Volcker definition of trading desk
On December 10,the U. The proscription is subject to exceptions that permit limited investments in such entities, as well as exemptions that permit banking entities to engage in organizational and offering activities and to provide investment management, prime brokerage and other services to such funds under certain conditions. Notably, while an original focus of the Volcker Rule was to protect insured banks from essentially using federal deposit insurance as a safety net for bad investments, the final regulations are not only applicable to banking organizations that carry FDIC deposit insurance and their owners, but also foreign banks with banking operations that do not carry FDIC insurance.
This does not, therefore, include foreign entities that make loans from outside of the United States. The Volcker Rule does apply to every foreign entity that directly or indirectly maintains a bank branch or agency in the United States, or controls a commercial lending company. The Volcker Rule does not apply to entities whose contacts with the United States do not require licensed agencies or branches.
For example, foreign banks that maintain only representative offices in the United States are not subject to the Volcker Rule. The establishment by U. Ownership by a foreign bank that has no U. It also requires that foreign financial institutions continuously assess the totality of their U. A trading account can generally be contrasted with an investment account that is maintained for longer term appreciation.
If a banking entity calculates risk-based volcker definition of trading desk ratios under the market risk capital rule, trading of financial instruments that are both market risk capital covered positions and trading positions or related hedges constitute proprietary trading.
Purchases and sales of financial instruments for its own account by a registered volcker definition of trading desk, swap dealer or security-based swap dealer affiliate for any purpose within the scope of its dealing activities constitutes proprietary trading.
These types of activities conducted outside of the United States also constitute proprietary trading. Therefore, subject to the exemptions discussed below, all trading activities by registered broker-dealers and their foreign equivalents, such as Canadian investment dealers, are subject to this prohibition.
In addition, a purchase and sale of a financial instrument is subject to a rebuttable presumption that it is for the trading account of a banking entity if it is held for fewer than 60 days or the risk of the financial instrument is substantially transferred within such period.
However, the Agencies did not adopt the converse of this presumption. Therefore, a purchase or sale of a financial instrument that is held for more than 60 days does not necessarily mean that it is not for the trading account of a banking entity.
Although there are limited exemptions to the broad ban on proprietary trading for banking entities, for foreign entities, the Agencies have crafted two important exemptions that help mitigate the extraterritorial effects of the proprietary trading prohibition. The proprietary trading prohibition does not apply to financial instruments that are sovereign debt obligations volcker definition of trading desk debt obligations of multinational central banks, such as the European Central Bank, of which the foreign sovereign is a memberincluding obligations of agencies and political subdivisions of that sovereign, in cases in which:.
A similar exemption is afforded to a foreign entity that is a foreign bank or regulated by the foreign sovereign as a securities dealer, even if controlled by a top-tier U.
The Agencies noted, however, with respect to this exemption, that they intend to monitor activity of banking entities to ensure that U. The foregoing exemption provides a weak parallel to the full exemption under the U. The final version of this exemption significantly expands on the exemption that had been proposed volcker definition of trading desk that had been widely criticized by the international banking community.
However, the Agencies still placed a number of conditions on the availability of the foreign banking exemption, as outlined below. The foreign banking exemption is applicable to the purchase and sale of any financial instrument if:. While personnel located in the United States acting for the foreign entity cannot be involved in soliciting, arranging, negotiating, making the decision to transact, or executing a transaction, personnel performing back office functions, such as clearing and settlement, would be able to do so in the United States.
However, the foreign banking entity is not treated as being located in the United States solely by virtue of operating or controlling such an office or subsidiary. There are volcker definition of trading desk certain other exemptions that may be available to foreign entities, including heavily conditioned exemptions for:. Underwriting activities of a banking entity are exempted from the proprietary trading prohibitions only if:.
Unlike the SEC Regulation M definition of distribution governing purchases and offers to purchase during a distribution and market stabilizationthe definition used in the Volcker Rule excludes the magnitude of the offering as a relevant factor.
Engaging in the following activities may indicate that a banking entity is acting as an underwriter as part of a distribution of securities:. Thus, this exemption will potentially affect local underwriting practices of banking entities on a worldwide basis unless, instead, the foreign banking exemption, discussed above, can be utilized.
It will also apply to Rule A transactions not conducted on a riskless principal basis. For firms that effect volcker definition of trading desk foreign public offering in conjunction with a U. If this is the case, then foreign underwriting practices would not be affected by the limitations in the underwriting exemption.
This position is consistent with the non-integration of these offerings for U. However, it remains uncertain whether dually-registered personnel of these distinct entities located outside of the United Statesacting in distinct capacities, can be used in both distributions.
These matters will need to be clarified with the staff of the functional regulators. This position may potentially apply in the case of offerings using the Canada-U. If these offerings can be viewed as distinct, separate exemptions could also be utilized.
However, in many of these cases, dually registered personnel are utilized, so clarification concerning this issue will be needed. Since such compensation arrangements are common in Canadian and other foreign investment banking transactions, the foreign banking exemption may instead be useful in this context with the foreign investment banking affiliate exclusively receiving such compensation. Such compensation could be received for volcker definition of trading desk investment account of a U.
As noted above, another exemption from the ban on proprietary trading was created for market-making related activities. Market making-related activities are exempted from the proprietary trading ban if:. Under this exemption, affiliated broker-dealers would need to be approved by the Financial Industry Regulatory Authority, Inc.
In addition to being appropriately registered in this manner, the broker-dealer would need to demonstrate consistency and substantial market-making activity, whether effected on an exchange, alternative trading systems or in other over-the-counter markets, either domestically or in foreign markets, in order to rely on this exemption. Thus, practices such as withdrawing from market making during periods of market stress or auto-quoting away from the market may disqualify a firm from relying on the exemption if not combined with robust bona fide market-making activities.
The prohibition on proprietary trading also exempts risk-mitigating hedging activities. These activities are permitted in connection with, and related to, individual or aggregated positions, contracts, or other holdings of the banking entity that are designed to reduce the specific risks to the banking entity in such connection. Risk-mitigating hedging activities of a banking entity are permitted if the following conditions are met:. As noted above, the determination of whether an activity or strategy is risk-reducing or mitigating must be made at the inception of the hedging activity.
Notwithstanding the exemptions from the proprietary trading ban described above, transactions will be deemed to be impermissible if they:. However, the amount of capital at risk in a transaction, whether or not the transaction can be hedged, the amount of leverage present in the transaction and the general financial condition of the banking entity engaging in the transaction, should be considered. A similar interest consists of an interest:.
Ownership Interest expressly excludes performance compensation to investment managers and other service providers to the covered fund and their employees or former employees, provided that any holdback is used solely for the purpose of satisfying contractual claw back rights and the holdback reserve does not share in subsequent performance. Such interests must generally be non-transferrable, except to affiliates, immediate family members or in connection with the sale of the business to an unaffiliated entity that provides such services.
The Volcker Rule also expressly provides that certain activities are permitted notwithstanding the general prohibition. A banking entity is permitted to make initial investments in a covered fund that it sponsors, including acting as the governing body for such entity, if:. The final rule imposes per Fund and aggregate de minimis limits on banking entity investments in covered funds. For fund of funds structures, compliance is measured only with regard to master funds and not individual feeder funds.
The greater of the amount contributed to covered funds and the fair market value of such interests must be deducted from Tier 1 Capital. An exemption similar to the exemption for permitted risk-mitigating hedging activities in the proprietary trading prohibition is also provided for permitted covered fund activities.
Foreign banking organizations are not subject to the prohibitions on covered fund activities if the following among other requirements are satisfied:. An activity or investment occurs solely volcker definition of trading desk of the United States if: Thus, considerably more flexibility is provided to foreign banking organizations, through reliance on volcker definition of trading desk combination volcker definition of trading desk the seeding period exemption and the foreign covered fund activity exemption, than is provided to U.
In this way, the relationship between a banking entity and a covered fund is subject to the same prohibitions on affiliated transactions as are non-covered fund affiliates of a U.
All such transactions are required to be entered into on terms that are comparable to those entered into with unaffiliated entities. If a banking entity enters into a prime brokerage transaction with a covered fund, the chief executive officer of the banking entity must certify annually with a duty to update that the banking entity does not, directly or indirectly guarantee, assume or otherwise insure the obligations or performance of the covered funds or of any covered fund in which it invests.
Banking entities that do not engage in any Volcker Rule covered activities are not required to establish a Volcker Rule compliance program. For foreign banking entities, it is sufficient if the U.
Banking entities that are engaged in significant trading must furnish periodic reports to their primary regulatory agencies on a range of quantitative measurements regarding their proprietary trading. Beginning on June 30,any U. Foreign banking entities with trading assets and liabilities of the combined U. Any banking entity subject to these reporting requirements must create and retain records documenting the preparation and content of each report, as well as the information necessary to permit a regulator to verify the accuracy of such information in the report for a period of volcker definition of trading desk years.
Scott Publication March Introduction On December volcker definition of trading desk,the U. As used volcker definition of trading desk the Volcker Rule, financial instruments consist of the following: Foreign Sovereign Debt Exemption The proprietary trading prohibition does not apply to financial instruments that are sovereign debt obligations including debt obligations of multinational central banks, such as the European Central Bank, of which the foreign sovereign is a memberincluding obligations of agencies and political subdivisions of that sovereign, in cases in which: The foreign banking exemption is applicable to the purchase and sale of any financial instrument if: The banking volcker definition of trading desk is not organized or directly or indirectly controlled by a banking entity volcker definition of trading desk in the United States; The foreign banking organization e.
This will impose a human resources constraint on foreign banking entities since personnel will need to be based outside of the United States even if U. As noted above, the Volcker Rule added two additional exemptions for transactions by volcker definition of trading desk foreign bank with unaffiliated market intermediaries such as unaffiliated registered broker-dealersthus preserving the prohibition on entering into a proprietary trading transaction with an affiliated U.
If the market intermediary is acting as agent, then the transaction also must be conducted anonymously on an exchange or trading facility. The Agencies have acknowledged that an anonymous trade could result in a transaction between a foreign bank and its U. Nevertheless, many foreign banking entities will need to reorganize their methods of executing transactions in U. Thus, foreign entities are substantially denied the benefits of having an affiliated U. Related hedges effected in the United States will also have to be effected with unaffiliated U.
This will increase execution costs and complexities for foreign banks. Foreign banks will also, as a result, be forced to volcker definition of trading desk sensitive proprietary trading information to unaffiliated U.
There are also certain other exemptions that may be available to foreign entities, including heavily conditioned exemptions for: Certain of these other exemptions are discussed in the sections that follow. Underwriting Exemption Underwriting activities of a banking entity are exempted from the proprietary trading prohibitions only if: