-by-trade analysis which would be expensive to compute
and would not provide any additional information that is not available
from other metrics. One commenter alleged that this metric was not
calculable by any methodology.\2783\
---------------------------------------------------------------------------

    \2780\ See NYSE Euronext.
    \2781\ See UBS.
    \2782\ See CH/ABASA; Goldman (Prop.Trading); Japanese Bankers
Ass'n; Occupy; SIFMA (Prop.Trading) (Feb. 2012); Wells Fargo
(Prop.Trading).
    \2783\ See Morgan Stanley.
---------------------------------------------------------------------------

    The Pay-to-Receive Spread Ratio has not been retained in the final
rule. As noted by some commenters, the broad information content of
this metric will largely be captured in the Comprehensive Profit and
Loss Attribution measurement. In addition, the Comprehensive Profit and
Loss Attribution will place such factors that are related to the
proposed Pay-to-Receive Spread Ratio in context with other factors that
determine total profitability. Accordingly, factors relating to the
payment of fees, commissions and spreads will not be considered in
isolation but will be viewed in a context that is appropriate to the
entirety of the trading desk's activities. Finally, using the
information contained in the Comprehensive Profit and Loss Attribution
to holistically assess the range of factors that determine overall
profitability, rather than requiring a large number of separate and
distinct measurements, will reduce the resulting compliance burden
while ensuring an integrated and holistic approach to assessing the
activities of each trading desk.
    Commenters also suggested a number of additional metrics be added
to the final rule that were not contained in the proposal. One
commenter, who advocated for an alternative framework for market making
supported by structural and transactional metrics, suggested that
structural metrics could include the ratio of salespeople to traders
and the level of resources devoted to client research and trading
content.\2784\ Two commenters supported the use of a counterparty risk
exposure measure, not only to the risk of counterparty default but also
to potential gains and losses to major counterparties for each of a
list of systemically important scenarios.\2785\ One of these commenters
suggested that entity-wide inflation risk assessments be produced on a
daily basis.\2786\ This commenter also argued that an important metric
that is missing is a Liquidity Gap Risk metric that estimates the price
change that occurs following a sudden disruption in liquidity for a
product, arguing that there needs to be an industry-wide effort to more
accurately measure and account for the significant effect that
liquidity and changes in its prevailing level have on the valuation of
each asset.
---------------------------------------------------------------------------

    \2784\ See Morgan Stanley.
    \2785\ See Prof. Duffie; Occupy.
    \2786\ See Occupy.
---------------------------------------------------------------------------

    One commenter argued that the metrics regime was well-designed for
market-making but lacking in other areas like hedging. This commenter
recommended the addition of additional metrics more applicable to other
non-market making activities like a net profit metric for
hedging.\2787\ Two commenters argued that quantitative measurement for
underwriting was not included in the proposal and stated that in a bona
fide underwriting, unsold balances should be relatively small so a
marker for potential non-bona fide underwriting should be recognized if
VaR (unhedged and uncovered) of the unsold balance that is allocated to
a banking entity is large relative to the expected revenue measured by
the pro rata underwriting spread.\2788\
---------------------------------------------------------------------------

    \2787\ See AFR et al. (Feb. 2012).
    \2788\ See AFR et al. (Feb. 2012); See also Public Citizen.
---------------------------------------------------------------------------

    After carefully considering the comments received, these and other
proposed metrics have not been included as part of the final rule. One
major concern raised by a range of commenters was the degree of
complexity and burden that would be required by the metrics reporting
regime. In light of these comments, the final rule includes a number of
quantitative measurements that are expected to provide a means of
characterizing the overall risk profile of the trading activities of
each trading desk and evaluating the extent to which the quantitative
profile of a trading desk's activities is consistent with permissible
trading activities in a cost effective and efficient manner while being
appropriate for a range of different trading activities. Moreover,
while many commenters suggested a number of different alternative
metrics, many of

these alternatives are consistent with the broad themes, risk
management, sources of revenues, customer facing activity, that inform
the quantitative measurements that are retained in the final rule.
Finally, banking entities will be expected to develop their own
metrics, as appropriate, to further inform and improve their own
monitoring and understanding of their trading activities. Many of the
alternative metrics that were suggested by commenters, especially those
that relate to a specific market or type of instrument, may be used by
banking entities as they develop their own quantitative measurements.
    For each individual quantitative measurement in the final rule,
Appendix A describes the measurement, provides general guidance
regarding how the measurement should be calculated and specifies the
period over which each calculation should be made. The proposed
quantitative measurements attempt to incorporate, wherever possible,
measurements already used by banking entities to manage risks
associated with their trading activities. Of the measurements proposed,
the Agencies expect that a large majority of measurements proposed are
either (i) already routinely calculated by banking entities or (ii)
based solely on underlying data that are already routinely calculated
by banking entities. However, calculating these measurements according
to the specifications described in Appendix A and at the trading desk
level mandated by the final rule may require banking entities to
implement new processes to calculate and furnish the required
data.\2789\
---------------------------------------------------------------------------

    \2789\ See Credit Suisse (Seidel) ; Morgan Stanley; UBS; Wells
Fargo (Prop. Trading); Soci[eacute]t[eacute] G[eacute]n[eacute]rale;
Occupy; Paul Volcker; AFR et al. (Feb. 2012); Western Asset Mgmt.;
Public Citizen.
---------------------------------------------------------------------------

    The extent of the burden associated with calculating and reporting
quantitative measurements will likely vary depending on the particular
measurements and differences in the sophistication of management
information systems at different banking entities. As noted, the
proposal tailored these data collections to the size and type of
activity conducted by each banking entity in an effort to minimize the
burden in particular on firms that engage in few or no trading
activities subject to the proposed rule.
    The Agencies have also attempted to provide, to the extent
possible, a standardized description and general method of calculating
each quantitative measurement that, while taking into account the
potential variation among trading practices and asset classes, would
facilitate reporting of sufficiently uniform information across
different banking entities so as to permit horizontal reviews and
comparisons of the quantitative profile of trading desks across firms.
    The Agencies expect to evaluate the data collected during the
compliance period both for its usefulness as a barometer of
impermissible trading activity and excessive risk-taking and for its
costs. This evaluation will consider, among other things, whether all
of the quantitative measurements are useful for all asset classes and
markets, as well as for all the trading activities subject to the
metrics requirement, or if further tailoring is warranted.\2790\ The
Agencies propose to revisit the metrics and determine, based on a
review of the data collected by September 30, 2015, whether to modify,
retain or replace the metrics. To allow firms to develop systems to
calculate and report these metrics, the Agencies have delayed all
reporting of the metrics until July 2014, phased in the reporting
requirements over a multi-year period, and reduced the category of
banking entities that must report the metrics to a smaller number of
firms that engage in significant trading activity. These steps,
combined with the reduction in the number of metrics required to be
reported, are designed to reduce the cost and burden associated with
compiling and reporting the metrics while retaining the usefulness of
this data collection in helping to ensure that trading activities are
conducted in compliance with section 13 of the BHC Act and the final
rule and in a manner that monitors, assesses and controls the risks
associated with these activities.
---------------------------------------------------------------------------

    \2790\ The Agencies believe this review, along with the fact
that quantitative measurements will not be used as a dispositive
tool for determining compliance and the removal of many of the
proposed metrics, should help address commenters' concerns that some
of the proposed quantitative measurements will not be as relevant
for certain asset classes, markets, and activities. See Morgan
Stanley; SIFMA et al. (Prop. Trading); Stephen Roach.
---------------------------------------------------------------------------

4. Section ----.21: Termination of Activities or Investments;
Authorities for Violations
    Section ----.21 implements section 13(e)(2) of the BHC Act, which
authorizes an Agency to order a banking entity subject to its
jurisdiction to terminate activities or investments that violate or
function as an evasion of section 13 of the Act.\2791\ Section 13(e)(2)
further provides that this paragraph shall not be construed to limit
the inherent authority of any Federal agency or State regulatory
authority to further restrict any investments or activities under
otherwise applicable provisions of law.\2792\
---------------------------------------------------------------------------

    \2791\ See 12 U.S.C. 1851(e)(2).
    \2792\ Id.
---------------------------------------------------------------------------

    The proposed rule implemented section 13(e)(2) in two parts. First,
Sec.  ----.21(a) of the proposal required any banking entity that
engages in an activity or makes an investment in violation of section
13 of the BHC Act or the proposed rule, or in a manner that functions
as an evasion of the requirements of section 13 of the BHC Act or the
proposed rule, including through an abuse of any activity or investment
permitted under subparts B or C, or otherwise violates the restrictions
and requirements of section 13 of the BHC Act or the proposed rule, to
terminate the activity and, as relevant, dispose of the
investment.\2793\ Second, Sec.  ----.21(b) of the proposal provided
that if, after due notice and an opportunity for hearing, the
respective Agency finds reasonable cause to believe that any banking
entity has engaged in an activity or made an investment described in
paragraph (a), the Agency may, by order, direct the entity to restrict,
limit, or terminate the activity and, as relevant, dispose of the
investment.\2794\
---------------------------------------------------------------------------

    \2793\ See proposed rule Sec.  ----.21(a). The proposal noted
that the Agencies included Sec.  ----.21(a), in addition to the
provisions of Sec.  ----.21(b) of the proposed rule, to clarify that
the requirement to terminate an activity or, as relevant, dispose of
an investment would be triggered when a banking entity discovers the
violation or evasion, regardless of whether an Agency order has been
issued.
    \2794\ See proposed rule Sec.  ----.21(b).
---------------------------------------------------------------------------

    Several commenters urged the Agencies to strengthen the authorities
provided for under Sec.  ----.21,\2795\ with some commenters expressing
concern that the proposed rule does not establish sufficient
enforcement mechanisms and penalties for violations of the rule's
requirements.\2796\ Some commenters suggested the Agencies add language
in Sec.  ----.21 authorizing the imposition of automatic and
significant financial penalties--as significant as the potential gains
from illegal proprietary trading--on traders, supervisors, executives,
and firms for violating section 13 of the BHC Act and the final
rule.\2797\ These

commenters suggested the Agencies incorporate reference to the Board's
authority under section 8 of the BHC Act into the rule,\2798\ and
others encouraged the Agencies to rely on their inherent authority to
impose automatic penalties and fines.\2799\ A few commenters stated
that traders, management, and banking entities should be held
responsible for violations under certain circumstances.\2800\ Finally,
another commenter recommended that officers and directors of a banking
entity be removed from office, be prohibited from being affiliated with
a banking entity, and be subject to salary clawbacks for violations of
section 13 of the BHC Act and the final rule.\2801\
---------------------------------------------------------------------------

    \2795\ See Sen. Merkley; Better Markets (Feb. 2012); Occupy; AFR
et al. (Feb. 2012); Public Citizen.
    \2796\ See, e.g., BEC et al. (Jan. 2012); John Reed; Better
Markets (Feb. 2012); AFR et al. (Feb. 2012); Occupy; Sen. Merkley;
Public Citizen.
    \2797\ See, e.g., Form Letter Type A; Form Letter Type B; Sarah
McKee; David R. Wilkes; Ben Leet; Karen Michaelis; Barry Rein; Allan
Richardson; Ronald Gedrim; Susan Pashkoff; Joan Budd; Frances
Vreman; Lisa Kazmier; Michael Wenger; Dyanne DiRosario; Alexander
Clayton; James Ofsink; Richard Leining (arguing that violators
should face penalties such as seizure and discharge of the board and
executives); Lee Smith; See also Occupy; Public Citizen.
    \2798\ See Better Markets (Feb. 2012) (contending that penalties
should include specific administrative penalties, including monetary
penalties, bars, cease and desist orders, strengthened penalties for
recurring violations, and sanctioning of employees involved in the
violation and public reporting of such sanctions); AFR et al.
(arguing that section 8 of the BHC Act provides civil penalties for
violations by a company or individual and criminal penalties for
willful violations of the BHC Act). See also Occupy (requesting the
Agencies provide penalties that are specific to this rule in
addition to the general framework for criminal and civil penalties
in section 8 of the BHC Act).
    \2799\ See Better Markets (Feb. 2012); Occupy; AFR et al. (Feb.
2012).
    \2800\ See John Reed; Better Markets (Feb. 2012). See also BEC
et al. (Jan. 2012) (arguing that CEOs and CFOs should be held fully
responsible for any violations of the rule by any employees above
the clerical level); Occupy (recommending that traders relying on an
exemption in the proposed rule be held personally liable for any
losses on trading positions).
    \2801\ See Occupy.
---------------------------------------------------------------------------

    The Agencies note that the authorities provided for in Sec.  --
--.21 are not exclusive. The Agencies have a number of enforcement
tools at their disposal to carry out their obligations to ensure
compliance with section 13 of the BHC Act and the final rule, and need
not reference them expressly in Sec.  ----.21 in order to exercise
them. Specifically, the Agencies may rely on their inherent authorities
under otherwise applicable provisions of banking, securities, and
commodities laws to bring enforcement actions against banking entities,
their officers and directors, and other institution-affiliated parties
for violations of law.\2802\ For example, a banking entity that
violates section 13 of the BHC Act and the final rule may be subject to
criminal and civil penalties under section 8 of the BHC Act. Banking
entities may also be subject to formal enforcement actions under
section 8 of the Federal Deposit Insurance Act (FDIA), such as cease
and desist orders or civil money penalty actions,\2803\ or safety and
soundness orders under section 39 of the FDIA which may be enforceable
through assessment of civil money penalties and through the federal
court system. In addition, officers, directors, and other institution-
affiliated parties\2804\ may be subject to civil money penalties,
prohibition or removal actions, and personal cease and desist orders
under section 8 of the FDIA. Submission of late, false, or misleading
reports, including false statements on compliance with section 13 of
the BHC Act or the final rule, may also result in actions under
applicable securities, commodities, banking, and criminal laws,
including imposition of civil money and criminal penalties.\2805\
Therefore, the final rule is consistent with the proposal and does not
mention other enforcement actions available to address violations of
section 13 of the BHC Act and this final rule.
---------------------------------------------------------------------------

    \2802\ See 12 U.S.C. 1851(g)(3).
    \2803\ See, e.g., 12 U.S.C. 1818(i) (authorizing imposition of
civil money penalties up to the maximum daily amount of $1,000,000
for, among other things, knowing violations of law or regulation).
    \2804\ See 12 U.S.C. 1813(u) (defining ``institution-affiliated
party'').
    \2805\ See, e.g., 12 U.S.C. 164 (authorizing imposition of civil
money penalties for, among other things, submitting false or
misleading reports or information to the OCC); 18 U.S.C. 1005
(authorizing imposition of fines of not more than $1,000,000 or
imprisonment not more than 30 years, or both, for, among other
things, making a false entry in the books, reports or statements of
a bank with intent to injure, defraud or deceive).
---------------------------------------------------------------------------

    Section 13 of the BHC Act and the final rule do not limit the reach
or applicability of the antifraud and other provisions of the federal
laws to banking entities, including, for example, section 17(a) of the
Securities Act of 1933 or section 10(b) and 15(c) of the Exchange Act
and the rules promulgated thereunder.
    One commenter also suggested that the Agencies use their authority
under section 13(d)(3) of the BHC Act to impose additional capital
requirements and quantitative limitations on banking entities for
repeat violations of the prohibition on proprietary trading.\2806\ The
Agencies believe they can rely on other inherent enforcement
authorities to address repeat violations. The Agencies note that
several other commenters also requested the Agencies to exercise their
authority under section 13(d)(3).\2807\ The Agencies do not believe
that it is appropriate to exercise their authority under this section
at this time, primarily because the capital treatment of banking
entities' trading activities is currently being addressed through the
Agencies' risk-based capital rulemakings.\2808\ Additionally, the
Agencies believe Congress intended section 13(d)(3) to serve the
prudential purposes of bolstering the safety and soundness of
individual banking entities and the wider U.S. financial system. To the
extent commenters suggested section 13(d)(3) be employed for a punitive
purpose, the Agencies do not believe the provision was designed to
serve such a purpose nor do the Agencies believe that would be an
appropriate use of the provision. Thus, the Agencies believe section
13(d)(3) is more appropriately employed for the prudential purposes of
bolstering the safety and soundness of individual banking entities and
the wider financial stability of the U.S. financial system.
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    \2806\ See Better Markets (Feb. 2012).
    \2807\ See Sen. Merkley; Public Citizen; Better Markets (Feb.
2012); Profs. Admati & Pfleiderer.
    \2808\ See Regulatory Capital Rules: Regulatory Capital,
Implementation of Basel III, Capital Adequacy, Transition
Provisions, Prompt Corrective Action, Standardized Approach for
Risk-weighted Assets, Market Discipline and Disclosure Requirements,
Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital
Rule; Final Rule, 78 FR 62,017 (Friday, October 11, 2013).
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    Commenters also urged the Agencies to clearly delineate in the
final rule the jurisdictional authority of each of the Agencies to
enforce compliance with section 13 of the BHC Act and the implementing
final rule. A number of commenters recommended approaches to
coordinating examinations and enforcement among the Agencies, as well
as to providing interpretive guidance.\2809\ For example, some
commenters observed that more than one Agency would have jurisdiction
over a given banking entity, and recommended that supervision and
enforcement of the final rule for all entities within a banking
enterprise remain completely with one Agency. \2810\ Further, some
commenters recommended that a single Agency be appointed to provide
interpretations, supervision, and enforcement of section 13 and the
rules thereunder for all banking entities.\2811\ Similarly, one
commenter suggested that the Board be given initial authority to
supervise the implementation of the rule because it is the primary
enforcer of the BHC Act and the single regulator that can currently
look across a banking group's entire global businesses, regardless of
legal entity. This commenter stated that the Board could then determine
whether an activity should be delegated to one of

the other Agencies for further examination or enforcement.\2812\ In
addition, with respect to interpretive authority, some commenters
indicated that the Board should be given sole interpretive authority of
the statute and the rules thereunder.\2813\ Other commenters urged the
Agencies to supervise and enforce the rule on a coordinated basis so as
to minimize duplicative enforcement efforts, reduce costs, and promote
certainty.\2814\
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    \2809\ See SIFMA et al. (Prop. Trading) (Feb. 2012); JPMC;
Barclays; Goldman (Prop. Trading); BoA; ABA (Keating); Comm. on
Capital Market Regulation; BEC et al.; ISDA (Apr. 2012).
    \2810\ See Barclays (arguing that ideally the umbrella federal
regulator of the enterprise should take this role); Goldman (Prop.
Trading).
    \2811\ See BoA; BEC et al.
    \2812\ See Comm. on Capital Market Regulation.
    \2813\ See SIFMA et al. (Prop. Trading) (Feb. 2012); BoA
(recommending that the Board be responsible for resolving
potentially conflicting supervisory recommendations or matters
requiring attention arising from examinations as well); ISDA (Apr.
2012). See also ABA (Keating) (arguing that the Agencies should
defer to the Board's sole authority to interpret provisions of
Volcker that intersect with other statutory provisions subject to
the Board's jurisdictional authority, such as Super 23A); JPMC
(contending that the Agencies should adopt and Seek comment on a
protocol for supervision and enforcement that will ensure a given
banking entity will face one set of rules and different banking
entities will face the same set of rules). The Agencies decline to
adopt the commenter's suggested approach of deferring to the Board's
sole interpretive authority with respect to the provisions of the
final rule. The Agencies believe at this time that such an approach
would be neither appropriate nor effective given the different
authorities and expertise of each Agency. See Part IV.C (discussing
the Agencies' decision not to adopt some commenters' requests that a
single agency be responsible for determining compliance with section
13).
    \2814\ See SIFMA et al. (Prop. Trading) (Feb. 2012); BoA
(stating that the Agencies should issue one set of exam findings
under these circumstances); ISDA (Apr. 2012).
---------------------------------------------------------------------------

    Section 13(e)(2) mandates that each Agency enforce compliance of
section 13 with respect to a banking entity ``under the respective
[A]gency's jurisdiction.'' \2815\ This section provides the Agencies
with the authority to order a banking entity to terminate activities or
investments that violate or function as an evasion of section 13 of the
BHC Act.\2816\ Decisions about whether to issue such orders could be
made after examinations or otherwise. Nothing in the final rule limits
an Agency's inherent authority to conduct examinations or otherwise
inspect banking entities to ensure compliance with the final rule.
Section ----.1 of each Agency's proposed rule described the specific
types of banking entities to which that Agency's rule applies. The
Agencies acknowledge commenters' concerns about overlapping
jurisdictional authority. The Agencies recognize that, on occasion, a
banking entity may be subject to jurisdiction by more than one Agency.
As is customary, the Agencies plan to coordinate their examination and
enforcement proceedings under section 13, to the extent possible and
practicable, so as to limit duplicative actions and undue costs and
burdens for banking entities.\2817\
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    \2815\ See 12 U.S.C. 1851(c)(2).
    \2816\ See 12 U.S.C. 1851(e)(2) (requiring ``due notice and
opportunity for hearing'').
    \2817\ See 12 U.S.C. 1844 (establishing jurisdictional
boundaries for regulation of bank holding companies); See also 12
U.S.C. 1828a (antievasion statute empowering OCC, FDIC, and the
Board to impose restrictions on relationships or transactions
between banks and their subsidiaries and affiliates).
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    The Agencies are adopting Sec.  ----.21 substantially as proposed.
Accordingly, Sec.  ----.21(a) of the final rule provides that any
banking entity that engages in an activity or makes an investment in
violation of section 13 of the BHC Act or the final rule or acts in a
manner that functions as an evasion of the requirements of section 13
of the BHC Act or the final rule, including through an abuse of any
activity or investment permitted or expressly excluded by the terms of
the final rule, or otherwise violates the restrictions and requirements
of section 13 of the BHC Act or the final rule, shall, upon discovery,
promptly terminate the activity and, as relevant, dispose of the
investment. This provision allows the Agencies to enforce the rule's
prohibitions against proprietary trading and sponsoring or owning
interests in covered funds regardless of how banking entities classify
their actions, while also providing banking entities the freedom to
legitimately engage in those banking activities which are outside the
scope of the statute.

V. Administrative Law Matters

A. Use of Plain Language

    Section 722 of the Gramm-Leach Bliley Act (Pub. L. 106-102, 113
Stat. 1338, 1471, 12 U.S.C. 4809) requires the Federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. The OCC, Board and FDIC invited comment on whether the
proposed rule was written plainly and clearly, or whether there were
ways the Federal banking agencies could make the rule easier to
understand. The Federal banking agencies received no comments on these
matters and believe that the final rule is written plainly and clearly.

B. Paperwork Reduction Act Analysis

    Certain provisions of the final rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with
the requirements of the PRA, the Agencies may not conduct or sponsor,
and a respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management
and Budget (OMB) control number. The OCC, FDIC, and Board will obtain
OMB control numbers. The information collection requirements contained
in this joint final rule, to the extent they apply to insured financial
institutions that are not under a holding company, have been submitted
to OMB for review and approval by the OCC and FDIC under section
3507(d) of the PRA and Sec.  1320.11 of OMB's implementing regulations
(5 CFR part 1320). The Board reviewed the final rule under the
authority delegated to the Board by OMB.
PRA Submission to OMB
    The Board will submit information collection burden estimates to
OMB and the submission will include burden for Federal Reserve-
supervised institutions, as well as burden for OCC-, FDIC-, SEC-, and
CFTC-supervised institutions under a holding company. The OCC and the
FDIC will take burden for banking entities that are not under a holding
company.
    The FDIC and OCC submitted these information collection estimates
to OMB at the proposed rule stage as well. OMB filed comments
instructing the OCC and FDIC to examine public comment in response to
the notice of proposed rulemaking and include in the supporting
statement of the next Information Collection Request (ICR), to be
submitted to OMB at the final rule stage, a description of how the OCC
and FDIC have responded to any public comments in response to the ICR.
Provisions Requiring PRA Clearance
    The final rule contains requirements subject to the PRA. The
reporting requirements are found in Sec. Sec.  ----.12(e) and --
--.20(d); the recordkeeping requirements are found in Sec. Sec.  --
--.3(d)(3), ----.4(b)(3)(i)(A), ----.5(c), ----.11(a)(2), and --
--.20(b)-(f); and the disclosure requirements are found in Sec.  --
--.11(a)(8)(i). The recordkeeping burden for Sec. Sec.  --
--.4(a)(2)(iii), ----.4(b)(2)(iii), ----.5(b)(1), ----.5(b)(2)(i), --
--.5(b)(2)(iv), ----.13(a)(2)(i), and ----.13(a)(2)(ii)(A) is accounted
for in Sec.  ----.20(b); the recordkeeping burden for Appendix B is
accounted for in Sec.  ----.20(c); the reporting and recordkeeping
burden for Appendix A is accounted for in Sec.  ----.20(d); and the
recordkeeping burden for Sec. Sec.  ----.10(c)(12)(i) and --
--.10(c)(12)(iii) is accounted for in Sec.  ----.20(e). These
information collection requirements would implement section 619 of the
Dodd-Frank Act, as mentioned in the Abstract below. The respondent/

recordkeepers are for-profit financial institutions, including small
businesses. A covered entity must retain these records for a period
that is no less than 5 years in a form that allows it to promptly
produce such records to [the Agency] on request.
Comments Received on PRA
    Of the comments received in response to the proposed rule, three
specifically referenced the PRA.\2818\ They were received from five
industry trade groups and focused on the analysis of the regulatory
burden imposed by regulation. They referenced the PRA burden as an
example of the significance of the burden imposed by the regulation but
did not address burden in the context of the PRA. A number of other
comments addressed reporting and recordkeeping requirements and the
utility of the information to be collected outside the context of the
PRA. As a result of these and other comments, the Agencies made changes
to the rule. These comments are discussed throughout the release.
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    \2818\ See BoA (acknowledging that the Agencies performed an
analysis of the information costs as required by the Paperwork
Reduction Act); SIFMA et al. (Covered Funds) (Feb. 2012) (noting
that the Agencies conducted a limited cost/benefit analysis of the
information requirements of the proposed rules under the PRA);
Chamber (Nov. 2013) (noting that the burden estimates for the
proposed rule stand at almost 6,600,000 hours per year).
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Proposed Information Collection
    Title of Information Collection: Reporting, Recordkeeping, and
Disclosure Requirements Associated with Proprietary Trading and Certain
Interests in and Relationships with Covered Funds.
    Frequency of Response: Annual, monthly, quarterly, and on occasion.
    Affected Public: Businesses or other for-profit.
    Respondents:
    Board: State member banks, bank holding companies, savings and loan
holding companies, mutual holding companies, foreign banking
organizations, U.S. branches or agencies of foreign banks, and other
holding companies that control an insured depository institution. The
Board will take burden for all institutions under a holding company
including:
     OCC-supervised institutions,
     FDIC-supervised institutions,
     Banking entities for which the CFTC is the primary
financial regulatory agency, as defined in section 2(12)(C) of the
Dodd-Frank Act, and
     Banking entities for which the SEC is the primary
financial regulatory agency, as defined in section 2(12)(B) of the
Dodd-Frank Act.
    OCC: National banks, federal savings associations, federal savings
banks not under a holding company, and their respective subsidiaries,
and their affiliates not under a holding company, and U.S. branches or
agencies of foreign banks. The OCC will take the burden with respect to
registered investment advisers and commodity trading advisers and
commodity pool operators that are subsidiaries of national banks,
federal savings associations, and federal savings banks not under a
bank holding company.
    FDIC: Insured state nonmember banks not under a holding company;
state savings associations and state savings banks not under a holding
company; subsidiaries of state nonmember banks, state savings
associations, and state savings banks not under a holding company; and
foreign banks having an insured branch and their branches and agencies.
    Abstract:
    Section 619 of the Dodd-Frank Act added a new section 13 to the BHC
Act (to be codified at 12 U.S.C. 1851) that generally prohibits any
banking entity from engaging in proprietary trading or from investing
in, sponsoring, or having certain relationships with a hedge fund or
private equity fund, subject to certain exemptions. As noted above, the
final rule contains requirements subject to the PRA. The Agencies
believe that the reporting, recordkeeping, and disclosure requirements
associated with the rule will permit banking entities and the Agencies
to enforce compliance with section 13 of the BHC Act and the final rule
and to identify, monitor and limit risks of activities permitted under
section 13, particularly involving banking entities posing the greatest
risk to financial stability. Compliance with the information
collections would be mandatory. As noted above, a number of commenters
addressed reporting and recordkeeping requirements and the utility of
the information to be collected outside the context of the PRA. As a
result of these comments, the Agencies made changes to the rule, which
are discussed throughout the release. The final burden estimates take
these changes into account and reflect the anticipated burden under the
final rules. As discussed in the release, in brief, the purpose for the
recordkeeping, disclosure, and reporting requirements contained within
the rule is to facilitate compliance with section 13 of the BHC and
implementing rules.
Section-by-Section Analysis
PRA Reporting Requirements
    Section ----.12(e) states that, upon application by a banking
entity, the Board may extend the period of time to meet the
requirements on ownership limitations in this section for up to 2
additional years, if the Board finds that an extension would be
consistent with safety and soundness and not detrimental to the public
interest. An application for extension must (1) be submitted to the
Board at least 90 days prior to expiration, (2) provide the reasons for
application including information that addresses the factors in
paragraph (e)(2) of Sec.  ----.12, and (3) explain the banking entity's
plan for reducing the permitted investment in a covered fund through
redemption, sale, dilution or other methods.
    Section ----.20(d) provides that a banking entity engaged in
proprietary trading activity must comply with the reporting
requirements described in Appendix A, if (1) the banking entity has,
together with its affiliates and subsidiaries, trading assets and
liabilities the average gross sum of which over the previous
consecutive four quarters, as measured as of the last day of each of
the four prior calendar quarters, equals or exceeds the established
threshold; (2) in the case of a foreign banking entity, the average
gross sum of the trading assets and liabilities of the combined U.S.
operations of the foreign banking entity (including all subsidiaries,
affiliates, branches and agencies of the foreign banking entity