The federal financial regulatory agencies have finalized revisions to their Volcker Rule regulations, with the Fed voting to approve the final rule on Oct. 3, 2019.
All five financial regulatory agencies have finalized proposed changes to their Volcker Rule regulations, which are aimed at clarifying what activities are prohibited, focusing requirements on entities with large trading operations, and simplifying regulatory requirements. The revisions are intended to reduce the burdens of compliance for small and mid-size banking entities (see Banking and Finance Law Daily, June 6, 2018). The changes will go into effect on Jan. 1, 2020, with a compliance date of Jan. 1, 2021, so as to give banking entities sufficient time to comply with the regulatory changes. Banking entities may voluntarily comply, in whole or in part, with the amendments adopted in the final rule following the effective date and prior to the compliance date, including the metrics requirements in the appendix to the final rule, subject to the agencies’ completion of certain technological programming necessary in order to accept metrics consistent with the final rule. The agencies would work with banking entities to test the revised metrics submission format and determine how and when banking entities can voluntarily comply with the final rule prior to the Jan. 1, 2021, compliance date.
The Federal Reserve Board announced that is approved the final rule that will tailor the provisions of their Volcker Rule regulations, making it the last of the five financial regulatory agencies to do so. The FDIC and the OCC became the first two federal financial regulators to approve the final rule (see Banking and Finance Law Daily, Aug. 20, 2019). The CFTC, and the SEC also adopted the final rule (see Securities Regulation Daily, Sept. 16, 2019 and Sept. 16, 2019).
Streamlined regulations. Under the revised rule, firms that do not have significant trading activities will have simplified and streamlined compliance requirements, while firms with significant trading activity will have more stringent compliance requirements. Community banks generally are exempt from the Volcker Rule by statute. The revisions continue to prohibit proprietary trading, while providing greater clarity and certainty for activities allowed under the law. With the changes, the agencies expect that the universe of trades that are considered prohibited proprietary trading will remain generally the same as under the agencies’ 2013 rule.
Fed’s Brainard votes against changes. Fed Governor Lael Brainard voted against the final rule, and issued a statement that she did not support the final rule "because it weakens the core protections against speculative trading within the banking federal safety net." The other members of the Federal Reserve Board: Chair Jerome H. Powell, Richard H. Clarida, Randal K. Quarles, and Michelle W. Bowman voted in favor of the final rule.
Brainard highlighted several area of concern, including the elimination of the "short-term intent" test for most entities. This change was not included in the proposed rule. Brainard stated that by eliminating this test, the final rule "materially narrows the scope of covered activities."
She also expressed concern about examiners’ ability to assess compliance with the final rule due to excessive reliance on firm’s "internal self-policing to set limits to distinguish permissible market making from illegal proprietary trading." Brainard stated that the final rule does not require firms to promptly report limit breaches and increases, and narrows the scope of the Chief Executive Officer attestation requirement, "which together could substantially weaken the Volcker rule prohibition on proprietary trading."
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