October 17, 2018
Comments on Proposed Revisions to Prohibitions and Restrictions on Proprietary
Trading and Certain Interests in, and Relationships With, Hedge Funds and Private
Equity Funds
Japanese Bankers Association
The Japanese Bankers Association (“JBA”) appreciates the opportunity tocomment on Proposed Revisions to Prohibitions and Restrictions on Proprietary
Trading and Certain Interests in, and Relationships With, Hedge Funds and Private
Equity Funds published on June 5, 2018, by five U.S. agencies (the Federal Reserve
Board (“FRB”), the Commodity Futures Trading Commission Office (“CFTC”), theOffice of the Comptroller of the Currency (“OCC”), the Federal Deposit Insurance
Corporation (“FDIC”) and the Securities and Exchange Commission (“SEC”)(collectively the “Agencies”).
We respectfully expect that the following comments will contribute to your further
discussion.
[Executive Summary]
We understand that the proposed amendments are the result of due consideration ofconcerns raised by financial institutions whilst implementing the Volcker Rule as well
as of existing business practices and procedures. We support the Agencies’ efforts toprovide greater clarity and to reduce financial institutions’ burdens to address therequirements, and regard the proposals as a significant step forward for establishing amore effective framework for the Volcker Rule.
On the other hand, we would like to note that, despite Agencies’ intention, some ofthe proposed amendments may incur additional burdens on financial institutions as theypresent additional requirements, which financial institutions will be obligated to comply
with. We therefore ask that the Agencies give due consideration to our comments
provided herein and finalize the proposed amendments based on our suggestions. In thecase of the Agencies’ decision to not implement our suggestions, we ask that the
Agencies provide reasonable lead time for financial institutions to undertake actions tocomply with the amendments.
Furthermore, although we have shared its comments and concerned with the
Agencies several times, some of it has still remained unresolved, such as the excessive
extraterritorial application of the Volcker Rule and an issue related to certain funds
being deemed as banking entities (“BEs”).
If the Agencies continue their efforts in simplifying the existing Volcker Rule and1

if all the concerns mentioned below are considered and addressed, we believe that
Volcker Rule’s unintended negative impacts on the soundness and organization structureof non-U.S. financial institutions will be mitigated and the possibility that the unilateralnational regulation may undermine the stability of the entire financial system will be
reduced. Furthermore, we believe that if excessive restrictions and prohibitions under
the current rules are reduced through such efforts, banking entities can continue todemonstrate their appropriate financial intermediary function.
The modification of extraterritorial application of the Volcker Rule should be
discussed in terms of its impacts on the soundness of the U.S. financial system andshould not be discussed from a perspective of competitive advantages anddisadvantages between U.S. banking entities and non-U.S. banking entities. Non-U.S.
banking entities should be able to appropriately conduct operations under thesupervision of their home agencies to the extent that they do not affect the soundness of
the U.S. financial system, and hence we respectfully expect that the excessive
extraterritorial application will be further corrected.
Furthermore, the proposed amendments should be finalized in a manner not tocause any contradictions and inconsistencies with international regulatory frameworks,
such as the Basel III requirements (including the fundamental review of the tradingbook (“FRTB”)) and initiatives within the U.S., such as the U.S. Treasury’s Reportpublished in June 2017.
The below are our detailed comments on some of the proposed amendments to theVolcker Rule Regulations.
1. Scope of banking entities(1) Scope of BEs
Subsidiaries that do not engage in trading activities in the U.S. should be excluded
from the scope of BEs and non-consolidated affiliates should also be excluded from thescope of BEs.
The primary objective of the Volcker Rule is to “maintain the soundness and safetyof the financial system in the United States.” However, the majority of BEs subject tothe Volcker Rule within Japanese banking groups are located outside the U.S., and manyof them do not engage in trading activities in the U.S. Accordingly, they do not have
impacts on the above-mentioned purpose.
If these entities would be included in the scope, a simplified individual firm levelcompliance program should be applied to subsidiaries that do not engage in trading
activities in the U.S. or non-consolidated affiliates.
(2) Classification approach for BEs① Definition of trading assets and liabilities (Q3-7)

2

The definition of trading assets and liabilities, which is a criterion set out in the
proposed amendments to classify BEs, should be clarified. This is because, while
trading assets and liabilities are significant concepts, the proposed rules do not provide
their definition. Once the definition is clarified, then, for aggregating trading assets andliabilities, non-U.S. banking entities should be allowed to do so in accordance withaccounting standards established at the home jurisdiction applied in preparing theirconsolidated financial statements.
② Scope of calculation for trading assets and liabilities
For the thresholds used for the three-tiered BE classification for non-U.S. banking
entities, trading assets and liabilities of the U.S. operations should be uniformly used inlight of determining impact on U.S. market. In addition, non-consolidated affiliates
should be excluded from the scope of calculation. In this regard, for non-consolidated
affiliates, the necessity to continuously track positions of trading assets and liabilities
may cause significant practical burdens. Given that a firm can only exercise limited
control over its non-consolidated affiliate(s), the concern that the firm may evade thestatute using its affiliate(s) as assumed by the Volcker Rule is considered to be low.
Therefore, including trading assets and liabilities of non-consolidated affiliates in thedetermination using the thresholds would not be warranted.
③ Level of threshold
For “banking entities with significant trading assets and liabilities,” the threshold
set at $10 billion or more of trading assets and liabilities would be a heavy requirement
for certain non-U.S. banking entities. Non-U.S. financial institutions are generally
subject to enhanced regulations established by their home agencies, and hence would be
subject to overlapping regulations. Therefore, such banks should, in particular, be given
due consideration. If non-U.S. banking entities will be subject to the enhanced
regulations in the U.S., we suggest that the Agencies consider raising the threshold for“banking entities with significant trading assets and liabilities” higher than $10 billion.
(3) Applicable compliance program based on the trading assets and liabilities of BEs(Q3-7)"Banking entities with limited trading assets and liabilities" should be clearlyexcluded from the scope of the Volcker Rule, rather than be permitted rebuttablepresumption of compliance with the Volcker Rule. Even if rebuttable presumption is
granted by the proposed amendments, this does not lead to a reduction in regulatory
costs of financial institutions and thus does not conform to the purpose of thisregulatory review, because this will necessitate the establishment of an internal control
to ensure thorough compliance in order for financial institutions to comply with3

applicable laws and regulations. Rather, this gives rise to a concern that regulatory costs
may differ between financial institutions that determine that they "will not establish acontrol until the Agencies rebut such presumption" (i.e., financial institutions with highrisk tolerance) and those that do not make such a decision. To address this, financial
institutions with lower risks should be clearly excluded from the scope of the Volcker
Rule.
(4) Treatment of funds not subject to the Volcker Rule (Q12)
We suggest that the Agencies permanently clarify that foreign excluded funds("FEFs") are excluded from the scope of BEs.
The extraterritorial application of the Volcker Rule is extremely extensive, goesbeyond the purposes of the enactment of the laws and regulations, and also imposes
excessive restrictions and burdens on non-U.S. banking entities. Consequently, we havesuggested “that the Rule be clarified so as to ensure 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 by virtue of the
non-U.S. BEs’ investment in or governance arrangements with the fund." 1
FEFs are funds established outside the U.S. and are managed in accordance withthe regulations and systems established at respective jurisdictions. In this regard, funds
that are subject to the Volcker Rule is designed with funds established in the U.S. in
mind and hence there are some cases where the requirements are not appropriate to thenature of FEFs. 2
Furthermore, since the treatment of FEFs and the scope of BEs are ambiguous,
investments in FEFs through the asset management business are currently addressed byapplying conservative treatment by referring to requirements of covered funds and othersimilar requirements.
Thus, FEFs, that are not subject to the Volcker Rule, should be managed inaccordance with the systems established at respective jurisdictions and should bepermanently clarified to be excluded from the scope of BEs.
The U.S. Treasury Report published in June 2017 clearly recommends that the
Agencies should exclude FEFs from the definition of BEs. In light of this, treatment of1"Requests related to the Volcker Rule" dated November 20, 2014 (Addressees: FRB, OCC, SEC,
CFTC and FDIC),"Requests related to the Volcker Rule" dated May 21, 2015 (the same addressees as above),"Requests related to the Volcker Rule" dated March 7, 2016 (the same addressees as above),,
See "Comments on Notice Seeking Public Input on the Volcker Rule issued by the Office of theComptroller of the Currency" dated September 21, 2017 (Addressee: OCC).
2
For example, there is a concern that a fund may be deemed as a BE under the concept of "control"
if BE holds certain interests in the fund. However, the concept of control through ownershipinterests is not relevant because there is no voting right in a contract-type investment trust, which
accounts for the majority of Japanese funds.

4

FEFs should be clarified.
Additionally, funds that are excluded from the definition of covered fund (e.g.
foreign public funds) are deemed to be investments that do not have an impact on theregulatory objectives of the Volcker Rule. Therefore, it should be clarified that thesefunds are excluded from the scope of BEs.
2．Proprietary trading(1) Definition of trading account (Q23-Q38)
Since we believe that the market risk capital prong allows banking entities todetermine which positions are in scope of the trading account, we support the Agencies’
proposal to remove the short-term intent prong.
On the other hand, we believe the introduction of accounting prong is unnecessary
as the market risk capital prong will also be applied to foreign banking entities under the
proposal. If the accounting prong is introduced, we suggest that the Agencies change thedefinition of accounting prong or expand the scope of excluded activities because thescope of the trading account will be significantly expanded.
While the accounting prong is considered to be a clear criterion, it encompasses
both the market risk capital prong and dealer prong, and hence this would lead to the
expansion of the scope of the trading account compared to the current definition.
Transactions which may be added to the scope include derivatives transactions(e.g., swaps for funding purposes and loan-related swaps) and cash transactions (e.g.,securities held for asset-liability management (“ALM”) purposes in the banking book).
Consequently, transactions which are conducted for non-trading purposes and are notintended to be covered under the Volcker Rule will also be included in the scope under
the proposed requirement.
There is also a concern that, if activities which have been previously excluded as
mentioned above, are defined as trading accounts, substantial additional complianceburdens may be imposed on foreign banking entities.
Given these considerations, financial instruments should not be included in thescope of the trading account merely because these are recorded at fair value. In the caseof our suggestion discussed above not being accepted, safe harbors 3 should be provided
allowing to exclude certain transactions from the definition of trading account in orderto prevent transactions for positions which are not held for trading purposes from being
limited.

3

Examples of safe harbors include ① positions held period of 60 days or longer, ② positions
held in the banking book, such as available-for-sale securities, and ③ positions to which hedge
accounting is applied under accounting standards established at the home jurisdiction.

5(2) “Reasonably expected near term demand (“RENTD”)” requirement related tomarket-making (“MM”) and underwriting activities (Q64-Q77)
We support the proposed “presumption of compliance” approach that permitsbanking entities to rely on their internal risk limits in order to be compliant with thestatutory RENTD requirements, instead of applying the RENTD measurement
requirements.
On the other hand, the proposed requirement to report to the appropriate
Authorities if a limit is exceeded or increased will cause an extremely high burden.
Financial institutions have already implemented the required escalation andrecordkeeping procedures in regards to actions to be taken in the event of exceeding or
increasing risk limits. Additionally competent authorities have already established aframework where they can promptly recognize whether a limit is exceeded or increasedusing metrics reporting. Therefore, reporting to the appropriate Authorities in the eventof exceeding or increasing a limit, which is currently being proposed, will create
unnecessary costs and for this reason should not be included in the rules.
If reporting is deemed required, it is important to provide a clarification on whichlevels of internal limits are subject to reporting as well as detailed required processes forsetting these limits, since are various internal limits, which are currently establishedwithin a BE.
(3) Amendments to the TOTUS 4 exemption (Q123-Q130)
Applying current TOTUS exemption, as a result, has very strictly restrictedtransactions between non-U.S. banking entities and U.S. banking entities, we believethat this has been one of causes of deteriorating liquidity in the U.S. market. We support
the Agencies’ proposal to remove the financing and counterparty prongs in order toimprove latitude in business and reduce burden to establish and implement control
procedures. Although this review would significantly improve liquidity in the U.S.
market, it is expected that non-U.S. banking entities will continue to incur operationalburden to certain extent since the legal entity requirements will be retained.
In this regard, primarily, no specific prohibitions should be imposed on foreigntransactions, and foreign transactions by non-U.S. banking entities should be treated as
one of excluded transactions. Furthermore, since the proposed amendments retain thelegal entity requirements (i.e., the BE (including relevant personnel), engaging as
principal in the purchase or sale is not located in the U.S.; and the purchase or sale is
not accounted for as principal directly or on a consolidated basis in the U.S.), it remains

4

the “trading outside the U.S.” (“TOTUS”) exemption (the Bank Holding Company Act of 1956
(the “BHC Act”) § 13(d)(1)(H) as implemented in Section_.6(e) of the 2013 Rule)6unclear whether inter affiliate transactions with subsidiaries and affiliates located in the
U.S. and intra-bank transactions with branches located in the U.S. are permitted. Suchinter-affiliate or intra-bank transactions are, in substance, equivalent to directly
conducting transactions with the U.S. bank by non-U.S. banking entities. Accordingly,
we suggest that such inter-affiliate or intra-bank transactions be clearly permitted.
In addition, in the proposed amendments, while the "arrangement, negotiation andexecution (“ANE”)" requirement for transactions is eliminated, only the arrangement
and negotiation are mentioned as examples of limited involvement which is not deemed
to be engaging in, the execution is not referred to. We suggest that the Agencies add theexecution or at least provide examples for the clarification purpose.
Furthermore, we believe that “the decision to purchase or sell” means adecision-making on matters that may lead to major risks associated with a transaction,
therefore we suggest that the Agencies exclude those executions of transactions made by
an U.S. resident from the scope, based on an extremely limited discretion.
(4) Exclusion of loan-related swaps (Q101-Q107)
Loan-related swaps are, in principle, held until the maturity of underlying loans
and are not for trading purposes and should therefore be excluded from the definition of
trading account. Financial institutions would incur higher operational burdens if swaps
related to loans are classified as market-making activities.
3．Fund investments(1) Definition of covered funds (Q131)
If a characteristics-based approach will be applied to the definition of a covered
fund, these characteristics should be limited to those that are easy to assess based on theapparent criteria in order to reduce an assessment burden.
Under the current definition of covered fund, funds that do not possess thecharacteristics of hedge funds and private equity (“PE”) funds that are originallyintended to be subject to the Volcker Rule are also included in the scope. As aconsequence, the involvement of foreign bank-affiliated asset management companies
located in the U.S. is limited, and healthy competitive environment in the asset
management business has been inhibited. Therefore, a simple approach to assess
whether a hedge fund or PE fund has a typical risk appetite characteristic based on theapparent criteria (e.g., whether a performance fee is charged) should be applied. If afund does not have such characteristics, it should be excluded from the definition ofcovered fund.
There is however a potential concern that the fund might become a BE as a resultof its exclusion from the definition of covered fund. Therefore prior to making a7

decision to change the definition of covered fund, we suggest that the Agencies
appropriately review the scope of BEs by considering our comments described in 1.(4)above.
In addition, since transactions, which are subject to the rules differ before and after
the amendments, current holdings may be deemed to be prohibited activities once theamendments are implemented. Therefore, with respect to transactions that are notsubject to the rules under the 2013 final rule, but are subject to the rules under the
proposed amendments, transitional measures should be provided in order to comply
with the amendments. If existing holdings are not going to be allowed to becontinuously held, it will become necessary to sell them before the rules are applied.
This may affect business operation before and after implementing the amendments tothe Volcker Rule. Therefore, introducing this requirement may have a considerable
impact on the market.
(2) Treatment of foreign public funds (Q145-Q151)
With regard to the interpretation of "sold predominantly through one or more
public offerings outside of the United States", which is a requirement for foreign publicfunds, the requirement related to the percentage of an offering to U.S. resident should be
eliminated despite the Preamble’s interpretation, that this is not applicable only when
the percentage of an offering to U.S. residents is 15% or less.
Given the difficulty of accurately identifying the location of a purchaser ofinterests of public funds and the possibility of unintended sales to U.S. residents, therequirement on the percentage of an offering of foreign public funds’ interests to U.S.
residents should be removed. If the complete removal is not possible, the percentage
should be raised to a reasonable level.
Furthermore, since especially Foreign ETFs and REITs are permitted to be held byretail investors and hence are apparently not deemed as a hedge fund or a PE fund thatare intended to be subject to the Volcker Rule, they should uniformly be deemed foreign
public funds which are excluded from the definition of covered fund, regardless of thepercentage of an offering of foreign public funds’ interests to U.S. residents.
It is impracticable to track U.S. investors and non-home jurisdiction investors’
ownership interests in listed instruments. In addition, establishing uniform regulatory
requirements that do not take into account situations of non-U.S. jurisdictions would
unnecessary have a negative impact on the stability of non-U.S. financial markets andincrease unnecessary regulatory burdens.

8(3) Amendments to the SOTUS 5 Exemption (Q191-Q193)
We support the proposed elimination of the financing prong related to the SOTUS
exemption as such elimination will increase the clarity of the Volcker Rule.
We understand that the amendments to SOTUS exemption have incorporated
specific marketing restriction, which is clarified by FAQ13 and which is related to theVolcker Rule and that the requirements for offerings and sale to U.S. residents havebeen clarified. On the other hand, marketing restriction related to SOTUS exemption
should be construed as prohibiting financial institutions from selling to U.S. residents,
as per current regulation, and this should not be extended to funds managed by third
parties (third-party funds).
If the scope of marketing restrictions were to be extended in order to cover
third-party funds, then it would be significantly restricted for foreign banking entities torely on SOTUS exemption, and as a consequence current regulations would be overly
stringent because financial institutions do not have any means to restrict the third-party's
sales activity. This significantly lacks balance between the objective of review to reduce
regulatory burden, and significant restrictions imposed on the investment activities offoreign banking entities.
(4) Treatment of loan securitization (Q176-Q178)
With regard to the exclusion of loan securitization, since the scope of permitted
underlying assets (other than loans) under the current rule is too narrow, we suggest that
the Agencies allow the inclusion of other assets to the extent that the product nature andrisk profile of the loan securitization do not vary significantly.
(5) Fund's seeding period (Q14)
The 3-year period of a seeding period defined under the current rule is one ofguideline. However, under certain conditions, 6 a seeding period of more than three
years should be permitted provided that a seed investment is made for the purpose of abona fide asset management business.
Asset management firms develop various products to meet investors’ needs. In
evaluation of new products, their actual track record is the most significant factor. Also,
investors often assess track record when making investments. Asset management firms
have used their own or their group’s funds to make seed investments to create such trackrecords. However, such activities are constrained by the Volcker Rule. While full-scale5

the “solely outside the U.S.” (“SOTUS”) exemption (the BHC Act § 13(d)(1)(I) as implemented in
Section _.13(b) of the 2013 Rule)
6
Such conditions would include the development of a sale and collection plans and conducting
periodic reviews.

9marketing is initiated after the three-year seeding period, investment decisions are madein light of external environment and other factors. Given these considerations, a seeding
period should not be set explicitly, and each asset management company should beallowed to reasonably determine the period by themselves instead. In addition, wesuggest that the Agencies clarify that FEFs are treated in the same manner as
above-mentioned treatment. As described in 1.(4) above, we also suggest that the
Agencies clarify that FEFs are not uniformly deemed as a BE, including during aseeding period.
4．Compliance program(1) Simplification of compliance program (Q214)
As we have been suggesting the review of the excessive extraterritorial application
several times previously, we welcome the proposed elimination of Appendix B that
stipulates detailed approval and effectiveness assessment processes for a complianceprogram because this decision is in line with the governance framework, which is set
forth in laws and regulations and customs established at respective jurisdictions.
We also agree with the proposal to apply a simplified compliance program tobanking entities with moderate trading assets and liabilities and to reduce complianceburden associated with market-making and hedging activities.
On the other hand, since the proposed amendments do not set forth the details ofcompliance program including the definition, we suggest that more detailed information
be provided in the final version.
Although the JBA and Japanese banks have made inquiries for uncertain areas andproposed improvements regarding the Rule to date, we could not obtain any specificresponses in many cases since coordination between the five agencies is necessary.
Furthermore, pursuing effective regulation with consideration of risk-based factors andbusiness activities within the U.S. as previously mentioned, would be supported by theestablishment of an appropriate communication channel among Agencies, covered
financial institutions and relevant industry groups. Otherwise, it is necessary to makethe segregation of the roles more clearly (e.g. formulation of regulatory policy,
enforcement of the regulation and the point of contact for inquiries) among the
Agencies.
(2) Compliance requirements for banking entities with moderate trading assets andliabilities (Q211)
Banking entities with moderate trading assets and liabilities should also be
excluded from the compliance program requirements (the CEO attestation, independent
testing, training, and recordkeeping provisions).

10

We understand that the purpose of the Proposal is to reduce excessive regulatorycompliance burden on financial institutions. However, a difference between the first tiercategory (significant) and the second tier category (moderate) of compliance program
requirements is so mere, that we suggest it to be reconsidered, whether the developmentof a separate compliance program is required. Proposed amendments will not lead to asignificant reduction in regulatory compliance burdens for financial institutionsclassified as "moderate." Given that financial institutions classified as "moderate" arealso required to appropriately comply with the Volcker Rule in their existing complianceprogram, requirements such as the CEO attestation, independent testing, training andrecordkeeping need not be imposed on such banking entities.
(3) CEO attestation (Q213)
The CEO attestation requirement will particularly impose burden on those who are
not currently obliged to make the CEO attestation. Therefore, we oppose the expansionof the scope of banking entities subject to the CEO attestation.
Banking entities, which a basic compliance program is applied to and which are
currently not subject to the CEO attestation have been monitoring the level ofcompliance as part of establishing their system of internal controls since the current
Volcker Rule has become effective, and have been conducting independent testing,audits and other similar activities. If the CEO attestation becomes a requirement, thesebanking entities will incur additional burden due to the need development andimplementation of a new framework. Accordingly, banking entities to which the basic
program is applied should be allowed to take the same approach as currently being
required, such as establishing a framework to monitor the level of compliance withapplicable rules and conducting internal audit.
To avoid an excessive extraterritorial application with respect to non-U.S. banking
entities, the scope of attestation should be limited to U.S. operations, regardless ofwhether they have already been subject to the CEO attestation requirement previously.
(4) Metrics reporting requirements
The proposed amendments have revised the metrics reporting requirements andadditionally set forth new requirements, including the preparation of the Trading Desk
Information and submission of a Narrative Statement. While details of development
costs are unclear at present, such requirements will additionally incur burden and costs
related to a development of systems and an improvement of measurement systems.
Given this, we strongly suggest considering the following comments.
① Changes in reporting formats (Q249)
We disagree with the proposal to change the scope of calculation items and11reporting formats because such changes would necessitate changes in a current
calculation system, and thereby increase costs.
②

Clarification of reporting metrics (Q220-Q233)
The proposed amendments related to metrics reporting requirements would beburdensome. If the purpose of the amendments to the Customer-Facing Activity
Measurements is to resolve the "difficulty in understanding metrics," such purpose canbe met by reporting underlying data of the existing metrics. We therefore suggest that
the Agencies avoid introducing a new measurement definition as this would necessitate
additional systems development.
③

Less-significant metrics (Q228- Q229)
We agree with the proposal to describe the nature of main activities for the Trading
Desk Information. However, we suggest that the Agencies not mandate reporting of
metrics which are considered unnecessary or insignificant in terms of the nature of theirbusiness 7, and allow to describing them in the Trading Desk Information instead.
④ FRTB (Fundamental review of the trading book) (Q257- Q259)
We understand that there are still open FRTB issues related to the classification of
the banking book and trading book which have yet to reach a conclusion. We ask that
the Agencies understand that, if new items will be recognized as the trading book, newsystems will become necessary to be developed and, since it will be impossible toaddress the new requirements immediately, banking entities will need a preparation
period once these requirements have become effective.
Since there is a concern that a definition may differ between exposures measured
under the FRTB and exposures arising from actual transactions in the trading book, wesuggest that the Agencies limit the scope of exposures arising from actual transactionsin the trading book.

7

For example, because a desk that trades only FX spot and futures contracts does not hold securities,
the inventory period for the securities is always zero. Whereas a desk with a large amount oftransactions compared to the limit can review compliance with permitted activity requirements
only through limit monitoring.

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(Scope of the definition of BE: Q3-Q18)
Q3: Would the general approach of the proposal to establish different requirements forbanking entities based on thresholds of trading assets and liabilities be appropriate?
・ While trading assets and liabilities are significant financial instruments, these are
not clearly defined. Therefore, the Agencies should firstly provide the definitions ofthese items.
・ In regards to aggregation of trading assets and liabilities, non-U.S. banking entities
should be allowed to comply with accounting standards, which are applied when
preparing their consolidated financial statements (i.e. to apply §__.2(b) of the
proposed rules mutatis mutandis).
Q12: Have commenters experienced disruptions to bona fide asset management
activities involving RICs, FPFs, and foreign excluded funds as a result of the interaction
between the statute’s and the 2013 final rule’s definitions of the terms “banking entity”
and “covered fund?”・ We would like to express our gratitude for the one-year No-Action Relief for certain
foreign funds announced in a policy statement issued on July 21, 2017 by the FRB,
the FDIC, and the OCC (“Policy Statement”) and also for relevant coordination andother efforts between the Agencies made towards the announcement of the
No-Action Relief.
・ However, the 2013 final rule caused serious effects on investments in foreign funds
which do not have any impact on the U.S. markets due to lack of specific guidanceand stipulation that FEFs are not BEs. This has forced banking entities to generally
take conservative approaches (e.g. reducing interests in investees which are not evenconsolidated for investment and financial purposes) and to limit their investments inforeign funds that are based on bona fide asset management activities. As aconsequence, the overall fund business was seriously affected.
・ Furthermore, since it had not been clarified whether FEFs should or should not betreated as a BE by the deadline on July 21, 2018, some entities are relying on the
TOTUS Exemption for those funds that may be deemed as BEs in order to comply
with the proprietary trading requirements. Even under the current situation, since theguidance is time-limited, the implementation of the Volker Rule has yet to become
stable. In this view, FEFs should be excluded from the scope of BE permanently.
・ The Volcker Rule’s regulation on investments in covered funds prohibits direct
investments in the covered fund but does not regulate investments made by thecovered fund (i.e. indirect investments from the view point of the investor of thecovered fund). However, once a fund in which the investor invests in, is determined
to be a BE, the fund is required to establish a compliance program and its
investments will be regulated under the Volcker Rule. This would mean that13

consequently the Volcker Rule is regulating indirect investments as well, which
gives rise to a concern that the scope of the regulation is overly expanded.
・ On the other hand, non-U.S. banks are allowed to engage in investments in covered
funds referred to in the previous paragraph by relying on the SOTUS Exemption, in
which case the fund is not treated as a BE. This would mean that consequently both
direct and indirect investments will be permitted. Therefore, it is difficult tounderstand the objective of this requirement.
・ “Ownership interest”, which was defined in the 2013 final rule, significantly
expanded the concept of the holding of funds. As a result, those funds in which anentity does not have control under the legislation and business practice different
from those of U.S., are deemed as controlled by the entity under the 2013 final rule.
This is imposing practical difficulties for regulatory compliance.
Q13: Has the guidance provided by the staffs of the Agencies’ and the Federal banking
agencies discussed above been effective in allowing banking entities to engage in asset
management activities, consistent with the restrictions and requirements of section 13?
・ Contract-type investment trusts offered as part of asset management activities inJapan, do not issue securities that correspond to the concept of the voting right underthe BHC Act and 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. Given this, at least those funds, that are offered as part of asset
management activities in our jurisdictions should be expressly excluded from thedefinition of a BE. Based on this, naturally, the seed investment conducted as part ofasset management activities should also be allowed.
・ Even if the above suggestions are not accepted, such fund should not be deemed as a
BE even where an entity accounts for the majority of the fund’s board of directors.
This is because the purpose of sending directors to the fund is, in many cases, toprovide administrative support as part of asset management activities and not tocontrol the fund, and therefore, in substance, the entity does not have control overthe fund even in such circumstances.
Q15: Are there other situations not addressed by the staffs’ guidance for RICs and FPFs
that may result in a banking entity sponsor’s investment in the fund exceeding 25
percent, and that limit banking entities’ ability to engage in asset management
activities?
・ Foreign funds that are managed pursuant to national regulations and systems in
respective jurisdictions should be excluded from the “BE” definition irrespective of
the investment ratio.
・ Securities companies in many occasions temporarily hold a large lot of public funds
14distributed in markets, such as ETF and REIT, as part of their brokerage activities inthe exchange (e.g. market-making, block trades, and underwriting), and therefore
are assumed to exceed the investment ratio of 25% in some cases. To avoid such asituation, securities companies may have to dispose of their interests in those publicfunds in which they invest. Otherwise, their investment ratio may increase as aresult of other investors’ terminations, which have actually occurred. From theperspective of investor protection, the Agencies should avoid those cases whereentities recover their cash in order to prevent their investee funds from falling withinthe “BE” definition and thereby resulting in a redemption of such funds.
・ In the first place, the investment policy and the product nature of ETF and REIT are
specified and the trustors undertake management activities in compliance with sucha policy, etc. Given this, even if a single investor’s interest ratio increases, theinvestor will not have control as defined under the BHC Act. This is particularly true
for those brokers, who temporarily holding public funds as part of their business.
Considering this, public funds distributed in markets such as ETF and REIT should
be excluded from the “BE” definition.
Q16: Have foreign excluded funds been able to effectively rely on the policy statement
to continue their asset management activities?
・ We suggest that the Agencies exclude FEFs that are sponsored by an asset
management company which is a bank’s subsidiary from the “BE” definition. Thisis important in order to ensure fair competition between an asset managementcompany which is a bank’s subsidiary and an asset management company which is a
subsidiary of a non-bank company.
・ The determination of the “BE” status based on the existence of control should be
modified. As described in the Executive Summary, if an entity is being assessed,
whether they have control, based on the threshold of holding no less than 25% of
voting securities, uncontrollable affiliates may also be included in the BE definition.
・ With respect to contract-type investment trusts, which are primary investment
targets for Japanese banks, under the Japanese legislation investors have no controlof such funds; contrary to the U.S. statute which recognizes such funds as being
controlled by investors. There is a significant negative extraterritorial impact inregards to applying control requirements under the U.S. BHC Act to those foreign
funds that are established and organized in accordance with the control standard
under national banking regulations in respective jurisdictions
・ According to the Policy Statement, the definition of “bona fide asset managementbusiness” is unclear. Therefore, in practice, based on the context of the Policy
Statement, this is interpreted as the business where the qualifying foreign excluded
fund (“QFEF”) engages in and does not violate applicable laws and regulations. By

15

the expression “violate applicable laws and regulations,” we mean, for example,
concealing fraudulent activities and evading applicable laws and regulations, and do
not mean activities that would be permitted if certain conditions are applied. If theabove interpretation is inconsistent with the Agencies’ intent, we suggest that a clear
definition for “bona fide asset management business” would be provided.
・ Regardless of whether QFEF requirements are satisfied or not, public funds andETFs that meet all of the following conditions should be exempted from the Volcker
Rule application and therefore excluded from the “BE” definition because banks
will not be able to control such funds’ investment activities.
 Privately placed funds 8①

The fund is organized or established outside the U.S. and is offered or sold
solely outside the U.S.

② If the fund is deemed to be a covered fund, the non-U.S. bank, that has
ownership interest in this fund, may apply the SOTUS Exemption.
 ETFs 9① The fund is operated outside the U.S. and does not rely on the U.S. laws.
② The administrator of the fund is independent from the non U.S. bank.
③ The non-U.S. bank is not involved in the fund administrator’s investment
activities.
Q17: The Agencies are extending the application of the policy statement with respect toqualifying foreign excluded funds for an additional year to accommodate the pendencyof the proposal. The Agencies are requesting comment on other approaches that the
Agencies could take to address these issues, consistent with the requirements of section
13 of the BHC Act.
・ In our response to Q16, we suggested that foreign funds would be excluded from the“BE” definition. In addition, the Agencies should permit banking entities to flexibly
determine the seeding period according to actual circumstances in respective
jurisdictions. Although foreign funds by their nature do not contradict the objectiveof the Volcker Rule, financial institutions may hesitate to seed such a fund out ofconcern that these funds may be deemed as BE funds, which is undermining thesound development of business in foreign countries. In light of the objectives of theregulation (i.e. to avoid conflict of interests, restrain a high-risk asset or a high-risk
8

The reason for not including “there is no U.S. investor” in the definition is because it isimpractical to identify in fund investments, etc. whether the ultimate investor is a U.S. person.
Also, as it is not a general practice, it would be difficult for Japanese investment trusts to prohibit
investments by certain investors (e.g. U.S. investors).
9
It is impossible for the bank itself to strengthen its control over a listed ETF by increasing thepercentage of ownership interest in the listed ETF. Additionally, the bank does not have control
over the fund’s investment activities.

16

trading strategy, and ensure the soundness of the financial stability of the U.S.),
those FEFs which are highly unlikely to pose a risk to the U.S., should be excluded
from the definition of BE.
Q18: Should the Agencies modify the 2013 final rule to address the issues raised by theinteraction between the 2013 final rule’s definitions of the terms “banking entity” and“covered fund,” consistent with section 13 of the BHC Act, and if so, how?
・ In some cases, a concern of being determined as a BE has arisen with respect to thevehicles other than FEFs that are excluded from the definition of covered fund (e.g.
loan securitization SPC), and is disincentivizing investments in such vehicles. After
having reviewed the definition of covered fund, we ask that the Agencies would
recognize the possibility of the entities, which should not be managed as a BE due
to their nature, falling under the definition of BE as a result of being excluded fromthe definition of covered fund, and appropriately review the definition of BE.
・ Modifying the definition of covered fund without giving any consideration may
significantly affect the existing investment business which is conducted based on the
pre-modified definition. If a fund is excluded from a covered fund as a result of suchmodification to the definition and falls within the definition of BE, it could benecessary to establish a compliance program and take other actions to comply with
the Volcker Rule for the fund. In this view, it should at least be clarified that those
funds, in which non-U.S. banks invest, are a non-BE.

(Proprietary trading: Q23 to Q129)
Q23: Should the Agencies adopt the proposed new accounting prong and remove theshort-term intent prong? Does using such a prong provide sufficient clarity regarding
which financial instruments are included in the trading account for purposes of the
proposal? Are there differences in the application of IFRS and GAAP that the Agencies
should consider? What are they and how would they impact the scope of the proposed
accounting prong?
・ As noted in the Executive Summary, we previously have been suggesting that the
Agencies remove the short-term intent prong and hence we appreciate the Agencies
taking into account our suggestion.
・ While the accounting prong is considered to be a clear determination criterion, thescope covered by the accounting prong overlaps with that covered by the market
risk capital prong and therefore this scope may become overly broad as comparedto the current definition of the trading account. Accordingly, only in determining
whether or not particular purchases and sales of a financial instrument are included
under the prong of the trading account, only the market risk capital prong should be17

applied, and the accounting prong should not be introduced.
・ For example, since held-to-maturity securities under Japanese GAAP are not in
scope of the accounting, market risk capital or dealer prong, they should not be
included in the scope of trading account. On the other hand, other financial
instruments held for long-term intent and, which have been excluded from thecurrent scope may be included in the proposed scope of trading account. In the case,of transactions not being included in the current scope and being included in the
trading account, significant costs for establishing an additional framework may
occur.
・ Even if the accounting prong is introduced, with respect to accounting standards
used to meet the accounting prong, we suggest that the Agencies clarify that
non-U.S. banking entities are permitted to use accounting standards adopted byindividual banking entities other than IFRS and US GAAP in making adetermination. Japanese GAAP differ from IFRS and US GAAP in terms of theclassification of securities and the recognition of profits and losses. 10 Accordingly,
requiring non-U.S. banking entities, which have not adopted IFRS or US GAAP todetermine based on these standards would impose excessive costs. Since non-U.S.
banking entities use generally accepted accounting standards under a regime inplace at respective jurisdictions, such a regime should be respected in applying the
U.S. rules.

Q25：Should the Agencies include all financial instruments that are recorded at fairvalue on a banking entity’s balance sheet as part of the proposed accounting prong?
Would such a definition be overly broad? If so, why and how should the definition be
narrowed, consistent with the statute?
・ Even if the accounting prong is introduced, the scope of transactions subject to therules should be limited to transactions, such as "trading securities", whose changes
in unrealized gains and losses directly affect profits and losses in a current period as
per our response to Q23, considering the objective of the "short term prong" in the
Final Rule, and the objective of reviewing the current rules.
・ In addition, since transactions that are subject to the rules differ before and after theamendments, current legitimate holdings may be deemed to be prohibited activities
once the amendments are implemented. Therefore, with respect to sell or
termination, etc. of transactions that are not subject to the rules under the 2013 final
rule, but are subject to the rules under the proposed amendments, exceptional
10

For example, the treatment of unlisted equity investments may differ between Japanese GAAP
and IFRS/US GAAP.

18

measures should be provided in order to comply with the amendments.
・ Even if our suggestion above is not accepted, safe harbors should be provided to
exclude certain transactions from the trading account, as discussed in the Executive
Summary, in order to prevent the limitation of investments in positions that are notfor trading purposes. Examples of safe harbors include:① Where positions are held for 60 days or more;② Positions held in the banking book, such as available-for-sale bonds; 11 and③ Position to which hedge accounting is applied under national GAAP 12
Q33: For purposes of determining whether certain trading activity is within thedefinition of proprietary trading, is the proposed accounting prong over- or
under-inclusive? If over- or under-inclusive, is there another alternative that would be amore appropriate replacement for the short-term prong?
・ The same as our response to Q23.
Q37: As compared to the 2013 final rule’s dealer and short-term intent prongs taken
together, would the proposed accounting prong result in a greater or lesser amount oftrading activity being included in the definition of “trading account?”
・ The same as our response to Q23.
Q40: Is the proposed desk-level threshold for presumed compliance with the prohibition
on proprietary trading ($25 million absolute P&L) an appropriate measure for indicatingthat the scale of a trading desk’s activities may not warrant the cost of more extensive
compliance requirements?
・ We understand that the provision relating to trading desks with small P&L (§_.3(c)of the proposed rules) is added with the aim of addressing an issue of unnecessary
expansion of the scope by introducing the accounting prong. Therefore, we support
the purpose of this provision.
・ On the other hand, burden of P&L measurements and addressing a breach of a11With respect to available-for-sale securities, investors who have purchased securities for purposes
other than short-term intent may be incentivized to reduce P&L arising from their investments to
below a certain level as a result of this amendment. This may lead to a decline in secondarytransactions and impair the soundness of markets. In addition, available-for-sale securities havedifferent purposes than trading securities under Japanese GAAP, and their accounting treatment
differs (accounting of P&L).
12
It is obvious that transactions to which hedge accounting is applied are not for short-term income
earning purposes which is prohibited by the statute. Therefore, at least, transactions to which
hedge accounting is applied should be explicitly excluded from the definition of proprietary
trading, instead of relying on the exception. Furthermore, in order to improve objectivity ofjudgement on whether hedge accounting is applied, treatment in accordance with the accounting
standards established at the home jurisdiction should be permitted.

19threshold are considerably heavy. Furthermore, since this provision merely sets
forth the “presumption,” conservative financial institutions may find it difficult torely on. This may rise a concern that the scope of the Volcker Rule and the scope ofsupervision will be expanded and that it will not be an efficient framework for bothbanking entities and the Agencies.
・ If this provision is going to be introduced, we suggest taking an approach to
exclude transactions which meet the safe harbor conditions of the scope as
described in Q25, rather than taking an approach to apply a presumption ofcompliance that could result in excessive burden.
・ In addition, if thresholds are used, daily net gains and losses used as a criterion for
determining the “presumption of compliance” should be limited to “realized andunrealized gains and losses that have direct impact on gains and losses in thecurrent period” in light of the objective of this provision to give due consideration
to trading desks with small P&L. 13
Q49：In addition to the example noted above, are there additional scenarios under which
commenters would envision foreign exchange forwards, foreign exchange swaps, or
physically-settled cross-currency swaps to be used for liquidity management? Should
any existing restrictions be removed to account for the proposed addition of thesetransactions?
・ We appreciate the Agencies taking into account our comment and including
cross-currency swaps and other similar transactions used for funding purposes inthe scope of excluded transactions.
・ On the other hand, burdens to address the requirement related to internal controls,
analysis and independent testing, which is set forth in §_.6(e)(3)(v) of the 2013
final rule may, in part, be higher than that of some permitted activities. This may
significantly reduce banking entities’ incentive to rely on this exclusion.
・ Accordingly, in order to make an effective use of this exclusion, we suggest that the
Agencies remove the requirement related to internal controls, analysis andindependent testing set forth in §_.6(e)(3)(v) of the 2013 final rule.
Q50: Should the proposal be further modified to protect against the possibility of firms
using the liquidity management exclusion to evade the requirements of section 13 of the
BHC Act and implementing regulations?
13

The proposed amendments set forth that "unrealized gains and losses" is included in thedetermination of the "presumption of compliance." However, in cases where transactions subject
to the Volcker Rule include available-for-sale securities under Japanese GAAP, the presumptionof compliance may not be applied to financial institutions whose transaction volume, such as apurchase or sale, is not large.

20

・ While non-deliverable forward (“NDF”) is used to hedge exposures to regulated
currencies, we consider that it is not economically or functionally different fromforeign exchange(“FX”) forward in terms of regulatory treatment. NDF therefore
should also be included in the scope of excluded transactions.
・ If the Treasury Function conducts its operations for liquidity management purposes,
we suggest that the Agencies consider including all types of derivatives in excluded
transactions. In particular, transactions conducted by liquidity-management related
trading desks at the Treasury Function for liquidity management purposes should be
deemed to be excluded transactions.
Q51: Should banking entities be permitted to purchase and sell physically-settled
cross-currency swaps under the liquidity management exclusion?
・ Such transactions should be permitted. In order to ensure sufficient liquidity andmaintain the soundness of financial markets, banking entities use currency swaps aswell as spot foreign exchanges.
Q52: Does the proposed exclusion align with existing policies and procedures thatbanking entities use to correct trading errors? Why or why not?
・ We support the proposed exclusion of transactions, which are used to correct
trading errors. In terms of segregation of positions in erroneous transactions,however, there are cases where it takes time to dispose of such positions, and cases
where it is possible to dispose them immediately, such as bonds and stocks. For thelatter case, conducting segregation, even temporarily, would lead to an increase inoperational burden. Accordingly, segregation should not be required for such cases.
Q57: Should the Agencies revise the trading desk definition to align with the level oforganization established by banking entities for other purposes, such as for otheroperational, management, and compliance purposes?
・ Since operational and compliance management units vary across financial
institutions, the classification and unit of trading desks should be determined at thediscretion of each financial institution in order to achieve effective and efficient
operation that is consistent with business practices.
・ In view of this, the definition of trading desk should clarify that the classification
and unit of the trading desk can be determined at the discretion of each financial
institution.
Q59: Please discuss any positive or negative consequences or costs and benefits that
could result if a “trading desk” is not defined as “the smallest discrete unit oforganization of a banking entity that purchases or sells financial instruments for the21

trading account of the banking entity or an affiliate thereof.”
・ If the current definition of trading desk is removed and is clarified that the unit of
the trading desk can be determined by taking into account the management ofbusiness practices at each financial institution, such treatment may improve
efficiency as per our comments in Q57. Consequently, costs associated with theconsideration of desk units may be reduced.
・ However, if the current definition of trading desk is removed and a clearer criteria
which further uniforms the definition is adopted, it will cause costs forreconsidering trading desk unit and significant burdens related to management ofdesk unit which differs from actual management practice. This does not seem to beconsistent with the objectives of the Proposed Rule.
Q64: (Under the proposal, all banking entities, regardless of their volume of trading
assets and liabilities, would be able to voluntarily avail themselves of the presumptionof compliance with the statutory RENTD requirement in section 13(d)(1)(B) of the
BHC Act by establishing and complying with these internal risk limits.) (omitted) Is the
proposed presumption of compliance for underwriting activity within internally set risk
limits sufficiently clear? If not, what changes should the Agencies make to further
clarify the rule?
・ We agree with the direction of the proposal which allows flexibility in setting the
RENTD. However, while the RENTD can be decided flexibly, this may also beburdensome for banking entities because the Agencies may interfere with the
RENTD decision process and banking entities may need to file reports upon
exceeding or increasing a limit.
・ Depending on an approach taken by the Agencies to set limits, actions taken by themost conservative banking groups may become a de facto standard which allbanking groups should adhere to. This may be an impediment for banking entities
in taking these actions whilst considering their actual business.
・ We suggest that the Agencies consider permitting to set limits based on absolutevalues of profits and losses in the case of an underwriting desk at a broker within abanking group (in-house broker).
Q67: By proposing an approach that permits banking entities to rely on internally set
limits to comply with the statutory RENTD requirement, the rule would no longer
expressly require firms to, among other things, conduct a demonstrable analysis ofhistorical customer demand, current inventory of financial instruments, and market andother factors regarding the amount, types, and risks of or associated with positions infinancial instruments in which the trading desk makes a market, including throughblock trades. Do commenters agree with the revised approach? What are the costs and22benefits of eliminating these requirements?
・ Since internally set limits are developed and applied by each banking entity in lightof capital requirements and risk management in consideration of the nature of its
activities, it is reasonable to believe that the presumption of compliancerequirements are met by complying with the internally set limits.
・ On the other hand, as noted in the Executive Summary, the proposed requirement toreport to the appropriate Authorities if a limit is exceeded or increased will cause an
extremely high burden. In regards to the actions to be taken in the event ofexceeding or increasing risk limits, financial institutions have already implemented
recommended escalation and recordkeeping procedures. Competent authorities
have already established a framework, which allows them to promptly recognize
whether a limit is exceed or increased by using metrics reporting. Therefore,
reporting to the appropriate Authorities in the event of exceeding or increasing alimit will create unnecessary costs for not only banking entities but also for the
Agencies. We therefore oppose the real-time reporting requirement in the event ofexceeding or increasing internal risk limits. If such reporting will be made arequirement, it is necessary to clarify which level of internal limits are subject toreporting as well as specific required processes for setting those limits, as at the
moment there are various internal limits established within a banking entity.
・ Non-U.S. banks are under the jurisdiction of their own national Agencies at eachhome jurisdiction. We therefore suggest that the Agencies consider removing therequirement for Non-U.S. banks to report to the U.S. agencies when a limit set at
each jurisdiction is exceeded in light of respecting the supervisory right of national
agencies. Furthermore, the processes for headquarters of non-U.S. banks to collectdata and file a report to the U.S. agencies whenever a limit is exceeded impose
significant burdens on financial institutions. Accordingly, we advise to exempt thereporting requirements on non-U.S. operations of non U.S. banks.
・ Even if this requirement is implemented, real-time reporting will not have an added
value as the U.S. agencies cannot immediately recognize real-time reporting due totime differences. Therefore, this reporting requirement should be limited to theestablishment of a framework that enables to appropriately file a report within areasonable timeframe upon the request of the U.S. agencies. If this suggestion is
accepted, we also ask that the Agencies provide details in regards to a level ofinternal risk limits.
Q73: Are there other modifications to the 2013 final rule’s requirements for permitted
underwriting that would improve the efficiency of the rule’s underwriting requirements
while adhering to the statutory requirement that such activity be designed not to exceed
the reasonably expected near term demands of clients, customers, and counterparties?

23

・ In order to allow more flexibility, we suggest making the following changes to the
proposals with regard to the presumed compliance related to the RENTD
requirements for market making and underwriting activities.
① The presumed compliance with the RENTD requirements is permitted only if
trading desks establish respective internal risk limits, appropriate for their risk
appetite, risk capacity and business strategy, and have properly definedthemselves as market maker in accordance with parameters set out in exclusions
related to the market making and underwriting activities.
② Clarify that transactions with affiliates that are within the arm's length aretreated as "Customer" for RENTD measurement purposes.
③ Removing reporting requirements when an internal risk limit is exceeded orincreased (see our response to Q67)
Q104: Should the Agencies exclude loan-related swaps from the definition of
proprietary trading under § __.3? Would including loan-related swaps within thedefinition of the “trading account” or “proprietary trading” be consistent with thestatutory definition of trading account? Why or why not?
・ Loan related swaps should be excluded from the definition of proprietary trading
and should not be counted as a trading account.
・ As the Agencies recognize, such type of swaps are conducted as "directly related tothe terms of the loans" based on the needs on the loan side. They are not for trading
purposes or for the short-term intent and do not impair the "soundness and safety of
the financial systems in the U.S." Therefore, such swaps should be separately
treated from other derivatives transactions conducted irrelevant to demands fromclients.
・ Even if such type of swaps are not excluded from the definition of trading account,they should be treated as instruments traded by a new desk which is a unit engaged
in immaterial transactions, and separated from a general trading desk (an MM deskor a TOTUS desk) (i.e. managed by a dedicated desk (e.g. "Loan-related Swaps
desk"). This means that separate minimum application and compliancerequirements, which are different from the MM or TOTUS desk, should be set forthese types of swaps).
Q107: Should other types of swaps also be addressed in the same manner? For example,
should the Agencies provide further guidance, or include in any exclusion or exemption
other end-user customer driven swaps used by the customer to hedge commercial risk?
・ Any derivatives activities that are apparently entered into, for purposes other thanthe proprietary trading activities, should also be excluded from the definition of
trading account, rather than limiting the exclusion to loan-related swaps.
24

・ Examples of such transactions include hedge swap transactions which are notentered into with a customer but are clearly matching with and managed together
with loans, FX transactions to hedge investments in foreign affiliates, FX
transactions conducted for FX hedges related to the leasing business, and thederivatives component of derivatives embedded deposits. Such transactions should
be excluded from the definition of trading account, since they are derivatives
transactions used for incidental purposes for other businesses, similarly toloan-related swaps.
・ From the similar viewpoint, permitted trading on behalf of customers as defined in§__.6(c) of the 2013 final rule is a sound activity, which is generally conducted byindividual financial institutions in order to manage risks arising from
customer-facing activities. It is therefore apparent that such transactions are not for
the trading account. As such, the Agencies is also aware that they are not subject tometrics reporting specified in the Appendix. Therefore, permitted trading on behalfof customers as defined in §__.6(c) of the 2013 final rule should not be treated aspermitted trading for which a specific compliance program is required to beestablished. They should be excluded from the definition of trading account toavoid excessive costs.
Q111: Should the Agencies permit banking entities to include affiliate hedging
transactions in determining the reasonably expected near-term demand of customers,clients, and counterparties, and in establishing internal risk limits? Why or why not?
・ Each financial institution has a different structure for hedge between trading desks.
For example, a financial institution that uses a hub-and-spoke model formarket-making activities, have a difficulty in demonstrating activities of amarket-making desk without inter-affiliate or intra-bank transactions. Accordingly,
in principle, inter-affiliate or intra-bank transactions should be included in the
RENTD.
Q113: What factors, if any, should the Agencies consider in determining whether toremove the requirement that a correlation analysis must be used to determine whether ahedging position, technique, or strategy reduces or otherwise significantly mitigates the
specific risk being hedged?
・ Because correlation analysis is burdensome and costly, we agree with the proposed
amendment to remove the requirement riskless transactions.
Q118: Would reducing the compliance requirements of § __.5(b) and § __.5(c) for
banking entities that do not have significant trading assets and liabilities reducecompliance costs and increase certainty for these banking entities?
25

・ With regard to the demonstration of hedge effectiveness for riskless transactions,we agree with the proposed amendment because an incentive for financial
institutions to hedge portfolio risk has been impaired due to constraints related torisk identification.
Q120: Would the proposed exclusion from the enhanced documentation requirements
for trading desks that hedge risk of other desks under the circumstances described makerisk-mitigating hedging activities more efficient and timely?
・ We believe that reducing compliance burdens will increase the flexibility of hedged
items and hedging instruments, which will lead to increasing flexibility in hedging
activities.
Q122: The Agencies have proposed using accounting principles as part of the definitionof trading account. Should the Agencies similarly use accounting principles to refer torisk-mitigated hedging activity?
・ If our suggestion to exclude transactions to which hedge accounting is applied,from the definition of proprietary trading, is not accepted, such transactions should
be clarified to be allowed as an exception to proprietary trading since they can beobjectively assessed as being risk-mitigating hedging activities.
・ In addition, excessive costs would be imposed on non-U.S. banks that do not adopt
IFRS or US GAAP if the determination of whether hedge accounting is applied isbased on these standards. Therefore, non-U.S. banks should be allowed to make adetermination in accordance with national accounting standards as noted in Q23.
Q123: Is the proposal’s implementation of the foreign trading exemption appropriate
and effectively delineated?
・ We support the proposal to simplify the conditions in order to qualify for theforeign trading exemption, which leaves only three prongs: ① engaging as
principal in a purchase or sale, ② location of the decision-maker of the purchaseof sale, and ③ booking of the purchase or sale.
・ We however suggest that the Agencies consider to make the prong ③ to be theonly requirement for TOTUS, so that the statement in the proposal "a foreignbanking entity would be able to make use of the exemption as long as the risk of thetransaction is booked outside of the United States," which is the point of TOTUS, isclearly reflected in the rule.
In this regard, the risk spreading to the U.S. is considered to be low if the legal
entity requirement that the booking is not made in the U.S. is met. The other two
conditions ① and ② does not allow a Japanese parent company, which is a BE,
to involve their subsidiary or branch located in the U.S., which is also a BE, in a26

purchase or sale of bonds or stocks traded in the U.S. markets. As a consequence,
the businesses of these subsidiaries and branches located in the U.S. have been
downsizing.
・ In addition to the modifications to the TOTUS requirements discussed above, wesuggest that the Agencies clarify the following points in order to avoid a reduction
in trading activities.
 A TOTUS desk can conduct a transaction with a desk at an affiliate or a branch
office located in the U.S.; 14 if the two desks are operating independently andboth desks are compliant with the Volcker Rule.
 A case, where investments of assets held are outsourced to a non-U.S. entity,
and this service organization outsources to a sub-service organization that is a
U.S. entity shall not be deemed as “personnel of a U.S. entity are involved in
the execution"; There is no restrictions in relation to the use of a dark pool for transactions
involving U.S. entities as agent; 15
 In determining whether a banking entity (including relevant personnel)
engaging in, or making the decision to, a purchase or sell as principal, is not
located in the U.S., in a case where non-U.S. personnel select products or
instruments to be traded and determine whether an investment is permitted, andinternally review whether financial instruments to be traded meet investment
criteria, is not deemed to be engaging in, or making the decision to, thepurchase or sale as principal; 16 and Similarly to the arrangement and negotiation, the execution of leave orders,
executed by U.S. residents, which are not accounted for as principal directly or
on a consolidated basis in the U.S., is deemed to be a limited involvement.
Q124: Are the proposal’s provisions regarding when an activity will be considered tohave occurred solely outside the United States for purposes of the foreign trading
exemption effective and sufficiently clear? Should additional requirements be added?
For example, should the financing prong or the counterparty prong be retained or
14

For non-U.S. banking entities to conduct transactions in the U.S. markets, they need to meet therequirements to qualify for permitted activities other than TOTUS while there is a time difference,etc. This has become burdens for non-U.S. banking entities. Transactions with subsidiaries
located in the U.S. and inter-affiliates or inter-banks transactions with branches located in the U.S.
are, in substance, equivalent to directly conducting transactions with the U.S. bank by the TOTUS
desk and are not considered to be law-evading activities such as practically conducting trading
activities in the U.S. via affiliates and branches located in the U.S. We believe that permitting
such transactions would contribute to an increase in liquidity in the U.S. markets.
15
The same as above.
16
The same as above.

27

modified rather than eliminated?
・ We support the proposals to remove the financing and counterparty prongs of
TOTUS requirements. The counterparty prong have caused a decline in liquidity inthe markets by restricting transactions between non-U.S. banks and U.S. banks,
which in turn have led to a decline in services for both Non-U.S. and U.S. banks interms of liquidity supply to their customers. The financing and counterparty prongs
also pose a high practical hurdle to demonstrate that the requirements are met, andimpose excessive burdens on non-U.S. banks to implement the Volcker Rule. 17 The
elimination of these requirements will significantly improve the transparency inapplying the Volcker Rule.
Q127: Does the proposal’s approach raise competitive equity concerns for U.S. banking
entities? If so, in what ways? Would the proposed modifications allow for foreign
entities to access the U.S. markets without commensurate regulation? How would this
impact competition? Would this disadvantage U.S. entities?
・ The removal of the counterparty prong may increase market liquidity and enable
sharper pricing.
・ As indicated in the Executive Summary, the extraterritorial application of the
Volcker Rule should be discussed in terms of its impacts on the soundness of the
U.S. financial system and should not be discussed from a perspective ofcompetitive advantages and disadvantages between U.S. banking entities andnon-U.S. banking entities. Non-U.S. banking entities should be able toappropriately conduct operations under the supervision of their home agencies tothe extent that they do not affect the soundness of the U.S. financial system, andtherefore the Volcker Rule should not be overly applied extraterritorially.
Q129: The proposed approach would eliminate the requirement in the 2013 final rulethat personnel of the banking entity who arrange, negotiate, or execute a purchase orsale under the foreign trading exemption be located outside the United States. Should
this requirement be removed?
・ Given that the objective of the Volcker Rule is to ensure the soundness of the U.S.
financial system, prohibiting non-U.S. banking entities from engaging in, andbooking, transactions outside the U.S merely because personnel is located in the
U.S., and therefore involved to a certain degree lacks a reasonable basis.
・ Since the definition of "relevant personnel" will become unclear as a result of
17

In some cases, counterparties which are, in substance, not U.S .entities such as international
financial institutions are subject to the Volcker Rule. Therefore, if the counterparty prong isremoved as a result of this amendment, it is expected that complicated procedures for confirming
customers will be eliminated, and operational burdens will be significantly reduced.

28

removing the ANE requirements, we suggest that the Authorities clarify the extent
to which personnel located in the U.S. are permitted to be involved in transactions.

(Fund investments: Q131-Q199)
Q131: Instead of retaining a unified definition of “covered fund,” should the Agencies
separately define “hedge fund” and “private equity fund” or define “covered fund” as a“hedge fund” or “private equity fund”?
・ The current definition of covered fund is broad, resulting in an issuer, used for
securitization purposes, being determined as a covered fund even though it is not ahedge fund or PE fund.
・ The current definition of covered fund exceeds the assumed scope of funds thatshould be regulated. Inclusion of those funds that do not have typical characteristics
of a hedge fund or private equity fund into the scope is restricting the involvementof those asset management companies, that are affiliated with a foreign bank andlocated in the U.S., and consequently healthy competitive environment for the asset
management business has been inhibited. When a bank-affiliated asset manager
provides investment services to U.S. residents through, among other things,
privately placed investment trusts, such trusts, that are managed by the asset
manager may become covered funds irrespective of its investment strategy and risk,
etc. This is not consistent with the original objective of the regulation to restrict
investments in hedge funds and private equity funds. In addition, entities incur
significant legal costs in relation to the covered fund determination. In this view, as
noted in the Executive Summary, it would be appropriate to the funds that can beeasily assessed based on the apparent criteria as not having typical characteristics ofa hedge fund or private equity fund from the definition of “covered fund”.
・ In order for the Volcker Rule to solely cover those activities relating to the U.S., thestatement “being offered and sold within the U.S.” should be added as one of theconditions to become a covered fund.
・ Clarifying the definition would add a substantial value to the compliance program.
However, we recommend that the Agencies to not introduce new permitted activities,
etc. because entities would incur additional costs in order to establish thedetermination process.
・ According to the definition described in section__.10(b)(1)(i) of the 2013 final rule,
covered fund can be interpreted as being the funds that are offered for sale or sold toresidents in the U.S. On the other hand, according to the preamble to the 2013 final
rule, not only the funds, offered for sale or sold in the primary market, but also thefunds, transacted with residents of the U.S. in the secondary market, are also
deemed as covered funds unless such transactions are restricted by the prospectus or29written agreement. In light of the objective of the provided provision, limiting theoffering for sale and sale in the primary market should make a significant effects.
Furthermore, as banks act as one of the investors, they are unable to control
secondary trades between third parties. From this viewpoint, the definition ofcovered fund should include offering for sale and sale to residents of the U.S. in the
primary market and should exclude secondary trades.
・ There is no business practice for domestic funds in non-U.S. countries which are notassumed to be offered for sale or sold to U.S. residents outside the U.S., to specify
in the prospectus or written agreement that they will not be offered for sale or soldto residents in the U.S. However, due to the current requirement, BEs are forced torequest fund managers to take such an action in practice, imposing excessive costs
on fund managers as a result. Given this, we suggest that the Agencies should not
require BE’s confirmation with the document such as prospectus or writtenagreement.
・ It is not clear whether there is a need to separately define “hedge fund” and “PE
fund,” as it is difficult to define the term “hedge fund,” and therefore this definition
should not be used in the first place.
・ It is unclear whether the Volcker Rule intends to restrict indirect investments inequities by prohibiting entities from holding PE funds. Even in the case of indirect
investments, the Basel Capital Accords, for example, requires a BE to calculate theamount of Risk-weighted Assets by the look-through approach for equities held by
BEs unless whether or not directly and thereby to maintain appropriate capital as awhole. We consider that this requirement can be relied on.
Q133：In the preamble to the 2013 final rule, the Agencies stated that tailoring the scopeof the definition of “covered fund” would allow the Agencies to avoid unintended
results that might follow from a definition that is “inappropriately imprecise.” Has the
final definition been “inappropriately imprecise” in practice?
・ In order to clarify the definition of SOTUS Exemption under the proposal, anelement of FAQ13 is incorporated in §__.13(b) of the 2013 final rule. The definition
described in §__.13(b)(1) of the 2013 final rule is, in substance, considered to havethe same meaning as “FEF.” Activities applicable to the SOTUS Exemption would
not pose a substantial risk to the U.S. market, and therefore should not cause theconcern for U.S. Agencies. Given this, such activities should be deemed as excluded
activities and the existing §__.13(b)(1) of the 2013 final rule should be used todefine these activities.
Q136: What kinds of compliance and other costs have banking entities incurred inanalyzing whether particular issuers are covered funds and implementing compliance30

programs for covered fund activities?
・ Since the definition of “offered for sale or sold to a resident of the U.S.” isambiguous, there are some cases where a fund is conservatively treated as a covered
fund if the likelihood of a U.S. resident’s retention of ownership interest in that fundcannot be denied.
・ If the ratio of ownership interest in a fund that is excluded from the covered funddefinition is high, a fund may be deemed as a BE even if the entity does not havecontrol of the fund. As a result, a considerable amount of additional burdens are
imposed on entities, such as inserting an additional description, regarding theVolcker Rule compliance, in the written agreement through negotiation with theorganizer of the fund and other parties.
・ There are some cases where legal advice is sought with respect to, among otherthings, whether an exemption (loan only or Rule 3a-7) can be applied to a purchaseof loan securitizations and whether a Master Fund and Feed Fund is respectively
deemed as a covered fund in the Feeder-Master Fund scheme (and ultimately the
SOTUS Exemption should be applied), giving more burdens and legal costs, etc.
・ Non-U.S. listed ETFs/publicly offered investment trusts, etc. should be clearlyexcluded from the covered fund definition because requiring to base the covered
fund determination on an element, insignificant for non-U.S. banking entities (i.e.
investment by a U.S. person), may incur additional compliance costs.
Q137: If the Agencies modify the covered fund base definition in whole or in part,
would banking entities expect to incur significant costs or burdens in order to becomecompliant?
・ If the covered fund base definition is not modified to the extent that it is consistent
with sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940, a fund
may become subject to the regulation in an unexpected manner, in this way
increasing the number of funds to which the SOTUS Exemption needs to be applied
for or which need to be managed under Super 23A. In such case, significant costs
would be required to seek legal opinions for each fund being held, which would
increase a burdens for compliance management. Furthermore, if a fund must be
terminated in order to comply with the modified definition, it would have asignificant effect on asset management. A series of compliance actions would haverequire significant human resources and time, and thus would have a huge impact.
・ Most of other exemptions being applied relate to loan securitizations, still resulting
in the increase of costs for seeking legal advice. Such legal fees could be reduced if
exemptions are simplified although it depends on risk recognition for a concern of
being determined as a BE.
・ We ask that the Agencies would recognize the possibility of the entities, which31

should not be managed as a BE due to their nature, falling under the definition of
BE as a result of being excluded from the definition of “covered fund”, and also
appropriately review the definition of BE.
Q140: Are foreign funds that satisfy the current conditions in the FPF exclusion
sufficiently similar to RICs such that it is appropriate to exclude these foreign funds
from the covered fund definition? Why or why not?
・ While foreign public funds are required to satisfy the condition if 15 percent or lessof the fund’s interests are sold to investors that are residents of the United States, it
is impossible for each banking entity to confirm whether foreign funds meet thiscondition. Out of all asset management companies in Japan, only “bank-affiliatedasset management companies” would be required to regularly confirm with all
distributors “the existence of U.S. residents or the number of U.S. residents, if any,
and the number of beneficiaries” in relation to all non-U.S. public funds.
Administrative burden arising therefrom could undermine the development/retentionof a favorable business relationship with distributors. Level playing field should beensured for asset management businesses.
Q142: Do FPFs present a heightened risk of evasion that justifies these additional
conditions, as they currently exist or with any of the modifications on which the
Agencies request comment below?
・ Non-U.S. listed ETFs and other highly transparent funds would be unlikely topresent a heightened risk of evasion even if no additional conditions that are notapplied to RICs are applied.
Q145: The Agencies understand that some funds may be formed under the laws of one
non-U.S. jurisdiction, but offered to retail investors in another. (…) In this case a
foreign fund could be authorized for sale to retail investors, as contemplated by the FPF
exclusion, but fail to satisfy this condition. Should the Agencies modify this condition
to address this situation? If so, how?
・ Applying a unified regulatory requirement, which does not consider situations thatmight be unique to respective non-U.S. jurisdictions, will lead to unnecessary
negative impact on the financial stability outside the U.S. and undue increase inregulatory burdens. Given this, the condition, regarding the offering for sale and thesale in home jurisdictions, should be deleted.
Q146: Should the Agencies, for example, modify the condition to omit any reference tothe fund’s “home jurisdiction” and instead provide, for example, that the fund must be
authorized to offer and sell ownership interests to retail investors in “the primary32

jurisdiction” in which the issuer’s ownership interests are offered and sold? (…) For
purposes of determining the primary jurisdiction, would the Agencies need to define theterm “primary” or a similar term to provide sufficient clarity? If so, how should the
Agencies define this or a similar term?
・ The Agencies should omit any reference to the fund’s “home jurisdiction” or“primary jurisdiction”, and instead modify the condition to simply require the funds
to “offer and sell ownership interests predominantly outside the U.S.”
Q160: Should the Agencies exclude from the definition of “covered fund” entities thatlack certain enumerated traits or factors of a hedge fund or private equity fund? (…) For
instance, the SEC’s Form PF defines the terms “hedge fund” and “private equity fund,”(…) Would it be appropriate to exclude from the definition of “covered fund” an entitythat does not meet either of the Form PF definitions of “hedge fund” and “private equityfund”?
・ Referencing the Form PF definition of “hedge fund”, in order to definecharacteristics of a hedge fund, is considered to be inappropriate. In somecircumstances, short position and leverage, etc. is needed for hedging purposes orfor generating appropriate return. Taking this into account, a fund should not be
subject to the regulation by sole virtue of taking such a position.
Q165: The Agencies request that commenters advocating for a characteristics-based
exclusion explain why particular characteristics are appropriate, what kinds of funds
and what kinds of investment strategies or portfolio holdings might be excluded by thecommenters’ suggested approach, and why that would be appropriate.
・ When a bank-affiliated asset manager provides investment services to U.S. persons
through, among other things, privately placed investment trusts, the asset manager
becomes a covered fund irrespective of its investment strategy and risk, etc. This is
not consistent with the original intent of the regulation to restrict investments inhedge funds and private equity funds. For example, as mentioned in the Executive
Summary, we consider that the original intent of restricting banking entities’
excessive risk-taking could be achieved by regulating, in particular, those funds,
which have such compensation arrangements, that could easily incentivize high-risk
investments.
Q169: If the Agencies were to provide a characteristics-based exclusion, to what extent
and how should the Agencies consider section 13’s limitations both on proprietary
trading and on covered fund activities?
・ It would not be easy to identify short-term sales/purchases based on their external
form. Therefore, as mentioned in the Executive Summary, preferably, the term33

“hedge fund” should be defined in a manner that can easily identify it based on its
external form.
Q172: Has the 2013 final rule’s exclusion for joint ventures allowed banking entities tocontinue to be able to share the risk and cost of financing their banking activities
through joint ventures, and therefore allowed banking entities to more efficiently
manage the risk of their operations, as contemplated by the Agencies in adopting thisexclusion?
・ Given that private equity investments through proprietary trading is not subject tothe regulation, those joint ventures, that are not broadly offered for sale to investors
and are formed in partnership with other companies, should also be excluded fromthe scope of application of the regulation. Therefore, we suggest that the Agenciesdelete the phrase “other than investing in securities for resale or other disposition”
from paragraph (ii) of §__.10(c)(3) of the 2013 final rule and also remove therequirement described in paragraph (iii).
Q176: Are there any concerns about how the 2013 final rule’s exclusions from thecovered fund definition for loan securitizations, qualifying asset-backed commercial
paper conduits, and qualifying covered bonds work in practice?
・ As a result of loan securitizations being excluded from the covered fund definition,
BE investors in securitizations are now unsure, whether a securitization SPC is not a
BE. This has prompted them to limit their ownership interest in the securitization
SPC because if the securitization SPC is determined as a BE, a significant amount ofadditional costs, related to the compliance with the BE-related rules, will incur andshort-term transactions involving cash equivalent, that the issuing entity is permitted
to hold under the final rule’s provision pertaining to exclusion of loan securitizations,will be deemed as the trading account and therefore will violate the proprietary trade
regulation.
・ As to asset-backed commercial paper (“ABCP”) conduits, we ask that the Agencies
exclude them from the scope of application of the prohibition of covered fundinvestments or to determine that they are not a covered fund.
・ We suggest that the Agencies clarify the definition of “ownership” of a fund.
Q177: Are there particular issues with complying with the terms of this exclusion forvehicles that are holding loans? (…) Should the Agencies consider permitting a loan
securitization vehicle to hold 5 percent or 10 percent of assets that are considered debt
securities rather than “loans,” as defined in the 2013 final rule?
・ As described in the Executive Summary, we recommend that the Agencies allow
inclusion of other assets to the extent that the product nature and risk profile of the34

loan securitization does not vary significantly. Specifically, we suggest that the
Agencies allow inclusion, to a certain extent, of senior secured bonds if theprospectus can confirm that they have priority for repayment ranking pari passu
with senior secured loans.
Q178：Should the Agencies modify the loan securitization exclusion to reflect the views
expressed by the Agencies’ staffs in response to a FAQ that the servicing assets
described in paragraph 10(c)(8)(i)(B) of the 2013 final rule may be any type of asset,
provided that any servicing asset that is a security must be a permitted security underparagraph 10(c)(8)(iii) of the 2013 final rule?
・ In addition to the proposed modifications to the text, we suggest that the Agencies
provide specific examples.
Q179：Are there modifications the Agencies should make to the 2013 final rule’s
definition of the term “ownership interest” in the context of securitizations?
・ It would be appropriate to exclude the comment that an interest in securitizations
has the senior/subordinated structure except for an interest held by the mostsubordinated investor, which is essentially an equity interest, from the definition of“ownership interest”. Investors in such securitizations do not receive residual
property and their “right to participate in the selection or removal of a generalpartner, managing member, member of the board of directors or trustees, investment
manager, investment adviser, or commodity trading advisor” is designed to limit therights of the most subordinated investor just before the occurrence of an event ofdefault, similarly to the covenant in the case of loans, and not to allow active
participation in removal.
・ Under the structure of securitizations, multiple indicators are already established toobjectively indicate that an event of default will occur at some point in the near
future. Triggering the exercise of the “right to participate in the selection or
removal” based on these indicators means that the rights of creditors are protected.
・ The current “ownership interest” definition only excludes the rights of a creditor to
exercise remedies upon the occurrence of “an event of default or an acceleration
event”. Similarly, we suggest that the Agencies exclude the following right: “theright to participate in the removal of an investment manager for cause, and the rightto nominate or vote for the replacing manager after the investment manager’s
resignation or removal”.
Q189：Is the proposal’s implementation of the foreign fund exemption effective? If not,what alternative would be more effective and/or clearer?
・ We welcome that the proposal removed the financing prong from the requirements35

to qualify for the SOTUS Exemption.
・ While §__.13(b)(1) of the 2013 final rule is a condition to qualify for the SOTUS
Exemption, we recognize that it is equivalent to the FEF requirement. Further,§__.13(b)(3) of the 2013 final rule defines in detail the requirement in§__.13(b)(1)(iii) of the 2013 final rule. If the phrase “an offering that targets
residents of the United States” stipulated in §__.13(b)(3) of the 2013 final rule isone of the conditions for the SOTUS Exemption, namely one of the conditions forthe covered fund; those funds that do not meet this condition would be a
non-covered fund as a FEF, if they satisfy all other conditions for being excluded
from the covered fund definition. Please confirm whether this interpretation iscorrect.
・ The proposal amends the text to read as follows: “an offering that targets residentsof the United States”. We ask the Agencies to provide a specific guidance on how
entities should demonstrate such situation (for example, describing “target forresidents of the United States” in the prospectus, etc. that stipulates that Regulation
S under the U.S. Securities Act is not applied).
・ If it is confirmed that a certain BE group as a whole does not have certain
relationships (e.g. investment manager and investment adviser) with a covered fund,a fund should be treated as a FEF instead of a covered fund because, in regards tothe marketing restriction, there would be no issue relying on the SOTUS Exemption.
・ In addition, certain funds for which “an offering that targets residents of the UnitedStates” is not specified should also be treated as a FEF, providing it is confirmedthat a certain BE group as a whole does not have certain relationships (e.g.
investment manager and investment adviser) with a covered fund.
Q191：Should the financing prong of the foreign fund exemption be retained?
・ It is preferable that the financing prong of the foreign fund exemption is removed
because banks have a general practice to engage in covered fund activities only after
credit risk and profitability of the covered fund was sufficiently taken into account.
Q192：Is the proposed exemption consistent with limiting the extraterritorial reach of
the rule with respect to FBOs?
・ Due to the marketing restriction, non-U.S. banks, that have both a sufficient sales
base and capabilities to develop attractive products, are forced to choose whether toretain an ownership interest in the covered fund through reliance on the SOTUS
Exemption (and thereby achieve capital gain) or to engage in asset management
activities (and thereby earn profits).
・ On the other hand, financial institutions, that only have either a sales base or product36

development capabilities, or financial institutions, that have neither of such qualities,
cannot expect profits from asset management activities, and therefore it would be
extremely difficult for them to have a competitive advantage over U.S. bank. Given
this, the marketing restriction are meaningless for them.
・ As noted in the Executive Summary, the extraterritorial application of the Volcker
Rule should be discussed in terms of its impacts on the soundness of the U.S.
financial system and should not be discussed from a perspective of competitive
advantages and disadvantages between U.S. banking entities and non-U.S. banking
entities. Non-U.S. banking entities should be able to appropriately conduct
operations under the supervision of their home agencies to the extent that they do
not affect the soundness of the U.S. financial system, and hence the Volcker Ruleshould not be overly applied extraterritorially.
Q193: Is the Agencies’ proposal regarding the 2013 final rule’s marketing restriction,
which reflects the staff interpretations incorporated within previous FAQs, sufficiently
clear?
・ We do not think that retaining an ownership interest in a covered fund in reliance on
the SOTUS Exemption will pose any risk to the Volcker Rule’s objectives to avoid
the use of U.S. taxpayers’ money in the event of a default of a bank and ensure thesoundness of the U.S. market.
・ In addition to the above, if the marketing restriction is not breached, there are noneed to modify the existing framework to regulate acquisition/retention of anownership interest in a covered fund for which a third party is serving as aninvestment manager and investment adviser, etc. If the Agencies are still determined
to implement the proposed modification, they should clarify what risks are posed by
non-U.S. banks’ acquisition/retention of an ownership interest in a covered fund andthen design the regulation to mitigate such risks.
Q194: Are clearing services provided by an FCM to its customers a relationship thatwould give rise to the policy concerns addressed by § __.14 of the 2013 final rule?
・ If the definition of covered fund outside the U.S. will be limited, it becomes almost
unlikely that such transactions will take place. Therefore, they should not give riseto the said policy concerns.
Q197: The letter※
provided by a registered FCM to covered funds for which affiliates of the FCM areengaged in the services identified in § __.14(a) including, for example, investment
management services.
Is the proposal’s approach to implementing the limitations on certain transactions with a37

covered fund effective?
※Issued by the CFTC’s Division of Swap Dealer and Intermediary Oversight・ It is reasonable, and has certain effects, to restrict specific transactions with covered
funds that are within the U.S. However, applying such a restriction to FEFs, which
are treated as a covered fund by sole virtue of its interest being held by a U.S.
resident imposes excessive regulatory burden. In this view, they should be allowed
to rely on local legislation, the regulatory capital framework such as Basel III, orother appropriate regulations.
・ According to the proposal, lending activities temporarily conducted upon clearing of
securities continue to be prohibited. Borrowing and other similar activities,
conducted for the purposes of paying cancellation charges and settling securities,
contribute to investor protection, and therefore should not be subject to theregulation.
・ It is stipulated that a BE, serving (directly or indirectly) as the investment adviser toa covered fund, may not enter into a transaction with the covered fund that would bea covered transaction as defined in Super 23A. We suggest that the Agencies clarify
that the term “investment adviser” in this context does not intend to include advisory
services for individual issues (e.g. financial advisory for purchase and financial
advisory for sale).
Q199: Should the Agencies amend § __.14 of the 2013 final rule to incorporate thequantitative limits in section 23A of the Federal Reserve and the Board’s Regulation W?
・ With respect to holding of an ownership interest in a fund, a certain percentage isapplied to determine whether the fund is controlled. On the other hand, transactions
such as loans under Super23A are absolutely prohibited, which is considered to be
an overly strict regulation from the perspective of the original objective of section
23A of the Federal Reserve Act, i.e. to restrict extension of credit to the affiliate, etc.
In practice, it requires significant workload to manage the amount of loans, and it
would be easier to implement the requirement which either permits or prohibits thetransactions.

(Compliance Program: Q204-Q291)
Question 204: What are some of the specific operational or other burdens or expenses
associated with the CEO attestation requirement? Please explain the circumstances
under which those potential burdens or expenses may arise.
・We suggest that processes for the CEO attestation to the Agencies be streamlined(e.g., establishing one e-mail address for every Agency).

38

Questions 219-233: Should the Agencies require banking entities to report changes indesk structure in the XML reporting format in addition to a description of the changes
in the Narrative Statement? (Excerpted question)
・ We believe it is advisable to retain the current requirements, and therefore oppose
the proposed amendments.
・ With respect to metrics reporting, the current rules set out the same criteria fordefining measurement among Panels 5 to 7, while the measurement definition to
identify Value differs across products. Accordingly, the current rules provide a more
simplified mechanism that uses “standardized formats for all products” throughtransmitting information to a calculation batch from upstream systems. Whereas,
under the proposed rules, these current assumptions are not met since themeasurement definition differs across panels and products. Therefore, banking
entities need to take actions to first "obtain information from upstream which varies
by product and Panel."・ If one of the factors that cause difficulty in understanding the Customer-Facing
Activity Measurements is the absolute value of all transactions over the reporting
period (the impact of large-lot trading is maintained for up to 90 days), an approach
to change the absolute value of all transactions to the daily value of transactions issufficient instead of introducing a new measurement.
・ Since the preparation of Desk Information has not been required, operationalburden, such as assessing definitions, is expected to additionally incur.
・ If this information will be created using systems, burdens and costs, related todevelopments and modifications would also incur.

Questions 234-241: Is the information required by the proposed Quantitative
Measurements Identifying Information effective and sufficiently clear? (Excerpted
question)・ We believe it is advisable to retain the current requirements, and therefore oppose
the proposed amendments.
・ While specific costs are unclear at the moment, this information has not beenrequired under the current rules, and therefore it is likely that operational burdens,such as assessing definitions, will occur to some extent.
・ If this information will be created using systems, burdens and costs related todevelopments and modifications will also incur.
Questions 242-244: Should the Narrative Statement be required? (Excerpted question)
・ We believe it is advisable to retain the current requirements, and therefore oppose
the proposed amendments.
39

・ This requirement would cause operational burden to a certain extent in preparing
the Narrative Statement, such as changing descriptions.
・ If this information will be created using systems, burdens and costs, related todevelopments and modifications will also incur.
Questions 245-254: Is the proposed frequency of reporting the Trading Desk
Information, Quantitative Measurements Identifying Information, and Narrative
Statement appropriate and effective? (Excerpted question)
・ We believe it is advisable to retain the current requirements, and therefore oppose
the proposed amendments.
・ Changing the scope of calculation items and reporting formats for quarterly metrics
reporting would entail changes in metrics measurement systems, and also incur
considerable operation burdens and costs such as system development outsourcing
costs in connection with changing systems.
Questions 257-284: Should Stressed VaR limits be removed as a reporting requirementfor desks engaged in permitted market making-related activity or risk-mitigating
hedging activity? (Excerpted question)
・ We believe it is advisable to retain the current requirements, and therefore oppose
the proposed amendments.
・ If customer-facing activities items are eliminated and new measurements are newly
established, measurements tools need to be modified and therefore considerable
time will be needed, if time required for testing is taken into account.
・ In addition to securing development staff, outsourcing costs will also incur. It is
expected that considerable burdens will incur in order to address changes in thecontents of quarterly metrics reporting.

40