Office of the Comptroller of the Currency 

Board of Governors of the Federal Reserve System 

Federal Deposit Insurance Corporation 

November 6, 2015 

Deduction Methodology for Investments in Volcker Rule Covered Funds 

Page 1 of 4 

Purpose 

The Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB), and 

the Federal Deposit Insurance Corporation (FDIC) are issuing this guidance to clarify the 

interaction between the agencies' regulatory capital rule and the Volcker Rule with respect to the 

appropriate capital treatment for investments in certain private equity funds and hedge funds 

(covered funds). 

Background 

In July 2013, the FRB and OCC issued a final rule (regulatory capital rule) that increased the 

quality and quantity of regulatory capital held by banking organizations and strengthened the 

framework for calculating regulatory capital to better reflect the underlying risks taken by banking 

organizations. [Footnote1 

- "Banking organization" includes national banks, state member banks, state non-member banks, federal savings 

associations, state savings associations, and top-tier bank holding companies domiciled in the United States not subject 

to the Federal Reserve's Small Bank Holding Company Policy Statement (12 CFR part 225, appendix C), as well as 

top-tier savings and loan holding companies domiciled in the United States, other than (i) savings and loan holding 

companies subject to the FRB's Small Bank Holding Company Policy Statement and (ii) certain savings and loan 

holding companies that are substantially engaged in insurance underwriting or commercial activities. End of Footnote 1.] 

The FDIC adopted an interim final rule that was substantively identical to the 

regulatory capital rule in July 2013 and later issued a final rule in April 2014 identical to the FRB's 

and the OCC's final rule. [Footnote 2 

- 78 Fed. Reg. 62018 (October 11, 2013) (FRB and OCC); 78 Fed. Reg. 20754 (April 14, 2014) (FDIC). These rules 

are codified at OCC - 12 CFR part 3 (national banks and federal savings associations); FRB - 12 CFR part 217 (state 

member banks, bank holding companies, and savings and loan holding companies); and FDIC - 12 CFR part 324 (state 

non-member banks and state savings associations). End of Footnote 2.] 

In December 2013, the FDIC, OCC, and FRB, along with the U.S. 

Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission, 

adopted a final rule to implement section 13 of the Bank Holding Company Act, also known as the 

Volcker rule, which was added by section 619 of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act, and which prohibits any banking entity [Footnote 3 

- A "banking entity" is defined by statute as any insured depository institution, any company affiliated with an insured 

depository institution, as well as any foreign bank that has a branch, agency, or commercial lending company in the 

United States, with certain limited exceptions. Any banking organization that is subject to the regulatory capital rule 

would be included within the definition of banking entity under the Volcker rule. 12 U.S.C. 1851(h)(1). End of Footnote 3.] 

from engaging in proprietary 
Page 2 of 4 

trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain 

relationships with, a covered fund. [Footnote 4 

- See 12 U.S.C. 1851; 12 CFR part 44 (OCC); 12 CFR part 248 (FRB); 12 CFR part 351 (FDIC). For defining hedge 

fund and private equity fund, see 12 U.S.C. 1851(h)(2). For defining covered fund, see 12 CFR 44(10)(b)-(c) (OCC), 

12 CFR 248.10(b)-(c) (FRB), and 12 CFR 351.10(b)-(c) (FDIC). End of Footnote 4.] 

Certain covered funds could be subject, under the regulatory capital rule and the Volcker 

rule, to overlapping tier 1 capital deductions. Specifically, the Volcker rule requires a banking 

organization to deduct the full amount of the banking organization's investment in a covered fund 

from tier 1 capital. [Footnote 5 

- See 12 CFR 44.12(d) (OCC), 12 CFR 248.12(d) (FRB), and 12 CFR 351.12(d) (FDIC); see also 12 CFR 44.12(b)-(c) 

(OCC), 12 CFR 248 10(b)-(c) (FRB), and 12 CFR 351.10(b)-(c) (FDIC). End of Footnote 5.] 

Simultaneously, under the regulatory capital rule, a covered fund that meets the 

definition of an "investment in the capital of an unconsolidated financial institution" [Footnote 6 

- See definitions of "financial institution," "non-significant investment in the capital of an unconsolidated financial 

institution," and "significant investment in the capital of an unconsolidated financial institution" in 12 CFR 3.2 (OCC), 

12 CFR 217.2 (FRB), and 12 CFR 324.2 (FDIC). For an explanation of the regulatory capital treatment that applies to 

investments in the capital of an unconsolidated financial institution, which includes covered fund UFIs, see 12 CFR 

3.22 (OCC), 12 CFR 217.22 (FRB), and 12 CFR 324.22 (FDIC). End of Footnote 6.] 

(a covered 

fund UFI) also could be subject to a deduction from tier 1 capital. The potential overlapping capital 

treatment for covered funds is discussed in the preambles of both the Volcker rule and the 

regulatory capital rule, and the preamble to the Volcker rule explains that the federal banking 

agencies would review the interaction between the requirements of the Volcker rule and the 

requirements of the regulatory capital rule and reconcile the two rules. [Footnote 7 

- See 78 Fed. Reg. at 62072 (October 11, 2013). See also 79 Fed. Reg. at 5731 (January 31, 2014). End of Footnote 7.] 

To clarify the interaction 

between the two rules with respect to these capital treatments, the methodology described in this 

guidance outlines mechanics aimed at reconciling the treatment across these rules. A banking 

organization should be able to demonstrate to its primary federal regulatory agency that the banking 

organization is in compliance with the Volcker rule and that all amounts of investments in covered 

funds have been deducted from tier 1 capital. 

The Volcker rule, including the required capital deduction for investments in a covered fund, 

became effective on July 21, 2015, for investments in and relationships with a covered fund made 

after December 31, 2013. [Footnote8 

- See FRB Order Approving Extension of Conformance Period (Dec. 10, 2013), available at 

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210b1.pdf; see also FRB Order Approving 

Extension of Conformance Period under Section 13 of the Bank Holding Company Act (December 18, 2014), available 

at http://www.federalreserve.gov/newsevents/press/bcreg/20141218a.htm.End of Footnote 8.] 

The FRB acted to give banking entities until July 21, 2016, to conform 

investments in and relationships with covered funds that were in place prior to December 31, 2013 

(legacy covered funds) and announced its intention to grant banking entities an additional one-year 

extension of the conformance period until July 21, 2017, to conform ownership interests in and 

relationships with legacy covered funds. As a result, for legacy covered funds, the Volcker rule 

capital deduction will not become effective until July 21, 2017. 
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Deduction Methodology 

1. The banking organization determines the amount of its investment in covered funds [Footnote 9 

- See 12 CFR 44.12(d) (OCC), 12 CFR 248.12(d) (FRB), and 12 CFR 351.12(d) (FDIC). End of Footnote 9.] 

that is 

subject to a full deduction from tier 1 capital pursuant to section . 12(d) of the Volcker 

rule. [Footnote10 

- See 12 CFR 44.12(d) (OCC), 12 CFR 248.12(d) (FRB), and 12 CFR 351.12(d) (FDIC). End of Footnote 10.] 

2. If the amount in step 1 is greater than zero, the banking organization must determine 

whether any investment in a covered fund is also an investment in a covered fund UFI under 

the regulatory capital rule. 

3. If the banking organization determines in step 2 that no covered fund is an investment in a 

covered fund UFI under the regulatory capital rule, the banking organization must fully 

deduct the amount calculated in step 1 from tier 1 capital pursuant to the Volcker rule and 

proceed to step 5. [Footnote11 

- Id. The Volcker rule requires that deductions be made from tier 1 capital. A banking organization can comply with 

this rule through a deduction from additional tier 1 capital or common equity tier 1 capital. See 12 CFR 44.12(d) 

(OCC), 12 CFR 248.12(d) (FRB), and 12 CFR 351.12(d) (FDIC). End of Footnote 11.] 

4. If the banking organization determines in step 2 that an investment in a covered fund is also 

an investment in a covered fund UFI, such that a part or the aggregate of its covered funds is 

deducted from common equity tier 1 capital or additional tier 1 capital under 

sections .22(c) and (d) of the regulatory capital rule, [Footnote12 

- Certain investments in the capital of unconsolidated financial institutions must be deducted from common equity tier 

1 capital while others may be deducted from additional tier 1 capital, the two elements that comprise tier 1 capital, 

under the regulatory capital rule. See 12 CFR 3.22(c)-(d) (OCC), 12 CFR 217.22(c)-(d) (FRB), and 12 CFR 324.22(c)-

(d) (FDIC). End of Footnote 12.] 

such deducted amounts count 

toward the amount required to be deducted that was calculated in step 1. 

5. Any remaining amount of covered funds that is not deducted from either common equity tier 

1 capital or additional tier 1 capital under the regulatory capital rule in accordance with step 

4 must be fully deducted from tier 1 capital pursuant to the Volcker rule. A banking 

organization must deduct the full amount of covered funds required to be deducted under 

section .12(d) according to the valuation methodology specified therein. 

6. A banking organization may exclude from risk-weighted assets (for calculating risk-based 

capital ratios), average total consolidated assets (for calculating the tier 1 leverage ratio), 

total leverage exposure (for calculating the supplementary leverage ratio), and total assets 

(for calculating whether a bank is critically undercapitalized for prompt corrective action 

purposes), amounts that are deducted from capital (i) under paragraphs (c) and (d) of 

section .22 of the regulatory capital rule (step 4) or (ii) under paragraph (d) of section 12 

of the Volcker rule (steps 3 or 5). 
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Reporting of Volcker Rule Deductions 

A banking organization should report deductions of covered funds made pursuant to the 

Volcker rule under steps 3 or 5 in line items 17 (BHCAP857 and RCFA/RCOAP857) and 24 

(BHCAP864 and RCFA/RCOAP864) of Schedule HC-R of the FR Y-9C Consolidated Financial 

Statements for Holding Companies report form or Schedule RC-R of the FFIEC 031 or 041 

Consolidated Reports of Condition and Income (Call Report forms), as applicable. [Footnote13 

- Reporting forms and instructions for holding companies are available at 

http://www.federalreserve.gov/apps/reportforms/default.aspx and for insured depository institutions at 

http://www.ffiec.gov/ffiec report forms.htm.End of Footnote 13.] 

In addition, 

banking organizations with $50 billion or more in total consolidated assets should reflect this 

treatment on the applicable DFAST reporting templates as follows: (i) DFAST-14A (OCC), (ii) 

DFAST-14(A) (FDIC); or (iii) the FR Y-14Q and FR Y-14A, Capital Assessment and StressTesting forms, Regulatory Capital Transitions Schedules, line items 24 (CQCDP857) and 30 

(CQCDP864) and on the FR Y-14A's Summary Schedule for Capital - DFAST and Capital -

CCAR Worksheets on line items 65 (CASDP857 and CPSDP857) and 72 (CASDP864 and 

CPSDP865) (FRB). Further, banking organizations that are required to complete the FFIEC 101 

Regulatory Capital Reporting for Institutions Subject to the Advanced Capital Adequacy 

Framework should reflect this treatment in line items 27 (AAABP857) and 41 (AAABP898) of 

schedule A of the FFIEC 101.