March 31, 2020
Board of Governors of the Federal Reserve

Federal Deposit Insurance Corporation

System

550 17th Street, NW

20th Street and Constitution Avenue, NW

Washington, DC 20429

Washington, DC 20551
Office of the Comptroller of the Currency

Securities and Exchange Commission

250 E Street, SW

100 F Street, NE

Washington, DC 20219

Washington, DC 20549

Commodity Futures Trading Commission
1155 21st Street, NW
Washington, DC 20581
Japanese Bankers Association

Re:
Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading andCertain Interests in, and Relationships With, Hedge Funds and Private Equity Funds: Federal
Reserve Docket No. R-1694 and RIN 7100-AF70, OCC Docket ID OCC-2020-0002 and RIN
1557-AE67, FDIC RIN 3064-AF17, SEC File no. S7-02-20 and RIN 3235-AM70, and CFTC
RIN 3038-AE 93
The Japanese Bankers Association (the “JBA”) 1 appreciates the opportunity to provide comments on
the Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests
in, and Relationships With, Hedge Funds and Private Equity Funds (the “Proposal”) published on
February 28, 2020, by the Board of Governors of the Federal Reserve System (“FRB”), the Office ofComptroller of the Currency (“OCC”), the Federal Deposit Insurance Corporation (“FDIC”), theSecurities and Exchange Commission (“SEC”), and the Commodity Futures Trading Commission(“CFTC”) (collectively, the “Agencies”).
I.

General comments

The JBA appreciates the efforts of the Agencies to improve and streamline the covered fund provisionsof the Volcker Rule and to mitigate some of the extraterritorial impact of the Volcker Rule on non-U.S.
funds. In particular, the JBA supports the proposed revisions to the requirements of the foreign publicfund (“FPF”) exclusion and the proposed relaxation of limitations on relationships with covered funds(so-called “Super 23A”). These aspects of the Proposal are generally consistent with requests madepreviously by the JBA and other industry participants, and would help mitigate certain extraterritorial
impacts of the Volcker Rule and reduce some of the operational burdens on non-U.S. banking entities
1

The Japanese Bankers Association (JBA) is the leading trade association for banks, bank holding companies and bankers
associations in Japan. As of March 31, 2020, JBA has 117 Full Members (banks), 3 Bank Holding Company Members(bank holding companies), 73 Associate Members (banks & bank holding company), 58 Special Members (regionallybased bankers associations) and 1 Sub-Associate Member for a total of 252 members. Several of its largest member
banks are active participants in the U.S. financial markets.

1without compromising the objectives of safety and soundness or U.S. financial stability.
On the other hand, certain elements of the Proposal contain ambiguities that could limit the overall
effectiveness of the proposed amendments and, in some cases, undermine the objectives of
streamlining and bringing greater clarity to the Volcker Rule’s fund-related provisions. In particular,
the JBA believes that the Proposal does not fully address concerns raised previously (by the JBA andothers) regarding the excessive extraterritorial impact of the Volcker Rule on certain non-U.S. funds
that might potentially be treated as banking entities (“BEs”). The JBA believes that the Proposal should
be further revised on this point, as set out below in Part II.
In addition to further revising the treatment of non-U.S. funds potentially treated as BEs, the JBA also
recommends further revisions and clarifications to certain other aspects of the Proposal, including thedefinition of “covered fund”, the definition of “ownership interest”, the requirements of the loan
securitization exclusion, and the effective date/transition period for the proposed covered fundamendments. These additional issues are discussed below in Part III.
The JBA believes that these additional revisions will further promote the safety and soundness of nonU.S. banking entities subject to the Volcker Rule, while substantially reducing the risk that the fundrelated provisions of the Volcker Rule might undermine non-U.S. regulatory schemes or the stabilityof global markets. Further, the JBA believes that these changes can be made without presenting any
incremental risk to U.S. financial stability or principles of competitive equity.
II.

Comments and Recommendations Regarding Qualifying Foreign Excluded Funds

The JBA appreciates the Agencies’ efforts to resolve the longstanding issues associated with foreign
excluded funds that might potentially be regarded as BEs under the Volcker Rule, and to do so on apermanent basis as opposed to relying on additional time-limited relief. The JBA has long regarded
the extraterritorial impact of the Volcker Rule on non-U.S. fund activities as among the mostproblematic aspects of the regulation, and has previously requested “that the Rule be clarified so as toensure that the funds owned by non-U.S. BEs, that are organized and offered exclusively outside of
the United States and that do not otherwise qualify as ‘covered funds’ are not deemed to be BEs byvirtue of the non-U.S. BE’s investment in or governance arrangements with the fund.” 2
While the JBA agrees that “proprietary trading” activities and “covered fund” investments byqualifying foreign excluded funds (“QFEFs”) should not be restricted in any way by the Volcker Rule,
the manner in which the Proposal achieves this objective could be improved in several ways.
A.

Banking Entity Exclusion Approach v. Permitted Activities Approach

First and most fundamentally, the JBA believes that the objectives of the Proposal in relation to QFEFs
would be better served by establishing a specific exclusion from the definition of “banking entity” for
QFEFs, rather than treating proprietary trading and covered fund investments (and sponsorship) by
QFEFs as a form of permitted activity. While the approach taken in the Proposal (i.e., of treating the
trading and covered fund activities of QFEFs as permitted activities) represents a welcome step in theright direction, this approach is incomplete insofar as it would result in QFEFs being treated as BEs in
2

See JBA Comment to the Agencies on Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading andCertain Interests in, and Relationships With, Hedge Funds and Private Equity Funds (Oct. 17, 2018); JBA Comment to
the OCC on Notice Seeking Public Input on the Volcker Rule (Sep. 21, 2017); JBA Requests related to the Volcker Rule
submitted to the Agencies (Mar. 7, 2016; May 21, 2015; Nov. 20, 2014).

2

all other respects. Most importantly, the JBA is concerned that QFEFs under the Proposal would be
required to establish a Volcker Rule compliance program to the same extent as other BEs. Such arequirement would often be difficult to satisfy, given that QFEFs are established outside the UnitedStates and operated in accordance with applicable home country regulations in the relevant jurisdiction.
At a minimum, imposing a Volcker Rule compliance screen over the activities of QFEFs—which
presumably would need to account not only for the conditions of the proprietary trading and covered
fund permitted activities exemptions, but also compliance with Super 23A by the QFEF (i.e., aspotential counterparty to a covered fund) and with the “backstop” provisions related to conflicts ofinterest and high-risk assets and trading strategies—would impose substantial costs and burdens on
QFEFs that are not shared by other non-U.S. asset management vehicles. Thus, QFEFs and theirbanking entity sponsors would remain at a competitive disadvantage as compared to similarly situatednon-U.S. vehicles and managers that are not subject to the Volcker Rule. In the JBA’s view, thisapproach would therefore continue to undermine the stated objectives of the QFEF exemption.
In addition to the foregoing, the JBA notes that there are various non-U.S. fund structures where avehicle might be characterized as a QFEF as a result of being controlled by a non-U.S. BE, but the
non-U.S. BE lacks the authority to compel the vehicle to adopt a Volcker Rule compliance program.
For example, contract-type investment trusts offered as part of asset management activities in Japando not issue securities or other instruments that correspond to “voting securities” under the U.S. Bank
Holding Company Act. Rather, these investment trusts are managed based on the investment policy
specified in the trust contract entered into between the settlor and trustee and thus are not controlled
by the investor. Therefore, it generally is not possible for a BE that is an investor in such a vehicle(even one that holds a greater than 1/3 interest and may be involved in marketing/advising the vehicle
as part of its asset management business) to establish a compliance program for the management andoperation of each contract-type investment trusts (and compel the trustee to implement such a program).
Based on the foregoing, the JBA recommends that a more streamlined and efficient approach toachieving the objectives of the QFEF exemption would be to exclude QFEFs entirely from the scopeof the BE definition. If the Agencies determine that such an exclusion is not feasible, then the JBA
recommends two alternatives to mitigate the impacts noted above: (i) expressly exempting QFEFs
from the Volcker Rule compliance program requirements, provided that a non-U.S. BE investing in orsponsoring the fund confirms that the QFEF requirements are satisfied; or (ii) clarifying that it isunnecessary to establish compliance program by treating proprietary trading and covered fundinvestments/activities conducted by a QFEF as activities excluded from the Volcker Rule, rather thanpermitted activities. If the Agencies elect to require QFEFs to establish any form of Volcker Rulecompliance program, the final rule should clarify the Agencies’ expectations in this regard (includingthat compliance program expectations for a QFEF are substantially more limited than for other BEs).
Other than the example above, the JBA also notes that there are some type of foreign excluded funds
that are not characterized as QFEFs and could not substantially be controlled by a non-U.S. BE sincesuch entity cannot exercise voting right. These funds might be treated as BEs under the Proposal,
however, the JBA also recommends that these funds be excluded from the scope of the BE definition,
given that the non-U.S. BE have no control influence.
B.

Definition of QFEF – Anti-Evasion Language

The Proposal indicates that a QFEF is generally intended to have the same meaning as in the FRB’s
2017 and 2019 policy statements. However, the language of the Proposal differs in a small but
important way that suggests (perhaps inadvertently) that BEs could be required to “police” theactivities of other, unaffiliated BEs in a way that is not commercially reasonable. Specifically, policy
3statements have provided previously that “a ‘qualifying foreign excluded fund’ means, with respect toa foreign banking entity, an entity that ... [i]s not operated in a manner that enables the foreign banking
entity to evade the requirements of section 13 or implementing regulations” (emphases added). The
corresponding provision in the Proposal, however, imposes a requirement that the QFEF “is notoperated in a manner that enables any other banking entity to evade the requirements of section 13 of
the BHC Act or this part” (emphasis added). The JBA believes this reference to “any other banking
entity” requires amendment, as it is not feasible for a non-U.S. BE sponsor of a QFEF to ensure thatno other BE (including one not controlled by the sponsoring BE) is somehow using the QFEF evade
the requirements of section 13. This aspect of the QFEF definition should be amended in a mannerconsistent with the policy statements (or otherwise in a way that clarifies the reference to “any otherbanking entity” means only the sponsoring BE and its affiliates).
C.

Definition of QFEF – Clarification Issues

As the JBA has expressed in previous comments, there are still certain ambiguities regarding therequirements for QFEFs that could undermine the objectives of a more streamlined approach to theirtreatment. In particular, the JBA believes that the requirements of sections 248.6(f)(3), (4), and (5) of
the Proposal should be further clarified because specific identification methods and frequency areunclear. For instance, regarding the requirements of sections 248.6(f)(4), the Agencies should treat afund as a QFEF in the case where a non-U.S. BE management company of the fund is approved by thehome country regulator to perform fund management in accordance with the local law. Also, regarding
the requirements of sections 248.6(f)(5), a fund should not be considered to evade the BHC Act in thecase where a non-U.S. BE sponsor of the fund judges that its scheme, management method, etc. are in
range of normal activity and thus there is no concern of evasion.
In addition, from the perspective of restricting excessive extraterritorial applications, the approach
could be considered that the QFEFs requirements could be substituted by SOTUS requirements solely(as a sufficient condition of the QFEF exemption) and funds that meet SOTUS requirements could be
defined as QFEFs.
III.

Other issues

As discussed above, the JBA has additional comments and recommendations on the following aspectsof the Proposal.
A.

Definition of “Covered Fund”

The JBA supports the new covered fund exclusions included in the Proposal and appreciates the
Agencies’ efforts to more closely align the functional definition of “covered fund” with Congressional
intent to address the risks posed by hedge funds and private equity funds. However, the JBA continues
to believe—even with these additional proposed exclusions—that the definition of covered fundremains overbroad to the extent that it applies to any collective investment vehicle not possessing therisk characteristics of hedge funds and private equity funds.
As a result of this overbroad definition and the burdens associated with confirming (on a case-by-casebasis) whether or not a particular fund falls under the definition of covered fund or meets therequirements of a particular exclusion, U.S. fund-related businesses continue to be limited by the
Volcker Rule. Because the Proposal does not address the fundamental overbreadth of the approachtaken in the Volcker Rule for defining covered funds, the Proposal would continue to limit the
involvement of foreign bank-affiliated asset management companies in the United States and thereby
4hamper the sound competitive environment for asset management business.
Accordingly, the JBA continues to believe that a better approach would be to base covered fund statuson the assessment of whether a particular fund demonstrates the typical risk appetite/characteristics ofa hedge fund or private equity fund (based on readily apparent criteria, such as whether a performancefee is charged), with all funds not demonstrating these characteristics being excluded. The JBA
believes this functional approach would more faithfully implement the objectives of the Volcker Ruleand appropriately limit its scope.
B.

Loan Securitization Exclusion

While the JBA appreciates the Agencies’ proposal to allow loan securitization vehicles to hold a small
amount of non-loan assets, the JBA believes it is not advisable to allow loan securitizations to hold
non-loan assets that have materially different risk characteristics from loans. A contrary approach could
cause complications and could make it difficult for investors to monitor each product. Accordingly,
assuming this modification to the exclusion is retained, non-loan assets should be limited to securities
that are not significantly different from loans in terms of risk characteristics. The JBA also requests
that the Agencies clarify how to calculate 5 percent of the “aggregate value” of the issuer’s assets forpurposes of this exception (e.g., based on market value, par value, etc.).
C.

Definition of Ownership Interest

The JBA supports the proposed amendment to the definition of “ownership interest” to clarify thatparticipation in the removal of an investment manager for cause or nominating/voting on a replacement
manager upon an investment manager’s resignation or removal will not cause an interest to be treatedas an ownership interest. However, the JBA believes that the “for cause” exception should be expanded
beyond situations involving an event of default and, at least, should include the examples listed in
Question 78, such as the occurrence of a “key person” event or a change in control with respect to an
investment manager. Debt holders should not be treated as holding an ownership interest in a covered
fund based on the rights listed in Question 78, given that those rights are generally provided to seniordebt holders of a fund for the purpose of securing their debt (i.e., as opposed to providing control overthe fund).
D.

Effective Date/Transition Period

As the revised regulations announced in August 2019 are effective on January 1, 2020, and due formandatory compliance on January 1, 2021, 3 the JBA suggests the Agencies also set adequatetransition periods for the covered fund and QFEF amendments, which should be at least one year. Even
if the Proposal is finalized as proposed and, on balance, is less restrictive than the current regulation,banking entities will still need to make changes to IT systems and operational processes to respond tothe changes. The JBA would not object to a similar early “opt in” option as was taken in theamendments to the proprietary trading rules.

(End)

3

See 84 FR 61974.

5