33432 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

DEPARTMENT OF TREASURY 

Office of the Comptroller of the 

Currency 

12 CFR Part 44 

[Docket No. OCC–2018–0010] 

RIN 1557–AE27 

FEDERAL RESERVE SYSTEM 

12 CFR Part 248 

[Docket No. R–1608] 

RIN 7100–AF 06 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Part 351 

RIN 3064–AE67 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 255 

[Release no. BHCA–3; File no. S7–14–18] 

RIN 3235–AM10 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 75 

RIN 3038–AE72 

Proposed Revisions to Prohibitions 

and Restrictions on Proprietary 

Trading and Certain Interests in, and 

Relationships With, Hedge Funds and 

Private Equity Funds 

AGENCY: Office of the Comptroller of the 

Currency, Treasury (‘‘OCC’’); Board of 

Governors of the Federal Reserve 

System (‘‘Board’’); Federal Deposit 

Insurance Corporation (‘‘FDIC’’); 

Securities and Exchange Commission 

(‘‘SEC’’); and Commodity Futures 

Trading Commission (‘‘CFTC’’). 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The OCC, Board, FDIC, SEC, 

and CFTC (individually, an ‘‘Agency,’’ 

and collectively, the ‘‘Agencies’’) are 

requesting comment on a proposal that 

would amend the regulations 

implementing section 13 of the Bank 

Holding Company Act (BHC Act). 

Section 13 contains certain restrictions 

on the ability of a banking entity and 

nonbank financial company supervised 

by the Board to engage in proprietary 

trading and have certain interests in, or 

relationships with, a hedge fund or 

private equity fund. The proposed 

amendments are intended to provide 

banking entities with clarity about what 

activities are prohibited and to improve 

supervision and implementation of 

section 13. 

DATES: Comments must be received on 

or before September 17, 2018. 

ADDRESSES: Interested parties are 

encouraged to submit written comments 

jointly to all of the Agencies. 

Commenters are encouraged to use the 

title ‘‘Restrictions on Proprietary 

Trading and Certain Interests in, and 

Relationships with, Hedge Funds and 

Private Equity Funds’’ to facilitate the 

organization and distribution of 

comments among the Agencies. 

Commenters are also encouraged to 

identify the number of the specific 

question for comment to which they are 

responding. Comments should be 

directed to: 

OCC: Because paper mail in the 

Washington, DC area and at the OCC is 

subject to delay, commenters are 

encouraged to submit comments 

through the Federal eRulemaking Portal 

or email, if possible. Please use the title 

‘‘Proposed Revisions to Prohibitions and 

Restrictions on Proprietary Trading and 

Certain Interests in, and Relationships 

with, Hedge Funds and Private Equity 

Funds’’ to facilitate the organization and 

distribution of the comments. You may 

submit comments by any of the 

following methods: 

• Federal eRulemaking Portal— 

‘‘regulations.gov’’: Go to 

www.regulations.gov. Enter ‘‘Docket ID 

OCC–2018–0010’’ in the Search Box and 

click ‘‘Search.’’ Click on ‘‘Comment 

Now’’ to submit public comments. 

• Click on the ‘‘Help’’ tab on the 

Regulations.gov home page to get 

information on using Regulations.gov, 

including instructions for submitting 

public comments. 

• Email: VolckerReg.Comments@

occ.treas.gov. 

• Mail: Legislative and Regulatory 

Activities Division, Office of the 

Comptroller of the Currency, 400 7th 

Street SW, Suite 3E–218, Washington, 

DC 20219. 

• Hand Delivery/Courier: 400 7th 

Street SW, Suite 3E–218, Washington, 

DC 20219. 

• Fax: (571) 465–4326. 

Instructions: You must include 

‘‘OCC’’ as the agency name and ‘‘Docket 

ID OCC–2018–0010’’ in your comment. 

In general, the OCC will enter all 

comments received into the docket and 

publish the comments on the 

Regulations.gov website without 

change, including any business or 

personal information that you provide 

such as name and address information, 

email addresses, or phone numbers. 

Comments received, including 

attachments and other supporting 

materials, are part of the public record 

and subject to public disclosure. Do not 

include any information in your 

comment or supporting materials that 

you consider confidential or 

inappropriate for public disclosure. 

You may review comments and other 

related materials that pertain to this 

rulemaking action by any of the 

following methods: 

• Viewing Comments Electronically: 

Go to www.regulations.gov. Enter 

‘‘Docket ID OCC–2018–0010’’ in the 

Search box and click ‘‘Search.’’ Click on 

‘‘Open Docket Folder’’ on the right side 

of the screen and then ‘‘Comments.’’ 

Comments can be filtered by clicking on 

‘‘View All’’ and then using the filtering 

tools on the left side of the screen. 

• Click on the ‘‘Help’’ tab on the 

Regulations.gov home page to get 

information on using Regulations.gov. 

Supporting materials may be viewed by 

clicking on ‘‘Open Docket Folder’’ and 

then clicking on ‘‘Supporting 

Documents.’’ The docket may be viewed 

after the close of the comment period in 

the same manner as during the comment 

period. 

• Viewing Comments Personally: You 

may personally inspect and photocopy 

comments at the OCC, 400 7th Street 

SW, Washington, DC 20219. For 

security reasons, the OCC requires that 

visitors make an appointment to inspect 

comments. You may do so by calling 

(202) 649–6700 or, for persons who are 

deaf or hearing impaired, TTY, (202) 

649–5597. Upon arrival, visitors will be 

required to present valid governmentissued photo identification and submit 

to security screening in order to inspect 

and photocopy comments. 

Board: You may submit comments, 

identified by Docket No. R–1608; RIN 

7100–AF 06, by any of the following 

methods: 

• Agency Website: http://

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm. 

• Email: regs.comments@

federalreserve.gov. Include docket and 

RIN numbers in the subject line of the 

message. 

• Fax: (202) 452–3819 or (202) 452– 

3102. 

• Mail: Ann E. Misback, Secretary, 

Board of Governors of the Federal 

Reserve System, 20th Street and 

Constitution Avenue NW, Washington, 

DC 20551. All public comments are 

available from the Board’s website at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm as 

submitted, unless modified for technical 


daltland on DSKBBV9HB2PROD with PROPOSALS3
Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33433 

reasons or to remove sensitive personal 

information at the commenter’s request. 

Public comments may also be viewed 

electronically or in paper form in Room 

3515, 1801 K Street NW. (between 18th 

and 19th Streets NW) Washington, DC 

20006 between 9:00 a.m. and 5:00 p.m. 

on weekdays. 

FDIC: You may submit comments, 

identified by RIN 3064–AE67 by any of 

the following methods: 

• Agency Website: http://

www.FDIC.gov/regulations/laws/ 

federal/propose.html. Follow 

instructions for submitting comments 

on the Agency website. 

• Mail: Robert E. Feldman, Executive 

Secretary, Attention: Comments/Legal 

ESS, Federal Deposit Insurance 

Corporation, 550 17th Street NW, 

Washington, DC 20429. 

• Hand Delivered/Courier: Comments 

may be hand-delivered to the guard 

station at the rear of the 550 17th Street 

Building (located on F Street) on 

business days between 7:00 a.m. and 

5:00 p.m. 

• Email: comments@FDIC.gov. 

Include the RIN 3064–AE67 on the 

subject line of the message. 

• Public Inspection: All comments 

received must include the agency name 

and RIN 3064–AE67 for this rulemaking. 

All comments received will be posted 

without change to http://www.fdic.gov/ 

regulations/laws/federal/, including any 

personal information provided. Paper 

copies of public comments may be 

ordered from the FDIC Public 

Information Center, 3501 North Fairfax 

Drive, Room E–1002, Arlington, VA 

22226 or by telephone at (877) 275–3342 

or (703) 562–2200. 

SEC: You may submit comments by 

the following methods: 

Electronic Comments 

• Use the SEC’s internet comment 

form (http://www.sec.gov/rules/ 

proposed.shtml); or 

Send an email to rule-comments@

sec.gov. Please include File Number S7– 

14–18 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Brent J. Fields, Secretary, Securities 

and Exchange Commission, 100 F Street 

NE, Washington, DC 20549–1090. 

All submissions should refer to File 

Number S7–14–18. This file number 

should be included on the subject line 

if email is used. To help us process and 

review your comments more efficiently, 

please use only one method. The SEC 

will post all comments on the SEC’s 

website (http://www.sec.gov/rules/ 

proposed.shtml). Comments are also 

available for website viewing and 

printing in the SEC’s Public Reference 

Room, 100 F Street NE, Washington, DC 

20549, on official business days 

between the hours of 10:00 a.m. and 

3:00 p.m. All comments received will be 

posted without change. Persons 

submitting comments are cautioned that 

the SEC does not redact or edit personal 

identifying information from comment 

submissions. You should submit only 

information that you wish to make 

available publicly. 

Studies, memoranda, or other 

substantive items may be added by the 

SEC or SEC staff to the comment file 

during this rulemaking. A notification of 

the inclusion in the comment file of any 

materials will be made available on the 

SEC’s website. To ensure direct 

electronic receipt of such notifications, 

sign up through the ‘‘Stay Connected’’ 

option at www.sec.gov to receive 

notifications by email. 

CFTC: You may submit comments, 

identified by RIN 3038–AE72 and 

‘‘Proposed Revisions to Prohibitions and 

Restrictions on Proprietary Trading and 

certain Interests in, and Relationships 

with, Hedge Funds and Private Equity 

Funds,’’ by any of the following 

methods: 

• Agency Website: https://

comments.cftc.gov. Follow the 

instructions on the website for 

submitting comments. 

• Mail: Send to Christopher 

Kirkpatrick, Secretary, Commodity 

Futures Trading Commission, 1155 21st 

Street NW, Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

Mail above. 

Please submit your comments using 

only one method. All comments must be 

submitted in English, or if not, 

accompanied by an English translation. 

Comments will be posted as received to 

www.cftc.gov and the information you 

submit will be publicly available. If, 

however, you submit information that 

ordinarily is exempt from disclosure 

under the Freedom of Information Act, 

you may submit a petition for 

confidential treatment of the exempt 

information according to the procedures 

set forth in CFTC Regulation 145.9.1. 

The CFTC reserves the right, but shall 

have no obligation, to review, prescreen, filter, redact, refuse or remove 

any or all of your submission from 

www.cftc.gov that it may deem to be 

inappropriate for publication, such as 

obscene language. All submissions that 

have been redacted or removed that 

contain comments on the merits of the 

rulemaking will be retained in the 

public comment file and will be 

considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT:

OCC: Suzette Greco, Assistant 

Director; Tabitha Edgens, Senior 

Attorney; Mark O’Horo, Attorney, 

Securities and Corporate Practices 

Division (202) 649–5510; for persons 

who are deaf or hearing impaired, TTY, 

(202) 649–5597, Office of the 

Comptroller of the Currency, 400 7th 

Street SW, Washington, DC 20219. 

Board: Kevin Tran, Supervisory 

Financial Analyst, (202) 452–2309, Amy 

Lorenc, Financial Analyst, (202) 452– 

5293, David Lynch, Deputy Associate 

Director, (202) 452–2081, David 

McArthur, Senior Economist, (202) 452– 

2985, Division of Supervision and 

Regulation; Flora Ahn, Senior Counsel, 

(202) 452–2317, Gregory Frischmann, 

Counsel, (202) 452–2803, or Kirin 

Walsh, Attorney, (202) 452–3058, Legal 

Division, Board of Governors of the 

Federal Reserve System, 20th and 

C Streets NW, Washington, DC 20551. 

For the hearing impaired only, 

Telecommunication Device for the Deaf 

(TDD), (202) 263–4869. 

FDIC: Bobby R. Bean, Associate 

Director, bbean@fdic.gov, Michael 

Spencer, Chief, Capital Markets 

Strategies Section, michspencer@

fdic.gov, or Brian Cox, Capital Markets 

Policy Analyst, brcox@fdic.gov, Capital 

Markets Branch, (202) 898–6888; 

Michael B. Phillips, Counsel, 

mphillips@fdic.gov, Benjamin J. Klein, 

Counsel, bklein@fdic.gov, or Annmarie 

H. Boyd, Counsel, aboyd@fdic.gov, 

Legal Division, Federal Deposit 

Insurance Corporation, 550 17th Street 

NW, Washington, DC 20429. 

SEC: Andrew R. Bernstein (Senior 

Special Counsel), Sophia Colas 

(Attorney-Adviser), Sam Litz (AttorneyAdviser), Office of Derivatives Policy 

and Trading Practices, or Aaron 

Washington (Special Counsel), Elizabeth 

Sandoe (Senior Special Counsel), Carol 

McGee (Assistant Director), or Josephine 

J. Tao (Assistant Director), at (202) 551– 

5777, Division of Trading and Markets, 

and Nicholas Cordell, Matthew Cook, 

Aaron Gilbride (Branch Chief), Brian 

McLaughlin Johnson (Assistant 

Director), and Sara Cortes (Assistant 

Director), at (202) 551–6787 or IArules@

sec.gov, Division of Investment 

Management, U.S. Securities and 

Exchange Commission, 100 F Street NE, 

Washington, DC 20549. 

CFTC: Erik Remmler, Deputy Director, 

(202) 418–7630, eremmler@cftc.gov; 

Cantrell Dumas, Special Counsel, (202) 

418–5043, cdumas@cftc.gov; Jeffrey 

Hasterok, Data and Risk Analyst, (646) 

746–9736, jhasterok@cftc.gov, Division 


daltland on DSKBBV9HB2PROD with PROPOSALS3
33434 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

1 Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Public Law 111–203, 124 Stat. 1376 

(2010). 

2See 12 U.S.C. 1851. Section 13 of the BHC Act 

does not prohibit a nonbank financial company 

supervised by the Board from engaging in 

proprietary trading, or from having the types of 

ownership interests in or relationships with a 

covered fund that a banking entity is prohibited or 

restricted from having under section 13 of the BHC 

Act. However, section 13 of the BHC Act provides 

that a nonbank financial company supervised by 

the Board would be subject to additional capital 

requirements, quantitative limits, or other 

restrictions if the company engages in certain 

proprietary trading or covered fund activities. See 

12 U.S.C. 1851(a)(2) and (f)(4). 

3See 12 U.S.C. 1851(a)(1)(A); 1851(h)(4) and (6). 

4See 12 U.S.C. 1851(d)(1). 

5See 12 U.S.C. 1851(a)(1)(B). 

6See, e.g., 12 U.S.C. 1851(d)(1)(G). 

7See 12 U.S.C. 1851(b)(2). Under section 

13(b)(2)(B) of the BHC Act, rules implementing 

section 13’s prohibitions and restrictions must be 

issued by: (i) The appropriate Federal banking 

agencies (i.e., the Board, the OCC, and the FDIC), 

jointly, with respect to insured depository 

institutions; (ii) the Board, with respect to any 

company that controls an insured depository 

institution, or that is treated as a bank holding 

company for purposes of section 8 of the 

International Banking Act, any nonbank financial 

company supervised by the Board, and any 

subsidiary of any of the foregoing (other than a 

subsidiary for which an appropriate Federal 

banking agency, the SEC, or the CFTC is the 

primary financial regulatory agency); (iii) the CFTC 

with respect to any entity for which it is the 

primary financial regulatory agency, as defined in 

section 2 of the Dodd-Frank Act; and (iv) the SEC 

with respect to any entity for which it is the 

primary financial regulatory agency, as defined in 

section 2 of the Dodd-Frank Act. See id. 

8See Prohibitions and Restrictions on Proprietary 

Trading and Certain Interests in, and Relationships 

with, Hedge Funds and Private Equity Funds; Final 

Rule, 79 FR 5535 (Jan. 31, 2014). 

9Public Law 115–174, 132 Stat. 1296–1368 

(2018). 

of Swap Dealer and Intermediary 

Oversight; Mark Fajfar, Assistant 

General Counsel, (202) 418–6636, 

mfajfar@cftc.gov, Office of the General 

Counsel; Stephen Kane, Research 

Economist, (202) 418–5911, skane@

cftc.gov, Office of the Chief Economist; 

Commodity Futures Trading 

Commission, Three Lafayette 

Centre,1155 21st Street NW, 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION: 

I. Background 

The Dodd-Frank Wall Street Reform 

and Consumer Protection Act (the 

‘‘Dodd-Frank Act’’) was enacted on July 

21, 2010.1 Section 619 of the DoddFrank Act added a new section 13 to the 

BHC Act (codified at 12 U.S.C. 1851), 

also known as the Volcker Rule, that 

generally prohibits any banking entity 

from engaging in proprietary trading or 

from acquiring or retaining an 

ownership interest in, sponsoring, or 

having certain relationships with a 

hedge fund or private equity fund 

(‘‘covered fund’’), subject to certain 

exemptions.2

Section 13 of the BHC Act generally 

prohibits banking entities from engaging 

as principal in trading for the purpose 

of selling financial instruments in the 

near term or otherwise with the intent 

to resell in order to profit from shortterm price movements.3 Section 13(d)(1) 

expressly exempts from this prohibition, 

subject to conditions, certain activities, 

including: 

• Trading in U.S. government, 

agency, and municipal obligations; 

• Underwriting and market-makingrelated activities; 

• Risk-mitigating hedging activities; 

• Trading on behalf of customers; 

• Trading for the general account of 

insurance companies; and 

• Foreign trading by non-U.S. 

banking entities.4

Section 13 of the BHC Act also 

generally prohibits banking entities 

from acquiring or retaining an 

ownership interest in, or sponsoring, a 

hedge fund or private equity fund.5

Section 13 contains several exemptions 

that permit banking entities to make 

limited investments in covered funds, 

subject to a number of restrictions 

designed to ensure that banking entities 

do not rescue investors in these funds 

from loss and are not themselves 

exposed to significant losses from 

investments or other relationships with 

these funds.6

Under the statute, authority for 

developing and adopting regulations to 

implement the prohibitions and 

restrictions of section 13 of the BHC Act 

is divided among the Board of 

Governors of the Federal Reserve 

System, the Federal Deposit Insurance 

Corporation, the Office of the 

Comptroller of the Currency, the 

Securities and Exchange Commission, 

and the Commodity Futures Trading 

Commission (individually, an 

‘‘Agency,’’ and collectively, the 

‘‘Agencies’’).7 The Agencies issued a 

final rule implementing these 

provisions in December 2013 (the ‘‘2013 

final rule’’).8

The Agencies have now had several 

years of experience implementing the 

2013 final rule and believe that 

supervision and implementation of the 

2013 final rule can be substantially 

improved. The Agencies acknowledge 

concerns that some parts of the 2013 

final rule may be unclear and 

potentially difficult to implement in 

practice. Based on experience since 

adoption of the 2013 final rule, the 

Agencies have identified opportunities, 

consistent with the statute, for 

improving the rule, including further 

tailoring its application based on the 

activities and risks of banking entities. 

Accordingly, the Agencies are issuing 

this proposal (the ‘‘proposal’’ or 

‘‘proposed amendments’’) to amend the 

2013 final rule, in order to provide 

banking entities with greater clarity and 

certainty about what activities are 

prohibited and seek to improve effective 

allocation of compliance resources 

where possible. The Agencies also 

believe that the modifications proposed 

herein would improve the ability of the 

Agencies to examine for, and make 

supervisory assessments regarding, 

compliance relative to the statute and 

the implementing rules. 

While section 13 of the BHC Act 

addresses certain risks related to 

proprietary trading and covered fund 

activities of banking entities, the 

Agencies note that the nature and 

business of banking entities involves 

other inherent risks, such as credit risk 

and general market risk. To that end, the 

Agencies have various tools, such as the 

regulatory capital rules of the Federal 

banking agencies and the 

comprehensive capital analysis and 

review framework of the Board, to 

require banking entities to manage the 

risks associated with their activities. 

The Agencies believe that the proposed 

changes to the 2013 final rule would be 

consistent with safety and soundness 

and enable banking entities to 

implement appropriate risk 

management policies in light of the risks 

associated with the activities in which 

banking entities are permitted to engage 

under section 13. 

The Agencies also note that the 

Economic Growth, Regulatory Relief, 

and Consumer Protection Act,9 which 

was enacted on May 24, 2018, amends 

section 13 of the BHC Act by narrowing 

the definition of banking entity and 

revising the statutory provisions related 

to the naming of covered funds. The 

Agencies plan to address these statutory 

amendments through a separate 

rulemaking process; no changes have 

been proposed herein that would 

implement these amendments. The 

amendments took effect upon 

enactment, however, and in the interim 

between enactment and the adoption of 

implementing regulations, the Agencies 

will not enforce the 2013 final rule in 

a manner inconsistent with the 

amendments to section 13 of the BHC 

Act with respect to institutions 

excluded by the statute and with respect 

to the naming restrictions for covered 

funds. Additionally, the specific 

regulatory amendments proposed herein 

would not be inconsistent with the 


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10FSOC, Study and Recommendations on 

Prohibitions on Proprietary Trading and Certain 

Relationships with Hedge Funds and Private Equity 

Funds (Jan. 18, 2011), available at http://

www.treasury.gov/initiatives/Documents/Volcker

%20sec%20619%20study%20final%201%2018

%2011%20rg.pdf (FSOC study); see 12 U.S.C. 

1851(b)(1). Prior to publishing its study, the FSOC 

requested public comment on a number of issues 

to assist the FSOC in conducting its study. See 

Public Input for the Study Regarding the 

Implementation of the Prohibitions on Proprietary 

Trading and Certain Relationships With Hedge 

Funds and Private Equity Funds, 75 FR 61758 (Oct. 

6, 2010). Approximately 8,000 comments were 

received from the public, including from members 

of Congress, trade associations, individual banking 

entities, consumer groups, and individuals. As 

noted in the issuing release for the FSOC study, 

these comments were considered by the FSOC 

when drafting the FSOC study. 

11See id. 

12See Prohibitions and Restrictions on 

Proprietary Trading and Certain Interests in, and 

Relationships with, Hedge Funds and Private 

Equity Funds, 76 FR 68846 (Nov. 7, 2011) (‘‘2011 

proposal’’). 

13See Prohibitions and Restrictions on 

Proprietary Trading and Certain Interests in, and 

Relationships with, Hedge Funds and Private 

Equity Funds, 77 FR 8331 (Feb. 14, 2012). 

14See http://www.regulations.gov/#!docket

Detail;D=OCC-2011-0014 (OCC); http://

www.federalreserve.gov/newsevents/reform_

systemic.htm (Board); http://www.fdic.gov/ 

regulations/laws/federal/2011/11comAD85.html 

(FDIC); http://www.sec.gov/comments/s7-41-11/ 

s74111.shtml (SEC); and http://www.cftc.gov/ 

LawRegulation/DoddFrankAct/Rulemakings/DF_

28_VolckerRule/index.htm (CFTC). 

15See Commodity Futures Trading Commission, 

CFTC Staff to Host a Public Roundtable to Discuss 

the Proposed Volcker Rule (May 24, 2012), 

available at http://www.cftc.gov/PressRoom/ 

PressReleases/pr6263-12; transcript available at 

http://www.cftc.gov/ucm/groups/public/@

newsroom/documents/file/transcript053112.pdf. 

16The 2013 final rule was published in the 

Federal Register on January 31, 2014, and became 

effective on April 1, 2014. Banking entities were 

required to fully conform their proprietary trading 

activities and their new covered fund investments 

and activities to the requirements of the 2013 final 

rule by the end of the conformance period, which 

the Board extended to July 21, 2015. The Board 

extended the conformance period for certain legacy 

covered fund activities until July 21, 2017. Upon 

application, banking entities also have an 

additional period to conform certain illiquid funds 

to the requirements of section 13 and implementing 

regulations. 

17See A Financial System That Creates Economic 

Opportunities, Banks and Credit Unions (June 

2017), available at https://www.treasury.gov/presscenter/press-releases/Documents/A%20Financial

%20System.pdf and A Financial System that 

Creates Economic Opportunities, Capital Markets 

(October 2017), available at https://

www.treasury.gov/press-center/press-releases/ 

Documents/A-Financial-System-Capital-MarketsFINAL-FINAL.pdf. 

18See Notice Seeking Public Input on the Volcker 

Rule (August 2017), available at https://

www.occ.gov/news-issuances/news-releases/2017/ 

nr-occ-2017-89a.pdf. Corresponding comment 

letters are available at https://www.regulations.gov/ 

docketBrowser?rpp=25&so=DESC&sb=commentDue

Date&po=0&dct=PS&D=OCC-2017-0014. A 

summary of the comment letters is available at 

https://occ.gov/topics/capital-markets/financialmarkets/trading-volcker-rule/volcker-noticecomment-summary.pdf. 

19A number of Agency principals have suggested 

modifications to the 2013 final rule. See Randal K. 

Quarles, Mar. 5, 2018, available at https://

www.federalreserve.gov/newsevents/speech/ 

quarles20180305a.htm; Daniel K. Tarullo, Apr. 4, 

2017, available at https://www.federalreserve.gov/ 

newsevents/speech/tarullo20170404a.htm; Martin J. 

Gruenberg, Nov. 14, 2017, available at https:// 

Continued 

recent statutory amendments to section 

13 of the BHC Act. 

A. Rulemaking Framework 

Section 13 of the BHC Act requires 

that implementation of its provisions 

occur in several stages. The first stage in 

implementing section 13 of the BHC Act 

was a study by the Financial Stability 

Oversight Council (‘‘FSOC’’).10 The 

FSOC study was issued on January 18, 

2011, and included a detailed 

discussion of key issues and 

recommendations related to 

implementation of section 13 of the 

BHC Act.11

Following the FSOC study, and as 

required by section 13(b)(2) of the BHC 

Act, the Board, OCC, FDIC, and SEC in 

October 2011 invited the public to 

comment on a proposal implementing 

the requirements of section 13 of the 

BHC Act.12 In February 2012, the CFTC 

issued a proposal that was substantially 

identical to the one proposed in October 

2011 by the other four Agencies.13 The 

Agencies received more than 600 

unique comment letters, including from 

members of Congress; domestic and 

foreign banking entities and other 

financial services firms; trade groups 

representing banking, insurance, and 

the broader financial services industry; 

U.S. state and foreign governments; 

consumer and public interest groups; 

and individuals. The comments 

addressed all major sections of the 2011 

proposal. To improve understanding of 

the issues raised by commenters, the 

staffs of the Agencies met with a 

number of these commenters to discuss 

issues relating to the 2011 proposal, and 

summaries of these meetings are 

available on each of the Agencies’ 

public websites.14 The CFTC staff also 

hosted a public roundtable on the 2011 

proposal.15 In formulating the 2013 final 

rule, the Agencies carefully reviewed all 

comments submitted in connection with 

the rulemaking and considered the 

suggestions and issues they raised in 

light of the statutory requirements as 

well as the FSOC study. In December 

2013, the Agencies issued the 2013 final 

rule implementing section 13 of the 

BHC Act. 

The Agencies are committed to 

revisiting and revising the rule as 

appropriate to improve its 

implementation. Since the adoption of 

the 2013 final rule, the Agencies have 

gained several years of experience 

implementing the 2013 final rule, and 

banking entities have had more than 

four years of experience implementing 

the 2013 final rule.16

In particular, the Agencies have 

received various communications from 

the public and other sources since 

adoption of the 2013 final rule and over 

the course of its implementation. These 

communications include written 

comments from members of Congress; 

domestic and foreign banking entities 

and other financial services firms; trade 

groups representing banking, insurance, 

and other firms within the broader 

financial services industry; U.S. state 

and foreign governments; consumer and 

public interest groups; and individuals. 

The U.S. Department of the Treasury 

also issued reports in June 2017 and 

October 2017, which contained 

recommendations regarding section 13 

of the BHC Act and the implementing 

regulations.17 In addition, the OCC 

issued a Request for Information (‘‘OCC 

Notice for Comment’’) in August 2017 

and received 87 unique comment letters 

and over 8,400 standardized letters 

regarding section 13 of the BHC Act and 

the implementing regulations.18

Moreover, staffs of the Agencies have 

held numerous meetings with market 

participants to discuss the 2013 final 

rule and its implementation. 

Collectively, these sources of public 

feedback have provided the Agencies 

with a better understanding of the 

concerns and challenges surrounding 

implementation of the 2013 final rule. 

Furthermore, the Agencies have 

collected nearly four years of 

quantitative data required under 

Appendix A of the 2013 final rule. The 

data collected in connection with the 

2013 final rule, compliance efforts by 

banking entities, and the Agencies’ 

experience in reviewing trading and 

investment activity under the 2013 final 

rule, have provided valuable insights 

into the effectiveness of the 2013 final 

rule. These insights highlighted areas in 

which the 2013 final rule may have 

resulted in ambiguity, overbroad 

application, or unduly complex 

compliance routines. With this 

proposal, and based on experience 

gained over the past few years, the 

Agencies seek to simplify and tailor the 

implementing regulations, where 

possible, in order to increase efficiency, 

reduce excess demands on available 

compliance capacities at banking 

entities, and allow banking entities to 

more efficiently provide services to 

clients, consistent with the 

requirements of the statute.19


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33436 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

www.fdic.gov/news/news/speeches/ 

spnov1417.html. 

20 12 U.S.C. 1851(b)(2)(B)(ii). 

21The Federal banking agencies issued guidance 

relating to compliance with the final rule for 

community banks in conjunction with the final rule 

in December of 2013. See The Volcker Rule: 

Community Bank Applicability, https://

www.federalreserve.gov/newsevents/pressreleases/ 

files/bcreg20131210a4.pdf. 

22See https://www.occ.treas.gov/topics/capitalmarkets/financial-markets/trading-volcker-rule/ 

volcker-rule-implementation-faqs.html (OCC); 

https://www.federalreserve.gov/bankinforeg/ 

volcker-rule/faq.htm (Board); https://www.fdic.gov/ 

regulations/reform/volcker/faq.html (FDIC); https:// 

www.sec.gov/divisions/marketreg/faq-volcker-rulesection13.htm (SEC); https://www.cftc.gov/ 

LawRegulation/DoddFrankAct/Rulemakings/DF_

28_VolckerRule/index.htm (CFTC). 

23See 12 U.S.C. 1851(d)(2). 24See id. 

B. Agency Coordination 

Section 13(b)(2)(B)(ii) of the BHC Act 

directs the Agencies to ‘‘consult and 

coordinate’’ in developing and issuing 

the implementing regulations ‘‘for the 

purpose of assuring, to the extent 

possible, that such regulations are 

comparable and provide for consistent 

application and implementation of the 

applicable provisions of section 13 of 

the BHC Act to avoid providing 

advantages or imposing disadvantages 

to the companies affected . . . .’’ 20 The 

Agencies recognize that coordinating 

with respect to regulatory 

interpretations, examinations, 

supervision, and sharing of information 

is important to maintain consistent 

oversight, promote compliance with 

section 13 of the BHC Act and 

implementing regulations, and foster a 

level playing field for affected market 

participants. The Agencies further 

recognize that coordinating these 

activities helps to avoid unnecessary 

duplication of oversight, reduces costs 

for banking entities, and provides for 

more efficient regulation. 

The Agencies request comment on 

coordination generally and the 

following specific questions: 

Question 1. Would it be helpful for 

the Agencies to hold joint information 

gathering sessions with a banking entity 

that is supervised or regulated by more 

than one Agency? If not, why not, and, 

if so, what should the Agencies consider 

in arranging these joint sessions? 

Question 2. In what ways could the 

Agencies improve the transparency of 

their implementation of section 13 of 

the BHC Act? What specific steps with 

respect to Agency coordination would 

banking entities find helpful to make 

compliance with section 13 and the 

implementing rules more efficient? 

What steps would commenters 

recommend with respect to 

coordination to better promote and 

protect the safety and soundness of 

banking entities and U.S. financial 

stability? 

II. Overview of Proposal 

A. General Approach 

The proposal would adopt a revised 

risk-based approach that would rely on 

a set of clearly articulated standards for 

both prohibited and permitted activities 

and investments, consistent with the 

requirements of section 13 of the BHC 

Act. In formulating the proposal, the 

Agencies have attempted to simplify 

and tailor the 2013 final rule, as 

described further below, to allow 

banking entities to more efficiently 

provide services to clients. 

The Agencies seek to address a 

number of targeted areas for potential 

revision in this proposal. First, the 

Agencies are proposing to tailor the 

application of the rule based on the size 

and scope of a banking entity’s trading 

activities. In particular, the Agencies 

aim to further reduce compliance 

obligations for small and mid-sized 

firms that do not have large trading 

operations and therefore reduce costs 

and uncertainty faced by small and midsize firms in complying with the final 

rule, relative to their amount of trading 

activity.21 In the experience of the 

Agencies since adoption of the 2013 

final rule, the costs and uncertainty 

faced by small and mid-sized firms in 

complying with the 2013 final rule can 

be disproportionately high relative to 

the amount of trading activity typically 

undertaken by these firms. 

In addition to tailoring the application 

of the rule, the Agencies also seek to 

streamline and clarify for all banking 

entities certain definitions and 

requirements related to the proprietary 

trading prohibition and limitations on 

covered fund activities and investments. 

In particular, this proposal seeks to 

codify or otherwise addresses matters 

currently addressed by staff responses to 

Frequently Asked Questions 

(‘‘FAQs’’).22 Additionally, the Agencies 

are seeking in this proposal to reduce 

metrics reporting, recordkeeping, and 

compliance program requirements for 

all banking entities and expand tailoring 

to make the scale of compliance activity 

required by the rule commensurate with 

a banking entity’s size and level of 

trading activity. 

In tailoring these proposed changes to 

the 2013 final rule, the Agencies note 

the following statutory limitations to the 

permitted proprietary trading and 

covered fund activities,23 which are 

incorporated in the 2013 final rule and 

have not been changed in the proposed 

rule. These statutory limitations provide 

that such permitted activities must not: 

(1) Involve or result in a material 

conflict of interest between the banking 

entity and its clients, customers, or 

counterparties; (2) result, directly or 

indirectly, in a material exposure by the 

banking entity to a high-risk asset or a 

high-risk trading strategy; or (3) pose a 

threat to the safety and soundness of the 

banking entity or to the financial 

stability of the United States.24

As a matter of structure, the proposed 

amendments would maintain the 2013 

final rule’s division into four subparts, 

and would maintain a metrics appendix 

while removing the 2013 final rule’s 

second appendix regarding enhanced 

minimum standards for compliance 

programs, as follows: 

• Subpart A of the 2013 final rule, as 

amended by the proposal, would 

describe the authority, scope, purpose, 

and relationship to other authorities of 

the rule and define terms used 

commonly throughout the rule; 

• Subpart B of the 2013 final rule, as 

amended by the proposal, would 

prohibit proprietary trading, define 

terms relevant to covered trading 

activity, establish exemptions from the 

prohibition on proprietary trading and 

limitations on those exemptions, and 

require certain banking entities to report 

certain information with respect to their 

trading activities; 

• Subpart C of the 2013 final rule, as 

amended by the proposal, would 

prohibit or restrict acquisition or 

retention of an ownership interest in, 

and certain relationships with, a 

covered fund; define terms relevant to 

covered fund activities and investments; 

and establish exemptions from the 

restrictions on covered fund activities 

and investments and limitations on 

those exemptions; and 

• Subpart D of the 2013 final rule, as 

amended by the proposal, would 

generally require banking entities with 

significant trading assets and liabilities 

to establish a compliance program 

regarding section 13 of the BHC Act and 

the rule, including written policies and 

procedures, internal controls, a 

management framework, independent 

testing of the compliance program, 

training, and recordkeeping; establish 

metrics reporting requirements for 

banking entities with significant trading 

assets and liabilities, pursuant to the 

Appendix; provide tailored compliance 

program requirements for banking 

entities without significant trading 

assets and liabilities, including a 

presumption of compliance for banking 

entities with limited trading assets and 

liabilities; and require certain larger 


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25This proposal contains certain proposed 

amendments to the 2013 final rule. The 2013 final 

rule would continue in effect where no change is 

made. 

26The proposal would amend §ll.2 of the 2013 

final rule to include a new defined term for each 

of these categories. The Agencies are proposing to 

republish §ll.2 in its entirety for clarity due to 

the renumbering of certain definitions. These 

proposed banking entity categories are discussed in 

further detail in Section II.G. of the SUPPLEMENTARY

INFORMATION, below. 

27This category would also include banking 

entities with trading assets and liabilities of less 

than $1 billion for which the presumption of 

compliance described below has been rebutted. 

28 Definitions used in the proposal would remain 

the same as in the 2013 final rule except as 

otherwise specified. 29See 2013 final rule §ll.3(b)(1)(i). 30See 2013 final rule §ll.3(b)(2). 31See 2013 final rule §ll.3(b)(1)(ii). 

banking entities to submit a chief 

executive officer (‘‘CEO’’) attestation 

regarding the compliance program. 

Given the complexities associated 

with the 2013 final rule, the Agencies 

request comment on the potential 

impact the proposal may have on 

banking entities and the activities in 

which they engage. The Agencies are 

interested in receiving comments 

regarding revisions described in the 

proposal relative to the 2013 final 

rule.25 Additionally, the Agencies 

recognize that there are economic 

impacts that would potentially arise 

from the proposal and its 

implementation of section 13 of the 

BHC Act. The Agencies have provided 

an assessment of the expected impact of 

the proposed modifications contained in 

the proposal, and the Agencies request 

comment on all aspects of such impacts, 

including quantitative data, where 

possible. Specific requests for comment 

are included in the following sections. 

B. Scope of Proposal 

To better tailor the application of the 

rule, the proposal would establish three 

categories of banking entities based on 

their level of trading activity.26 The first 

category would include banking entities 

with ‘‘significant trading assets and 

liabilities,’’ defined as those banking 

entities that, together with their 

affiliates and subsidiaries, have trading 

assets and liabilities (excluding 

obligations of or guaranteed by the 

United States or any agency of the 

United States) equal to or exceeding $10 

billion. These banking entities, which 

generally have large trading operations, 

would be required to comply with the 

most extensive set of requirements 

under the proposal. 

The second category would include 

banking entities with ‘‘moderate trading 

assets and liabilities,’’ defined as those 

banking entities that do not have 

significant trading assets and liabilities 

or limited trading assets and liabilities. 

Banking entities with moderate trading 

assets and liabilities are those entities 

that, together with their affiliates and 

subsidiaries, have trading assets and 

liabilities (excluding obligations of or 

guaranteed by the United States or any 

agency of the United States) less than 

$10 billion, but above the threshold 

described below for banking entities 

with limited trading assets and 

liabilities.27 These banking entities 

would be subject to reduced compliance 

requirements and a more tailored 

approach in light of their smaller and 

less complex trading activities. 

The third category includes banking 

entities with ‘‘limited trading assets and 

liabilities,’’ defined as those banking 

entities that have, together with their 

affiliates and subsidiaries, trading assets 

and liabilities (excluding trading assets 

and liabilities involving obligations of 

or guaranteed by the United States or 

any agency of the United States) less 

than $1 billion. This $1 billion 

threshold would be based on the 

worldwide trading assets and liabilities 

of a banking entity and all of its 

affiliates. With respect to a foreign 

banking organization (‘‘FBO’’) and its 

subsidiaries, the $1 billion threshold 

would be based on worldwide 

consolidated trading assets and 

liabilities, and would not be limited to 

its combined U.S. operations. 

The proposal would establish a 

presumption of compliance for all 

banking entities with limited trading 

assets and liabilities. Banking entities 

operating pursuant to this proposed 

presumption of compliance would have 

no obligation to demonstrate 

compliance with subparts B and C of the 

proposal on an ongoing basis. If, 

however, upon examination or audit, 

the relevant Agency determines that the 

banking entity has engaged in 

proprietary trading or covered fund 

activities that are prohibited under 

subpart B or subpart C, such Agency 

may exercise its authority to rebut the 

presumption of compliance and require 

the banking entity to comply with the 

requirements of the rule applicable to 

banking entities that have moderate 

trading assets and liabilities. The 

purpose of this presumption of 

compliance would be to further reduce 

compliance costs for small and mid-size 

banks that either do not engage in the 

types of activities subject to section 13 

of the BHC Act or engage in such 

activities only on a limited scale. 

The proposal also includes a 

reservation of authority that would 

allow an Agency to require a banking 

entity with limited or moderate trading 

assets and liabilities to apply any of the 

more extensive requirements that would 

otherwise apply if the banking entity 

had significant or moderate trading 

assets and liabilities, if the Agency 

determines that the size or complexity 

of the banking entity’s trading or 

investment activities, or the risk of 

evasion, warrants such treatment. 

C. Proprietary Trading Restrictions 

Subpart B of the 2013 final rule 

implements the statutory prohibition on 

proprietary trading and the various 

exemptions to this prohibition included 

in the statute. Section ll.3 of the 2013 

final rule contains the core prohibition 

on proprietary trading and defines a 

number of related terms. The proposal 

would make several changes to § ll.3 

of the 2013 final rule. Notably, the 

proposal would revise, in a manner 

consistent with the statute, the 

definition of ‘‘trading account’’ in order 

to increase clarity regarding the 

positions included in the definition.28

The definition of ‘‘trading account’’ is a 

threshold definition that tells a banking 

entity whether the purchase or sale of a 

financial instrument is subject to the 

restrictions and requirements of section 

13 of the BHC Act and the 2013 final 

rule in the first instance. 

In the 2013 final rule, the Agencies 

defined the statutory term ‘‘trading 

account’’ to include three prongs. The 

first prong includes any account that is 

used by a banking entity to purchase or 

sell one or more financial instruments 

principally for the purpose of short-term 

resale, benefitting from short-term price 

movements, realizing short-term 

arbitrage profits, or hedging another 

trading account position (the ‘‘shortterm intent prong’’).29 For purposes of 

this part of the definition, the 2013 final 

rule also contains a rebuttable 

presumption that the purchase or sale of 

a financial instrument by a banking 

entity is for the trading account if the 

banking entity holds the financial 

instrument for fewer than 60 days or 

substantially transfers the risk of the 

financial instrument within 60 days of 

purchase (or sale).30 The second prong 

covers trading positions that are both 

covered positions and trading positions 

for purposes of the Federal banking 

agencies’ market risk capital rules, as 

well as hedges of covered positions (the 

‘‘market risk capital prong’’).31 The 

third prong covers any account used by 

a banking entity that is a securities 

dealer, swap dealer, or security-based 

swap dealer that is licensed or 

registered, or required to be licensed or 

registered, as a dealer, swap dealer, or 


daltland on DSKBBV9HB2PROD with PROPOSALS3
33438 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

32See 2013 final rule §ll.3(b)(1)(iii)(A). The 

dealer prong also includes positions entered into by 

a banking entity that is engaged in the business of 

a dealer, swap dealer, or security-based swap dealer 

outside of the United States, to the extent the 

instrument is purchased or sold in connection with 

the activities of such business. See 2013 final rule 

§ll.3(b)(1)(iii)(B). 

33 12 U.S.C. 1851(h)(6). As in the 2013 final rule, 

the Agencies note that the term ‘‘trading account’’ 

is a statutory concept and does not necessarily refer 

to an actual account. ‘‘Trading account’’ is simply 

nomenclature for the set of transactions that are 

subject to the prohibitions on proprietary trading 

under the 2013 final rule, including as it would be 

amended by the proposal. 

34 ‘‘Applicable accounting standards’’ is defined 

in the 2013 final rule, and the proposal would not 

make any change to this definition. ‘‘Applicable 

accounting standards’’ means U.S. generally 

accepted accounting principles or such other 

accounting standards applicable to a covered 

banking entity that the relevant Agency determines 

are appropriate, that the covered banking entity 

uses in the ordinary course of its business in 

preparing its consolidated financial statements. See 

2013 final rule §ll.10(d)(1). The proposal would 

move this defined term to §ll.2, to accommodate 

its proposed usage outside of subpart C. 

security-based swap dealer, to the extent 

the instrument is purchased or sold in 

connection with the activities that 

require the banking entity to be licensed 

or registered as such (the ‘‘dealer 

prong’’).32

In the experience of the Agencies, 

determining whether or not positions 

fall into the short-term intent prong of 

the trading account definition has often 

proved unclear and subjective, and, 

consequently, may result in ambiguity 

or added costs and delays. For this 

reason, the proposal would remove the 

short-term intent prong from the 2013 

final rule’s definition of trading account 

and eliminate the associated rebuttable 

presumption, and would also modify 

the definition of trading account as 

described below to include other 

accounts described in the statutory 

definition of ‘‘trading account.’’ 33

The remaining two prongs of the 

trading account definition in the 2013 

final rule, the market risk capital prong 

and the dealer prong, generally would 

remain unchanged because, in the 

experience of the Agencies, 

interpretation of both prongs has been 

relatively straightforward and clear in 

practice for most banking entities. The 

proposal would, however, modify the 

market risk capital prong to cover the 

trading positions of FBOs subject to 

similar requirements in the applicable 

foreign jurisdiction. The Agencies are 

proposing this modification for FBOs to 

take into account the different 

frameworks and supervisors FBOs may 

have in their home countries. 

Specifically, the proposal would modify 

the market risk capital prong to apply to 

FBOs that are subject to capital 

requirements under a market risk 

framework established by their 

respective home country supervisors, 

provided the market risk framework is 

consistent with the market risk 

framework published by the Basel 

Committee on Banking Supervision, as 

amended. The Agencies expect that this 

standard, similar to the current market 

risk capital prong referencing the U.S. 

market risk capital rules, would include 

trading account activities of FBOs 

consistent with the statutory trading 

account requirements. The Agencies 

believe the proposed approach would be 

an appropriate interpretation of the 

statutory trading account definition. The 

Agencies likewise believe that 

application of the market risk capital 

prong to FBOs as described herein 

would be relatively straightforward and 

clear in practice. 

In addition, the Agencies are 

proposing two changes related to the 

trading account definition that are 

intended to replace the short-term intent 

prong. These changes include: (i) The 

addition of an accounting prong and (ii) 

a presumption of compliance with the 

prohibition on proprietary trading for 

trading desks that are not subject to the 

market risk capital prong or the dealer 

prong, based on a prescribed profit and 

loss threshold. Under the proposed 

accounting prong, a trading desk that 

buys or sells a financial instrument (as 

defined in the 2013 final rule and 

unchanged by the proposal) that is 

recorded at fair value on a recurring 

basis under applicable accounting 

standards would be doing so for the 

‘‘trading account’’ of the banking 

entity.34 Financial instruments that 

would be covered by the proposed 

accounting prong generally include, but 

are not limited to, derivatives, trading 

securities, and available-for-sale 

securities. For example, a security that 

is classified as ‘‘trading’’ under U.S. 

generally accepted accounting 

principles (‘‘GAAP’’) would be included 

in the proposal’s definition of ‘‘trading 

account’’ under the proposed approach 

because it is recorded at fair value. 

The proposed presumption of 

compliance, which would apply at the 

trading desk level, would provide that 

each trading desk that purchases or sells 

financial instruments for a trading 

account pursuant to the accounting 

prong may calculate the net gain or loss 

on the trading desk’s portfolio of 

financial instruments each business day, 

reflecting realized and unrealized gains 

and losses since the previous business 

day, based on the banking entity’s fair 

value for such financial instruments. 

If the sum of the absolute values of 

the daily net gain and loss figures for 

the preceding 90-calendar-day period 

does not exceed $25 million, the 

activities of the trading desk would be 

presumed to be in compliance with the 

prohibition on proprietary trading, and 

the banking entity would have no 

obligation to demonstrate that such 

trading desk’s activity complies with the 

rule on an ongoing basis. If this 

calculation exceeds the $25 million 

threshold, the banking entity would 

have to demonstrate compliance with 

section 13 of the BHC Act and the 

implementing regulations, as described 

in more detail below. The Agencies are 

also proposing to include a reservation 

of authority to address any positions 

that may be incorrectly scoped into or 

out of the definition. 

Section ll.3 of the 2013 final rule 

also details various exclusions from the 

definition of proprietary trading for 

certain purchases and sales of financial 

instruments that generally do not 

involve the requisite short-term trading 

intent under the statute. The proposal 

would make several changes to these 

exclusions. First, the proposal would 

clarify and expand the scope of the 

financial instruments covered in the 

liquidity management exclusion. 

Second, it would add an exclusion from 

the definition of proprietary trading for 

transactions made to correct errors made 

in connection with customer-driven or 

other permissible transactions. 

Section ll.4 of the 2013 final rule 

implements the statutory exemptions for 

underwriting and market making-related 

activities. The proposal would make 

several changes to this section intended 

to improve the practical application of 

these exemptions. In particular, the 

proposal would establish a presumption 

that trading within internally set risk 

limits satisfies the requirement that 

permitted underwriting and market 

making-related activities must be 

designed not to exceed the reasonably 

expected near-term demands of clients, 

customers, or counterparties 

(‘‘RENTD’’). The Agencies believe this 

presumption would allow for a clearer 

application of these exemptions, and 

would provide banking entities with 

more flexibility and certainty in 

conducting permissible underwriting 

and market making-related activities. In 

addition, the proposal would make the 

exemptions’ compliance program 

requirements applicable only to banking 

entities with significant trading assets 

and liabilities. 

The proposal would also modify the 

2013 final rule’s implementation of the 

statutory exemption for permitted riskmitigating hedging activities in §ll.5, 

by reducing restrictions on the 

eligibility of an activity to qualify as a 


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35See infra SUPPLEMENTARY INFORMATION, Part 

III.D. 

permitted risk-mitigating hedging 

activity. For banking entities with 

moderate or limited trading assets and 

liabilities, the proposal would remove 

all requirements under the 2013 final 

rule except the requirement that 

hedging activity be designed to reduce 

or otherwise mitigate one or more 

specific, identifiable risks arising in 

connection with and related to one or 

more identified positions, contracts, or 

other holdings and that the hedging 

activity be recalibrated to maintain 

compliance with the rule. For banking 

entities with significant trading assets 

and liabilities, the proposal would 

maintain many of the 2013 final rule’s 

requirements, including the requirement 

that the hedging activity be designed to 

reduce or otherwise mitigate one or 

more specific, identifiable risks. The 

proposal would, however, eliminate the 

current requirement that the hedging 

activity ‘‘demonstrably reduces’’ or 

otherwise ‘‘significantly mitigates’’ risk, 

reduce documentation requirements 

associated with risk-mitigating hedging 

transactions that are conducted by one 

desk to hedge positions at another desk 

with pre-approved types of instruments 

within pre-set hedging limits, and 

eliminate the 2013 final rule’s 

correlation analysis requirement. These 

foregoing changes are intended to 

reduce costs and uncertainty and 

improve the utility of the hedging 

exemption. 

Section ll.6(e) of the proposal 

would remove certain requirements of 

the 2013 final rule implementing the 

statutory exemption for trading by a 

foreign banking entity that occurs solely 

outside of the United States. In 

particular, the proposal would modify 

the requirement that any personnel of 

the banking entity or any of its affiliates 

that arrange, negotiate, or execute such 

purchase or sale not be located in the 

United States. It also would (1) remove 

the requirement that no financing for 

the banking entity’s purchase or sale be 

provided, directly or indirectly, by any 

branch or affiliate that is located in the 

United States or organized under the 

laws of the United States or of any state, 

and (2) eliminate certain limitations on 

a foreign banking entity’s ability to enter 

into transactions with a U.S. 

counterparty. 

The proposal would retain the other 

requirements of § ll.6(e) of the 2013 

final rule, including the requirement 

that the banking entity engaging as 

principal in the purchase or sale 

(including relevant personnel) not be 

located in the United States or 

organized under the laws of the United 

States or of any State, that the banking 

entity not book a transaction to a U.S. 

affiliate or branch, and that the banking 

entity (including relevant personnel) 

that makes the decision to purchase or 

sell as principal is not located in the 

United States or organized under the 

laws of the United States or of any State. 

Taken as a whole, the proposed 

amendments to this exemption seek to 

reduce the impact of the 2013 final rule 

on foreign banking entities’ operations 

outside of the United States by focusing 

on where the trading of these banking 

entities as principal occurs, where the 

trading decision is made, and whether 

the risk of the transaction is borne 

outside the United States. 

D. Covered Fund Activities and 

Investments 

Subpart C of the 2013 final rule 

implements the statutory prohibition on 

directly or indirectly acquiring and 

retaining an ownership interest in, or 

having certain relationships with, a 

covered fund, as well as the various 

exemptions to this prohibition included 

in the statute. Section ll.10 of the 

2013 final rule defines the scope of the 

prohibition on the acquisition and 

retention of ownership interests in, and 

certain relationships with, a covered 

fund, and provides the definition of 

‘‘covered fund.’’ The Agencies request 

comment on a number of potential 

modifications to this section. 

Section ll.11(c) of the 2013 final 

rule outlines the requirements that 

apply when a banking entity engages in 

underwriting or market making-related 

activities with respect to a covered fund. 

The proposal would modify these 

requirements with respect to covered 

fund ownership interests for third-party 

covered funds to generally allow for the 

same types of activities as are permitted 

for other financial instruments. The 

proposal would also make changes to 

§ ll.13(a) of the 2013 final rule to 

expand a banking entity’s ability to 

engage in hedging activities involving 

an ownership interest in a covered fund. 

E. Compliance Program Requirements 

Subpart D of the 2013 final rule 

requires a banking entity engaged in 

covered trading activities or covered 

fund activities to develop and 

implement a program reasonably 

designed to ensure and monitor 

compliance with the prohibitions and 

restrictions on proprietary trading 

activities and covered fund activities 

and investments set forth in section 13 

of the BHC Act and the 2013 final rule. 

As in the 2013 final rule, the proposal 

would provide that a banking entity that 

does not engage in proprietary trading 

activities (other than trading in U.S. 

government or agency obligations, 

obligations of specified governmentsponsored entities, and state and 

municipal obligations) or covered fund 

activities and investments need only 

establish a compliance program prior to 

becoming engaged in such activities or 

making such investments. To further 

enhance compliance efficiencies, the 

proposal would reduce compliance 

requirements for most banking entities 

and expand tailoring of the 

requirements based on the banking 

entity categories previously described in 

this Supplementary Information section. 

Under the proposal, a banking entity 

with significant trading assets and 

liabilities would be required to establish 

a six-pillar compliance programs 

commensurate with the size, scope, and 

complexity of its activities and business 

structure that meets six specific 

requirements already included in the 

2013 final rule. These requirements 

include (1) written policies and 

procedures reasonably designed to 

document, describe, monitor and limit 

trading activities and covered fund 

activities and investments conducted by 

the banking entity; (2) a system of 

internal controls; (3) a management 

framework that, among other things, 

includes appropriate management 

review of trading limits, strategies, 

hedging activities, investments, 

incentive compensation and other 

matters identified in the rule or by 

management as requiring attention; (4) 

independent testing and audits; (5) 

training for certain personnel; and (6) 

recordkeeping requirements.35 Certain 

additional documentation requirements 

for covered funds would also apply to 

banking entities with significant trading 

assets and liabilities. Because the 

proposal would eliminate Appendix B 

of the 2013 final rule, which requires 

large banking entities and banking 

entities engaged in significant trading 

activities to have a separate compliance 

program that complies with certain 

enhanced minimum standards, the 

proposed rule would essentially permit 

a banking entity with significant trading 

assets and liabilities to integrate 

compliance programs meeting these 

requirements into its existing 

compliance regime. 

Under the proposal, a banking entity 

with moderate trading assets and 

liabilities would be required to include 

in its existing compliance policies and 

procedures appropriate references to the 

requirements of section 13 of the BHC 

Act and the implementing rules as 

appropriate given the activities, size, 


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33440 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

36See proposal §ll.2(ff). With respect to a 

banking entity that is an FBO or a subsidiary of an 

FBO, the threshold would apply based on the 

trading assets and liabilities of the FBO’s combined 

U.S. operations, including all subsidiaries, 

affiliates, branches, and agencies. This threshold 

would align with the threshold currently used 

under the 2013 final rule to determine whether a 

banking entity is subject to the metrics reporting 

requirements of Appendix A of the 2013 final rule. 

scope, and complexity of the banking 

entity. 

The proposal would also include in 

subpart D the specifications for the 

presumption of compliance noted above 

that would apply for banking entities 

with limited trading assets and 

liabilities. 

The proposal would eliminate 

Appendix B of the 2013 final rule, 

which specifies enhanced minimum 

standards for compliance programs of 

large banking entities and banking 

entities engaged in significant trading 

activities. The proposal would, 

however, maintain the 2013 final rule’s 

CEO attestation requirement, and would 

apply it to all banking entities with 

significant trading assets and liabilities 

and moderate trading assets and 

liabilities. 

F. Metrics Reporting Requirement 

As part of adopting the 2013 final 

rule, the Agencies committed to 

reviewing and assessing the quantitative 

measurements data (‘‘metrics’’) for their 

effectiveness in monitoring covered 

trading activities for compliance with 

section 13 of the BHC Act and the 

implementing regulations. Since that 

time and as part of implementing the 

2013 final rule, the Agencies have 

reviewed the metrics submitted by the 

banking entities and considered 

whether all of the quantitative 

measurements are useful for all asset 

classes and markets, as well as for all of 

the trading activities subject to the 

metrics requirement, or whether 

modifications are appropriate. 

In the proposal, the Agencies aim to 

better align the effectiveness of the 

metrics data with its associated value in 

monitoring compliance. To that end, the 

proposal would streamline the metrics 

reporting and recordkeeping 

requirements by tailoring the 

requirements based on a banking 

entity’s size and level of trading activity, 

completely eliminating particular 

metrics based on experience working 

with the data, and adding a limited set 

of new metrics. The proposal also 

would provide certain firms with 

additional time to report metrics to the 

Agencies, beyond the current deadlines 

set forth in Appendix A of the 2013 

final rule. The Agencies solicit comment 

regarding whether a single point of 

collection among the Agencies for 

metrics would be more effective. 

G. Banking Entity Categorization and 

Tailoring 

As noted, the proposal would define 

three different categories of banking 

entities based on thresholds of trading 

assets and liabilities, in order to 

improve compliance efficiencies for all 

banking entities generally and further 

reduce compliance costs for firms that 

have little or no activity subject to the 

prohibitions and restrictions of section 

13 of the BHC Act. 

The first category would include any 

banking entity with significant trading 

assets and liabilities, defined under the 

proposal to mean a banking entity that, 

together with its affiliates and 

subsidiaries, has trading assets and 

liabilities (excluding trading assets and 

liabilities involving obligations of, or 

guaranteed by, the United States or any 

agency of the United States) the average 

gross sum of which (on a worldwide 

consolidated basis) over the previous 

consecutive four quarters, as measured 

as of the last day of each of the four 

previous calendar quarters, equals or 

exceeds $10 billion.36 The Agencies 

believe that this threshold would 

capture a significant portion of the 

trading assets and liabilities in the U.S. 

banking system, but would reduce 

burdens for smaller, less complex 

banking entities. The Agencies estimate 

that approximately 95 percent of the 

trading assets and liabilities in the U.S. 

banking system are currently held by 

those banking entities that would have 

significant trading assets and liabilities 

under the proposal. Under the proposal, 

the most stringent compliance 

requirements would apply to these 

banking entities, which generally have 

large trading operations. For example, as 

described in the relevant sections of this 

Supplementary Information section 

below, the proposal would require 

banking entities with significant trading 

assets and liabilities to comply with a 

greater set of requirements than other 

banking entities to meet the conditions 

of the exemptions for permitted 

underwriting and market making-related 

activities and risk-mitigating hedging 

activities. In addition, the proposal 

would require these banking entities to 

maintain a six-pillar compliance 

program (i.e., written policies and 

procedures, internal controls, 

management framework, independent 

testing, training, and records), 

commensurate with the size, scope, and 

complexity of their activities and 

business structure, which the banking 

entities could integrate into their 

existing compliance regime. 

The second category would include 

any banking entity with moderate 

trading assets and liabilities, defined as 

a banking entity that does not have 

significant trading assets and liabilities 

or limited trading assets and liabilities 

(described below). These banking 

entities, together with their affiliates 

and subsidiaries, generally have trading 

assets and liabilities (excluding 

obligations of or guaranteed by the 

United States or any agency of the 

United States) of $1 billion or more but 

less than $10 billion. As with the 

threshold described above for firms with 

significant trading assets and liabilities, 

the Agencies believe that the proposed 

threshold for firms with moderate 

trading assets and liabilities would 

appropriately cover a significant 

percentage of trading activities in the 

United States. The Agencies estimate 

that approximately 98 percent of the 

trading assets and liabilities in the U.S. 

banking system are currently held by 

those firms that would have trading 

assets and liabilities of $1 billion or 

more, including firms with both 

significant and moderate trading assets 

and liabilities. Relative to banking 

entities with significant trading assets 

and liabilities, banking entities with 

moderate trading assets and liabilities 

would be subject to reduced 

requirements and a tailored approach in 

light of their smaller portfolio of trading 

activity. For example, the proposal 

would require banking entities with 

moderate trading assets and liabilities to 

comply with a more tailored set of 

requirements under the underwriting, 

market-making, and risk-mitigating 

hedging exemptions, as compared to the 

requirements applicable to banking 

entities with significant trading assets 

and liabilities. In addition, these firms 

would be subject to a simplified 

compliance program requirement, 

which would allow the banking entity 

to comply with the applicable 

requirements by updating existing 

policies and procedures. The Agencies 

believe these changes could 

substantially reduce the costs of 

compliance for banking entities that do 

not have significant trading assets and 

liabilities. 

The third category would include any 

banking entity with limited trading 

assets and liabilities, defined under the 

proposal to mean a banking entity that, 

together with its affiliates and 

subsidiaries, has trading assets and 

liabilities (excluding trading assets and 

liabilities involving obligations of, or 

guaranteed by, the United States or any 

agency of the United States) the average 


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37The Agencies are proposing to adopt a different 

measure of trading assets and liabilities in 

determining whether a banking entity has less than 

$1 billion in trading assets and liabilities for 

purposes of tailoring the requirements of the rule 

described herein. Specifically, the proposed test 

would look at worldwide trading assets and 

liabilities of all banking entities, including foreign 

banking entities. By contrast, the test for whether 

a foreign banking entity has significant trading 

assets and liabilities provides that the banking 

entity need only include the trading assets and 

liabilities of its consolidated U.S. operations in this 

calculation. Banking entities with limited trading 

assets and liabilities under the proposal would be 

eligible for a presumption of compliance, but such 

a presumption may not be appropriate for large 

foreign banking entities that have substantial 

worldwide trading assets and liabilities. Therefore, 

the Agencies have proposed to adopt one test that 

would apply to both domestic and foreign banking 

entities for purposes of the limited trading assets 

and liabilities threshold. 38See §ll.20(f) of the 2013 final rule. 

39As noted above, with respect to foreign banking 

entities, the proposal would measure whether a 

banking entity has significant trading assets and 

liabilities by reference to the aggregate assets of the 

foreign banking entity’s U.S. operations, including 

its U.S. branches and agencies, rather than 

worldwide operations. This approach is intended to 

be consistent with the statute’s focus on the risks 

posed by trading activities within the United States 

and also to address concerns regarding the level of 

burden for foreign banking entities with respect to 

their foreign operations. 

gross sum of which (on a worldwide 

consolidated basis) over the previous 

consecutive four quarters, as measured 

as of the last day of each of the four 

previous calendar quarters, is less than 

$1 billion.37 While entities with less 

than $1 billion in trading assets and 

liabilities engage in some activities 

covered by section 13 of the BHC Act 

and the implementing rules, as noted 

above, these activities constitute a 

relatively small percentage of the 

trading assets and liabilities in the U.S. 

banking system. In light of the relatively 

small scale of activities engaged in by 

such firms, the Agencies are proposing 

to provide significant tailoring of 

requirements for such firms. Under the 

proposal, a banking entity with limited 

trading assets and liabilities would be 

presumed to be in compliance with 

subpart B and subpart C of the 

implementing regulations and would 

have no affirmative obligation to 

demonstrate compliance with subpart B 

and subpart C on an ongoing basis. If, 

upon examination or audit, the relevant 

Agency determines that the banking 

entity has engaged in covered trading 

activities or covered fund activities that 

are otherwise prohibited under subpart 

B or subpart C, such Agency may 

exercise its authority to rebut the 

presumption of compliance and require 

the banking entity to demonstrate 

compliance with the requirements of the 

rule applicable to a banking entity with 

moderate trading assets and liabilities. 

Additionally, as noted below, the 

relevant Agency would retain its 

authority to require a banking entity to 

apply any compliance requirements that 

would otherwise apply if the banking 

entity had moderate or significant 

trading assets and liabilities if such 

Agency determines that the size or 

complexity of the banking entity’s 

trading or investment activities, or the 

risk of evasion, does not warrant a 

presumption of compliance. 

The purpose of this proposed 

presumed compliance provision would 

be to significantly reduce compliance 

program obligations for small and midsize banking entities that do not engage 

on a large scale in activities subject to 

the proposal. Based on data from the 

December 31, 2017, reporting period, all 

but approximately 40 top-tier banking 

entities would be eligible for presumed 

compliance. 

The proposal would apply the 2013 

final rule’s CEO attestation requirement 

for all banking entities with significant 

or moderate trading assets and 

liabilities. Furthermore, all banking 

entities would remain subject to the 

covered fund provisions of the 2013 

final rule, with some modifications 

described further below, including to 

the applicable compliance program 

requirements based on the trading assets 

and liabilities of the banking entity. As 

under the 2013 final rule, banking 

entities that do not engage in covered 

funds activities or proprietary trading 

would not be required to establish a 

compliance program unless or until 

prior to becoming engaged in such 

activities or making such investments.38

The proposal also includes a 

reservation of authority that would 

allow an Agency to require a banking 

entity with limited or moderate trading 

assets and liabilities to apply any of the 

more extensive requirements that would 

otherwise apply if the banking entity 

had moderate or significant trading 

assets and liabilities, if the Agency 

determines that the size or complexity 

of the banking entity’s trading or 

investment activities, or the risk of 

evasion, warrants such treatment. 

The proposal seeks to tailor 

requirements based on a relatively 

simple, straightforward, and objective 

measure connected to the activities 

subject to section 13 of the BHC Act. 

Therefore, the Agencies are proposing 

thresholds that are based on the trading 

activities of a banking entity, and are 

considered on a consolidated basis with 

its affiliates and subsidiaries. In 

addition, many of the requirements that 

the proposal would apply on a tailored 

basis to banking entities based on these 

thresholds relate to the statutory 

prohibition on proprietary trading and 

the associated exemptions, such as for 

permitted underwriting, market making, 

and risk-mitigating hedging activities. In 

general, this approach would seek to 

apply requirements commensurate with 

the size and complexity of a banking 

entity’s trading activities. 

Under this approach, banking entities 

with the largest trading activity (banking 

entities with significant trading assets 

and liabilities) would be subject to the 

most extensive requirements. These 

firms are currently subject to reporting 

requirements under Appendix A of the 

2013 final rule due to the fact that they 

engage in the most trading activity 

subject to section 13 of the BHC Act and 

the implementing regulations.39

Banking entities with moderate trading 

activities and liabilities would be 

subject to more tailored requirements, 

commensurate with the smaller scale of 

their trading activities. These firms are 

generally subject to the Federal banking 

agencies’ market risk capital rules (like 

banking entities with significant trading 

assets and liabilities) and engage in 

some level of trading activity that is 

subject to the requirements of section 13 

of the BHC Act, but not to the same 

degree as firms with significant trading 

assets and liabilities. Banking entities 

with limited trading assets and 

liabilities would be subject to 

significantly reduced requirements in 

recognition of the relatively small scale 

of covered activities in which they 

engage, and in order to reduce 

compliance costs associated with 

activities that are less likely to be 

relevant for these firms. 

The Agencies request comment 

regarding all aspects of the proposed 

approach to tailoring application of the 

rule. In particular, the Agencies request 

comment on the following questions: 

Question 3. Would the general 

approach of the proposal to establish 

different requirements for banking 

entities based on thresholds of trading 

assets and liabilities be appropriate? Are 

the proposed thresholds appropriate or 

are there different thresholds that would 

be better suited and why? If so, what 

thresholds should be used and why? 

Would the proposed approach 

materially reduce compliance and other 

costs for banking entities that do not 

have significant trading activity? Would 

the proposed approach maintain 

sufficient measures to ensure 

compliance with the requirements of 

section 13 of the BHC Act? If not, what 

approach would work better? Would an 

approach based on the risk profile of the 


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33442 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

40See 2013 final rule §ll.2(c). Consistent with 

the statute, for purposes of this definition, the term 

‘‘insured depository institution’’ does not include 

certain institutions that function solely in a trust or 

fiduciary capacity. See 2013 final rule §ll.2(r). 

41See 12 U.S.C. 1841(a)(2); 12 CFR 225.2(e). 

banking entity be more appropriate? 

Why or why not? 

Question 4. The proposal seeks to 

establish a streamlined and 

comprehensive version of the rule for 

banking entities with significant trading 

assets and liabilities. Is the proposed 

definition of ‘‘significant trading assets 

and liabilities’’ appropriate? If not, what 

definition would be better and why? 

Would it be more appropriate to define 

a banking entity with significant trading 

assets and liabilities to include all 

banking entities subject to the Federal 

banking agencies’ market risk capital 

rules? Why or why not? 

Question 5. Are the proposed 

requirements for a banking entity with 

moderate trading assets and liabilities 

appropriate? Why or why not? If not, 

what requirements would be better and 

why? Should any requirements be 

added? Should any requirements be 

removed or modified? If so, please 

explain. 

Question 6. The proposal contains a 

presumption of compliance for banking 

entities with limited trading assets and 

liabilities. Should the Agencies presume 

compliance for any other levels of 

activity? Why or why not? Are the 

proposed requirements for a banking 

entity with limited trading assets and 

liabilities appropriate? Should any 

requirements be added? If so, please 

explain which requirements should be 

added and why. Do commenters believe 

this approach would work in practice? 

Would it reduce costs and increase 

certainty for small firms? If not, what 

approach would work better or be more 

appropriate and why? Is the proposed 

scope of banking entities that would be 

eligible for the presumption of 

compliance appropriately defined? Why 

or why not? Please explain. If not, what 

scope would be more appropriate? 

Question 7. The proposal would tailor 

application of the regulation by 

categorizing a banking entity, together 

with its subsidiaries and affiliates, based 

on trading assets and liabilities. Should 

the Agencies consider further tailoring 

the application of the regulation by 

categorizing certain banking entities 

separately from their subsidiaries and 

affiliates? For example, should the 

Agencies consider further tailoring for a 

banking entity, including an SEC 

registered broker-dealer, that is an 

affiliate of a banking entity with 

significant trading assets and liabilities, 

but which generally operates on a basis 

that the banking entity believes is 

separate and independent from its 

affiliates and parent company for 

purposes relevant for compliance with 

the implementing regulations. Why or 

why not? 

Question 8. How might a banking 

entity within a corporate group 

demonstrate that it has separate and 

independent operations from that of the 

consolidated holding company group 

(e.g., information barriers, separate 

corporate formalities and management; 

status as a registered securities dealer, 

investment adviser, or futures 

commission merchant; written policies 

and procedures designed to separate the 

activities of the affiliate from other 

banking entities)? Alternatively, could 

such entities be identified using certain 

quantitative measurements, such as by 

creating a specific dollar threshold of 

trading activity or by calculating a ratio 

comparing the entity’s individual 

trading assets and liabilities to the gross 

trading assets and liabilities of the 

consolidated group? Why or why not? In 

addition, what standards could be 

applied to distinguish such 

arrangements from corporate structures 

established to evade compliance 

requirements that would otherwise 

apply under section 13 of the BHC Act 

and the proposal? Please discuss, 

identify, and describe any conditions, 

functional barriers, or business practices 

that may be relevant. Commenters that 

suggest additional tailoring of the 

regulation for certain affiliates of large 

bank holding companies should suggest 

specific and detailed parameters for 

such a category. Commenters should 

also describe why they believe such 

parameters are appropriate and are 

designed to prevent substantial risk to 

the holding company, its affiliates, and 

the financial system. 

Question 9. For purposes of 

determining the appropriate standard 

for compliance, the proposal would 

establish a threshold of $10 billion in 

trading assets and liabilities; banking 

entities with moderate trading assets 

and liabilities would be subject to a 

streamlined set of requirements under 

the proposal. If the Agencies were to 

apply additional tailoring for certain 

affiliates of banking entities with 

significant trading assets and liabilities, 

should such banking entities be subject 

to the same set of standards for 

compliance as those that are being 

proposed for banking entities with 

moderate trading assets and liabilities? 

Why or why not? Are there 

requirements that are not currently 

contemplated for banking entities with 

moderate trading assets and liabilities 

that nevertheless should apply, 

consistent with the statute? Please 

explain. 

Question 10. What are the potential 

consequences if certain banking entities 

were to be subject to a more streamlined 

set of standards for compliance than 

their parent company and affiliates? 

What are the potential costs and 

benefits? Please explain. Are there ways 

in which a more tailored compliance 

regime for these types of banking 

entities could be crafted to mitigate any 

potential negative consequences 

associated with this approach, if any, 

consistent with the statute? Please 

explain. 

Question 11. Could one or more 

aspects of the proposed rule incentivize 

banking entities to restructure their 

business operations to achieve a specific 

result relative to the rule, such as to 

facilitate compliance under the rule in 

a particular way or to avoid some or all 

of its requirements? If so, how? Please 

be as specific as possible. 

III. Section by Section Summary of 

Proposal 

A. Subpart A—Authority and 

Definitions 

1. Section ll.2: Definitions 

a. Banking Entity 

The 2013 final rule, consistent with 

section 13 of the BHC Act, defines the 

term ‘‘banking entity’’ to include: (i) 

Any insured depository institution; (ii) 

any company that controls an insured 

depository institution; (iii) any company 

that is treated as a bank holding 

company for purposes of section 8 of the 

International Banking Act of 1978; and 

(iv) any affiliate or subsidiary of any 

entity described in clauses (i), (ii), or 

(iii).40

Under the BHC Act, an entity is 

generally considered an affiliate of an 

insured depository institution, and 

therefore a banking entity itself, if it 

controls, is controlled by, or is under 

common control with an insured 

depository institution. Under the BHC 

Act, a company controls another 

company if: (i) The company directly or 

indirectly or acting through one or more 

other persons owns, controls, or has 

power to vote 25 percent or more of any 

class of voting securities of the 

company; (ii) the company controls in 

any manner the election of a majority of 

the directors of trustees of the other 

company; or (iii) the Board determines, 

after notice and opportunity for hearing, 

that the company directly or indirectly 

exercises a controlling influence over 

the management or policies of the 

company.41


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42A covered fund is not excluded from the 

banking entity definition if it is itself an insured 

depository institution, a company that controls an 

insured depository institution, or a company that is 

treated as a bank holding company for purposes of 

section 8 of the International Banking Act of 1978. 

The 2013 final rule also excludes from the banking 

entity definition a portfolio company held under 

the authority contained in section 4(k)(4)(H) or (I) 

of the BHC Act, or any portfolio concern, as defined 

under 13 CFR 107.50, that is controlled by a small 

business investment company, as defined in section 

103(3) of the Small Business Investment Act of 

1958, so long as the portfolio company or portfolio 

concern is not itself an insured depository 

institution, a company that controls an insured 

depository institution, or a company that is treated 

as a bank holding company for purposes of section 

8 of the International Banking Act of 1978. The 

definition also excludes the FDIC acting in its 

corporate capacity or as conservator or receiver 

under the Federal Deposit Insurance Act or Title II 

of the Dodd-Frank Act. 

43See 2011 proposal, 76 FR at 68885. The 

Agencies proposed the clarification ‘‘because the 

definition of ‘affiliate’ and ‘subsidiary’ under the 

BHC Act is broad, and could include a covered fund 

that a banking entity has permissibly sponsored or 

made an investment in because, for example, the 

banking entity acts as general partner or managing 

member of the covered fund as part of its permitted 

sponsorship activities.’’ Id. The Agencies observed 

that if ‘‘such a covered fund were considered a 

‘banking entity’ for purposes of the proposed rule, 

the fund itself would become subject to all of the 

restrictions and limitations of section 13 of the BHC 

Act and the proposed rule, which would be 

inconsistent with the purpose and intent of the 

statute.’’ Id. 

44Corporate governance structures for RICs have 

not raised similar questions because the Board’s 

regulations and orders have long recognized that a 

bank holding company may organize, sponsor, and 

manage a RIC, including by serving as investment 

adviser to the RIC, without controlling the RIC for 

purposes of the BHC Act. See 79 FR at 5676. 

45See supra note 22, FAQ 16. 

46The staffs also made clear that this guidance 

was equally applicable to SEC-regulated business 

development companies. 

47See supra note 22, FAQ 14. 

The 2013 final rule excludes covered 

funds and other types of entities from 

the definition of banking entity.42 In the 

2011 proposal, the Agencies reasoned 

that excluding covered funds from the 

definition of banking entity would 

‘‘avoid application of section 13 of the 

BHC Act in a way that appears 

unintended by the statute and would 

create internal inconsistencies in the 

statutory scheme.’’ 43

Since the adoption of the 2013 final 

rule, the Agencies have received a 

number of requests for guidance 

regarding instances in which certain 

funds that are excluded from the 

covered fund definition are considered 

banking entities. This situation may 

occur as a result of the sponsoring 

banking entity having control over the 

fund, as defined under the BHC Act. A 

banking entity sponsoring a U.S. 

registered investment company (‘‘RIC’’), 

a foreign public fund (‘‘FPF’’), or foreign 

excluded fund could be considered to 

control the fund by virtue of a 25 

percent or greater investment in any 

class of voting securities during a 

seeding period or, for FPFs and foreign 

excluded funds, by virtue of corporate 

governance structures abroad such as 

where the fund’s sponsor selects the 

majority of the fund’s directors or 

trustees, or otherwise controls the fund 

for purposes of the BHC Act by contract 

or through a controlled corporate 

director.44 Questions regarding these 

funds’ potential status as banking 

entities arise, in part, because of the 

interaction between the statute’s and the 

2013 final rule’s definitions of the terms 

‘‘banking entity’’ and ‘‘covered fund.’’ 

In particular, following the adoption 

of the 2013 final rule, the staffs of the 

Agencies received numerous inquiries 

about this issue in connection with RICs 

and FPFs, which are excluded from the 

covered fund definition. The Agencies 

similarly received numerous inquiries 

regarding certain foreign funds offered 

and sold outside of the United States 

that are excluded from the covered fund 

definition with respect to a foreign 

banking entity (foreign excluded funds). 

Sponsors of RICs, FPFs, and foreign 

excluded funds asserted that the 

treatment of these funds as banking 

entities would disrupt bona fide asset 

management activities involving funds 

that are not covered funds, which these 

sponsors argued would be inconsistent 

with section 13 of the BHC Act. These 

disruptions would arise because many 

funds’ investment strategies involve 

proprietary trading prohibited by the 

2013 final rule, and may also involve 

investments in covered funds. Sponsors 

of these funds further asserted that the 

permitted activities in the 2013 final 

rule also do not appear to be designed 

for funds, which by design invest in 

financial instruments for their own 

account. The 2013 final rule, for 

example, provides exemptions from the 

rule’s proprietary trading restrictions for 

underwriting and market-makingrelated activities—exemptions for 

activities in which broker-dealers 

engage but that are not applicable to 

funds. 

In addition, sponsors of RICs, FPFs, 

and foreign excluded funds asserted that 

restricting banking entities’ bona fide 

investment management businesses in 

order to avoid treatment of their funds 

as banking entities would put bankaffiliated investment advisers at a 

competitive disadvantage relative to 

non-bank affiliated advisers engaged in 

the same activities without advancing 

the statutory purposes underlying 

section 13 of the BHC Act. Sponsors of 

FPFs and foreign excluded funds also 

have asserted that treating a foreign 

banking entity’s foreign funds offered 

outside of the United States as banking 

entities themselves would be an 

inappropriate extraterritorial 

application of section 13 and the 2013 

final rule and also unnecessary to 

reduce risks posed to banking entities 

and U.S. financial stability by 

proprietary trading activities and 

investments in or relationships with 

covered funds. 

In response to these inquiries, the 

staffs of the Agencies issued responses 

to FAQs addressing the treatment of 

RICs and FPFs. The staffs observed in 

response to an FAQ that the preamble 

to the 2013 final rule recognized that a 

banking entity may own a significant 

portion of the shares of a RIC or FPF 

during a brief period during which the 

banking entity is testing the fund’s 

investment strategy, establishing a track 

record of the fund’s performance for 

marketing purposes, and attempting to 

distribute the fund’s shares (the socalled ‘‘seeding period’’).45 The staffs 

therefore stated that they would not 

advise the Agencies to treat a RIC or FPF 

as a banking entity under the 2013 final 

rule solely on the basis that the RIC or 

FPF is established with a limited 

seeding period, absent other evidence 

that the RIC or FPF was being used to 

evade section 13 and the 2013 final rule. 

The staffs stated their understanding 

that the seeding period for an entity that 

is a RIC or FPF may take some time. 

Recognizing that the length of a seeding 

period can vary, the staffs provided an 

example of three years, the maximum 

period of time expressly permitted for 

seeding a covered fund under the 2013 

final rule, without setting any maximum 

prescribed period for a RIC or FPF 

seeding period. Accordingly, the staffs 

stated that they would neither advise 

the Agencies to treat a RIC or FPF as a 

banking entity solely on the basis of the 

level of ownership of the RIC or FPF by 

a banking entity during a seeding 

period, nor expect that a banking entity 

would submit an application to the 

Board to determine the length of the 

seeding period.46

The staffs also provided a response to 

an FAQ regarding FPFs.47 In this 

response, staffs of the Agencies stated 

their understanding that, unlike in the 

case of RICs, sponsors of FPFs in some 

foreign jurisdictions select the majority 

of the fund’s directors or trustees, or 

otherwise control the fund for purposes 

of the BHC Act by contract or through 

a controlled corporate director. These 

and other corporate governance 

structures abroad therefore had raised 

questions regarding whether FPFs that 


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48Statement regarding Treatment of Certain 

Foreign Funds under the Rules Implementing 

Section 13 of the Bank Holding Company Act (July 

21, 2017), available at https://www.federalreserve.

gov/newsevents/pressreleases/files/ 

bcreg20170721a1.pdf. 

49 ‘‘Foreign banking entity’’ was defined for 

purposes of the policy statement to mean a banking 

entity that is not, and is not controlled directly or 

indirectly by, a banking entity that is located in or 

organized under the laws of the United States or 

any State. 

are sponsored and distributed outside 

the United States and in accordance 

with foreign laws are banking entities by 

virtue of their relationships with a 

banking entity. The staffs further 

observed that, by referring to 

characteristics common to publicly 

distributed foreign funds rather than 

requiring that FPFs organize themselves 

identically to RICs, the 2013 final rule 

recognized that foreign jurisdictions 

have established their own frameworks 

governing the details for the operation 

and distribution of FPFs. The staffs also 

observed that § ll.12 of the 2013 final 

rule further provides that, for purposes 

of complying with the covered fund 

investment limits, a RIC, SEC-regulated 

business development company 

(‘‘BDC’’), or FPF will not be considered 

to be an affiliate of the banking entity 

so long as the banking entity meets the 

conditions set forth in that section. 

Based on these considerations, the 

staffs stated that they would not advise 

that the activities and investments of an 

FPF that meet the requirements in 

§ ll.10(c)(1) and § ll.12(b)(1) of the 

2013 final rule be attributed to the 

banking entity for purposes of section 

13 of the BHC Act or the 2013 final rule, 

where the banking entity, consistent 

with §ll.12(b)(1) of the 2013 final 

rule, (i) does not own, control, or hold 

with the power to vote 25 percent or 

more of any class of voting shares of the 

FPF (after the seeding period), and (ii) 

provides investment advisory, 

commodity trading, advisory, 

administrative, and other services to the 

fund in compliance with applicable 

limitations in the relevant foreign 

jurisdiction. The staffs further stated 

that they would not advise that the FPF 

be deemed a banking entity under the 

2013 final rule solely by virtue of its 

relationship with the sponsoring 

banking entity, where these same 

conditions are met. 

With respect to foreign excluded 

funds, the Federal banking agencies 

released a policy statement on July 21, 

2017 (the ‘‘policy statement’’), in 

response to concerns expressed by a 

number of foreign banking entities, 

foreign government officials, and other 

market participants about the possible 

unintended consequences and 

extraterritorial impact of section 13 and 

the 2013 final rule for these funds, 

which are excluded from the definition 

of ‘‘covered fund’’ in the 2013 final 

rule.48 The policy statement provided 

that the staffs of the Agencies are 

considering ways in which the 2013 

final rule may be amended, or other 

appropriate action that may be taken, to 

address any unintended consequences 

of section 13 and the 2013 final rule for 

foreign excluded funds. 

To provide additional time, the policy 

statement provides that the Federal 

banking agencies would not propose to 

take action during the one-year period 

ending July 21, 2018, against a foreign 

banking entity 49 based on attribution of 

the activities and investments of a 

qualifying foreign excluded fund (as 

defined below) to the foreign banking 

entity, or against a qualifying foreign 

excluded fund as a banking entity, in 

each case where the foreign banking 

entity’s acquisition or retention of any 

ownership interest in, or sponsorship of, 

the qualifying foreign excluded fund 

would meet the requirements for 

permitted covered fund activities and 

investments solely outside the United 

States, as provided in section 13(d)(1)(I) 

of the BHC Act and §ll.13(b) of the 

2013 final rule, as if the qualifying 

foreign excluded fund were a covered 

fund. For purposes of the policy 

statement, a ‘‘qualifying foreign 

excluded fund’’ means, with respect to 

a foreign banking entity, an entity that: 

(1) Is organized or established outside 

the United States and the ownership 

interests of which are offered and sold 

solely outside the United States; 

(2) Would be a covered fund were the 

entity organized or established in the 

United States, or is, or holds itself out 

as being, an entity or arrangement that 

raises money from investors primarily 

for the purpose of investing in financial 

instruments for resale or other 

disposition or otherwise trading in 

financial instruments; 

(3) Would not otherwise be a banking 

entity except by virtue of the foreign 

banking entity’s acquisition or retention 

of an ownership interest in, or 

sponsorship of, the entity; 

(4) Is established and operated as part 

of a bona fide asset management 

business; and 

(5) Is not operated in a manner that 

enables the foreign banking entity to 

evade the requirements of section 13 or 

implementing regulations. 

The Agencies are continuing to 

consider the issues raised by the 

interaction between the 2013 final rule’s 

definitions of the terms ‘‘banking 

entity’’ and ‘‘covered fund,’’ including 

the issues addressed by the Agencies’ 

staffs and the Federal banking agencies 

discussed above. Accordingly, nothing 

in the proposal would modify the 

application of the staff FAQs discussed 

above, and the Agencies will not treat 

RICs or FPFs that meet the conditions 

included in the applicable staff FAQs as 

banking entities or attribute their 

activities and investments to the 

banking entity that sponsors the fund or 

otherwise may control the fund under 

the circumstances set forth in the FAQs. 

In addition, to accommodate the 

pendency of the proposal, for an 

additional period of one year until July 

21, 2019, the Agencies will not treat 

qualifying foreign excluded funds that 

meet the conditions included in the 

policy statement discussed above as 

banking entities or attribute their 

activities and investments to the 

banking entity that sponsors the fund or 

otherwise may control the fund under 

the circumstances set forth in the policy 

statement. This additional time will 

allow the Agencies to benefit from 

public feedback in response to the 

requests for comment that follow. 

Specifically, the Agencies request 

comment on the following: 

Question 12. 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?’’ If so, what 

sorts of disruptions, and how have 

commenters addressed them? 

Question 13. 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? 

Question 14. Do commenters believe 

that there is uncertainty about the 

length of permissible seeding periods 

for RICs, FPFs, and SEC-regulated 

business development companies due to 

the Agencies’ description of a seeding 

period with reference to the activities a 

banking entity undertakes while seeding 

a fund without specifying a maximum 

period of time? Would an approach that 

specified a particular period of time 

beyond which a seeding period cannot 

extend provide additional clarity? If so, 

what would be an appropriate time 

period? Should any specified time 

period be based on the period of time 

that typically is required for a RIC or 

FPF to develop a performance track 

record, recognizing that some additional 

time will also be needed to market the 


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50See supra note 48. 

fund after developing the track record? 

How much time is necessary to develop 

a performance track record for a RIC or 

FPF to effectively market the fund to 

third-party investors and how does this 

vary based on the fund’s strategy or 

other factors? If the Agencies did specify 

a fixed amount of time for seeding 

generally, should the Agencies also 

provide relief that permits a fund’s 

seeding period to exceed this period of 

time, without the fund being considered 

a banking entity, subject to additional 

conditions, such as documentation of 

the business need for the sponsor’s 

continued investment? Should such 

additional relief include the lengthening 

of the seeding period for such 

investments? Conversely, would the 

current approach of not prescribing a 

fixed period of time for a seeding period 

be more effective in providing flexibility 

for funds that may need more time to 

develop a track record without having to 

specify a particular time period that will 

be appropriate for all funds? 

Question 15. 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? For example, could a 

sponsor’s investment exceed 25 percent 

as investors redeem in anticipation of a 

liquidation, causing the sponsor’s 

investment to increase as a percentage 

of the fund’s assets? Are there instances 

in which one or more large investors 

may redeem from a fund and, as a 

result, the sponsor may seek to 

temporarily invest in the fund for the 

benefit of remaining shareholders? 

Question 16. Have foreign excluded 

funds been able to effectively rely on the 

policy statement to continue their asset 

management activities? Why or why 

not? Have foreign banking entities 

experienced any difficulties in 

complying with the condition in the 

policy statement that a foreign banking 

entity’s acquisition or retention of any 

ownership interest in, or sponsorship of, 

the qualifying foreign excluded fund 

would need to meet the requirements 

for permitted covered fund activities 

and investments solely outside the 

United States, as provided in section 

13(d)(1)(I) of the BHC Act and 

§ ll.13(b) of the 2013 final rule? 

Would the proposed changes in this 

proposal to § ll.13(b) or any other 

provision of the 2013 final rule help 

foreign banking entities comply with the 

policy statement? Is the policy 

statement’s definition of ‘‘qualifying 

foreign excluded fund’’ appropriate, or 

is it too narrow or too broad? Is further 

guidance needed with respect to any of 

the requirements in the definition of 

‘‘qualifying foreign excluded fund’’? For 

example, is it clear what constitutes a 

bona fide asset management business? 

Has the policy statement posed any 

issues for foreign banking entities and 

their compliance programs? 

Question 17. As stated above, the 

Agencies will not treat RICs or FPFs that 

meet the conditions included in the staff 

FAQs discussed above as banking 

entities or attribute their activities and 

investments to the banking entity that 

sponsors the fund or otherwise may 

control the fund under the 

circumstances set forth in the FAQs. In 

addition, the Agencies are extending the 

application of the policy statement with 

respect to qualifying foreign excluded 

funds for an additional year to 

accommodate the pendency of 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. 

Question 18. Instead of, or in addition 

to, providing Agency guidance as 

discussed above, should the Agencies 

modify the 2013 final rule to address the 

issues raised by the interaction 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? For example, 

should the Agencies modify the 2013 

final rule to provide that a banking 

entity may elect to treat certain entities, 

such as a qualifying foreign excluded 

fund that meets the conditions of the 

policy statement, as covered funds, 

which would result in exclusion of 

these entities from the term ‘‘banking 

entity?’’ Would allowing a banking 

entity to invest in, sponsor, or have 

certain relationships with, the fund 

subject to the covered fund limitations 

in the 2013 final rule be an effective 

way for banking entities to address the 

issues raised? For example, a banking 

entity could sponsor and retain a de 

minimis investment in such a fund, 

subject to §§ ll.11 and ll.12 of the 

2013 final rule. A foreign bank could 

invest in or sponsor such a fund so long 

as these activities and investments 

occur solely outside the United States, 

subject to the limitations in § ll.13(b) 

of the 2013 final rule. 

Question 19. If a banking entity is 

willing to subject its activities and 

investments with respect to a noncovered fund to the covered fund 

limitations in section 13 and the 2013 

final rule, which are designed to prevent 

banking entities from being exposed to 

significant losses from investments in or 

other relationships with covered funds, 

is there any reason that the ability to 

make this election should be limited to 

particular types of non-covered funds? 

Conversely, should a banking entity 

only be permitted to elect to treat as a 

covered fund a ‘‘qualifying foreign 

excluded fund,’’ as defined in the policy 

statement issued by the Federal banking 

agencies? 50

Question 20. If a banking entity 

elected to treat an entity as a covered 

fund, what potentially adverse effects 

could result and how should the 

Agencies address them? For example, if 

a foreign banking entity elected to treat 

a foreign excluded fund as a covered 

fund, would the application of the 

restrictions in § ll.14 and the 

compliance obligations under §ll.20 

of the 2013 final rule involve the same 

or similar disruptions and 

extraterritorial application of section 

13’s restrictions that this approach 

would be designed to avoid? If so, what 

approach, consistent with the statute, 

should the Agencies take to address this 

issue? As discussed below in this 

Supplementary Information section, the 

Agencies are also requesting comment 

regarding potential changes in 

interpretation with respect to the 2013 

final rule’s implementation of section 

13(f) of the BHC Act. How would any 

such modifications change any effects 

relating to an election to treat an entity 

as a covered fund? 

Question 21. With respect to foreign 

excluded funds, to what extent would 

the proposed changes, and especially 

the proposed changes to §§ll.6(e) and 

ll.13(b) of the 2013 final rule, 

adequately address the concerns raised 

regarding the treatment of foreign 

excluded funds as banking entities? If 

not, what additional modifications to 

these sections would enable such a fund 

to engage in proprietary trading or 

covered fund activity? Should the 

Agencies provide or modify exemptions 

under the 2013 final rule such that a 

qualifying foreign excluded fund could 

operate more effectively and efficiently, 

notwithstanding its status as a banking 

entity? If so, please explain how such an 

exemption would be consistent with the 

statute. 

Question 22. Are there any other 

investment vehicles or entities that are 

treated as banking entities and for 

which commenters believe relief, 

consistent with the statute, would be 

appropriate? Which ones and why? 

What form of relief could be provided 

in a way consistent with the statute? For 

example, staffs of the Agencies have 

received inquiries regarding employees’ 

securities companies (‘‘ESCs’’), which 


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51See supra note 37. 52See supra note 36. 53 12 U.S.C. 1851(a)(1)(A). 54 12 U.S.C. 1851(h)(4). The statutory proprietary 

trading definition applies to the purchase or sale, 

or the acquisition or disposition of, any security, 

derivative, contract of sale of a commodity for 

future delivery, option on any such security, 

derivative, or contract, or any other security or 

financial instrument that the Agencies by rule 

determine. 

55 12 U.S.C. 1851(h)(6) (defining ‘‘trading 

account’’). 

56 §ll.3(a) of the proposed rule. 

57 §ll.3(b)(1)(i) of the proposed rule. 

58See supra note 18. 

59 §ll.3(b)(2) of the proposed rule. 

generally rely on an exemption from 

registration under the Investment 

Company Act provided by section 6(b) 

of that Act. These funds are controlled 

by their sponsors and, if those sponsors 

are banking entities, may themselves be 

treated as banking entities. Treating 

these ESCs as banking entities, however, 

may conflict with their stated 

investment objectives, which commonly 

are to invest in covered funds for the 

benefit of the employees of the 

sponsoring banking entity. Should an 

ESC be treated differently if its banking 

entity sponsor controls the ESC by 

virtue of corporate governance 

arrangements, which is a required 

condition of the exemptive relief under 

section 6(b) of the Investment Company 

Act that ESCs receive from the SEC, but 

does not acquire or retain any 

ownership interest in the ESC? If so, 

how should the Agencies consider 

residual or reversionary interests 

resulting from employees forfeiting their 

interests in the ESC? In pursuing their 

stated investment objectives on behalf of 

employees, do ESCs make these 

investment ‘‘as principal,’’ as 

contemplated by section 13? To what 

extent do banking entities invest 

directly in ESCs? Are there any other 

investment vehicles or entities, in 

pursuing their stated investment 

objectives on behalf of employees, that 

banking entities invest in ‘‘as principal’’ 

(e.g., nonqualified deferred 

compensation plans such as trusts 

modeled under IRS Revenue Procedure 

92–64, commonly referred to as ‘‘rabbi 

trusts’’)? How should the Agencies 

consider these investment vehicles or 

entities with respect to section 13? 

Please include an explanation of how 

the commenters’ preferred treatment of 

any investment vehicle would be 

consistent with section 13 of the BHC 

Act, including the statutory definition of 

‘‘banking entity.’’ 

b. Limited Trading Assets and 

Liabilities 

The proposed rule would add a 

definition of limited trading assets and 

liabilities. As described in greater detail 

in Part II.G above, limited trading assets 

and liabilities would be defined under 

the proposal as trading assets and 

liabilities (excluding trading assets and 

liabilities involving obligations of, or 

guaranteed by, the United States or any 

agency of the United States) the average 

gross sum of which (on a worldwide 

consolidated basis) over the previous 

consecutive four quarters, as measured 

as of the last day of each of the four 

previous calendar quarters, does not 

exceed $1 billion.51

c. Moderate Trading Assets and 

Liabilities 

The proposed rule would add a 

definition of moderate trading assets 

and liabilities. As described in greater 

detail in Part II.G above, moderate 

trading assets and liabilities would be 

defined under the proposal as trading 

assets and liabilities that are not 

significant trading assets and liabilities 

or limited trading assets and liabilities. 

d. Significant Trading Assets and 

Liabilities 

The proposed rule would add a 

definition of significant trading assets 

and liabilities. As described in greater 

detail in Part II.G above, significant 

trading assets and liabilities would be 

defined under the proposal as trading 

assets and liabilities (excluding trading 

assets and liabilities involving 

obligations of, or guaranteed by, the 

United States or any agency of the 

United States) the average gross sum of 

which (on a worldwide consolidated 

basis) over the previous consecutive 

four quarters, as measured as of the last 

day of each of the four previous 

calendar quarters, equals or exceeds $10 

billion.52

B. Subpart B—Proprietary Trading 

Restrictions 

1. Section ll.3 Prohibition on 

Proprietary Trading 

Section 13 of the BHC Act generally 

prohibits banking entities from engaging 

in proprietary trading.53 The statute 

defines ‘‘proprietary trading’’ as 

engaging as principal for the trading 

account of the banking entity in any 

transaction to purchase or sell, or 

otherwise acquire or dispose of, any of 

a number of financial instruments.54

The statute defines ‘‘trading account’’ as 

any account used for acquiring or taking 

positions in financial instruments 

‘‘principally for the purpose of selling in 

the near term (or otherwise with the 

intent to resell in order to profit from 

short-term price movements), and any 

such other accounts as the Agencies 

may, by rule, determine.’’ 55

a. Definition of Trading Account 

The 2013 final rule, like the statute, 

defines proprietary trading as engaging 

as principal for the trading account of 

the banking entity in any purchase or 

sale of one or more financial 

instruments.56 The 2013 final rule 

implements the statutory definition of 

trading account with a three-pronged 

definition. The first prong (the ‘‘shortterm intent prong’’) includes within the 

definition of trading account any 

account used by a banking entity to 

purchase or sell one or more financial 

instruments principally for the purpose 

of (a) short-term resale, (b) benefitting 

from short-term price movements, (c) 

realizing short-term arbitrage profits, or 

(d) hedging any of the foregoing.57

Banking entities and others have 

informed the Agencies that this prong of 

the definition imposes significant 

compliance costs and uncertainty 

because it requires determining the 

intent of each individual who purchases 

and sells a financial instrument.58 In 

gaining experience implementing the 

2013 final rule, the Agencies recognize 

that banking entities lack clarity about 

whether particular purchases and sales 

of a financial instrument are included 

under this prong of the trading account. 

The 2013 final rule includes a rebuttable 

presumption that the purchase or sale of 

a financial instrument is for the trading 

account under the short-term intent 

prong if the banking entity holds the 

financial instrument for fewer than 60 

days or substantially transfers the risk of 

the position within 60 days (the ‘‘60-day 

rebuttable presumption’’).59 If a banking 

entity sells or transfers the risk of a 

position within 60 days, it may rebut 

the presumption by demonstrating that 

it did not purchase or sell the financial 

instrument principally for short-term 

trading purposes. In the Agencies’ 

experience, a broad range of 

transactions could trigger the 60-day 

rebuttable presumption. For example, 

the purchase of a security with a 

maturity (or remaining maturity) of 

fewer than 60 days to meet the 

regulatory requirements of a foreign 

government or to manage the banking 

entity’s risks could trigger the 60-day 

rebuttable presumption because the 

banking entity holds the security for 

fewer than 60 days. In both cases, 

however, it is unlikely that the banking 

entity intended to purchase or sell the 

instrument principally for the purpose 

of short-term resale. 


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60 §ll.3(b)(1)(ii) of the proposed rule. 

61 §ll.3(b)(1)(iii)(A) of the proposed rule. The 

dealer prong also includes positions entered into by 

a banking entity that is engaged in the business of 

a dealer, swap dealer, or security-based swap dealer 

outside of the United States, to the extent the 

instrument is purchased or sold in connection with 

the activities of such business. See 2013 final rule 

§ll.3(b)(1)(iii)(B). 

62 In addition, the Agencies are proposing to 

adopt a presumption of compliance for banking 

entities with limited trading activities. See 

§ll.20(g) of the proposed rule. 

63An insured depository institution may be 

registered as, among other things, a swap dealer and 

a security-based swap dealer, but only the swap and 

security-based dealing activities that require it to be 

so registered are included in the trading account by 

virtue of the dealer prong. If an insured depository 

institution purchases or sells a financial instrument 

in connection with activities of the insured 

depository institution that do not trigger registration 

as a swap dealer, such as lending, deposit-taking, 

the hedging of business risks, or other end-user 

activity, the financial instrument would be 

included in the trading account only if the purchase 

or sale of the financial instrument falls within the 

market risk capital trading account prong under 

§ll.3(b)(1) or the accounting prong under 

§ll.3(b)(3) of the proposed rule. See 79 FR at 

5549, note 135. 

64See §ll.3(b)(2) of the proposed rule. 

65See Accounting Standards Codification (ASC) 

820–10–20 and International Financial Reporting 

Standard (IFRS) 13.9. 

The other two prongs of the 2013 final 

rule’s definition of trading account are 

the ‘‘market risk capital prong’’ and the 

‘‘dealer prong.’’ The ‘‘market risk capital 

prong’’ applies to the purchase or sale 

of financial instruments that are both 

market risk capital rule covered 

positions and trading positions.60 The 

‘‘dealer prong’’ applies to the purchase 

or sale of financial instruments by a 

banking entity that is licensed or 

registered, or required to be licensed or 

registered, as a dealer, swap dealer, or 

security-based swap dealer, to the extent 

the instrument is purchased or sold in 

connection with the activities that 

require the banking entity to be licensed 

or registered as such.61

The Agencies are proposing to revise 

the regulatory trading account definition 

to address concerns that the 2013 final 

rule’s short-term intent prong requires 

banking entities and the Agencies to 

make subjective determinations with 

respect to each trade a banking entity 

conducts, and that the 60-day rebuttable 

presumption may scope in activities 

that do not involve the types of risks or 

transactions the statutory definition of 

proprietary trading appears to have been 

intended to cover. Specifically, the 

Agencies propose to retain the existing 

dealer prong and a modified version of 

the market risk capital prong, and to 

replace the 2013 final rule’s short-term 

intent prong with a new third prong 

based on the accounting treatment of a 

position, in each case to implement the 

requirements of the statutory definition. 

The new prong would provide that 

‘‘trading account’’ means any account 

used by a banking entity to purchase or 

sell one or more financial instruments 

that is recorded at fair value on a 

recurring basis under applicable 

accounting standards (the ‘‘accounting 

prong’’). The Agencies also propose to 

eliminate the 60-day rebuttable 

presumption in the 2013 final rule. 

The Agencies further propose to add 

a presumption of compliance with the 

prohibition on proprietary trading for 

trading desks that do not purchase or 

sell financial instruments subject to the 

market risk capital prong or the dealer 

prong and operate under a prescribed 

profit and loss threshold.62 While still 

subject to the prohibition on proprietary 

trading under section 13 of the BHC Act 

and the applicable regulatory 

requirements, such eligible trading 

desks that remain under the threshold 

would not have to demonstrate their 

compliance with subpart B on an 

ongoing basis, as discussed below. 

Notwithstanding this regulatory 

presumption of compliance, the 

Agencies would reserve authority to 

determine on a case-by-case basis that a 

purchase or sale of one or more 

financial instruments by a banking 

entity either is or is not for the trading 

account, and, as a result, may require 

that a trading desk demonstrate 

compliance with subpart B on an 

ongoing basis with respect to a financial 

instrument. 

Under the proposed approach, 

‘‘trading account’’ would continue to 

include any account used by a banking 

entity to (1) purchase or sell one or more 

financial instruments that are both 

market risk capital rule covered 

positions and trading positions (or 

hedges of other market risk capital rule 

covered positions), if the banking entity, 

or any affiliate of the banking entity, is 

an insured depository institution, bank 

holding company, or savings and loan 

holding company, and calculates riskbased capital ratios under the market 

risk capital rule, or (2) purchase or sell 

one or more financial instruments for 

any purpose, if the banking entity is 

licensed or registered, or required to be 

licensed or registered, to engage in the 

business of a dealer, swap dealer, or 

security-based swap dealer, if the 

instrument is purchased or sold in 

connection with the activities that 

require the banking entity to be licensed 

or registered as such 63 (or if the banking 

entity is engaged in the business of a 

dealer, swap dealer, or security-based 

swap dealer outside of the United 

States, if the instrument is purchased or 

sold in connection with the activities of 

such business).64 The Agencies are 

proposing to retain these prongs because 

both prongs provide clear lines and 

well-understood standards for purposes 

of determining whether or not a 

purchase or sale of a financial 

instrument is in the trading account. 

The Agencies also propose to adapt the 

market risk capital prong to apply to the 

activities of FBOs in order to take into 

account the different regulatory 

frameworks and supervisors that FBOs 

may have in their home countries. 

Specifically, the Agencies propose to 

include within the market risk capital 

prong, with respect to a banking entity 

that is not, and is not controlled directly 

or indirectly by a banking entity that is, 

located in or organized under the laws 

of the United States or any State, any 

account used by the banking entity to 

purchase or sell one or more financial 

instruments that are subject to capital 

requirements under a market risk 

framework established by the homecountry supervisor that is consistent 

with the market risk framework 

published by the Basel Committee on 

Banking Supervision, as amended from 

time to time. 

b. Trading Account—Accounting Prong 

The proposal’s definition of ‘‘trading 

account’’ for purposes of section 13 of 

the BHC Act would replace the shortterm intent prong in the 2013 final rule 

with a new prong based on accounting 

treatment, by reference to whether a 

financial instrument (as defined in the 

2013 final rule and unchanged by the 

proposal) is recorded at fair value on a 

recurring basis under applicable 

accounting standards. Such instruments 

generally include, but are not limited to, 

derivatives, trading securities, and 

available-for-sale securities. For 

example, for a banking entity that uses 

GAAP, a security that is classified as 

‘‘trading’’ under GAAP would be 

included in the proposal’s definition of 

‘‘trading account’’ under this approach 

because it is recorded at fair value. ‘‘Fair 

value’’ refers to a measurement basis of 

accounting, and is defined under GAAP 

as the price that would be received to 

sell an asset or paid to transfer a liability 

in an orderly transaction between 

market participants at the measurement 

date.65

The proposal’s inclusion of this prong 

in the definition of ‘‘trading account’’ is 

intended to give greater certainty and 

clarity to banking entities about what 

financial instruments would be 

included in the trading account, because 

banking entities should know which 

instruments are recorded at fair value on 


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66 12 U.S.C. 1851(h)(6). 

67See id. 68 12 U.S.C. 1851(h)(6). 

their balance sheets. This modification 

of the rule’s definition of trading 

account would include other accounts 

that may be used by banking entities for 

the purpose described in the statutory 

definition of ‘‘trading account.’’ 66 The 

proposal is intended to address 

concerns that the statutory definition of 

trading account may be read to 

contemplate an inquiry into the 

subjective intent underlying a trade.67

The proposal would therefore adopt the 

accounting prong as an objective means 

of ensuring that such positions entered 

into by banking entities principally for 

the purpose of selling in the near term, 

or with the intent to resell in order to 

profit from short-term price movements, 

are incorporated in the definition of 

trading account. For entities that are not 

subject to the market-risk capital prong 

or the dealer prong, the accounting 

prong would therefore be the sole 

avenue by which such banking entities 

would become subject to the 

requirements in subpart B of the 

proposed rule. 

Question 23. Should the Agencies 

adopt the proposed new accounting 

prong and remove the short-term intent 

prong? Why or why not? 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? 

Question 24. Is using the accounting 

prong appropriate considering the fact 

that entities may have discretion over 

whether certain financial instruments 

are recorded at fair value (and therefore 

subject to the restrictions in section 13 

of the BHC Act)? Could the proposed 

accounting prong incentivize banking 

entities to modify their accounting 

treatment with respect to certain 

financial instruments in order to evade 

the prohibition on proprietary trading? 

Why or why not? If so, could those 

effects have an impact on the banking 

entity’s accounting practices? 

Question 25. Should the Agencies 

include all financial instruments that 

are recorded at fair value on a banking 

entity’s balance sheet as part of the 

proposed accounting prong? Why or 

why not? Would such a definition be 

overly broad? If so, why and how 

should the definition be narrowed, 

consistent with the statute? Would such 

a definition be too narrow and exclude 

financial instruments that should be 

included? If so, should the Agencies 

apply a different approach? Why or why 

not? 

Question 26. Is the proposal’s 

inclusion of available-for-sale securities 

under the proposed accounting prong 

appropriate? Why or why not? 

Question 27. The proposed 

accounting prong would include all 

derivatives in the proposed accounting 

prong since derivatives are required to 

be recorded at fair value. Is this 

appropriate? Why or why not? 

Question 28. Should the scope of the 

proposed accounting prong be further 

specified? In particular, should practical 

expedients to fair value measurements 

permitted under applicable accounting 

standards be included in the ‘‘trading 

account’’ definition (e.g., equity 

securities without readily determinable 

fair value under ASC 321 or investments 

using the net asset value (‘‘NAV’’) 

practical expedient under ASC 820)? 

Why or why not? Are there other 

relevant examples that cause concern? 

Question 29. Is there a better 

approach to defining ‘‘trading account’’ 

for purposes of section 13 of the BHC 

Act, consistent with the statute? If so, 

please explain. 

Question 30. Would the short-term 

intent prong in the 2013 final rule be 

preferable to the proposed accounting 

prong? Why or why not? Should the 

Agencies rely on a potentially objective 

measure, such as the accounting 

treatment of a financial instrument, to 

implement the definition of ‘‘trading 

account’’ in section 13(h)(6), which 

includes any account used for acquiring 

or taking positions in certain securities 

and instruments ‘‘principally for the 

purpose of selling in the near term (or 

otherwise with the intent to resell in 

order to profit from short-term price 

movements’’? 68

Question 31. Would references to 

accounting treatment be better 

formulated as safe harbors or 

presumptions within the short-term 

intent prong under the 2013 final rule? 

Why or why not? 

Question 32. What impact, if any, 

would the proposed accounting prong 

have on the liquidity of corporate bonds 

or other securities? Please explain. 

Question 33. For purposes of 

determining whether certain trading 

activity is within the definition of 

proprietary trading, is the proposed 

accounting prong over- or underinclusive? If over- or under-inclusive, is 

there another alternative that would be 

a more appropriate replacement for the 

short-term prong? Please explain. If 

over-inclusive, what types of 

transactions or positions could 

potentially be included in the definition 

of proprietary trading that should not 

be? Please explain, and provide specific 

examples of the particular transactions 

or positions. If under-inclusive, what 

types of transactions or positions could 

potentially be omitted from the 

definition of proprietary trading that 

should be included in light of the 

language and purpose of the statute? 

Please explain and provide specific 

examples of the particular transactions 

or positions. 

Question 34. The dealer prong of the 

trading account definition includes 

accounts used for purchases or sales of 

one or more financial instruments for 

any purpose, if the banking entity is, 

among other things, licensed or 

registered, or is required to be licensed 

or registered, to engage in the business 

of a dealer, swap dealer, or securitybased swap dealer, to the extent the 

instrument is purchased or sold in 

connection with the activities that 

require the banking entity to be licensed 

or registered as such. In adopting the 

2013 final rule, the Agencies recognized 

that banking entities that are registered 

dealers may not have previously 

engaged in such an analysis, thereby 

resulting in a new regulatory 

requirement for these entities. The 

Agencies did, however, note that if the 

regulatory analysis otherwise engaged in 

by banking entities was substantially 

similar to the dealer prong analysis, 

then any increased compliance burden 

could be small or insubstantial. Have 

any banking entities incurred increased 

compliance costs resulting from the 

requirement to analyze whether 

particular activities would require 

dealer registration? If so, how 

substantial are those additional costs 

and have those costs changed over time, 

including as a result of the banking 

entity becoming more accustomed to 

engaging in the required analysis? 

Question 35. In the case of banking 

entities that are registered dealers, how 

often does the analysis of whether 

particular activities would require 

dealer registration result in identifying 

transactions or positions that would not 

be included under the dealer prong? 

How does the volume of those 

transactions or positions compare to the 

volume of transactions or positions that 

are included under the dealer prong? 

What types of transactions or positions 

would not be included under the dealer 

prong and how often are those 

transactions included by a different part 

of the definition of ‘‘trading account,’’ 

namely the short-term prong? 

Question 36. For transactions or 

positions not covered by the dealer 


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69For example, trading desks that 

contemporaneously and effectively offset or hedge 

the assets and liabilities that they acquire through 

trades with customers as a result of engagement in 

customer-driven activities could be expected under 

most conditions to generally experience lower 

amounts of daily profit or loss attributable to daily 

fluctuations in the value of the desk’s positions 

than desks engaged in speculative activities. 

70Some banking entities without meaningful 

trading activities may not currently calculate P&L 

as described in this proposal, but the Agencies 

believe that many, if not most, of those banking 

entities would be banking entities with limited 

trading assets and liabilities that would be 

presumed to comply with the proposed rule under 

proposed §ll.20(g). 

prong, would those transactions or 

positions be covered by the proposed 

accounting treatment prong? Why or 

why not? 

Question 37. 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 of trading 

activity being included in the definition 

of ‘‘trading account’’? What are the 

resulting costs and benefits? In 

responding to this question, 

commenters are encouraged to be as 

specific as possible in describing the 

transactions or positions used to 

support their analysis. 

Question 38. Would banking entities 

regulated by Agencies that are market 

regulators incur additional (or lesser) 

compliance costs or burdens in the 

course of complying with the proposal 

as compared to the costs and burdens of 

other banking entities? How would the 

costs and burdens incurred by these 

banking entities compare as a whole to 

those of other banking entities? Please 

explain. 

c. Presumption of Compliance With the 

Prohibition on Proprietary Trading 

The Agencies propose to include a 

presumption of compliance with the 

proposed rule’s proprietary trading 

prohibition based on an objective, 

quantitative measure of a trading desk’s 

activities. This presumption of 

compliance would apply to a banking 

entity’s individual trading desks rather 

than to the banking entity as a whole. 

As described below, a trading desk 

operating pursuant to the proposed 

presumption would not be obligated to 

demonstrate that the activities of the 

trading desk comply with subpart B on 

an ongoing basis. The proposed 

presumption would only be available 

for a trading desk’s activities that may 

be within the trading account under the 

proposed accounting prong, for a 

trading desk that is not subject to the 

market risk capital prong or the dealer 

prong of the trading account definition. 

The replacement of the short-term intent 

prong with the accounting prong would 

represent a significant change from the 

2013 final rule and could potentially 

apply to certain activities that were 

previously not within the regulatory 

definition of trading account. However, 

the presumption of compliance would 

limit the expansion of the definition of 

‘‘trading account’’ to include—unless 

the presumption is rebutted—only the 

activities of a trading desk that engages 

in a greater than de minimis amount of 

activity (unless the presumption is 

rebutted). 

The proposed presumption would not 

be available for trading desks that 

purchase or sell positions that are 

within the trading account under the 

market risk capital prong or the dealer 

prong. The Agencies are not proposing 

to extend the presumption of 

compliance with the prohibition on 

proprietary trading to activities of 

banking entities that are included under 

the market risk capital prong or the 

dealer prong because, based on their 

experience implementing the 2013 final 

rule, the Agencies believe that these two 

prongs are reasonably designed to 

include the appropriate trading 

activities. Banking entities subject to the 

market risk capital prong and the dealer 

prong have had several years of 

experience complying with the 

requirements of the 2013 final rule and 

experience with identifying these 

activities in other contexts. The 

Agencies believe that banking entities 

with activities that are covered by these 

prongs are able to conduct appropriate 

trading activities in an efficient manner 

pursuant to exclusions from the 

definition of proprietary trading or 

pursuant to the exemptions for 

permitted activities. The Agencies 

further note that the proposed revisions 

to the exemptions (described herein) are 

intended to facilitate the ability of 

banking entities subject to the market 

risk capital prong and the dealer prong 

to better engage in otherwise permitted 

activities such as market-making. 

Additionally, the Agencies note that the 

presumption of compliance with the 

prohibition on proprietary trading is 

optional for a banking entity. 

Accordingly, if a banking entity prefers 

to demonstrate ongoing compliance for 

activity captured by the accounting 

prong rather than calculating the 

threshold for presumed compliance 

described below, it may do so at its 

discretion. 

Under the proposed compliance 

presumption, the activities of a trading 

desk of a banking entity that are not 

covered by the market risk capital prong 

or the dealer prong would be presumed 

to comply with the proposed rule’s 

prohibition on proprietary trading if the 

activities do not exceed a specified 

quantitative threshold. The trading desk 

would remain subject to the prohibition, 

but unless the desk engages in a 

material level of trading activity (or the 

presumption of compliance is rebutted 

as described below), the desk would not 

be required to comply with the more 

extensive requirements that would 

otherwise apply under the proposal in 

order to demonstrate compliance. As 

described further below, the Agencies 

propose to use the absolute value of the 

trading desk’s profit and loss (‘‘absolute 

P&L’’) on a 90-calendar-day rolling basis 

as the relevant quantitative measure for 

this threshold. 

The proposed rule includes a 

threshold for the presumption of 

compliance based on absolute P&L 

because this measure tends to correlate 

with the scale and nature of a trading 

desk’s trading activities.69 In addition, if 

the positions of a trading desk have 

recently significantly contributed to the 

financial position of the banking entity, 

such that the absolute P&L-based 

threshold is exceeded, the proposed 

trading-desk-level presumption would 

become unavailable and the banking 

entity would be required to comply with 

more extensive requirements of the rule 

to ensure compliance. Using absolute 

P&L as the relevant measure of trading 

desk risk would provide an additional 

advantage as an objective measure that 

most banking entities are already 

equipped to calculate.70 This measure 

would also indicate the realized 

outcomes of the risks of a trading desk’s 

positions, rather than modeled 

estimates. 

In general, the proposed presumption 

of compliance would take the approach 

that a trading desk that consistently 

does not generate more than a threshold 

amount of absolute P&L does not engage 

in trading activities of a sufficient scale 

to warrant the costs associated with 

more extensive requirements of the rule 

to otherwise demonstrate compliance 

with the prohibition on proprietary 

trading. Such an approach is intended 

to reflect a view that the lesser activity 

of these trading desks does not justify 

the costs of an extensive ongoing 

compliance regime for those trading 

desks in order to ensure compliance 

with section 13 of the BHC Act and the 

implementing regulations. 

Under the proposal, each trading desk 

that operates under the presumption of 

compliance with the prohibition on 

proprietary trading would be required to 

determine on a daily basis the absolute 

value of its net realized and unrealized 


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71Provided that a trading desk’s absolute P&L 

does not exceed the $25 million threshold, a 

banking entity would not have to assess the 

accounting treatment of each transaction of a 

trading desk that operates pursuant to the 

presumption of compliance with the prohibition on 

proprietary trading. 

gains or losses on its portfolio of 

financial instruments based on the fair 

value of the financial instruments. The 

sum of the absolute values of gains or 

losses for each trading date in any 90- 

calendar-day period is the trading desk’s 

90-calendar-day absolute P&L. If this 

value exceeds $25 million at any point, 

then the banking entity would be 

required to notify the appropriate 

Agency that it has exceeded the 

threshold in accordance with the 

Agency’s notification policies and 

procedures. 

The Agencies propose to use the 

absolute value of a trading desk’s daily 

P&L because absolute value would 

ensure that losses would be counted 

toward the measurement to the same 

extent as gains. Thus, a trading desk 

could not avoid triggering compliance 

by offsetting significant net gains on one 

day with significant net losses on 

another day. Measuring absolute P&L on 

a rolling basis would mean that the 

threshold could be triggered in any 90- 

calendar-day period. 

This proposed trading-desk-level 

presumption of compliance with the 

prohibition on proprietary trading 

would be intended to allow banking 

entities to conduct ordinary banking 

activities without having to assess every 

individual trade for compliance with 

subpart B of the implementing 

regulations and, in particular, the 

proposed accounting prong.71

As noted above, one advantage of 

using absolute P&L as the relevant 

measure of trading desk risk is that it 

would provide a relatively simple and 

objective measure that most banking 

entities are already equipped to 

calculate. For example, banking entities 

subject to the current metrics reporting 

requirements should already be 

equipped to calculate P&L on a daily 

basis. Other banking entities with 

significant trading activities likely 

currently calculate P&L on a daily basis 

for the purpose of monitoring their 

positions and risks. Moreover, a banking 

entity’s methodology for calculating 

P&L is generally subject to internal and 

external audit requirements, managerial 

monitoring, and applicable public 

reporting requirements under the U.S. 

securities laws. Under the proposed 

approach, the Agencies would review 

banking entities’ methodologies for 

calculating absolute P&L for purposes of 

the presumption of compliance with the 

prohibition on proprietary trading. 

The specific threshold chosen aims to 

characterize trading desks not engaged 

in prohibited proprietary trading. Based 

on the metrics collected by the Agencies 

since issuance of the 2013 final rule, 90- 

calendar-day absolute P&L values below 

$25 million dollars are typically 

indicative of trading desks not engaged 

in prohibited proprietary trading. Under 

the proposal, the activities of a trading 

desk that exceeds the $25 million 

threshold would not presumptively 

comply with the prohibition on 

proprietary trading. If a trading desk 

operating pursuant to the proposed 

presumption of compliance with the 

prohibition on proprietary trading 

exceeded the $25 million threshold, the 

banking entity would be required to 

notify the appropriate Agency, 

demonstrate that the trading desk’s 

purchases and sales of financial 

instruments comply with subpart B 

(e.g., the desk’s purchases and sales are 

not included in the rule’s definition of 

trading account or meet the terms of an 

exclusion from the definition of 

proprietary trading or a permitted 

activity exemption), and demonstrate 

how the trading desk that exceeded the 

threshold will maintain compliance 

with subpart B on an ongoing basis. The 

proposed presumption of compliance is 

intended to apply to the desks of 

banking entities that are not engaged in 

prohibited proprietary trading and is not 

intended as a safe harbor. The Agencies 

therefore propose to include within the 

presumption of compliance a process by 

which an Agency may rebut this 

regulatory presumption of compliance. 

Under the proposal, the Agency would 

be able to rebut the presumption of 

compliance with the prohibition on 

proprietary trading for the activities of 

a trading desk that does not exceed the 

$25 million threshold by providing the 

banking entity written notification of 

the Agency’s determination that one or 

more of the trading desk’s activities 

violates the prohibition on proprietary 

trading under subpart B. 

In addition, the proposed rule 

includes a reservation of authority 

(described further below) that would 

allow an Agency to designate any 

activity as a proprietary trading activity 

if the Agency determines on a case-bycase basis that the banking entity has 

engaged as principal for the trading 

account of the banking entity in any 

purchase or sale of one or more 

financial instruments under 12 U.S.C. 

1851(h)(6). 

Question 39. Should the Agencies 

consider any objective measures other 

than accounting treatment to replace the 

2013 final rule’s short-term intent 

prong? For example, should the 

Agencies consider including an 

objective quantitative threshold (such as 

the absolute P&L threshold described in 

the proposed presumption of 

compliance with the proprietary trading 

prohibition) as an element of the trading 

account definition? Why or why not, 

and how would such a measure be 

consistent with the requirements of 

section 13 of the BHC Act? 

Question 40. Is the proposed desklevel threshold for presumed 

compliance with the prohibition on 

proprietary trading ($25 million 

absolute P&L) an appropriate measure 

for indicating that the scale of a trading 

desk’s activities may not warrant the 

cost of more extensive compliance 

requirements? Why or why not? If not, 

what other measure would be more 

appropriate? If absolute P&L is an 

appropriate measure, is $25 million an 

appropriate threshold? Why or why not? 

Should this threshold be periodically 

indexed for inflation? 

Question 41. What issues do 

commenters expect would arise if the 

$25 million threshold is applied to each 

trading desk at a banking entity? Would 

variations in levels and types of activity 

of the different trading desks raise 

challenges in the application of the 

threshold? 

Question 42. What factors, if any, 

should the Agencies keep in mind as 

they consider how the $25 million 

threshold should be applied over time, 

as trading desks’ activities change and 

banking entities may reorganize their 

trading desks? Would the $25 million 

threshold require any adjustment if a 

banking entity consolidated more than 

one trading desk into one, or split the 

activities of a trading desk among 

multiple trading desks? 

Question 43. As described further 

below, the Agencies are requesting 

comment regarding a potential change 

to the definition of ‘‘trading desk’’ that 

would allow a banking entity greater 

discretion to define the business units 

that constitute trading desks for 

purposes of the 2013 final rule. If the 

Agencies were to adopt both this change 

to the definition of ‘‘trading desk’’ and 

the trading desk-level presumption of 

compliance described above, would 

such a combination create opportunities 

for evasion? If so, how could such 

concerns be mitigated? 

Question 44. Recognizing that the 

Agencies that are market regulators 

operate under an examination and 

enforcement model that differs from a 

bank supervisory model, from a 

practical perspective would the 

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72See 2013 final rule §ll.3(a). 

73See 2013 final rule §ll.3(d). 74See 2013 final rule §ll.3(d)(3). 

75See 79 FR at 5555. 

76See 7 U.S.C. 1a(24) and 1a(25). 

77 §ll.3(d)(3) of the proposed rule (emphasis 

added). 

term intent prong with an accounting 

prong, including the presumption of 

compliance, apply differently to 

banking entities regulated by market 

regulators as compared to other banking 

entities? Please explain. 

Question 45. Is the process by which 

the Agencies may rebut the presumption 

of compliance sufficiently clear? If not, 

how should the process be changed? 

Question 46. Under the proposed 

presumption of compliance, banking 

entities would be required to notify the 

appropriate Agency whenever the 

activities of a trading desk with the 

relevant activities crosses the $25 

million P&L threshold. Should the 

Agencies consider an alternative 

methodology in which a banking entity 

regulated by the SEC or CFTC, as 

appropriate, makes and keeps a detailed 

record of each instance and provides 

such records to SEC or CFTC staff 

promptly upon request or during an 

examination? Why or why not? 

Question 47. Would an alternative 

methodology to the notification 

requirement, applicable solely to 

banking entities regulated by Agencies 

that are market regulators, whereby 

these firms would be required to 

escalate notices of instances when the 

P&L threshold has been exceeded 

internally for further inquiry and 

determination as to whether notice 

should be given to the applicable 

regulator, using objective factors 

provided by the rule? Why or why not? 

If such an approach would be more 

appropriate, what objective factors 

should be used to determine when 

notice should be given to the applicable 

regulator? Please be as specific as 

possible. 

Question 48. Should the Agencies 

specify notice and response procedures 

in connection with an Agency 

determination that the presumption is 

rebutted pursuant to §ll.3(c)(2) of the 

proposal? Why or why not? If not, what 

other approach would be appropriate? 

d. Excluded Activities. 

As previously discussed, § ll.3 of 

the 2013 final rule generally prohibits a 

banking entity from engaging in 

proprietary trading.72 In addition to 

defining the scope of trading activity 

subject to the prohibition on proprietary 

trading, the 2013 final rule also provides 

several exclusions from the definition of 

proprietary trading.73 Based on their 

experience implementing the 2013 final 

rule, the Agencies are proposing to 

modify the exclusion for liquidity 

management and to adopt new 

exclusions for transactions made to 

correct errors and for certain offsetting 

swap transactions. In addition, the 

Agencies request comment regarding 

whether any additional exclusions 

should be added, for example, to 

address certain derivatives entered into 

in connection with a customer lending 

transaction. 

1. Liquidity Management Exclusion 

The 2013 final rule excludes from the 

definition of proprietary trading the 

purchase or sale of securities for the 

purpose of liquidity management in 

accordance with a documented liquidity 

management plan.74 This exclusion is 

subject to several requirements. First, 

the liquidity management exclusion is 

limited by its terms to securities and 

requires that transactions be pursuant to 

a liquidity management plan that 

specifically contemplates and 

authorizes the particular securities to be 

used for liquidity management 

purposes; describes the amounts, types, 

and risks of securities that are consistent 

with the entity’s liquidity management; 

and the liquidity circumstances in 

which the particular securities may or 

must be used. Second, any purchase or 

sale of securities contemplated and 

authorized by the plan must be 

principally for the purpose of managing 

the liquidity of the banking entity, and 

not for the purpose of short-term resale, 

benefitting from actual or expected 

short-term price movements, realizing 

short-term arbitrage profits, or hedging a 

position taken for such short-term 

purposes. Third, the plan must require 

that any securities purchased or sold for 

liquidity management purposes be 

highly liquid and limited to instruments 

the market, credit, and other risks of 

which the banking entity does not 

reasonably expect to give rise to 

appreciable profits or losses as a result 

of short-term price movements. Fourth, 

the plan must limit any securities 

purchased or sold for liquidity 

management purposes to an amount that 

is consistent with the banking entity’s 

near-term funding needs, including 

deviations from normal operations of 

the banking entity or any affiliate 

thereof, as estimated and documented 

pursuant to methods specified in the 

plan. Fifth, the banking entity must 

incorporate into its compliance program 

internal controls, analysis, and 

independent testing designed to ensure 

that activities undertaken for liquidity 

management purposes are conducted in 

accordance with the requirements of the 

final rule and the entity’s liquidity 

management plan. Finally, the plan 

must be consistent with the supervisory 

requirements, guidance, and 

expectations regarding liquidity 

management of the Agency responsible 

for regulating the banking entity. These 

requirements are designed to ensure that 

the liquidity management exclusion is 

not misused for the purpose of 

impermissible proprietary trading.75

The Agencies propose to amend the 

exclusion for liquidity management 

activities to allow banking entities to 

use foreign exchange forwards and 

foreign exchange swaps, each as defined 

in the Commodity Exchange Act,76 and 

physically settled cross-currency swaps 

(i.e., cross-currency swaps that involve 

an actual exchange of the underlying 

currencies) as part of their liquidity 

management activities. Currently, the 

liquidity management exclusion is 

limited to the ‘‘purchase or sale of a 

security . . . for the purpose of liquidity 

management . . .’’ if several specified 

requirements are met.77 As a result, 

banking entities may not currently rely 

on the liquidity management exclusion 

for foreign exchange derivative 

transactions used for liquidity 

management because the exclusion is 

limited to securities. However, the 

Agencies understand that banking 

entities often use foreign exchange 

forwards, foreign exchange swaps, and 

cross-currency swaps for liquidity 

management purposes. In particular, 

foreign exchange forwards, foreign 

exchange swaps, and cross-currency 

swaps are often used by trading desks to 

manage liquidity both in the United 

States and in foreign jurisdictions. For 

example, foreign branches and 

subsidiaries of U.S. banking entities 

often have liquidity requirements 

mandated by foreign jurisdictions, and 

foreign exchange products can be used 

to address currency risk arising from 

holding this liquidity in foreign 

currencies. As a particular example, a 

U.S. banking entity may have U.S. 

dollars to fund its operations but require 

Japanese yen for its branch in Japan. 

The banking entity could use a foreign 

exchange swap to convert its U.S. 

dollars to Japanese yen to fund the 

operations of its Japanese branch. 

To streamline compliance for banking 

entities operating in foreign 

jurisdictions and using foreign exchange 

forwards, foreign exchange swaps, and 

cross-currency swaps for liquidity 

management purposes, the Agencies 

propose to expand the liquidity 

management exclusion to permit the 


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78The Agencies propose to define a crosscurrency swap as a swap in which one party 

exchanges with another party principal and interest 

rate payments in one currency for principal and 

interest rate payments in another currency, and the 

exchange of principal occurs on the date the swap 

is entered into, with a reversal of the exchange of 

principal at a later date that is agreed upon when 

the swap is entered into. This definition is 

consistent with regulations pertaining to margin 

and capital requirements for covered swap entities, 

swap dealers, and major swap participants. See 12 

CFR 45.2; 12 CFR 237.2; 12 CFR 349.2; 17 CFR 

23.151. 

79See §ll.3(e)(3)(i)–(vi) of the proposed rule. 

purchase or sale of foreign exchange 

forwards (as that term is defined in 

section 1a(24) of the Commodity 

Exchange Act (7 U.S.C. 1a(24)), foreign 

exchange swaps (as that term is defined 

in section 1a(25) of the Commodity 

Exchange Act (7 U.S.C. 1a(25)), and 

physically-settled cross-currency 

swaps 78 entered into by a banking 

entity for the purpose of liquidity 

management in accordance with a 

documented liquidity management 

plan. The proposed rule would permit 

a banking entity to purchase or sell 

foreign exchange forwards, foreign 

exchange swaps, and physically-settled 

cross-currency swaps to the same extent 

that a banking entity may purchase or 

sell securities under the existing 

exclusion, and the existing conditions 

that apply for securities transactions 

would also apply to transactions in 

foreign exchange forwards, foreign 

exchange swaps, and physically-settled 

cross-currency swaps.79

The inclusion of cross-currency swaps 

would be limited to swaps for which all 

payments are made in the currencies 

being exchanged, as opposed to cashsettled swaps, to limit the potential for 

these instruments to be used for 

proprietary trading that is not for 

liquidity management purposes. While 

foreign exchange forwards and foreign 

exchange swaps, as defined in the 

Commodity Exchange Act, are by 

definition limited to an exchange of the 

designated currencies, no similarly 

limited definition of the term ‘‘crosscurrency swap’’ is available for this 

purpose. Cross-currency swaps 

generally are more flexible in their 

terms, may have longer durations, and 

may be used to achieve a greater variety 

of potential outcomes. Accordingly, out 

of concern that cross-currency swaps 

could be used for prohibited proprietary 

trading, the Agencies propose to limit 

the use of cross-currency swaps for 

purposes of the liquidity management 

exclusion to only those swaps for which 

the payments are made in the two 

currencies being exchanged. 

Question 49. 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 crosscurrency swaps to be used for liquidity 

management? Are the existing 

conditions of the liquidity management 

exclusion appropriate for these types of 

derivatives activities, or should 

additional conditions be added to 

account for the particular characteristics 

of the financial instruments that the 

Agencies are proposing to be added? 

Should any existing restrictions be 

removed to account for the proposed 

addition of these transactions? 

Question 50. Do the requirements of 

the existing liquidity management 

exclusion, as proposed to be modified 

by expanding the exclusion to include 

foreign exchange forwards, foreign 

exchange swaps, or physically-settled 

cross-currency swaps, sufficiently 

protect against the possibility of banking 

entities using the exclusion to conduct 

impermissible speculative trading, 

while also permitting bona fide liquidity 

management? 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? 

Question 51. Should banking entities 

be permitted to purchase and sell 

physically-settled cross-currency swaps 

under the liquidity management 

exclusion? Should banking entities be 

permitted to purchase and sell any other 

financial instruments under the 

liquidity management exclusion? 

2. Transactions to Correct Bona Fide 

Trade Errors 

The Agencies understand that, from 

time to time, a banking entity may 

erroneously execute a purchase or sale 

of a financial instrument in the course 

of conducting a permitted or excluded 

activity. For example, a trading error 

may occur when a banking entity is 

acting solely in its capacity as an agent, 

broker, or custodian pursuant to § ll

.3(d)(7) of the 2013 final rule, such as by 

trading the wrong financial instrument, 

buying or selling an incorrect amount of 

a financial instrument, or purchasing 

rather than selling a financial 

instrument (or vice versa). To correct 

such errors, a banking entity may need 

to engage in a subsequent transaction as 

principal to fulfill its obligation to 

deliver the customer’s desired financial 

instrument position and to eliminate 

any principal exposure that the banking 

entity acquired in the course of its effort 

to deliver on the customer’s original 

request. Under the 2013 final rule, 

banking entities have expressed concern 

that the initial trading error and any 

corrective transactions could, 

depending on the facts and 

circumstances involved, fall within the 

proprietary trading definition if the 

transaction is covered by any of the 

prongs of the trading account definition 

and is not otherwise excluded pursuant 

to a different provision of the rule. 

Accordingly, the Agencies are 

proposing a new exclusion from the 

definition of proprietary trading for 

trading errors and subsequent correcting 

transactions because such transactions 

do not appear to be the type of 

transaction the statutory definition of 

‘‘proprietary trading’’ was intended to 

cover. In particular, these transactions 

generally lack the intent described in 

the statutory definition of ‘‘trading 

account’’ to profit from short-term price 

movements. The proposed exclusion 

would be available for certain purchases 

or sales of one or more financial 

instruments by a banking entity if the 

purchase (or sale) is made in error in the 

course of conducting a permitted or 

excluded activity or is a subsequent 

transaction to correct such an error. The 

Agencies note that the availability of the 

proposed exclusion will depend on the 

facts and circumstances of the 

transactions. For example, the failure of 

a banking entity to make reasonable 

efforts to prevent errors from 

occurring—as indicated, for example, by 

the magnitude or frequency of errors, 

taking into account the size, activities, 

and risk profile of the banking entity— 

or to identify and correct trading errors 

in a timely and appropriate manner may 

indicate trading activity that is not truly 

an error and therefore inconsistent with 

the exclusion. 

As an additional condition, once the 

banking entity identifies purchases 

made in error, it would be required to 

transfer the financial instrument to a 

separately-managed trade error account 

for disposition, as a further indication 

that the transaction reflects a bona fide 

error. The Agencies believe that this 

separately-managed trade error account 

should be monitored and managed by 

personnel independent from the traders 

who made the error and that banking 

entities should monitor and manage 

trade error corrections and trade error 

accounts. Doing so would help prevent 

personnel from using these accounts to 

evade the prohibition on proprietary 

trading, such as by retaining positions 

in error accounts to benefit from shortterm price movements or by 

intentionally and incorrectly classifying 

transactions as error trades or as 

corrections of error trades in order to 

realize short term profits. 


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80See 2013 final rule §ll.4(a)(2); §ll.4(b)(2). 

81See 2013 final rule §ll.4(b)(2)(ii). 

82See 2013 final rule Appendix A. 83 2013 final rule §ll.3(e)(13). 

Question 52. Does the proposed 

exclusion align with existing policies 

and procedures that banking entities use 

to correct trading errors? Why or why 

not? 

Question 53. Is the proposed 

exclusion for bona fide errors 

sufficiently narrow so as to prevent 

banking entities from evading other 

requirements of the rule? Conversely, 

would it be too narrow to be workable? 

Why or why not? 

Question 54. Do commenters believe 

that the proposed exclusion for bona 

fide trade errors is sufficiently clear? If 

not, why not, and how should the 

Agencies clarify it? 

Question 55. Does the proposed 

exclusion conflict with any of the 

requirements of a self-regulatory 

organization’s rules for correcting 

trading errors? If it does, should the 

Agencies give banking entities the 

option of complying with those rules 

instead of the requirements of the 

proposed exclusion? When answering 

this question, commenters should 

explain why the rules of self-regulatory 

organizations are sufficient to prevent 

personnel from evading the prohibition 

on proprietary trading. 

Question 56. Should the Agencies 

provide specific criteria or factors to 

help banking entities determine what 

constitutes a separately managed trade 

error account? Why or why not? How 

would these factors or criteria help 

banking entities identify activities that 

are covered by the proposed exclusion 

for trading errors? 

3. Definition of Other Terms Related to 

Proprietary Trading 

The Agencies are requesting comment 

on alternatives to the 2013 final rule’s 

definition of ‘‘trading desk.’’ The trading 

desk definition is significant because 

compliance with the underwriting and 

market-making provisions is determined 

at the trading-desk level.80 For example, 

the ‘‘reasonably expected near-term 

customer demand,’’ or RENTD, 

requirements for both underwriting and 

market-making activities must be 

calculated for each trading desk.81

Additionally, under the 2013 final rule, 

banking entities must furnish metrics at 

the trading-desk level.82 Further, the 

proposed presumption of compliance 

with the prohibition on proprietary 

trading would require trading desks 

operating pursuant to the presumption 

to calculate absolute P&L at the trading 

desk level and would apply to all the 

activities of the trading desk. 

Under the 2013 final rule, ‘‘trading 

desk’’ is defined as ‘‘the smallest 

discrete unit of organization of a 

banking entity that purchases or sells 

financial instruments for the trading 

account of the banking entity or an 

affiliate thereof.’’ 83 Some banking 

entities have indicated that, in practice, 

this definition has led to uncertainty 

regarding the meaning of ‘‘smallest 

discrete unit.’’ Some banking entities 

have also communicated that this 

definition has caused confusion and 

duplicative compliance and reporting 

efforts for banking entities that also 

define trading desks for purposes not 

related to the 2013 final rule, including 

for internal risk management and 

reporting and calculating regulatory 

capital requirements. 

Accordingly, the Agencies are 

requesting comment on whether to 

revise the trading desk definition to 

align with the trading desk concept used 

for other purposes. The Agencies are 

seeking comment on a potential multifactor trading desk definition based on 

the same criteria typically used to 

establish trading desks for other 

operational, management, and 

compliance purposes. For example, the 

Agencies could define a trading desk as 

a unit of organization of a banking entity 

that purchases or sells financial 

instruments for the trading account of 

the banking entity or an affiliate thereof 

that is: 

• Structured by the banking entity to 

establish efficient trading for a market 

sector; 

• Organized to ensure appropriate 

setting, monitoring, and management 

review of the desk’s trading and hedging 

limits, current and potential future loss 

exposures, strategies, and compensation 

incentives; and 

• Characterized by a clearly-defined 

unit of personnel that typically: 

Æ Engages in coordinated trading 

activity with a unified approach to its 

key elements; 

Æ Operates subject to a common and 

calibrated set of risk metrics, risk levels, 

and joint trading limits; 

Æ Submits compliance reports and 

other information as a unit for 

monitoring by management; and 

Æ Books its trades together. 

The Agencies believe that this 

potential approach to the definition of 

trading desk could be easier to monitor 

and for banking entities to apply. At the 

same time, however, any revised 

definition should not be so broad as to 

hinder the ability of the Agencies or the 

banking entities to detect prohibited 

proprietary trading. 

Under the alternative approach on 

which the Agencies are requesting 

comment, a banking entity’s trading 

desk designations would be subject to 

Agency review, as appropriate, through 

the examination process or otherwise. 

Such a definition would be intended to 

reduce the burdens on banking entities 

by aligning the regulation’s trading desk 

concept with the organizational 

structure that firms already have in 

place for purposes of carrying out their 

ordinary course business activities. 

Specifically, to the extent the trading 

desk definition in the 2013 final rule 

has been interpreted to apply at too 

granular a level, the Agencies request 

comment as to whether such a 

definition would reduce compliance 

costs by clarifying that banking entities 

are not required to maintain policies 

and procedures and to collect and report 

information at a level of the 

organization identified solely for 

purposes of section 13 of the BHC Act 

and implementing regulations. 

Question 57. Should the Agencies 

revise the trading desk definition to 

align with the level of organization 

established by banking entities for other 

purposes, such as for other operational, 

management, and compliance purposes? 

Which of the proposed factors would be 

appropriate to include in the trading 

desk definition? Do these factors reflect 

the same principles banking entities 

typically use to define trading desks in 

the ordinary course of business? Are 

there any other factors that the Agencies 

should consider such as, for example, 

how a banking entity would monitor 

and aggregate P&L for purposes other 

than compliance with section 13 of the 

BHC Act and the implementing 

regulation? 

Question 58. How would the adoption 

of a different trading desk definition 

affect the ability of banking entities and 

the Agencies to detect impermissible 

proprietary trading? Please explain. 

Would a different definition of ‘‘trading 

desk’’ make it easier or harder for 

banking entities and supervisors to 

monitor their trading activities for 

consistency with section 13 of the BHC 

Act and implementing regulations? 

Would allowing banking entities to 

define ‘‘trading desk’’ for purposes of 

compliance with section 13 of the BHC 

Act and the implementing regulations 

create opportunities for evasion, and if 

so, how could such concerns be 

mitigated? 

Question 59. Please discuss any 

positive or negative consequences or 

costs and benefits that could result if a 

‘‘trading desk’’ is not defined as ‘‘the 


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33454 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

84 12 U.S.C. 1851(h)(6). 

85See §ll.3(b) of the proposed rule. 

86See 12 U.S.C. 1851(h)(6). 

87These notice and response procedures would 

be consistent with procedures that apply to many 

banking entities in other contexts. See 12 CFR 

3.404. 88 12 U.S.C. 1851(d)(1)(B). 

smallest discrete unit of organization of 

a banking entity that purchases or sells 

financial instruments for the trading 

account of the banking entity or an 

affiliate thereof.’’ Please include in your 

discussion any positive or negative 

impact with respect to (i) the ability to 

record the quantitative measurements 

required in the Appendix and (ii) the 

usefulness of such quantitative 

measurements. 

e. Reservation of Authority 

The Agencies propose to include a 

reservation of authority allowing an 

Agency to determine, on a case-by-case 

basis, that any purchase or sale of one 

or more financial instruments by a 

banking entity for which it is the 

primary financial regulatory agency 

either is or is not for the trading account 

as defined in section 13(h)(6) of the BHC 

Act.84 In evaluating whether the Agency 

should designate a purchase or sale as 

for the trading account, the Agency will 

consider consistency with the statutory 

definition, and, to the extent 

appropriate and consistent with the 

statute, may consider the impact of the 

activity on the safety and soundness of 

the financial institution or the financial 

stability of the United States, the risk 

characteristics of the particular activity, 

or any other relevant factor. 

The Agencies request comment as to 

whether such a reservation of authority 

would be necessary in connection with 

the proposed definition of trading 

account, which would focus on 

objective factors rather than on 

subjective intent.85 While the Agencies 

recognize that the use of objective 

factors to define proprietary trading is 

intended to simplify compliance, the 

Agencies also recognize that this 

approach may, in some circumstances, 

produce results that are either underinclusive or over-inclusive with respect 

to the definition of proprietary trading. 

The Agencies further recognize that the 

underlying statute sets forth elements of 

proprietary trading that are inherently 

subjective, for example, ‘‘intent to resell 

in order to profit from short-term price 

movements.’’ 86 In order to provide 

appropriate balance and to recognize the 

subjective elements of the statute, the 

Agencies request comment as to 

whether a reservation of authority is 

appropriate. 

The Agencies propose to administer 

this reservation of authority with 

appropriate notice and response 

procedures. In those circumstances 

where the primary financial regulatory 

agency of a banking entity determines 

that the purchase or sale of one or more 

financial instruments is for the trading 

account, the Agency would be required 

to provide written notice to the banking 

entity explaining why the purchase or 

sale is for the trading account. The 

Agency would also be required to 

provide the banking entity with a 

reasonable opportunity to provide a 

written response before the Agency 

reaches a final decision. Specifically, a 

banking entity would have 30 days to 

respond to the notice with any 

objections to the determination and any 

factors that the banking entity would 

have the Agency consider in reaching its 

final determination. The Agency could, 

in its discretion, extend the response 

period beyond 30 days for good cause. 

The Agency could also shorten the 

response period if the banking entity 

consents to a shorter response period or, 

if, in the opinion of the Agency, the 

activities or condition of the banking 

entity so requires, provided that the 

banking entity is informed promptly of 

the new response period. Failure to 

respond within the time period would 

amount to a waiver of any objections to 

the Agency’s determination that a 

purchase or sale is for the trading 

account. After the close of banking 

entity’s response period, the Agency 

would decide, based on a review of the 

banking entity’s response and other 

information concerning the banking 

entity, whether to maintain the 

Agency’s determination that the 

purchase or sale is for the trading 

account. The banking entity would be 

notified of the decision in writing. The 

notice would include an explanation of 

the decision.87

Question 60. Is the reservation of 

authority to allow the appropriate 

Agency to determine whether a 

particular activity is proprietary trading 

appropriate? Why or why not? 

Question 61. Would the proposed 

reservation of authority further the goals 

of transparency and consistency in 

interpretation of section 13 of the BHC 

Act and the implementing regulations? 

Would it be more appropriate to have 

these type of determinations made 

jointly by the Agencies? Is the standard 

by which an Agency would make a 

determination under the proposed 

reservation of authority sufficiently 

clear? If determinations are not made 

jointly by the Agencies, what concerns 

could be presented if two banking entity 

affiliates receive different or conflicting 

determinations from different Agencies? 

Question 62. Should Agencies’ 

determinations pursuant to the 

reservation of authority be made public? 

Would publication of such 

determinations further the goals of 

consistency and transparency? Please 

explain. Should the Agencies follow 

consistent practices with respect to 

publishing notices of determinations 

pursuant to the reservation of authority? 

Question 63. Are the notice and 

response procedures adequate? Why or 

why not? Recognizing that market 

regulators operate under a different 

regulatory structure as compared to the 

Federal banking agencies, should the 

proposed notice and response 

procedures be modified to account for 

such differences (including by creating 

separate procedures that would be 

applicable solely in the case of reporting 

to market regulators)? Why or why not? 

2. Section ll.4: Permitted 

Underwriting and Market-Making 

Activities 

a. Permitted Underwriting Activities 

Section 13(d)(1)(B) of the BHC Act 

contains an exemption from the 

prohibition on proprietary trading for 

the purchase, sale, acquisition, or 

disposition of securities, derivatives, 

contracts of sale of a commodity for 

future delivery, and options on any of 

the foregoing in connection with 

underwriting activities, to the extent 

that such activities are designed not to 

exceed RENTD.88 Section ll.4(a) of 

the 2013 final rule implements the 

statutory exemption for underwriting 

and sets forth the requirements that 

banking entities must meet in order to 

rely on the exemption. Among other 

things, the 2013 final rule requires that: 

• The banking entity act as an 

‘‘underwriter’’ for a ‘‘distribution’’ of 

securities and the trading desk’s 

underwriting position be related to such 

distribution; 

• The amount and types of securities 

in the trading desk’s underwriting 

position be designed not to exceed the 

reasonably expected near term demands 

of clients, customers, or counterparties, 

and reasonable efforts be made to sell or 

otherwise reduce the underwriting 

position within a reasonable period, 

taking into account the liquidity, 

maturity, and depth of the market for 

the relevant type of security; 

• The banking entity has established 

and implements, maintains, and 

enforces an internal compliance 

program that is reasonably designed to 


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89See 79 FR at 5561 (internal footnotes omitted). 

90See id. 

91See id. 

92See id. 

93See supra Part I.A of this SUPPLEMENTARY

INFORMATION section. 

94 Id. 

95 12 U.S.C. 1851(d)(1)(B). 

96See 2013 final rule §ll.4(a)(2)(ii). 

97See supra Part I.A. of this SUPPLEMENTARY

INFORMATION section. 

98As a consequence of these proposed changes to 

focus on risk limits, many of the requirements of 

the 2013 final rule relating to risk limits associated 

with underwriting would be incorporated into this 

requirement and modified or removed as 

appropriate in this section of the proposal. 

ensure the banking entity’s compliance 

with the requirements of the 

underwriting exemption, including 

reasonably designed written policies 

and procedures, internal controls, 

analysis, and independent testing 

identifying and addressing: 

Æ The products, instruments, or 

exposures each trading desk may 

purchase, sell, or manage as part of its 

underwriting activities; 

Æ Limits for each trading desk, based 

on the nature and amount of the trading 

desk’s underwriting activities, including 

the reasonably expected near term 

demands of clients, customers, or 

counterparties, on the amount, types, 

and risk of the trading desk’s 

underwriting position, level of 

exposures to relevant risk factors arising 

from the trading desk’s underwriting 

position, and period of time a security 

may be held; 

Æ Internal controls and ongoing 

monitoring and analysis of each trading 

desk’s compliance with its limits; and 

Æ Authorization procedures, 

including escalation procedures that 

require review and approval of any 

trade that would exceed a trading desk’s 

limit(s), demonstrable analysis of the 

basis for any temporary or permanent 

increase to a trading desk’s limit(s), and 

independent review of such 

demonstrable analysis and approval; 

• The compensation arrangements of 

persons performing the banking entity’s 

underwriting activities are designed not 

to reward or incentivize prohibited 

proprietary trading; and 

• The banking entity is licensed or 

registered to engage in the activity 

described in the underwriting 

exemption in accordance with 

applicable law. 

As the Agencies explained in the 2013 

final rule, underwriters play an 

important role in facilitating issuers’ 

access to funding, and thus 

underwriters are important to the 

capital formation process and economic 

growth.89 Obtaining new financing can 

be expensive for an issuer because of the 

natural information advantage that less 

well-known issuers have over investors 

about the quality of their future 

investment opportunities.90 An 

underwriter can help reduce these costs 

by mitigating the information 

asymmetry between an issuer and its 

potential investors.91 The underwriter 

does this based in part on its familiarity 

with the issuer and other similar issuers 

as well as by collecting information 

about the issuer. This allows investors 

to look to the reputation and experience 

of the underwriter as well as its ability 

to provide information about the issuer 

and the underwriting.92

In recognition of how the 

underwriting market functions, the 

Agencies adopted a comprehensive, 

multi-faceted approach in the 2013 final 

rule. In the several years since the 

adoption of the 2013 final rule, 

however, public commenters have 

observed that the significant compliance 

requirements in the regulation may 

unnecessarily constrain underwriting 

without a corresponding reduction in 

the type of trading activities that the 

rule was designed to prohibit.93

As described in further detail below, 

the Agencies are proposing to tailor, 

streamline, and clarify the requirements 

that a banking entity must satisfy to 

avail itself of the underwriting 

exemption. In that regard, the Agencies 

are proposing to modify the 

underwriting exemption to clarify how 

a banking entity may measure and 

satisfy the statutory requirement that 

underwriting activity be designed not to 

exceed the reasonably expected near 

term demand of clients, customers, or 

counterparties. Specifically, the 

proposal would establish a 

presumption, available to banking 

entities both with and without 

significant trading assets and liabilities, 

that trading within internally set risk 

limits satisfies the statutory requirement 

that permitted underwriting activities 

must be designed not to exceed RENTD. 

The Agencies also are proposing to 

tailor the underwriting exemption’s 

compliance program requirements to the 

size, complexity, and type of activity 

conducted by the banking entity by 

making those requirements applicable 

only to banking entities with significant 

trading assets and liabilities. Based on 

feedback the Agencies have received, 

banking entities that do not have 

significant trading assets and liabilities 

can incur costs to establish, implement, 

maintain, and enforce the compliance 

program requirements in the 2013 final 

rule, notwithstanding the lower level of 

such banking entities’ trading 

activities.94 Accordingly, the Agencies 

believe that the proposed revisions to 

the underwriting exemption would 

provide banking entities that do not 

have significant trading assets and 

liabilities with more flexibility to meet 

client and customer demands and 

facilitate the capital formation process, 

while, consistent with the statute, 

continuing to safeguard against trading 

activity that could threaten the safety 

and soundness of banking entities and 

the financial stability of the United 

States, by more appropriately aligning 

the associated compliance obligations 

with the size of banking entities’ trading 

activities. 

b. RENTD Limits and Presumption of 

Compliance 

As described above, the statutory 

exemption for underwriting in section 

13(d)(1)(B) of the BHC Act requires that 

such activities be designed not to 

exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties.95 Consistent with the 

statute, §ll.4(a)(2)(ii) of the 2013 final 

rule’s underwriting exemption requires 

that the amount and type of the 

securities in the trading desk’s 

underwriting position be designed not 

to exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties, and reasonable efforts 

are made to sell or otherwise reduce the 

underwriting position within a 

reasonable period, taking into account 

the liquidity, maturity, and depth of the 

market for the relevant type of 

security.96

The Agencies’ experience 

implementing the 2013 final rule has 

indicated that the approach the 

Agencies have taken to give effect to the 

statutory standard of reasonably 

expected near term demands of clients, 

customers, or counterparties may be 

overly broad and complex, and also may 

inhibit otherwise permissible 

underwriting activity. The Agencies 

have received feedback as part of 

implementing the rule that compliance 

with the factors in the rule can be 

complex and costly.97

Instead of the approach for the 

underwriting exemption in the 2013 

final rule, the Agencies are proposing to 

establish the articulation and use of 

internal risk limits as a key mechanism 

for conducting trading activity in 

accordance with the rule’s underwriting 

exemption.98 In particular, the proposal 

would provide that the purchase or sale 

of a financial instrument by a banking 

entity shall be presumed to be designed 

not to exceed, on an ongoing basis, the 

reasonably expected near term demands 


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33456 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

99Under the proposal, banking entities with 

significant trading assets and liabilities would 

continue to be required to establish internal risk 

limits for each trading desk as part of the 

underwriting compliance program requirement in 

§ll.4(a)(2)(iii)(B), the elements of which would 

cross-reference directly to the requirement in 

proposed §ll.4(a)(8)(i). Banking entities that do 

not have significant trading assets and liabilities 

would no longer be required to establish a 

compliance program that is specific for the 

purposes of complying with the exemption for 

underwriting, but would need to do so if they chose 

to utilize the proposed presumption of compliance 

with respect to the statutory RENTD requirement in 

section 13(d)(1)(B) of the BHC Act. 

100The Agencies expect that the risk and position 

limits metric that is already required for certain 

banking entities under the 2013 final rule (and 

would continue to be required under the Appendix 

to the proposal) would help banking entities and 

the Agencies to manage and monitor the 

underwriting activities of banking entities subject to 

the metrics reporting and recordkeeping 

requirements of the Appendix. See infra Part 

III.E.2.i.i. 

of clients, customers, or counterparties 

if the banking entity establishes internal 

risk limits for each trading desk, subject 

to certain conditions, and implements, 

maintains, and enforces those limits, 

such that the risk of the financial 

instruments held by the trading desk 

does not exceed such limits. The 

Agencies believe that this approach 

would provide firms with more 

flexibility and certainty in conducting 

permissible underwriting. 

Under the proposal, all banking 

entities, regardless of their volume of 

trading assets and liabilities, would be 

able to voluntarily avail themselves of 

the presumption of 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. Specifically, the 

proposal would provide that a banking 

entity would establish internal risk 

limits for each trading desk that are 

designed not to exceed the reasonably 

expected near term demands of clients, 

customers, or counterparties, based on 

the nature and amount of the trading 

desk’s underwriting activities, on the: 

(1) Amount, types, and risk of its 

underwriting position; 

(2) Level of exposures to relevant risk 

factors arising from its underwriting 

position; and 

(3) Period of time a security may be 

held. 

Banking entities utilizing this 

presumption would be required to 

maintain internal policies and 

procedures for setting and reviewing 

desk-level risk limits in a manner 

consistent with the statute.99 The 

proposed approach would not require 

that a banking entity’s risk limits be 

based on any specific or mandated 

analysis, as required under the 2013 

final rule. Rather, a banking entity 

would establish the risk limits 

according to its own internal analyses 

and processes around conducting its 

underwriting activities in accordance 

with section 13(d)(1)(B).100

The proposal would require a banking 

entity to promptly report to the 

appropriate Agency when a trading desk 

exceeds or increases its internal risk 

limits. A banking entity would also be 

required to report to the appropriate 

Agency any temporary or permanent 

increase in an internal risk limit. In the 

case of both reporting requirements (i.e., 

notice of an internal risk limit being 

exceeded and notice of an increase to 

the limit), the notice would be 

submitted in the form and manner as 

directed by the applicable Agency. 

As noted, a banking entity would not 

be required to adhere to any specific, 

pre-defined requirements for the limitsetting process beyond the banking 

entity’s own ongoing and internal 

assessment of the amount of activity 

that is required to conduct 

underwriting, including to reflect the 

banking entity’s ongoing and internal 

assessment of the reasonably expected 

near term demands of clients, 

customers, or counterparties. The 

proposal would, however, provide that 

internal risk limits established by a 

banking entity shall be subject to review 

and oversight by the appropriate Agency 

on an ongoing basis. Any review of such 

limits would assess whether or not 

those limits are established based on the 

statutory standard—i.e., the trading 

desk’s reasonably expected near term 

demands of clients, customers, or 

counterparties on an ongoing basis, 

based on the nature and amount of the 

trading desk’s underwriting activities. 

So long as a banking entity has 

established and implements, maintains, 

and enforces such limits, the proposal 

would presume that all trading activity 

conducted within the limits meets the 

requirements that the underwriting 

activity be based on the reasonably 

expected near term demands of clients, 

customers, or counterparties. The 

Agencies would expect to closely 

monitor and review any instances of a 

banking entity exceeding a risk limit as 

well as any temporary or permanent 

increase to a trading desk limit. 

Under the proposal, the presumption 

of compliance for permissible 

underwriting activities may be rebutted 

by the Agency if the Agency determines, 

based on all relevant facts and 

circumstances, that a trading desk is 

engaging in activity that is not based on 

the trading desk’s reasonably expected 

near term demands of clients, 

customers, or counterparties on an 

ongoing basis. The Agency would 

provide notice of any such 

determination to the banking entity in 

writing. 

The Agencies request comment on the 

proposed addition of a presumption that 

conducting underwriting activities 

within internally set risk limits satisfies 

the requirement that permitted 

underwriting activities be designed not 

to exceed the reasonably expected nearterm demands of clients, customers, or 

counterparties. In particular, the 

Agencies request comment on the 

following questions: 

Question 64. 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? 

Question 65. How would the 

proposed approach, as it relates to the 

establishment and reliance on internal 

trading limits, impact the capital 

formation process and the liquidity of 

particular markets? 

Question 66. How would the 

proposed approach, as it relates to the 

establishment and reliance on internal 

trading limits, impact the underlying 

objectives of section 13 of the BHC Act 

and the 2013 final rule? For example, 

how should the Agencies assess internal 

trading limits and any changes in them? 

Question 67. 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 of 

historical customer demand, current 

inventory of financial instruments, and 

market and other factors regarding the 

amount, types, and risks of or associated 

with positions in financial instruments 

in which the trading desk makes a 

market, including through block trades. 

Do commenters agree with the revised 

approach? What are the costs and 

benefits of eliminating these 

requirements? 

Question 68. Would the proposal’s 

approach to permissible underwriting 

activities effectively implement the 

statutory exemption? Why or why not? 

Would this approach improve the 

ability of banking entities to engage in 

underwriting relative to the 2013 final 

rule? If not, what approach would be 

better? Please explain. 

Question 69. Does the proposed 

reliance on using a trading desk’s 

internal risk limits to comply with the 

statutory RENTD requirement in section 

13(d)(1)(B) of the BHC Act present 

opportunities to evade the overall 


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prohibition on proprietary trading? If so, 

how? Please be as specific as possible. 

Additionally, please provide any 

changes to the proposal that might 

address such potential circumvention. 

Alternatively, please explain why the 

proposal to rely on a trading desk’s 

internal risk limits to comply with the 

statutory RENTD requirement should 

not present opportunities to evade the 

prohibition on proprietary trading. 

Question 70. Do banking entities need 

greater clarity about how to set the 

proposed internal risk limits for 

permissible underwriting activity? If so, 

what additional information would be 

useful? Please explain. 

Question 71. Are the proposed 

changes to the exemption for 

underwriting appropriately tailored to 

the operation and structure of the 

underwriting market, particularly firm 

commitment offerings? Could the 

proposal be modified in order to better 

align with the operation and structure of 

the underwriting market? Recognizing 

that the proposal would not require 

banking entities to use their internal risk 

limits to establish a rebuttable 

presumption of compliance with the 

requirements of section 13(d)(1)(B) of 

the BHC Act, would the proposal be 

workable in the context of underwritten 

offerings, including firm commitment 

underwritings? How would an Agency 

rebut the presumption of compliance in 

the context of underwritten offerings, 

including firm commitment 

underwritings? Could the proposal, if 

adopted, affect a banking entity’s 

willingness to participate in a firm 

commitment underwriting? Please 

explain, being as specific as possible. 

Question 72. Should any additional 

guidance or information be provided to 

explain the process and standard by 

which the Agencies could rebut the 

presumption of permissible 

underwriting? If so, please explain. 

Please include specific subject areas that 

could be addressed in such guidance 

(e.g., criteria used as the basis for a 

rebuttal, the rebuttal process, etc.). 

Question 73. 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? If so, please describe 

these modifications as well as how they 

would improve the efficiency of the 

underwriting exemption and meet the 

statutory standard. 

Question 74. Under the proposed 

presumption of compliance for 

permissible underwriting activities, 

banking entities would be required to 

notify the appropriate Agency when a 

trading limit is exceeded or increased 

(either on a temporary or permanent 

basis), in each case in the form and 

manner as directed by each Agency. Is 

this requirement sufficiently clear? 

Should the Agencies provide greater 

clarity about the form and manner for 

providing this notice? Should those 

notices be required to be provided 

‘‘promptly’’ or should an alternative 

time frame apply? Alternatively, should 

each Agency establish its own deadline 

for when these notices should be 

provided? Please explain. 

Question 75. Should the Agencies 

instead establish a uniform method of 

reporting when a trading desk exceeds 

or increases an internal risk limit (e.g., 

a standardized form)? Why or why not? 

If so, please provide as much detail as 

possible. If not, please describe any 

impediments or costs to implementing a 

uniform notification process and 

explain why such a system may not be 

efficient or might undermine the 

effectiveness of the proposed 

notification requirement. 

Question 76: Should the Agencies 

implement an alternative reporting 

methodology for notifying the 

appropriate Agency when a trading 

limit is exceeded or increased that 

would apply solely in the case of a 

banking entity’s obligation to report 

such occurrences to a market regulator? 

For example, instead of an affirmative 

notice requirement, should such 

banking entities be required to make 

and keep a detailed record of each 

instance as part of its books and records, 

and to provide such records to SEC or 

CFTC staff promptly upon request or 

during an examination? Why or why 

not? As an additional alternative, 

should banking entities be required to 

escalate notices of limit exceedances or 

changes internally for further inquiry 

and determination as to whether notice 

should be given to the applicable market 

regulator, using objective factors 

provided by the rule, be a more 

appropriate process for these banking 

entities? Why or why not? If such an 

approach would be more appropriate, 

what objective factors should be used to 

determine when notice should be given 

to the applicable regulator? Please be as 

specific as possible. 

Question 77. Should the Agencies 

specify notice and response procedures 

in connection with an Agency 

determination that the presumption 

pursuant to § ll.4(a)(8)(iv) is rebutted? 

Why or why not? If so, what type of 

procedures should they specify? For 

example, should the notice and 

response procedures be similar to those 

in §ll.3(g)(2)? If not, what other 

approach would be appropriate? 

c. Compliance Program and Other 

Requirements 

The underwriting exemption in the 

2013 final rule requires that a banking 

entity establishes and implements, 

maintains, and enforces a compliance 

program, as required by subpart D, that 

is reasonably designed to ensure 

compliance with the requirements of the 

exemption. Such compliance program is 

required to include reasonably designed 

written policies and procedures, 

internal controls, analysis and 

independent testing identifying and 

addressing: (i) The products, 

instruments, or exposures each trading 

desk may purchase, sell, or manage as 

part of its underwriting activities; (ii) 

limits for each trading desk, based on 

the nature and amount of the trading 

desk’s underwriting activities, including 

the reasonably expected near term 

demands of clients, customers, or 

counterparties, based on certain factors; 

(iii) internal controls and ongoing 

monitoring and analysis of each trading 

desk’s compliance with its limits; and 

(iv) authorization procedures, including 

escalation procedures that require 

review and approval of any trade that 

would exceed one or more of a trading 

desk’s limits, demonstrable analysis of 

the basis for any temporary or 

permanent increase to one or more of a 

trading desk’s limits, and independent 

review (i.e., by risk managers and 

compliance officers at the appropriate 

level independent of the trading desk) of 

such demonstrable analysis and 

approval. 

Banking entities and others have 

stated that the compliance program 

requirements of the underwriting 

exemption are overly complex and 

burdensome. The Agencies generally 

believe the compliance program 

requirements play an important role in 

facilitating and monitoring a banking 

entity’s compliance with the exemption. 

However, with the benefit of experience, 

the Agencies also believe those 

requirements can be appropriately 

tailored to the scope of the underwriting 

activities conducted by each banking 

entity. 

Specifically, the Agencies are 

proposing a tiered approach to the 

underwriting exemption’s compliance 

program requirements so as to make 

them commensurate with the size, 

scope, and complexity of the relevant 

banking entity’s trading activities and 

business structure. Consistent with the 


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101Under the 2013 final rule, the compliance 

program requirement in §ll.4(a)(2)(iii) is part of 

the compliance program required by subpart D, but 

is specifically used for purposes of complying with 

the exemption for underwriting activity. 

102Under the proposal, the compliance program 

requirements that are specific for the purposes of 

complying with the exemption for underwriting 

activities in §ll.4(a) would remain unchanged for 

banking entities with significant trading assets and 

liabilities, although the requirements related to 

limits for each trading desk would be moved (but 

not modified) into new §ll.4(a)(8)(i) as part of 

the proposed presumption of compliance. 

103 12 U.S.C. 1851(d)(1)(B). 

104See 79 FR at 5612. 

105See id. at 5615. 

106See id. at 5576. In addition, staffs from some 

of the Agencies have analyzed the liquidity of the 

corporate bond market in the time since the 2013 

final rule was adopted. For example, Federal 

Reserve Board staff have prepared quarterly reports 

2013 final rule, a banking entity with 

significant trading assets and liabilities 

would continue to be required to 

establish, implement, maintain, and 

enforce a comprehensive internal 

compliance program as a condition for 

relying on the underwriting exemption. 

However, the Agencies propose to 

eliminate the exemption’s compliance 

program requirements for banking 

entities that have moderate or limited 

trading assets and liabilities.101

The proposed removal of the 

exemption’s compliance program 

requirements for banking entities that 

do not have significant trading assets 

and liabilities would not relieve those 

banking entities of the obligation to 

comply with the prohibitions on 

proprietary trading, and the other 

requirements of the exemption for 

underwriting activities, as set forth in 

section 13 of the BHC Act and the 2013 

final rule, both as currently written and 

as proposed to be amended. However, 

eliminating the compliance program 

requirements as a condition to being 

able to rely on the underwriting 

exemption should provide these 

banking entities that do not have 

significant trading assets and liabilities 

an appropriate amount of flexibility to 

tailor the means by which they seek to 

ensure compliance with the underlying 

requirements of the exemption for 

underwriting activities, and to allow 

them to structure their internal 

compliance measures in a way that 

takes into account the risk profile and 

underwriting activity of the particular 

trading desk. This proposed change 

would also be consistent with the 

proposed modifications to the general 

compliance program requirements for 

these banking entities under §ll.20 of 

the 2013 final rule, discussed further 

below in this SUPPLEMENTARY

INFORMATION section. 

The Agencies understand that 

banking entities that do not have 

significant trading assets and liabilities 

can incur significant costs to establish, 

implement, maintain, and enforce the 

compliance program requirements 

contained in the 2013 final rule. In some 

instances, those costs may be 

disproportionate to the banking entity’s 

trading activity and risk. Accordingly, 

eliminating the compliance program 

requirements for banking entities that 

do not have significant trading assets 

and liabilities may reduce costs that are 

passed on to investors and increase 

capital formation without materially 

impacting the rule’s ability to ensure 

that the objectives set forth in section 13 

of the BHC Act are satisfied.102

The Agencies request comment on the 

proposed revisions to the exemption for 

the underwriting activities compliance 

program requirement. In particular, the 

Agencies request comment on the 

following questions: 

Question 78. Would the proposed 

tiered compliance approach based on a 

banking entity’s trading assets and 

liabilities appropriately balance the 

costs and benefits for banking entities 

that do not have significant trading 

assets and liabilities? Why or why not? 

If so, how? If not, what other approach 

would be more appropriate? 

Question 79. Should the Agencies 

simplify and streamline the exemption 

for underwriting activities compliance 

requirements for banking entities with 

significant trading assets and liabilities? 

If so, please explain. 

Question 80. Do commenters agree 

with the proposal to have the 

underwriting exemption specific 

compliance program requirements apply 

only to banking entities with significant 

trading assets and liabilities? Why or 

why not? 

Question 81. In addition to the 

proposed changes to the underwriting 

exemption, are there any technical 

corrections the Agencies should make to 

§ ll.4(a), such as to eliminate 

redundant or duplicative language or to 

correct or refine certain crossreferences? If so, please explain. 

d. Market-Making Activities 

Section 13(d)(1)(B) of the BHC Act 

contains an exemption from the 

prohibition on proprietary trading for 

the purchase, sale, acquisition, or 

disposition of securities, derivatives, 

contracts of sale of a commodity for 

future delivery, and options on any of 

the foregoing in connection with market 

making-related activities, to the extent 

that such activities are designed not to 

exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties.103 Sectionll.4(b) of 

the 2013 final rule implements the 

statutory exemption for market makingrelated activities and sets forth the 

requirements that all banking entities 

must meet in order to rely on the 

exemption. Among other things, the 

2013 final rule requires that: 

• The trading desk that establishes 

and manages the financial exposure 

routinely stands ready to purchase and 

sell one or more types of financial 

instruments related to its financial 

exposure and is willing and available to 

quote, purchase and sell, or otherwise 

enter into long and short positions in 

those types of financial instruments for 

its own account, in commercially 

reasonable amounts and throughout 

market cycles on a basis appropriate for 

the liquidity, maturity, and depth of the 

market for the relevant types of financial 

instruments; 

• The amount, types, and risks of the 

financial instruments in the trading 

desk’s market maker inventory are 

designed not to exceed, on an ongoing 

basis, the reasonably expected near term 

demands of clients, customers, or 

counterparties, as required by the 

statute and based on certain factors and 

analysis specified in the rule; 

• The banking entity has established 

and implements, maintains, and 

enforces an internal compliance 

program that is reasonably designed to 

ensure its compliance with the market 

making exemption, including 

reasonably designed written policies 

and procedures, internal controls, 

analysis, and independent testing 

identifying and assessing certain 

specified factors; 104

• To the extent that any required 

limit 105 established by the trading desk 

is exceeded, the trading desk takes 

action to bring the trading desk into 

compliance with the limits as promptly 

as possible after the limit is exceeded; 

• The compensation arrangements of 

persons performing market makingrelated activities are designed not to 

reward or incentivize prohibited 

proprietary trading; and 

• The banking entity is licensed or 

registered to engage in market makingrelated activities in accordance with 

applicable law. 

When adopting the 2013 final rule, 

the Agencies endeavored to balance two 

goals of section 13 of the BHC Act: To 

allow market making to take place, 

which is important to well-functioning 

and liquid markets as well as the 

economy, and simultaneously to 

prohibit proprietary trading unrelated to 

market making or other permitted 

activities, consistent with the statute.106


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to monitor market-level liquidity in corporate bond 

markets since 2014. See https://

www.federalreserve.gov/foia/corporate-bondliquidity-reports.htm. See also Report to Congress: 

Access to Capital and Market Liquidity, SEC 

Division of Economic and Risk Analysis staff, 

https://www.sec.gov/files/access-to-capital-andmarket-liquidity-study-dera-2017.pdf (‘‘Access to 

Capital and Market Liquidity’’). 

107See supra Part I of this SUPPLEMENTARY

INFORMATION section. 

108See supra Part III.B.2.a of this SUPPLEMENTARY

INFORMATION section. 

109 Id. 

110 12 U.S.C. 1851(d)(1)(B). 

111See 2013 final rule §ll.4(b)(2)(iii). 

112See supra Part I.A. 

113As a consequence of these changes to focus on 

risk limits, many of the requirements of the 2013 

final rule relating to risk limits associated with 

market making-related activity have been 

incorporated into this requirement and modified or 

deleted as appropriate in this section of the 

proposal. 

To accomplish these goals the Agencies 

adopted a comprehensive, multi-faceted 

approach. In the several years since the 

adoption of the 2013 final rule, 

however, the Agencies have observed 

that the significant compliance 

requirements and lack of clear bright 

lines in the regulation may 

unnecessarily constrain market 

making,107 and the Agencies believe 

some of the requirements are 

unnecessary to prevent the type of 

trading activities that the rule was 

designed to prohibit. 

As described in further detail below, 

the Agencies are proposing to tailor, 

streamline, and clarify the requirements 

that a banking entity must satisfy to 

avail itself of the market making 

exemption. Similar to the proposed 

underwriting exemption,108 the 

Agencies are proposing to modify the 

market making exemption by providing 

a clearer way to measure and satisfy the 

statutory requirement that market 

making-related activity be designed not 

to exceed the reasonably expected near 

term demand of clients, customers, or 

counterparties. Specifically, the 

proposal would establish a 

presumption, available to banking 

entities both with and without 

significant trading assets and liabilities, 

that trading within internally set risk 

limits satisfies the statutory requirement 

that permitted market making-related 

activities must be designed not to 

exceed RENTD. In addition, the 

Agencies also are proposing to tailor the 

market making exemption’s compliance 

program requirements to the size, 

complexity, and type of activity 

conducted by the banking entity by 

making those requirements applicable 

only to banking entities with significant 

trading assets and liabilities. 

Based on feedback the Agencies have 

received, banking entities that do not 

have significant trading assets and 

liabilities can incur substantial costs to 

establish, implement, maintain, and 

enforce the compliance program 

requirements in the 2013 final rule, 

notwithstanding the lower level of such 

banking entities’ trading activities.109

Accordingly, the Agencies believe that 

the proposed revisions to the market 

making exemption would provide 

banking entities that do not have 

significant trading assets and liabilities 

with more flexibility to meet customer 

demands and facilitate robust trading 

markets, while continuing to safeguard 

against trading activity that could 

threaten the safety and soundness of 

banking entities and the financial 

stability of the United States by more 

appropriately aligning the associated 

compliance obligations with the size of 

banking entities’ trading activities. 

e. RENTD Limits and Presumption of 

Compliance 

As described above, the statutory 

exemption for market making-related 

activities in section 13(d)(1)(B) of the 

BHC Act requires that such activities be 

designed not to exceed the reasonably 

expected near term demands of clients, 

customers, or counterparties.110

Consistent with the statute, 

§ ll.4(b)(2)(ii) of the 2013 final rule’s 

market making exemption requires that 

the amount, types, and risks of the 

financial instruments in the trading 

desk’s market maker inventory be 

designed not to exceed, on an ongoing 

basis, the reasonably expected near term 

demands of clients, customers, or 

counterparties, based on certain market 

factors and analysis.111

The 2013 final rule provides two 

factors for assessing whether the 

amount, types, and risks of the financial 

instruments in the trading desk’s market 

maker inventory are designed not to 

exceed, on an ongoing basis, the 

reasonably expected near term demands 

of clients, customers, or counterparties. 

Specifically, these factors are: (i) The 

liquidity, maturity, and depth of the 

market for the relevant type of financial 

instrument(s), and (ii) demonstrable 

analysis of historical customer demand, 

current inventory of financial 

instruments, and market and other 

factors regarding the amount, types, and 

risks of or associated with positions in 

financial instruments in which the 

trading desk makes a market, including 

through block trades. Under 

§ ll.4(b)(2)(iii)(C) of the 2013 final 

rule, a banking entity must account for 

these considerations when establishing 

risk and inventory limits for each 

trading desk. 

The Agencies’ experience 

implementing the 2013 final rule has 

indicated that the approach the 

Agencies have taken to give effect to the 

statutory standard of reasonably 

expected near term demands of clients, 

customers, or counterparties may be 

overly broad and complex, and also may 

inhibit otherwise permissible market 

making-related activity. In particular, 

the Agencies have received feedback as 

part of implementing the rule that 

compliance with the factors in the rule 

can be complex and costly.112 For 

example, banking entities have 

communicated that they must engage in 

a number of complex and intensive 

analyses to meet the ‘‘demonstrable 

analysis’’ requirement under 

§ ll.4(b)(2)(ii)(B) and may still be 

unable to gain comfort that their bona 

fide market making-related activity 

meets these factors. Finally, the 

Agencies’ experience implementing the 

rule also indicates that the requirements 

of the 2013 final rule do not provide 

bright line conditions under which 

trading can clearly be classified as 

permissible market making. 

Accordingly, the Agencies are seeking 

comment on a proposal to implement 

this key statutory factor in a manner 

designed to provide banking entities 

and the Agencies with greater certainty 

and clarity about what activity 

constitutes permissible market making 

pursuant to the exemption. The 

Agencies are proposing to establish the 

articulation and use of internal risk 

limits as a key mechanism for 

conducting trading activity in 

accordance with the rule’s market 

making exemption.113 In particular, the 

proposal would provide that the 

purchase or sale of a financial 

instrument by a banking entity shall be 

presumed to be designed not to exceed, 

on an ongoing basis, the reasonably 

expected near term demands of clients, 

customers, or counterparties, based on 

the liquidity, maturity, and depth of the 

market for the relevant types of financial 

instrument, if the banking entity 

establishes internal risk limits for each 

trading desk, subject to certain 

conditions, and implements, maintains, 

and enforces those limits, such that the 

risk of the financial instruments held by 

the trading desk does not exceed such 

limits. The Agencies believe that this 

approach would allow for a clearer 

application of these exemptions, and 

would provide firms with more 

flexibility and certainty in conducting 

market making-related activities. 

Under the proposal, all banking 

entities, regardless of their volume of 


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114Under the proposal, banking entities with 

significant trading assets and liabilities would 

continue to be required to establish internal risk 

limits for each trading desk as part of the market 

making compliance program requirement in 

§ll.4(b)(2)(iii)(C), the elements of which would 

cross-reference directly to the requirement in 

proposed §ll.4(b)(6)(i). Banking entities without 

significant trading assets and liabilities would no 

longer be required to establish a compliance 

program that is specific for the purposes of 

complying with the exemption for market makingrelated activity, but would need to establish and 

implement, maintain, and enforce these limits if 

they chose to utilize the proposed presumption of 

compliance with respect to the statutory RENTD 

requirement in section 13(d)(1)(B) of the BHC Act. 

115The Agencies expect that the risk and position 

limits metric that is already required for certain 

banking entities under the 2013 final rule (and 

would continue to be required under the Appendix 

to the proposal) would help banking entities and 

the Agencies to manage and monitor the market 

making activities of banking entities subject to the 

metrics reporting and recordkeeping requirements 

of the Appendix. See infra Part III.E.2.i.i. 

trading assets and liabilities, would be 

able to voluntarily avail themselves of 

the presumption of compliance with the 

statutory RENTD requirement in section 

13(d)(1)(B) of the BHC Act by 

establishing and complying with 

internal risk limits. Specifically, the 

proposal would provide that a banking 

entity would establish internal risk 

limits for each trading desk that are 

designed not to exceed the reasonably 

expected near term demands of clients, 

customers, or counterparties, based on 

the nature and amount of the trading 

desk’s market making-related activities, 

on the: 

(1) Amount, types, and risks of its 

market maker positions; 

(2) Amount, types, and risks of the 

products, instruments, and exposures 

the trading desk may use for risk 

management purposes; 

(3) Level of exposures to relevant risk 

factors arising from its financial 

exposure; and 

(4) Period of time a financial 

instrument may be held. 

Banking entities utilizing this 

presumption would be required to 

maintain internal policies and 

procedures for setting and reviewing 

desk-level risk limits in a manner 

consistent with the statute.114 The 

proposed approach would not require 

that a banking entity’s risk limits be 

based on any specific or mandated 

analysis, as required under the 2013 

final rule. Rather, a banking entity 

would establish the risk limits 

according to its own internal analyses 

and processes around conducting its 

market making activities in accordance 

with section 13(d)(1)(B).115

The proposal would require a banking 

entity to promptly report to the 

appropriate Agency when a trading desk 

exceeds or increases its internal risk 

limits. A banking entity would also be 

required to report to the appropriate 

Agency any temporary or permanent 

increase in an internal risk limit. In the 

case of both reporting requirements (i.e., 

notice of an internal risk limit being 

exceeded and notice of an increase to 

the limit), the notice would be 

submitted in the form and manner as 

directed by the applicable Agency. 

As noted, a banking entity would not 

be required to adhere to any specific, 

pre-defined requirements for the limitsetting process beyond the banking 

entity’s own ongoing and internal 

assessment of the amount of activity 

that is required to conduct market 

making activity, including to reflect the 

banking entity’s ongoing and internal 

assessment of the reasonably expected 

near term demands of clients, 

customers, or counterparties. The 

proposal would, however, provide that 

internal risk limits established by a 

banking entity shall be subject to review 

and oversight by the appropriate Agency 

on an ongoing basis. Any review of such 

limits would assess whether or not 

those limits are established based on the 

statutory standard—i.e., the trading 

desk’s reasonably expected near term 

demands of clients, customers, or 

counterparties on an ongoing basis, 

based on the nature and amount of the 

trading desk’s market making-related 

activities. So long as a banking entity 

has established and implements, 

maintains, and enforces such limits, the 

proposal would presume that all trading 

activity conducted within the limits 

meets the requirements that the market 

making activity be based on the 

reasonably expected near term demands 

of clients, customers, or counterparties. 

The Agencies would expect to closely 

monitor and review any instances of a 

banking entity exceeding a risk limit as 

well as any temporary or permanent 

increase to a trading desk limit. 

Under the proposal, the presumption 

of compliance for permissible market 

making-related activities may be 

rebutted by the Agency if the Agency 

determines, based on all relevant facts 

and circumstances, that a trading desk 

is engaging in activity that is not based 

on the trading desk’s reasonably 

expected near term demands of clients, 

customers, or counterparties on an 

ongoing basis. The Agency would 

provide notice of any such 

determination to the banking entity in 

writing. 

The following is an example of the 

presumption of compliance for 

permissible market making-related 

activities. A transport company 

customer may seek to hedge its longterm exposure to price fluctuations in 

fuel by asking a banking entity to create 

a structured ten-year fuel swap with a 

notional amount of $1 billion because 

there is no liquid market for this type 

of swap. A trading desk at the banking 

entity that makes a market in energy 

swaps may respond to this customer’s 

hedging needs by executing a custom 

fuel swap with the customer. If the risk 

resulting from activities related to the 

transaction does not exceed the internal 

risk limits for the trading desk that 

makes a market in energy swaps, the 

banking entity shall be presumed to be 

engaged in permissible market makingrelated activity that is designed not to 

exceed, on an ongoing basis, the 

reasonably expected near term demands 

of clients, customers, or counterparties. 

Moreover, if assuming the position 

would result in an exposure exceeding 

the trading desk’s limits, the banking 

entity could increase the risk limit in 

accordance with its internal policies 

and procedures for reviewing and 

increasing risk limits so long as the 

increase was consistent with meeting 

the reasonably expected near term 

demands of clients, customers, and 

counterparties. 

The Agencies request comment on the 

proposed addition of a presumption that 

trading within internally set risk limits 

satisfies the statutory requirement that 

permitted market making-related 

activities be designed not to exceed the 

reasonably expected near-term demands 

of clients, customers, or counterparties. 

In particular, the Agencies request 

comment on the following questions: 

Question 82. Is the proposed 

presumption of compliance for 

transactions that are within internally 

set risk limits sufficiently clear? If not, 

what changes would further clarify the 

rule? Is there another approach that 

would be more appropriate? 

Question 83. Would the proposed 

approach—namely the reliance on 

internally set limits based on RENTD— 

adequately eliminate the need for a 

definition for ‘‘market maker 

inventory?’’ Why or why not? 

Question 84. How would the 

proposed approach, as it relates to the 

establishment and reliance on internal 

trading limits, impact the liquidity of 

particular markets? 

Question 85. How would the 

proposed approach, as it relates to the 

establishment and reliance on internal 

trading limits, impact the underlying 

objectives of section 13 of the BHC Act 

and the 2013 final rule? For example, 

how should the Agencies assess internal 

trading limits and any changes in them? 

Question 86. By proposing an 

approach that permits banking entities 

to rely on internally set limits to comply 


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with the statutory RENTD requirement, 

the rule would no longer expressly 

require firms to, among other things, 

conduct a demonstrable analysis of 

historical customer demand, current 

inventory of financial instruments, and 

market and other factors regarding the 

amount, types, and risks of or associated 

with positions in financial instruments 

in which the trading desk makes a 

market, including through block trades. 

Do commenters agree with the revised 

approach? What are the costs and 

benefits of eliminating these 

requirements? 

Question 87. Would the market 

making exemption, as proposed, present 

any problems for a trading desk that 

makes a market in derivatives? Are there 

any changes the Agencies could make to 

the proposal to clarify how the market 

making exemption applies to trading 

desks that make a market in derivatives? 

Question 88. Would the proposal’s 

approach to permissible market makingrelated activities effectively implement 

the statutory exemption? Why or why 

not? Would this approach improve the 

ability of banking entities to engage in 

market making relative to the 2013 final 

rule? If not, what approach would be 

better? Please explain. 

Question 89. Does the proposed 

reliance on using a trading desk’s 

internal risk limits to comply with the 

statutory RENTD requirement in section 

13(d)(1)(B) of the BHC Act present 

opportunities to evade the overall 

prohibition on proprietary trading? If so, 

how? Please be as specific as possible. 

Additionally, please provide any 

changes to the proposal that might 

address such potential circumvention. 

Alternatively, please explain whether 

the proposal to rely on a trading desk’s 

internal risk limits to comply with the 

statutory RENTD requirement would 

present opportunities to evade the 

prohibition on proprietary trading. 

Question 90. Do banking entities 

require greater clarity about how to set 

their internal risk limits for permissible 

market making-related activity? If so, 

what additional information would be 

useful? Please explain. 

Question 91. Should any additional 

guidance or information be provided to 

explain the process and standard by 

which the Agencies could rebut the 

presumption of permissible market 

making, including specific subject areas 

that could be addressed in such 

guidance (e.g., criteria used as the basis 

for a rebuttal, the rebuttal process, etc.)? 

If so, please explain. 

Question 92. Are there other 

modifications to the 2013 final rule’s 

requirements for permitted market 

making that would improve the 

efficiency of the rule’s 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? If so, 

please describe these modifications as 

well as how they would improve the 

efficiency of the rule and meet the 

statutory standard. 

Question 93. Under the proposed 

presumption of compliance for 

permissible market making-related 

activities, banking entities would be 

required to notify the appropriate 

Agency when a trading limit is 

exceeded or increased (either on a 

temporary or permanent basis), in each 

case in the form and manner as directed 

by each Agency. Is this requirement 

sufficiently clear? Should the Agencies 

provide greater clarity about the form 

and manner for providing this notice? 

Should those notices be required to be 

provided ‘‘promptly’’ or should an 

alternative timeframe apply? 

Alternatively, should each Agency 

establish its own deadline for when 

these notices should be provided? 

Please explain. 

Question 94. Should the Agencies 

instead establish a uniform method of 

reporting when a trading desk exceeds 

or increases an internal risk limit (e.g., 

a standardized form)? Why or why not? 

If yes, please provide as much detail as 

possible. If not, please describe any 

impediments or costs to implementing a 

uniform notification process and 

explain why such a system may not be 

efficient or might undermine the 

effectiveness of the proposed 

notification requirement. 

Question 95: Should the Agencies 

implement an alternative reporting 

methodology for notifying the 

appropriate Agency when a trading 

limit is exceeded or increased that 

would apply solely in the case of a 

banking entity’s obligation to report 

such occurrences to a market regulator? 

For example, instead of an affirmative 

notice requirement, should such 

banking entity instead be required to 

make and keep a detailed record of each 

instance as part of its books and records, 

and to provide such records to SEC or 

CFTC staff promptly upon request or 

during an examination? Why or why 

not? As an additional alternative, 

should banking entities be required to 

escalate notices of limit exceedances or 

changes internally for further inquiry 

and determination as to whether notice 

should be given to the applicable market 

regulator, using objective factors 

provided by the rule? Why or why not? 

If such an approach would be more 

appropriate, what objective factors 

should be used to determine when 

notice should be given to the applicable 

regulator? Please be as specific as 

possible. 

Question 96. Should the Agencies 

specify notice and response procedures 

in connection with an Agency 

determination that the presumption 

pursuant to § ll.4(b)(6)(iv) is 

rebutted? Why or why not? If so, what 

type of procedures should they specify? 

For example, should the notice and 

response procedures be similar to those 

in §ll.3(g)(2)? If not, what other 

approach would be appropriate? 

f. Compliance Program and Other 

Requirements 

The market making exemption in the 

2013 final rule requires that a banking 

entity establish and implement, 

maintain, and enforce a compliance 

program, as required by subpart D, that 

is reasonably designed to ensure 

compliance with the requirements of the 

exemption. Such a compliance program 

is required to include reasonably 

designed written policies and 

procedures, internal controls, analysis, 

and independent testing identifying and 

addressing: (i) The financial instruments 

each trading desk stands ready to 

purchase and sell in accordance with 

the exemption for market makingrelated activities; (ii) the actions the 

trading desk will take to demonstrably 

reduce or otherwise significantly 

mitigate the risks of its financial 

exposure consistent with the limits 

required under paragraph (b)(2)(iii)(C), 

the products, instruments, and 

exposures each trading desk may use for 

risk management purposes; the 

techniques and strategies each trading 

desk may use to manage the risks of its 

market making-related activities and 

inventory; and the process, strategies, 

and personnel responsible for ensuring 

that the actions taken by the trading 

desk to mitigate these risks are and 

continue to be effective; (iii) limits for 

each trading desk, based on the nature 

and amount of the trading desk’s market 

making activities, including the 

reasonably expected near term demands 

of clients, customers, or counterparties; 

(iv) internal controls and ongoing 

monitoring and analysis of each trading 

desk’s compliance with its limits; and 

(v) authorization procedures, including 

escalation procedures that require 

review and approval of any trade that 

would exceed one or more of a trading 

desk’s limits, demonstrable analysis of 

the basis for any temporary or 

permanent increase to one or more of a 

trading desk’s limits, and independent 

review (i.e., by risk managers and 

compliance officers at the appropriate 


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116Under the 2013 final rule, the compliance 

program requirement in §ll.4(b)(2)(iii) is part of 

the compliance program required by subpart D, but 

is specifically used for purposes of complying with 

the exemption for market making-related activity. 

117See supra Part III.B.2 of this SUPPLEMENTARY

INFORMATION section. 

118Under the proposal, the compliance program 

requirements that are specific for the purposes of 

complying with the exemption for market makingrelated activities in §ll.4(b) would remain 

unchanged for banking entities with significant 

trading assets and liabilities, although the 

requirements related to limits for each trading desk 

would be moved (but not modified) into new 

§ll.4(b)(6)(i) as part of the proposed presumption 

of compliance. 

119 In the case of national banks, a loan-related 

swap is considered to be a customer-driven 

derivatives transaction. See 12 U.S.C 24 (Seventh). 

See also OCC, Activities Permissible for National 

Banks and Federal Savings Associations, 

Cumulative (Oct. 2017), available at https://

www.occ.gov/publications/publications-by-type/ 

other-publications-reports/pub-other-activitiespermissible-october-2017.pdf. 

level independent of the trading desk) of 

such demonstrable analysis and 

approval. 

Banking entities and others have 

stated that the compliance program 

requirements of the market making 

exemption can be overly complex and 

burdensome. The Agencies generally 

believe the compliance program 

requirements play an important role in 

facilitating and monitoring a banking 

entity’s compliance with the exemption. 

However, with the benefit of time and 

experience, the Agencies believe it is 

appropriate to tailor those requirements 

to the scope of the market makingrelated activities conducted by each 

banking entity. 

Specifically, the Agencies are 

proposing a tiered approach to the 

market making exemption’s compliance 

program requirements so as to make 

them commensurate with the size, 

scope, and complexity of the relevant 

banking entity’s activities and business 

structure. Consistent with the 2013 final 

rule, a banking entity with significant 

trading assets and liabilities would 

continue to be required to establish, 

implement, maintain, and enforce a 

comprehensive internal compliance 

program as a condition for relying on 

the market making exemption. However, 

the Agencies propose to eliminate the 

exemption’s compliance program 

requirements for banking entities that 

have moderate or limited trading assets 

and liabilities.116

The proposed removal of the 

exemption’s compliance program 

requirements for banking entities that 

do not have significant trading assets 

and liabilities would not relieve those 

banking entities of the obligation to 

comply with the prohibitions on 

proprietary trading, and the other 

requirements of the exemption for 

market making-related activities, as set 

forth in section 13 of the BHC Act and 

the 2013 final rule, both as currently 

written and as proposed to be amended. 

However, eliminating the compliance 

program requirements as a condition to 

being able to rely on the market making 

exemption should provide these 

banking entities that do not have 

significant trading assets and liabilities 

an appropriate amount of flexibility to 

tailor the means by which they seek to 

ensure compliance with the underlying 

requirements of the exemption for 

market making-related activities, and to 

allow them to structure their internal 

compliance measures in a way that 

takes into account the risk profile and 

market making activity of the particular 

trading desk. 

As noted in the discussion pertaining 

to the underwriting exemption,117

banking entities that do not have 

significant trading assets and liabilities 

can incur significant costs to establish, 

implement, maintain, and enforce the 

compliance program requirements 

contained in the 2013 final rule. In some 

instances, those costs may be 

disproportionate to the banking entity’s 

trading activity and risk. Accordingly, 

eliminating the compliance program 

requirements for banking entities that 

do not have significant trading assets 

and liabilities may reduce costs that are 

passed on to investors and increase 

liquidity without materially impacting 

the rule’s ability to ensure that the 

objectives set forth in section 13 of the 

BHC Act are satisfied.118

The Agencies request comment on the 

proposed revisions to the exemption for 

market making-related activities 

compliance program requirement. In 

particular, the Agencies request 

comment on the following questions: 

Question 97. Would the proposed 

tiered compliance approach based on a 

banking entity’s trading assets and 

liabilities appropriately balance the 

costs and benefits for banking entities 

that do not have significant trading 

assets and liabilities? Why or why not? 

Question 98. Should the Agencies 

make specific changes to simplify and 

streamline the compliance requirements 

of the exemption for market makingrelated activities for banking entities 

with significant trading assets and 

liabilities? If so, how? 

Question 99. Do commenters agree 

with the proposal to have the market 

making exemption specific compliance 

program requirements apply only to 

banking entities with significant trading 

assets and liabilities? Why or why not? 

Question 100. In addition to the 

proposed changes to the market making 

exemption, are there any technical 

corrections the Agencies should make to 

§ ll.4(b), such as to eliminate 

redundant or duplicative language or to 

correct or refine certain crossreferences? If so, please explain. 

g. Loan-Related Swaps 

The Agencies have received 

inquiries—typically from smaller 

banking entities that are not subject to 

the market risk capital rule and are not 

required to register as dealers—as to the 

treatment of certain swaps entered into 

with a customer in connection with a 

loan (‘‘loan-related swap’’).119 These 

loan-related swaps are financial 

instruments under the 2013 final rule 

and would also be financial instruments 

under the proposal. In addition, if the 

proposed accounting prong of the 

trading account definition is adopted, 

any derivative transaction would 

constitute proprietary trading pursuant 

to the definition of ‘‘trading account’’ if 

it were recorded at fair value on a 

recurring basis under applicable 

accounting standards. The Agencies 

believe it is likely that loan-related 

swaps would be considered proprietary 

trading on this basis. Accordingly, for 

the transaction to be permissible, a 

banking entity would need to rely on an 

applicable exclusion from the definition 

of proprietary trading or exemption in 

the implementing regulations. 

In a loan-related swap transaction, a 

banking entity enters into a swap with 

a customer in connection with a 

customer’s loan and contemporaneously 

offsets the swap with a third party. The 

swap with the loan customer is directly 

related to the terms of the customer’s 

loan, such as a term loan, revolving 

credit facility, or other extension of 

credit. A common example of a loanrelated swap begins with a banking 

entity offering a loan to a customer. The 

banking entity seeks to make a floatingrate loan to reduce interest rate risk, but 

the customer would prefer a fixed-rate 

loan. To achieve the desired result, the 

banking entity makes a floating-rate loan 

to the customer and contemporaneously 

or nearly contemporaneously enters into 

an interest rate swap with the same 

customer and an offsetting swap with 

another counterparty. As a result, the 

customer receives economics similar to 

a fixed-rate loan. The banking entity has 

offset its market risk associated with the 

customer-facing swap but retains 

counterparty risk from both swaps. 

The inquiries received by the 

Agencies have asked whether the loanrelated swap and the offsetting hedging 

swap would be permissible under the 


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120The Agencies note that ‘‘market making’’ for 

purposes of the 2013 final rule, including for this 

proposal, is limited to the context of the 2013 final 

rule and is not applicable to any other rule, the 

federal securities laws, or in any other context 

outside of the 2013 final rule. 

121See 2013 final rule §ll.4(b)(2)(i); 79 FR at 

5595–5597. 

122See, e.g., 79 FR at 5596 (‘‘. . . the Agencies 

continue to recognize that market makers in highly 

illiquid markets may trade only intermittently or at 

the request of particular customers, which is 

sometimes referred to as trading by appointment.’’) 

(emphasis added). 

123The Agencies understand that, for the reasons 

described in this section, loan-related swaps 

present a particular challenge for smaller banking 

entities that are neither subject to the market risk 

rule nor registered as dealers. On the other hand, 

such swaps typically do not present the same 

challenges for banking entities that are subject to 

the market risk rule or are registered as dealers 

because the availability of the market-making 

exemption is apparent. 

124This section’s focus on market making is 

provided solely for purpose of the proposal’s 

implementation of section 13 of the BHC Act and 

does not affect a banking entity’s obligation to 

comply with additional or different requirements 

under applicable securities, derivatives, banking, or 

other laws. 

exemption for market making related 

activities.120 In particular, some banking 

entities enter into these swaps relatively 

infrequently and, as a result, have asked 

whether such activity could satisfy the 

requirement of the exemption in the 

2013 final rule that the trading desk 

using the exemption routinely stands 

ready to purchase and sell the relevant 

type of financial instrument, in 

commercially reasonable amounts and 

throughout market cycles on a basis 

appropriate for the liquidity, maturity, 

and depth of the market for the type of 

financial instrument.121

The Agencies understand that a 

banking entity’s decision to enter into 

loan-related swaps tends to be 

situational and dependent on changes in 

market conditions, as well as the 

interaction of a number of factors 

specific to the banking entity, such as 

the nature of the customer relationship. 

Under certain market conditions and 

with certain types of customers, the 

frequency and use of loan-related swaps 

may be infrequent, or the frequency may 

change over time as conditions change. 

It also may be the case that a banking 

entity, particularly smaller banking 

entities, may enter into a limited 

number of loan-related swaps in one 

quarter and then not execute another 

such swap for a year or more. 

Accordingly, for these swaps it may be 

appropriate to apply the market making 

exemption by focusing on the 

characteristics of the relevant market. 

For purposes of the exemption, the 

relevant market may be a market with 

minimal demand, such as a market with 

a customer base that demands, for 

example, only a few loan-related swaps 

in a year.122 The Agencies therefore 

request comment as to whether it is 

appropriate to permit loan-related 

swaps to be conducted pursuant to the 

exemption for market making-related 

activities where the frequency with 

which a banking entity executes such 

swaps is minimal, but the banking 

entity remains prepared to execute such 

swaps when a customer makes an 

appropriate request.123 For example, a 

banking entity could meet the 

requirement to routinely stand ready to 

make a market in loan-related swaps in 

the context of its customer base and the 

relevant market if it is willing and 

available to engage in loan-related swap 

transactions with its loan customers to 

meet the customers’ needs in respect of 

one or more loans entered into with 

such banking entity throughout market 

cycles and as such customers’ needs 

change. 

In addition, the Agencies note that a 

banking entity may also infrequently 

enter into loan-related swaps in both 

directions because of how those swaps 

are commonly used by market 

participants. For example, providing a 

floating to fixed swap is common in 

connection with a floating rate loan (as 

described in the example above), but the 

reverse (i.e., seeking to convert from a 

fixed rate to a floating rate) is much less 

common. Accordingly, the Agencies 

request comment on whether loanrelated swaps should be permitted 

under the market-making exemption if 

the banking entity stands ready to make 

a market in both directions whenever a 

customer makes an appropriate request, 

but in practice primarily makes a market 

in the swaps in one direction because of 

how the swaps are used.124

The Agencies are also considering 

whether it would be appropriate to 

exclude loan-related swaps from the 

definition of proprietary trading for 

some banking entities or to permit the 

activity pursuant to an exemption from 

the prohibition on proprietary trading 

other than market making. For example, 

possible additions or alternatives could 

include a new exclusion in 

§ ll.3(d) or a new exemption in 

§ ll.6 pursuant to the Agencies’ 

exemptive authority under section 

13(d)(1)(J) of the BHC Act. In particular, 

the Agencies request comment regarding 

a specific option that would add an 

exclusion in § ll.3(d), which would 

specify that ‘‘proprietary trading’’ under 

§ ll3 does not include the purchase or 

sale of related swaps by a banking entity 

in a transaction in which the banking 

entity purchases (or sells) a swap with 

a customer and contemporaneously sells 

(or purchases) an offsetting derivative in 

connection with a loan or open credit 

facility between the banking entity and 

the customer, if the rate, asset, liability 

or other notional item underlying the 

swap with the customer is, or is directly 

related to, a financial term of the loan 

or open credit facility with the customer 

(including, without limitation, the loan 

or open credit facility’s duration, rate of 

interest, currency or currencies, or 

principal amount) and the offsetting 

swap is designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks of the swap(s) 

with the customer. 

In considering any of these 

alternatives, the Agencies request 

comment on what parameters would be 

appropriate for the exclusion or 

exemption and what conditions should 

be considered to address any concerns 

about whether such an exclusion or 

exemption could be too broad. 

Question 101. Is it appropriate to treat 

loan-related swaps as permissible under 

the market making exemption if a 

banking entity stands ready to enter into 

such swaps upon request by a customer, 

but enters into such swaps on an 

infrequent basis due to the nature of the 

demand for such swaps? Why or why 

not? 

Question 102. Should a banking entity 

standing ready to transact in either 

direction on behalf of customers in such 

swaps be eligible for the market making 

exemption if, as a practical matter, it 

more frequently encounters demand on 

one side of the market and less 

frequently encounters demand on the 

other side for such products? Why or 

why not? 

Question 103. Is the scenario 

described above for the treatment of 

loan-related swaps workable? If not, 

why not? Are there alternative 

approaches that would be more effective 

and consistent with the statute? 

Question 104. Should the Agencies 

exclude loan-related swaps from the 

definition of proprietary trading under 

§ ll.3? Would including loan-related 

swaps within the definition of the 

‘‘trading account’’ or ‘‘proprietary 

trading’’ be consistent with the statutory 

definition of trading account? Why or 

why not? 

Question 105. In the alternative, 

should the Agencies provide an 

exclusion for such loan-related swaps 

under §ll.6? What would be the 

benefits or drawbacks of each approach? 

How would permitting such loanrelated swaps pursuant to the Agencies’ 

authority under section 13(d)(1)(J) of the 

BHC Act promote and protect the safety 

and soundness of banking entities and 


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the financial stability of the United 

States? If an exclusion or permitted 

activity is adopted, should the Agencies 

limit which banking entities may use 

the exclusion or permitted activity, and 

what conditions, if any, should be 

placed on the types, volume, or other 

characteristics of the loan-related swaps 

and the related activity? 

Question 106. How should loanrelated swaps be defined? What 

parameters should be used to assess 

which swaps meet the definition? 

Question 107. 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? 

h. Market Making Hedging 

During implementation of the 2013 

final rule, the Agencies received a 

number of inquiries regarding the 

circumstances under which banking 

entities could elect to comply with 

market making risk management 

provisions permitted in § ll.4(b) or 

alternatively the risk-mitigating hedging 

requirements under § ll.5. These 

inquiries generally related to whether a 

trading desk could treat an affiliated 

trading desk as a client, customer, or 

counterparty for purposes of the market 

making exemption’s RENTD 

requirement; and whether, and under 

what circumstances, one trading desk 

could undertake market making risk 

management activities for one or more 

other trading desks. 

Each trading desk engaging in a 

transaction with an affiliated trading 

desk that meets the definition of 

proprietary trading must rely on one of 

the exemptions of section 13 of the BHC 

Act and the 2013 final rule in order for 

the transaction to be permissible. In one 

example presented to the Agencies, one 

trading desk of a banking entity may 

make a market in a certain financial 

instrument (e.g., interest rate swaps), 

and then transfer some of the risk of that 

instrument (e.g., foreign exchange 

(‘‘FX’’) risk) to a second trading desk 

(e.g., an FX swaps desk) that may or 

may not separately engage in market 

making-related activity. The Agencies 

request comment as to whether, in such 

a scenario, the desk taking the risk (in 

the preceding example, the FX swaps 

desk) and the market making desk (in 

the preceding example, the interest rate 

desk) should be permitted to treat each 

other as a client, customer, or 

counterparty for purposes of 

establishing risk limits or reasonably 

expected near-term demand levels 

under the market making exemption. 

The Agencies also request comment 

as to whether each desk should be 

permitted to treat swaps executed 

between the desks as permitted market 

making-related activities of one or both 

desks if the swap does not cause the 

relevant desk to exceed its applicable 

limits and if the swap is entered into 

and maintained in accordance with the 

compliance requirements applicable to 

the desk, without treating the affiliated 

desk as a client, customer, or 

counterparty for purposes of 

establishing or increasing its limits. This 

approach would be intended to 

maintain appropriate limits on 

proprietary trading by not permitting an 

expansion of a trading desk’s market 

making limits based on internal 

transactions. At the same time, this 

approach would be intended to permit 

efficient internal risk management 

strategies within the limits established 

for each desk. The Agencies are also 

requesting comment on the 

circumstances in which an 

organizational unit of an affiliate 

(‘‘affiliated unit’’) of a trading desk 

engaged in market making-related 

activities in compliance with §ll.4(b) 

(‘‘market making desk’’) would be 

permitted to enter into a transaction 

with the market making desk in reliance 

on the market making risk management 

exemption available to the market 

making desk. In this scenario, to effect 

such reliance the market making desk 

would direct the affiliated unit to 

execute a risk-mitigating transaction on 

the market making desk’s behalf. If the 

affiliated unit does not independently 

satisfy the requirements of the market 

making exemption with respect to the 

transaction, it would be permitted to 

rely on the market making exemption 

available to the market making desk for 

the transaction if: (i) The affiliated unit 

acts in accordance with the market 

making desk’s risk management policies 

and procedures established in 

accordance with § ll.4(b)(2)(iii); and 

(ii) the resulting risk mitigating position 

is attributed to the market making desk’s 

financial exposure (and not the 

affiliated unit’s financial exposure) and 

is included in the market making desk’s 

daily profit and loss calculation. If the 

affiliated unit establishes a riskmitigating position for the market 

making desk on its own accord (i.e., not 

at the direction of the market making 

desk) or if the risk-mitigating position is 

included in the affiliated unit’s financial 

exposure or daily profit and loss 

calculation, then the affiliated unit may 

still be able to comply with the 

requirements of the risk-mitigating 

hedging exemption pursuant to §ll.5 

for such activity. 

The Agencies request comment on the 

issues identified above. In particular, 

the Agencies request comment on the 

following questions: 

Question 108. Should the Agencies 

clarify the ability of banking entities to 

engage in hedging transactions directly 

related to market making positions, 

including multi-desk market making 

hedging, regardless of which desk 

undertakes the hedging trades? 

Question 109. Have banking entities 

found that certain restrictions on market 

making hedging activities under the 

final rule impede the ability of banking 

entities to effectively and efficiently 

engage in such hedging transactions? If 

so, what specific requirements have 

proved to be the most problematic? 

Question 110. How effective are the 

existing restrictions on market making 

hedging activities at reducing risks 

within a banking entity’s investment 

portfolio? Please explain. 

Question 111. 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? 

Question 112. Would the changes 

separately proposed to §ll.5 of the 

2013 final rule, or other changes to 

§ ll.5, eliminate the need for the 

additional interpretations described 

above, for example, because a banking 

entity could more easily conduct these 

activities in accordance with the 

requirements of § ll.5? 

3. Section ll.5: Permitted RiskMitigating Hedging Activities 

a. Section ll.5 of the 2013 Final Rule 

Section 13(d)(1)(C) provides an 

exemption for risk-mitigating hedging 

activities that are designed to reduce the 

specific risks to a banking entity in 

connection with and related to 

individual or aggregated positions, 

contracts, or other holdings. Section 

l.5 of the 2013 final rule implements 

section 13(d)(1)(C) of the BHC Act. 

Section ll.5 of the 2013 final rule 

provides a multi-faceted approach to 

implementing the hedging exemption to 

ensure that hedging activity is designed 

to be risk-reducing and does not mask 

prohibited proprietary trading. Riskmitigating hedging activities must 

comply with certain conditions for 

those activities to qualify for the 

exemption. Generally, a banking entity 

relying on the hedging exemption must 

have in place an appropriate internal 


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125See 2013 final rule §ll.5(b)(1) and (3). 

126See 2013 final rule §ll.5(b)(2). 

127See 2013 final rule §ll.5(c). 

128 12 U.S.C. 1851(d)(1)(C). 

129For the same reasons, the Agencies are 

proposing to revise §ll.13(a) of the 2013 final 

rule (relating to permitted risk-mitigating hedging 

activities involving acquisition or retention of an 

ownership interest in a covered fund) to remove the 

references to covered fund ownership interests 

Continued 

compliance program that meets specific 

requirements to support its compliance 

with the terms of the exemption, and 

the compensation arrangements of 

persons performing risk-mitigating 

hedging activities must be designed not 

to reward or incentivize prohibited 

proprietary trading.125 In addition, the 

hedging activity itself must meet 

specified conditions; for example, at 

inception, it must be designed to reduce 

or otherwise significantly mitigate and 

must demonstrably reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks arising in 

connection with and related to 

identified positions, contracts, or other 

holdings of the banking entity, and the 

activity must not give rise to any 

significant new or additional risk that is 

not itself contemporaneously hedged.126

Finally, §ll.5 establishes certain 

documentation requirements with 

respect to the purchase or sale of 

financial instruments made in reliance 

of the risk-mitigating exemption under 

certain circumstances.127

b. Proposed Amendments to Section 

ll.5 

i. Correlation Analysis for Section 

ll.5(b)(1)(iii) 

Section ll.5(b)(1)(iii) of the 2013 

final rule requires a correlation analysis 

as part of the broader analysis of 

whether a hedging position, technique, 

or strategy (1) may reasonably be 

expected to reduce or otherwise 

significantly mitigate the specific risks 

being hedged, and (2) demonstrably 

reduces or otherwise significantly 

mitigates the specific risks being 

hedged. 

In adopting the 2013 final rule, the 

Agencies indicated that they expected 

the banking entity to undertake a 

correlation analysis that will provide a 

strong indication of whether a potential 

hedging position, strategy, or technique 

will or will not demonstrably reduce the 

risk it is designed to reduce. The nature 

and extent of the correlation analysis 

undertaken would be dependent on the 

facts and circumstances of the hedge 

and the underlying risks targeted. If 

sufficient correlation cannot be 

demonstrated, then the Agencies 

expected that such analysis would 

explain why not and also how the 

proposed hedging position, technique, 

or strategy was designed to reduce or 

significantly mitigate risk and how that 

reduction or mitigation can be 

demonstrated. 

In the course of implementing § ll.5 

of the 2013 final rule, the Agencies have 

become aware of practical difficulties 

with the correlation analysis 

requirement. In particular, banking 

entities have communicated that the 

correlation analysis requirement can 

add delays, costs, and uncertainty, and 

have questioned the extent to which the 

required correlation analysis helps to 

ensure the accuracy of hedging activity 

or compliance with the requirements of 

section 13 of the BHC Act. 

During implementation, the Agencies 

have observed that a banking entity may 

sometimes develop or modify its 

hedging activities as the risks it seeks to 

hedge are occurring, and the banking 

entity may not have enough time to 

undertake a complete correlation 

analysis before it needs to put the 

hedging transaction in place to fully 

hedge against the risks as they arise. In 

other cases, the hedging activity, while 

designed to reduce risk as required by 

the statute, may not be practical if 

delays or compliance costs resulting 

from undertaking a correlation analysis 

outweigh the benefits of performing the 

analysis. In addition, the extent to 

which two activities are correlated and 

will remain correlated into the future 

can vary significantly from one position, 

strategy, or technique to another. 

Assessing whether a particular hedge is 

sufficiently correlated to satisfy the 

correlation requirement of 

§ ll.5(b)(1)(iii) may be difficult, 

especially if that assessment must be 

justified after the hedge is entered into 

(when information that may not have 

been available earlier may become 

relevant). Given this uncertainty, 

banking entities may be hesitant to 

undertake a risk-mitigating hedge out of 

concern of inadvertently violating the 

regulation because the hedge did not 

satisfy one of the requirements. 

Based on the implementation 

experience of the Agencies and public 

feedback, the Agencies are proposing to 

remove the correlation analysis 

requirement for risk-mitigating hedging 

activities. The Agencies anticipate that 

removing this correlation analysis 

requirement would avoid the 

uncertainties described above without 

significantly impacting the conditions 

that risk-mitigating hedging activities 

must meet in order to qualify for the 

exemption. The Agencies also note that 

section 13 of the BHC Act does not 

specifically require this correlation 

analysis. Instead, the statute only 

provides that a hedging position, 

technique, or strategy is permitted so 

long as it is ‘‘. . . designed to reduce the 

specific risks to the banking 

entity . . .’’ 128 The 2013 final rule 

added the correlation analysis 

requirement as a measure intended to 

ensure compliance with this exemption. 

ii. Hedge Demonstrably Reduces or 

Otherwise Significantly Mitigates 

Specific Risks for Section 

ll.5(b)(2)(iv)(B) 

Similarly, the requirement in 

§ ll.5(b)(2)(iv)(B) that a riskmitigating hedging activity 

demonstrably reduces or otherwise 

significantly mitigates specific risks is 

not directly required by section 

13(d)(1)(C) of the BHC Act. As noted 

above, the statute instead requires that 

the hedge be designed to reduce or 

otherwise significantly mitigate specific 

risks. The Agencies believe that this is 

effective for addressing the relevant 

risks. 

In practice, it appears that the 

requirement to show that hedging 

activity demonstrably reduces or 

otherwise significantly mitigates a 

specific, identifiable risk that develops 

over time can be complex and could 

potentially reduce bona fide riskmitigating hedging activity. The 

Agencies recognize that in some 

circumstances, it may be difficult for 

banking entities to know with sufficient 

certainty that a potential hedging 

activity being considered will 

continuously demonstrably reduce or 

significantly mitigate an identifiable risk 

after it is implemented. For example, 

unforeseeable changes in market 

conditions, event risk, sovereign risk, 

and other factors that cannot be known 

in advance could reduce or eliminate 

the otherwise intended hedging 

benefits. In these events, it would be 

very difficult, if not impossible, for a 

banking entity to comply with the 

continuous requirement to 

demonstrably reduce or significantly 

mitigate the identifiable risks. In such 

cases, a banking entity may determine 

not to enter into what would otherwise 

be an effective hedge of foreseeable risks 

out of concern that the banking entity 

may not be able to effectively comply 

with the continuing hedging or 

mitigation requirement if unforeseen 

risks occur. Therefore, the proposal 

would remove the ‘‘demonstrably 

reduces or otherwise significantly 

mitigates’’ specific risk requirement 

from §ll.5(b)(1)(iv)(B).129


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acquired or retained by the banking entity 

‘‘demonstrably’’ reducing or otherwise significantly 

mitigating the specific, identifiable risks to the 

banking entity described in that section. 

130See 2013 final rule §ll.5(c)(1)(i). 

131See 2013 final rule §ll.5(c)(1)(iii) 

132See 2013 final rule §ll.5(c)(1)(ii) 133 79 FR at 5638–39. 

iii. Reduced Compliance Requirements 

for Banking Entities that do not have 

Significant Trading Assets and 

Liabilities for Section ll.5(b) and (c) 

Consistent with the proposed changes 

relating to the scope of the requirements 

for banking entities that do not have 

significant trading assets and liabilities, 

the Agencies have reassessed the 

requirements in § ll.5(b) and 

§ ll.5(c) for banking entities that do 

not have significant trading assets and 

liabilities. For these firms, the Agencies 

are proposing to eliminate the 

requirements for a separate internal 

compliance program for risk-mitigating 

hedging under § ll.5(b)(1); certain of 

the specific requirements of 

§ ll.5(b)(2); the limits on 

compensation arrangements for persons 

performing risk-mitigating activities in 

§ ll.5(b)(3); and the documentation 

requirements for those activities in 

§ ll.5(c). These requirements are 

overly burdensome and complex for 

banking entities with moderate trading 

assets and liabilities. In general, the 

Agencies expect that banking entities 

without significant trading assets and 

liabilities are less likely to engage in the 

types of trading activities and hedging 

strategies that would necessitate these 

additional compliance requirements. 

Given these considerations, it appears 

that removing the requirements for 

banking entities that do not have 

significant trading assets and liabilities 

to comply with the requirements of 

§ ll.5(b) and § ll.5(c) is unlikely to 

materially increase risks to the safety 

and soundness of the banking entity or 

U.S. financial stability. Therefore, the 

Agencies are proposing to eliminate and 

modify these requirements for banking 

entities that do not have significant 

trading assets and liabilities. In place of 

those requirements, new § ll.5(b)(2) 

of the proposal would require that riskmitigating hedging activities for those 

banking entities be: (i) At the inception 

of the hedging activity (including any 

adjustments), designed to reduce or 

otherwise significantly mitigate one or 

more specific, identifiable risks, 

including the risks specifically 

enumerated in the proposal; and (ii) 

subject to ongoing recalibration, as 

appropriate, to ensure that the hedge 

remains designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks. The Agencies 

anticipate that these tailored 

requirements for banking entities 

without significant trading assets and 

liabilities would effectively implement 

the statutory requirement that the 

hedging transactions be designed to 

reduce specific risks the banking entity 

incurs. In connection with these 

proposed changes, the proposal also 

includes conforming changes to 

§ ll.5(b)(1) and § ll.5(c) of the final 

2013 rule to make the requirements of 

those sections applicable only to 

banking entities that have significant 

trading assets and liabilities. 

iv. Reduced Documentation 

Requirements for Banking Entities That 

Have Significant Trading Assets and 

Liabilities for Section ll.5(c) 

Section ll.5(c) of the 2013 final rule 

requires enhanced documentation for 

hedging activity conducted under the 

risk-mitigating hedging exemption if the 

hedging is not conducted by the specific 

trading desk establishing or responsible 

for the underlying positions, contracts, 

or other holdings, the risks of which the 

hedging activity is designed to 

reduce.130 The 2013 final rule also 

requires enhanced documentation for 

hedges established to hedge aggregated 

positions across two or more desks. The 

2013 final rule recognizes that a trading 

desk may be responsible for hedging 

aggregated positions of that desk and 

other desks, business units, or affiliates. 

In that case, the trading desk putting on 

the hedge is at least one step removed 

from some of the positions being 

hedged. Accordingly, the 2013 final rule 

provides that the documentation 

requirements in § ll.5(c) apply if a 

trading desk is hedging aggregated 

positions that include positions from 

more than one trading desk.131

The 2013 final rule also requires 

enhanced documentation for hedges 

established by the specific trading desk 

establishing or directly responsible for 

the underlying positions, contracts, or 

other holdings, the risks of which the 

hedge is designed to reduce, if the hedge 

is effected through a financial 

instrument, technique, or strategy that is 

not specifically identified in the trading 

desk’s written policies and procedures 

as a product, instrument, exposure, 

technique, or strategy that the trading 

desk may use for hedging.132 The 

Agencies note that this documentation 

requirement does not apply to hedging 

activity conducted by a trading desk in 

connection with the market makingrelated activities of that desk or by a 

trading desk that conducts hedging 

activities related to the other 

permissible trading activities of that 

desk so long as the hedging activity is 

conducted in accordance with the 

compliance program for that trading 

desk. 

For banking entities that have 

significant trading assets and liabilities, 

the proposal would retain the enhanced 

documentation requirements for the 

hedging transactions identified in 

§ ll.5(c)(1) to permit evaluation of the 

activity. While this documentation 

requirement results in certain more 

extensive compliance efforts (as 

acknowledged by the Agencies when 

the 2013 final rule was adopted),133 the 

Agencies continue to believe this 

requirement serves an important role to 

prevent evasion of the requirements of 

section 13 of the BHC Act and the 2013 

final rule. 

However, based on the Agencies’ 

experience during the first several years 

of implementation of the 2013 final rule, 

it appears that many hedges established 

by one trading desk for other affiliated 

desks are often part of common hedging 

strategies that are used repetitively. In 

those instances, the regulatory purpose 

for the documentation requirements of 

§ ll.5(c) of the 2013 final rule, to 

permit subsequent evaluation of the 

hedging activity and prevent evasion, is 

much less relevant. In weighing the 

significantly reduced regulatory and 

supervisory relevance of additional 

documentation of common hedging 

trades against the complexity of 

complying with the enhanced 

documentation requirements, it appears 

that the documentation requirements 

are not necessary in those instances. 

Reducing the documentation 

requirement for common hedging 

activity undertaken in the normal 

course of business for the benefit of one 

or more other trading desks would also 

make beneficial risk-mitigating activity 

more efficient and potentially improve 

the timeliness of important riskmitigating hedging activity, the 

effectiveness of which can be time 

sensitive. 

Accordingly, the Agencies are 

proposing a new paragraph (c)(4) in 

§ ll.5 that would eliminate the 

enhanced documentation requirement 

for hedging activities that meets certain 

conditions. In excluding a trading desk’s 

common hedging instruments from the 

enhanced documentation requirements 

in §ll.5(c), the Agencies seek to 

distinguish those financial instruments 

that are commonly used for hedging 

activities and require the banking entity 

to have in place appropriate limits so 

that less common or unusual levels of 

hedging activity would still be subject to 


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134Section 13(d)(1)(H) of the BHC Act permits 

trading conducted by a foreign banking entity 

pursuant to paragraph (9) or (13) of section 4(c) of 

the BHC Act (12 U.S.C. 1843(c)), if the trading 

occurs solely outside of the United States, and the 

banking entity is not directly or indirectly 

controlled by a banking entity that is organized 

under the laws of the United States or of one or 

more States. See 12 U.S.C. 1851(d)(1)(H). 

135This section’s discussion of the concept of 

‘‘solely outside of the United States’’ is provided 

solely for purposes of the proposal’s 

implementation of section 13(d)(1)(H) of the BHC 

Act, and does not affect a banking entity’s 

obligation to comply with additional or different 

requirements under applicable securities, banking, 

or other laws. Among other differences, section 13 

of the BHC Act does not necessarily include the 

customer protection, transparency, anti-fraud, antimanipulation, and market orderliness goals of other 

statutes administered by the Agencies. These other 

goals or other aspects of those statutory provisions 

may require different approaches to the concept of 

‘‘solely outside of the United States’’ in other 

contexts. 

136 12 U.S.C. 1843(c)(9), (13). See 2013 final rule 

§ll.6(e)(1)(i) and (ii). 

the enhanced documentation 

requirements. Accordingly, the proposal 

would provide that compliance with the 

enhanced documentation requirement 

would not apply to purchases and sales 

of financial instruments for hedging 

activities that are identified on a written 

list of financial instruments preapproved by the banking entity that are 

commonly used by the trading desk for 

the specific types of hedging activity for 

which the financial instrument is being 

purchased or sold. In addition, under 

the proposal, at the time of the purchase 

or sale of the financial instruments, the 

related hedging activity would need to 

comply with written, pre-approved 

hedging limits for the trading desk 

purchasing or selling the financial 

instrument, which would be required to 

be appropriate for the size, types, and 

risks of the hedging activities commonly 

undertaken by the trading desk; the 

financial instruments purchased and 

sold by the trading desk for hedging 

activities; and the levels and duration of 

the risk exposures being hedged. These 

conditions on the pre-approved limits 

are intended to provide clarity as to the 

types and characteristics of the limits 

needed to comply with the proposal. 

The Agencies would expect that a 

banking entity’s pre-approved limits 

should be reasonable and set to 

correspond to the type of hedging 

activity commonly undertaken and at 

levels consistent with the hedging 

activity undertaken by the trading desk 

in the normal course. 

The Agencies request comment on the 

proposed revisions to §ll.5 regarding 

permitted risk-mitigating hedging 

activities. In particular, the Agencies 

request comment on the following 

questions: 

Question 113. What factors, if any, 

should the Agencies consider in 

determining whether to remove the 

requirement that a correlation analysis 

must be used to determine whether a 

hedging position, technique, or strategy 

reduces or otherwise significantly 

mitigates the specific risk being hedged? 

Question 114. Is the Agencies’ 

assessment of the complexities of the 

correlation analysis requirement across 

the spectrum of hedging activities 

accurate? Why or why not? 

Question 115. How does the 

requirement to undertake a correlation 

analysis impact a banking entity’s 

decision on whether to enter into 

different types of hedges? 

Question 116. How does the 

correlation analysis requirement affect 

the timing of hedging activities? 

Question 117. Does the current 

requirement that a hedge must 

demonstrably reduce or otherwise 

significantly mitigate specific risks lead 

banking entities to decline to enter into 

hedging transactions that would 

otherwise be designed to reduce or 

otherwise significantly mitigate specific 

risks arising in connection with 

identified positions, contracts, or other 

holdings of the banking entity? If so, 

under what circumstances? 

Question 118. Would reducing the 

compliance requirements of §ll.5(b) 

and §ll.5(c) for banking entities that 

do not have significant trading assets 

and liabilities reduce compliance costs 

and increase certainty for these banking 

entities? 

Question 119. Would the proposed 

reductions in the compliance 

requirements for risk-mitigating hedging 

activities by banking entities that do not 

have significant trading assets and 

liabilities increase materially the risks to 

the safety and soundness of the banking 

entity or U.S. financial stability? Why or 

why not? 

Question 120. Would the proposed 

exclusion from the enhanced 

documentation requirements for trading 

desks that hedge risk of other desks 

under the circumstances described 

make risk-mitigating hedging activities 

more efficient and timely? Why or why 

not? Should any of the existing 

documentation requirements be retained 

for firms without significant trading 

assets and liabilities? Are there any 

hedging documentation requirements 

applicable in other contexts (e.g., 

accounting) that could be leveraged for 

the purposes of this requirement? How 

would the proposed exclusion from the 

enhanced documentation requirements 

impact both internal and external 

compliance and oversight of a banking 

entity? 

Question 121. With respect to the 

proposed exclusion from enhanced 

documentation for trading desks that 

hedge risk of other desks under certain 

circumstances, are the requirements for 

a pre-approved list of financial 

instruments and pre-approved hedging 

limits reasonable? Should those 

requirements be modified, expanded, or 

reduced? If so, how? Should the 

Agencies provide greater clarity for 

determining which financial 

instruments are ‘‘commonly used by the 

trading desk for the specific type of 

hedging activity for which the financial 

instrument is being purchased or sold’’ 

for inclusion on the pre-approved list? 

Similarly, should the Agencies provide 

greater clarity for determining preapproved hedging limits? 

Question 122: The Agencies have 

proposed using accounting principles as 

part of the definition of trading account. 

Should the Agencies similarly use 

accounting principles to refer to riskmitigated hedging activity? For 

example, should the Agencies provide 

an exemption for hedging activity that is 

accounted for under the provisions of 

ASC 815 (Derivatives and Hedging)? 

Why or why not? Should the Agencies 

require entities that engage in riskmitigating hedging activity measure 

hedge effectiveness? Why or why not? 

4. Section ll.6(e): Permitted Trading 

Activities of a Foreign Banking Entity 

Section 13(d)(1)(H) of the BHC Act 134

permits certain foreign banking entities 

to engage in proprietary trading that 

occurs solely outside of the United 

States (the foreign trading 

exemption).135 The statute does not 

define when a foreign banking entity’s 

trading occurs ‘‘solely outside of the 

United States.’’ 

a. Permitted Trading Activities of a 

Foreign Banking Entity 

The 2013 final rule includes several 

conditions on the availability of the 

foreign trading exemption. Specifically, 

in addition to limiting the exemption to 

foreign banking entities where the 

purchase or sale is made pursuant to 

paragraph (9) or (13) of section 4(c) of 

the BHC Act,136 the 2013 final rule 

provides that the foreign trading 

exemption is available only if: 

(i) The banking entity engaging as 

principal in the purchase or sale 

(including any personnel of the banking 

entity or its affiliate that arrange, 

negotiate, or execute such purchase or 

sale) is not located in the United States 

or organized under the laws of the 

United States or of any State; 

(ii) The banking entity (including 

relevant personnel) that makes the 

decision to purchase or sell as principal 


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137 ‘‘U.S. entity’’ is defined for purposes of this 

provision as any entity that is, or is controlled by, 

or is acting on behalf of, or at the direction of, any 

other entity that is, located in the United States or 

organized under the laws of the United States or of 

any State. See 2013 final rule §ll.6(e)(4). 

138 12 U.S.C. 1851(d)(1)(J). 

is not located in the United States or 

organized under the laws of the United 

States or of any State; 

(iii) The purchase or sale, including 

any transaction arising from riskmitigating hedging related to the 

instruments purchased or sold, is not 

accounted for as principal directly or on 

a consolidated basis by any branch or 

affiliate that is located in the United 

States or organized under the laws of 

the United States or of any State; 

(iv) No financing for the banking 

entity’s purchase or sale is provided, 

directly or indirectly, by any branch or 

affiliate that is located in the United 

States or organized under the laws of 

the United States or of any State; 

(v) The purchase or sale is not 

conducted with or through any U.S. 

entity,137 other than: 

(A) A purchase or sale with the 

foreign operations of a U.S. entity, if no 

personnel of such U.S. entity that are 

located in the United States are 

involved in the arrangement, 

negotiation or execution of such 

purchase or sale. 

The Agencies also exercised their 

authority under section 13(d)(1)(J) 138 to 

allow the following types of purchases 

or sales to be conducted with a U.S. 

entity: 

(B) A purchase or sale with an 

unaffiliated market intermediary acting 

as principal, provided the purchase or 

sale is promptly cleared and settled 

through a clearing agency or derivatives 

clearing organization acting as a central 

counterparty; or 

(C) A purchase or sale through an 

unaffiliated market intermediary, 

provided the purchase or sale is 

conducted anonymously (i.e., each party 

to the purchase or sale is unaware of the 

identity of the other party(ies) to the 

purchase or sale) on an exchange or 

similar trading facility and promptly 

cleared and settled through a clearing 

agency or derivatives clearing 

organization acting as a central 

counterparty. 

The proposal would modify the 

requirements of the 2013 final rule 

relating to the foreign trading exemption 

in a number of ways. Specifically, the 

proposal would retain the first three 

requirements of the 2013 final rule, with 

a modification to the first requirement, 

and would remove the last two 

requirements of § ll.6(e)(3). As a 

result, §ll.6(e)(3), as modified by the 

proposal, would require that for a 

foreign banking entity to be eligible for 

this exemption: 

(i) The banking entity engaging as 

principal in the purchase or sale 

(including relevant personnel) is not 

located in the United States or 

organized under the laws of the United 

States or of any State; 

(ii) The banking entity (including 

relevant personnel) that makes the 

decision to purchase or sell as principal 

is not located in the United States or 

organized under the laws of the United 

States or of any State; and 

(iii) The purchase or sale, including 

any transaction arising from riskmitigating hedging related to the 

instruments purchased or sold, is not 

accounted for as principal directly or on 

a consolidated basis by any branch or 

affiliate that is located in the United 

States or organized under the laws of 

the United States or of any State. 

The proposal would maintain these 

three requirements in order to ensure 

that the banking entity (including any 

relevant personnel) that engages in the 

purchase or sale as principal or makes 

the decision to purchase or sell as 

principal is not located in the United 

States or organized under the laws of 

the United States or any State. 

Furthermore, the proposal would retain 

the 2013 final rule’s requirement that 

the purchase or sale, including any 

transaction arising from a related riskmitigating hedging transaction, is not 

accounted for as principal at the U.S. 

operations of the foreign banking entity. 

The proposal would, however, modify 

the first requirement relative to the 2013 

final rule, to replace the requirement 

that any personnel of the banking entity 

that arrange, negotiate, or execute such 

purchase or sale are not located in the 

United States with one that would 

restrict only the relevant personnel 

engaged in the banking entity’s decision 

in the purchase or sale not located in 

the United States. Under the proposed 

approach, for purposes of section 13 of 

the BHC Act and the implementing 

regulations, the focus of the requirement 

would be on whether the banking entity 

that engages in the purchase or sale as 

principal (including any relevant 

personnel) is located in the United 

States. The purpose of this modification 

is to make clear that some limited 

involvement by U.S. personnel (e.g., 

arranging or negotiating) would be 

consistent with this exemption so long 

as the principal bearing the risk of a 

purchase or sale is outside the United 

States. The proposed modifications 

would permit a foreign banking entity to 

engage in a purchase or sale under this 

exemption so long as the principal risk 

and actions of the purchase or sale do 

not take place in the United States for 

purposes of section 13 and the 

implementing regulations. The proposal 

would also eliminate the following two 

requirements from § ll.6(e), which are 

referred to as the ‘‘financing prong’’ and 

the ‘‘counterparty prong,’’ respectively, 

in the discussion that follows: 

No financing for the banking entity’s 

purchase or sale is provided, directly or 

indirectly, by any branch or affiliate that 

is located in the United States or 

organized under the laws of the United 

States or of any State; 

The purchase or sale is not conducted 

with or through any U.S. entity, other 

than: 

A purchase or sale with the foreign 

operations of a U.S. entity, if no 

personnel of such U.S. entity that are 

located in the United States are 

involved in the arrangement, 

negotiation or execution of such 

purchase or sale. 

A purchase or sale with an 

unaffiliated market intermediary acting 

as principal, provided the purchase or 

sale is promptly cleared and settled 

through a clearing agency or derivatives 

clearing organization acting as a central 

counterparty; or 

A purchase or sale through an 

unaffiliated market intermediary, 

provided the purchase or sale is 

conducted anonymously (i.e. each party 

to the purchase or sale is unaware of the 

identity of the other party(ies) to the 

purchase or sale) on an exchange or 

similar trading facility and promptly 

cleared and settled through a clearing 

agency or derivatives clearing 

organization acting as a central 

counterparty. 

Since the adoption of the 2013 final 

rule, foreign banking entities have 

communicated to the Agencies that 

these requirements have unduly limited 

their ability to make use of the statutory 

exemption for proprietary trading and 

have resulted in an impact on foreign 

banking entities’ operations outside of 

the United States that these banking 

entities believe is broader than 

necessary to achieve compliance with 

the requirements of section 13 of the 

BHC Act. In response to these concerns, 

the Agencies are proposing to remove 

the financing prong and the 

counterparty prong, which would focus 

the key requirements of this exemption 

on the principal actions and risk of the 

transaction. In addition, the proposal 

would remove the financing prong to 

address concerns that the fungibility of 

financing has made this requirement 

difficult to apply in practice in certain 

circumstances to determine whether 

particular financing is tied to a 


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139See 12 U.S.C. 1851(h)(4) (emphasis added). 

140At the same time, however, the Agencies 

recognize the possibility that there may also be risks 

to U.S. banking entities and the U.S. economy as 

a result of allowing foreign banking entities to 

conduct a broader range of activities within the 

United States. For example, and as discussed above, 

the Agencies are requesting comment on whether 

the proposal would give foreign banking entities a 

competitive advantage over U.S. banking entities 

with respect to identical trading activity in the 

United States. 

particular trade. Market participants 

have raised a number of questions about 

the financing prong and have indicated 

that identifying whether financing has 

been provided by a U.S. affiliate or 

branch can be exceedingly complex, in 

particular with respect to demonstrating 

that financing has not been provided by 

a U.S. affiliate or branch with respect to 

a particular transaction. To address the 

concerns raised by foreign banking 

entities and other market participants, 

the proposal would amend the foreign 

trading exemption to focus on the 

principal risk of a transaction and the 

location of the actions as principal and 

trading decisions, so that a foreign 

banking entity would be able to make 

use of the exemption so long as the risk 

of the transaction is booked outside of 

the United States. While the Agencies 

recognize that a U.S. branch or affiliate 

that extends financing could bear some 

risks, the Agencies note that the 

proposed modifications to the foreign 

trading exemption are designed to 

require that the principal risks of the 

transaction occur and remain solely 

outside of the United States. For 

example, the exemption would continue 

to provide that the purchase or sale, 

including any transaction arising from 

risk-mitigating hedging related to the 

instruments purchased or sold, may not 

be accounted for as principal directly or 

indirectly on a consolidated basis by 

any U.S. branch or affiliate. 

Similarly, foreign banking entities 

have communicated to the Agencies that 

the counterparty prong has been overly 

difficult and costly for banking entities 

to monitor, track, and comply with in 

practice. As a result, the Agencies are 

proposing to remove the requirement 

that any transaction with a U.S. 

counterparty be executed solely with 

the foreign operations of the U.S. 

counterparty (including the requirement 

that no personnel of the counterparty 

involved in the arrangement, 

negotiation, or execution may be located 

in the United States) or through an 

unaffiliated intermediary and an 

anonymous exchange in order to 

materially reduce the reported 

inefficiencies associated with rule 

compliance. In addition, market 

participants have indicated that this 

requirement has in practice led foreign 

banking entities to overly restrict the 

range of counterparties with which 

transactions can be conducted, as well 

as disproportionately burdened 

compliance resources associated with 

those transactions, including with 

respect to counterparties seeking to do 

business with the foreign banking entity 

in foreign jurisdictions. 

As a result, the Agencies propose to 

remove the counterparty prong. The 

proposal would focus the requirements 

of the foreign trading exemption on the 

location of a foreign banking entity’s 

decision to trade, action as principal, 

and principal risk of the purchase or 

sale. This proposed focus on the 

location of actions and risk as principal 

is intended to align with the statute’s 

definition of ‘‘proprietary trading’’ as 

‘‘engaging as principal for the trading 

account of the banking entity.’’ 139

Consistent with that approach, the focus 

of the proposed approach would be on 

the activities of a foreign banking entity 

as principal in the United States. The 

statute exempts the trading of foreign 

banking entities that is conducted 

‘‘solely’’ outside the United States. 

Under the proposal, the relevant inquiry 

would focus on whether the principal 

risk of the transaction is located or held 

outside of the United States and the 

location of the trading decision and 

banking entity acting as principal. The 

proposal would remove the 

requirements of § ll.6(e)(3) that are 

less directly relevant to these 

considerations. 

Information provided by foreign 

banking entities has demonstrated that 

few trading desks of foreign banking 

entities have utilized the foreign trading 

exemption in practice. This information 

has raised concerns that the current 

requirements for the exemption may be 

overly restrictive of permitted activities. 

Accordingly, the proposal would 

modify the exemption under the 2013 

final rule to make the requirements 

more workable, so that it may be 

available to foreign banking entities 

trading solely outside the United States. 

The Agencies request comment as to 

whether the proposed modifications to 

the foreign trading exemption would 

result in disadvantages for U.S. banking 

entities competing with foreign banking 

entities. The statute contains an 

exemption to allow foreign banking 

entities to engage in trading activity that 

is solely outside the United States. The 

statute also contains a prohibition on 

proprietary trading for U.S. banking 

entities regardless of where their 

activity is conducted. The statute 

generally prohibits U.S. banking entities 

from engaging in proprietary trading 

because of the perceived risks of those 

activities to U.S. banking entities and 

the U.S. economy. The Agencies believe 

that this means that the prohibition on 

proprietary trading is intended make 

U.S. banking entities safer and stronger, 

and reduce risks to U.S. financial 

stability, and that the foreign operations 

of foreign banking entities should not be 

subject to the prohibition on proprietary 

trading for their activities overseas. The 

proposal would implement this 

distinction with respect to transactions 

that occur outside of the United States 

where the principal risk is booked 

outside of the United States and the 

actions and decisions as principal occur 

outside of the United States by foreign 

operations of foreign banking entities. 

Under the statute and the rulemaking 

framework, U.S. banking entities would 

be able to continue trading activities 

that are consistent with the statute and 

regulation, including permissible 

market-making, underwriting, and riskmitigating hedging activities as well as 

other types of trading activities such as 

trading on behalf of customers. U.S. 

banking entities are permitted to engage 

in these trading activities as exemptions 

from the general prohibition on 

proprietary trading under the statute. 

Moreover, and consistent with the 

statute, the proposal seeks to streamline 

and reduce the requirements of several 

of these key exemptions to make them 

more workable and available in practice 

to all banking entities subject to section 

13 of the BHC Act and the 

implementing regulations.140

Consistent with the 2013 final rule, 

the exemption under the proposal 

would not exempt the U.S. or foreign 

operations of U.S. banking entities from 

having to comply with the restrictions 

and limitations of section 13 of the BHC 

Act. Thus, the U.S. and foreign 

operations of a U.S. banking entity that 

is engaged in permissible market 

making-related activities or other 

permitted activities may engage in those 

transactions with a foreign banking 

entity that is engaged in proprietary 

trading in accordance with the 

exemption under § ll.6(e) of the 2013 

final rule, so long as the U.S. banking 

entity complies with the requirements 

of §ll.4(b), in the case of market 

making-related activities, or other 

relevant exemption applicable to the 

U.S. banking entity. The proposal, like 

the 2013 final rule, would not impose a 

duty on the foreign banking entity or the 

U.S. banking entity to ensure that its 

counterparty is conducting its activity 

in conformance with section 13 and the 

implementing regulations. Rather, that 


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141See §ll.6(e)(3). 

142See §§ll.6(e)(3)(i) and ll.6(e)(3)(v)(A). 

obligation would be on each party 

subject to section 13 to ensure that it is 

conducting its activities in accordance 

with section 13 and the implementing 

regulations. 

The proposal’s exemption for trading 

of foreign banking entities outside the 

United States could potentially give 

foreign banking entities a competitive 

advantage over U.S. banking entities 

with respect to permitted activities of 

U.S. banking entities because foreign 

banking entities could trade directly 

with U.S. counterparties without being 

subject to the limitations associated 

with the market-making or other 

exemptions under the rule. This 

competitive disparity in turn could 

create a significant potential for 

regulatory arbitrage. In this respect, the 

Agencies seek to mitigate this concern 

through other changes in the proposal; 

for example, U.S. banking entities 

would continue to be able to engage in 

all of the activities permitted under the 

2013 final rule and the proposal, 

including the simplified and 

streamlined requirements for marketmaking and risk-mitigating hedging and 

other types of trading activities. The 

proposal’s modifications therefore in 

general seek to balance concerns 

regarding competitive impact while 

mitigating the concern that an overly 

narrow approach to the foreign trading 

exemption may cause market 

bifurcations, reduce the efficiency and 

liquidity of markets, make the 

exemption overly restrictive to foreign 

banking entities, and harm U.S. market 

participants. 

The Agencies request comment on the 

proposal’s revised approach to 

implementing the foreign trading 

exemption. In particular, the Agencies 

request comment on the following 

questions: 

Question 123. Is the proposal’s 

implementation of the foreign trading 

exemption appropriate and effectively 

delineated? If not, what alternative 

would be more appropriate and 

effective? 

Question 124. Are the proposal’s 

provisions regarding when an activity 

will be considered to have occurred 

solely outside the United States for 

purposes of the foreign trading 

exemption effective and sufficiently 

clear? If not, what alternative would be 

clearer and more effective? Should any 

requirements be modified or removed? 

If so, which requirements and why? 

Should additional requirements be 

added? If so, what requirements and 

why? For example, should the financing 

prong or the counterparty prong be 

retained or modified rather than 

eliminated? Why or why not? Do the 

proposed modifications effectively focus 

the foreign trading exemption on the 

principal actions and risk of the 

transaction and ensure that the 

principal risk remains solely outside the 

United States? Are there any other 

conditions the Agencies should include 

in the foreign trading and foreign fund 

exemptions to address the possibility 

that risks associated with foreign trading 

or covered fund activities could flow 

into the U.S. financial system through 

financing for those activities coming 

from U.S. branches of affiliates, without 

raising the same compliance difficulties 

banking entities have experienced with 

the current financing prong? 

Question 125. What effects do 

commenters believe the proposed 

modifications to the foreign trading 

exemption, particularly with respect to 

trading with U.S. entities, would have 

with respect to the safety and soundness 

of banking entities and U.S. financial 

stability? Would the proposed 

modifications allow for risks to 

aggregate in the United States based on 

activity of foreign banking entities? For 

example, what effects would removal of 

the counterparty prong have for U.S. 

financial market liquidity, and what 

consequences could such effects have 

for the safety and soundness of banking 

entities and U.S. financial stability? 

Could the proposal be further modified, 

consistent with statutory requirements, 

to better promote and protect the safety 

and soundness of banking entities and 

U.S. financial stability? Please explain. 

Question 126. What impact could the 

proposal have on a foreign banking 

entity’s ability to trade in the United 

States? Should any additional 

requirements of the 2013 final rule be 

removed? Why or why not? If so, which 

requirements and why? Should any of 

the requirements of the 2013 final rule 

that the Agencies are proposing to 

eliminate be retained? Why or why not? 

If so, which requirements and why? 

Question 127. 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? Would the 

proposed revisions to the 2013 final 

rule’s exemptions for market making, 

underwriting, and risk-mitigating 

hedging and new exclusions contained 

in this proposal help to mitigate these 

concerns? How could such concerns be 

addressed while effectively 

implementing this statutory exemption? 

Question 128. The proposed approach 

would eliminate the requirement in the 

2013 final rule that trading performed 

pursuant to the foreign trading 

exemption not be conducted with or 

through any U.S. entity, subject to 

certain exceptions.141 Would 

eliminating this requirement give 

foreign banking entities a competitive 

advantage over U.S. banking entities 

with respect to identical trading activity 

in the United States? For example, 

would eliminating this requirement give 

foreign banking entities a competitive 

advantage over U.S. banking entities 

with respect to permitted marketmaking or underwriting activities? Why 

or why not? Are there ways that any 

such competitive disparities could 

potentially be mitigated or eliminated in 

a manner consistent with the statute? If 

so, please explain. Would the proposed 

approach create opportunities for 

certain banking entities to avoid the 

operation of the rule in ways that would 

frustrate the purposes of the statute? If 

so, how? 

Question 129. The proposed approach 

would eliminate the requirement in the 

2013 final rule that personnel of the 

banking entity who arrange, negotiate, 

or execute a purchase or sale under the 

foreign trading exemption be located 

outside the United States.142 Should 

this requirement be removed? Why or 

why not? Would eliminating this 

restriction, thereby allowing foreign 

banking entities to perform certain core 

market-facing activities in the United 

States and with U.S. customers, create 

competitive disparities between foreign 

banking entities and U.S. banking 

entities? Please explain. Are there ways 

that any such competitive disparities 

could potentially be mitigated or 

eliminated in a manner consistent with 

the statute? If so, please explain. Would 

the proposed approach create 

opportunities for banking entities to 

avoid the operation of the rule in ways 

that would frustrate the purposes of the 

statute? If so, how? 

Question 130. Instead of removing the 

requirement that any personnel of the 

banking entity that arrange, negotiate, or 

execute a purchase or sale be located 

outside of the United States, should the 

Agencies provide definitions or 

guidance on these terms, for example, 

similar to definitions and guidance 

adopted or issued by the SEC and CFTC 

under Title VII of the Dodd-Frank Act 

and implementing regulations? Are 

there any other modifications that 

would be more appropriate? 


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143See 12 U.S.C. 1851(a)(1)(B). 144Sections 3(c)(1) and 3(c)(7) of the Investment 

Company Act are exclusions commonly relied on 

by a wide variety of entities that would otherwise 

be covered by the broad definition of ‘‘investment 

company’’ contained in that Act. 12 U.S.C. 

1851(h)(2). Sections 3(c)(1) and 3(c)(7) of the 

Investment Company Act, in relevant part, provide 

two exclusions from the definition of ‘‘investment 

company’’ for: (1) Any issuer whose outstanding 

securities are beneficially owned by not more than 

one hundred persons and which is not making and 

does not presently propose to make a public 

offering of its securities (other than short-term 

paper); or (2) any issuer, the outstanding securities 

of which are owned exclusively by persons who, at 

the time of acquisition of such securities, are 

‘‘qualified purchasers’’ as defined by section 

2(a)(51) of the Investment Company Act, and which 

is not making and does not at that time propose to 

make a public offering of such securities. See 15 

U.S.C. 80a–3(c)(1) and (c)(7). 

145See 79 FR at 5671. 

146 Id. In the preamble to the 2013 final rule, the 

Agencies also expressed their intent to exercise the 

statutory anti-evasion authority provided in section 

13(e) of the BHC Act and other prudential 

authorities in order to address instances of evasion. 

The 2013 final rule permits the Agencies to jointly 

determine to include within the definition of 

‘‘covered fund’’ any fund excluded from that 

definition, and this authority may be exercised to 

address instances of evasion. See 2013 final rule 

§ll.10(c). 

147See 79 FR at 5670. Section 13(h)(2) provides 

that: ‘‘the terms ‘hedge fund’ and ‘private equity 

fund’ mean an issuer that would be an investment 

company as defined in the [Investment Company 

Act] (15 U.S.C. 80a–1 et seq.), but for section 3(c)(1) 

or 3(c)(7) of that Act, or such similar funds as the 

[Agencies] may, by rule, as provided in subsection 

(b)(2), determine.’’ See 12 U.S.C. 1851(h)(2) 

(emphasis added). 

148See 79 FR at 5670. 

149See id. at 5666. 

150 In adopting the 2013 final rule, the Agencies 

referred to legislative history that suggested that 

Congress may have foreseen that its base definition 

could lead to unintended results and might be 

overly broad, too narrow, or otherwise off the mark. 

See id. at 5670–71. 

151See 2013 final rule §ll.10(b)(1)(i), (ii), and 

(iii). 

C. Subpart C—Covered Fund Activities 

and Investments 

1. Section ll.10: Prohibition on 

Acquisition or Retention of Ownership 

Interests in, and Certain Relationships 

With, a Covered Fund 

a. Prohibition Regarding Covered Fund 

Activities and Investments 

As noted above and except as 

otherwise permitted, section 13(a)(1)(B) 

of the BHC Act generally prohibits a 

banking entity from acquiring or 

retaining any ownership interest in, or 

sponsoring, a covered fund.143 Section 

13(d) of the BHC Act contains certain 

exemptions to this prohibition. Subpart 

C of the 2013 final rule implements 

these and other provisions of section 13 

related to covered funds. Specifically, 

§ ll.10(a) of the 2013 final rule 

establishes the scope of the covered 

fund prohibitions and §ll.10(b) of the 

2013 final rule defines a number of key 

terms, including ‘‘covered fund.’’ 

Section ll.10(c) of the 2013 final rule 

tailors the definition of ‘‘covered fund’’ 

by providing particular exclusions. The 

covered fund definition, taking into 

account the particular exclusions, is 

central to the operation of subpart C of 

the 2013 final rule because it specifies 

the types of entities to which the 

prohibition contained in § ll.10(a) of 

the 2013 final rule applies, unless the 

relevant activity is specifically 

permitted under an available exemption 

contained elsewhere in subpart C of the 

final rule. 

In the 2013 final rule, the Agencies 

adopted a tailored definition of 

‘‘covered fund’’ that covers issuers of 

the type that would be investment 

companies but for section 3(c)(1) or 

3(c)(7) of the Investment Company 

Act 144 with exclusions for certain 

specific types of issuers. The Agencies 

designed the exclusions to focus the 

covered fund definition on vehicles 

used for the investment purposes that 

the Agencies believed were the target of 

section 13 of the BHC Act.145 The 

definition of ‘‘covered fund’’ under the 

2013 final rule also includes certain 

funds organized and offered outside of 

the United States to address the 

potential for circumvention of the 

restrictions in section 13 through 

foreign fund structures and certain types 

of commodity pools for which a 

registered commodity pool operator has 

elected to claim the exemption provided 

by section 4.7 of the CFTC’s regulations 

or investor limitations apply.146 In the 

preamble to the 2013 final rule, the 

Agencies stated their belief that the 

definition was consistent with the 

words, structure, purpose, and 

legislative history of section 13 of the 

BHC Act.147 In particular, the Agencies 

stated that the purpose of section 13 

appears to be to limit the involvement 

of banking entities in high-risk 

proprietary trading, as well as their 

investment in, sponsorship of, and other 

connections with, entities that engage in 

investment activities for the benefit of 

banking entities, institutional investors, 

and high-net worth individuals.148

Further, the Agencies indicated that 

section 13 permitted them to tailor the 

scope of the definition to funds that 

engage in the investment activities 

contemplated by section 13 (as opposed, 

for example, to vehicles that merely 

serve to facilitate corporate 

structures).149 Tailoring the scope of the 

definition was intended to allow the 

Agencies to avoid any unintended 

results that might follow from a 

definition that was inappropriately 

imprecise.150

The Agencies request comment on 

whether the 2013 final rule’s covered 

fund definition effectively implements 

the statute and is appropriately tailored 

to identify funds that engage in the 

investment activities contemplated by 

section 13. The Agencies also request 

comment on whether the definition has 

been inappropriately imprecise and, if 

so, whether that has led to any 

unintended results. 

i. Covered Fund ‘‘Base Definition’’— 

Section ll.10(b) 

In considering whether to further 

tailor the covered fund definition, the 

Agencies seek comment in this section 

on the 2013 final rule’s general 

approach to defining the term ‘‘covered 

fund’’ and the 2013 final rule’s ‘‘base 

definition’’ of covered fund, that is, the 

definition as provided in §ll.10(b) 

before applying the exclusions found in 

§ ll.10(c), as well as alternatives to 

this base definition.151 In the sections 

that follow the Agencies request 

comment on exclusions from the 

covered fund definition that relate to 

specific areas of concern expressed to 

the Agencies. 

Question 131. The Agencies adopted 

in the 2013 final rule a unified 

definition of ‘‘covered fund’’ rather than 

having separate definitions for ‘‘hedge 

fund’’ and ‘‘private equity fund’’ 

because the statute defines ‘‘hedge 

fund’’ and ‘‘private equity fund’’ 

without differentiation. 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’’? Would such an 

approach more effectively implement 

the statute? If so, how should the 

Agencies define these terms and why? 

Alternatively, the Agencies request 

comment below as to whether the 

Agencies should provide exclusions 

from the covered fund base definition 

for an issuer that does not share certain 

characteristics commonly associated 

with a hedge fund or private equity 

fund. If the Agencies were to define the 

terms ‘‘hedge fund’’ and ‘‘private equity 

fund,’’ would it be more effective to do 

so with an exclusion from the covered 

fund definition for issuers that do not 

resemble ‘‘hedge funds’’ and ‘‘private 

equity funds’’? 

Question 132. In the 2013 final rule, 

the Agencies tailored the scope of the 

definition to funds that engage in the 

investment activities contemplated by 

section 13. Does the 2013 final rule’s 

definition of ‘‘covered fund’’ effectively 

include funds that engage in those 


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152See 79 FR at 5670–71. 

investment activities? Are there funds 

that are included in the definition of 

‘‘covered fund’’ that do not engage in 

those investment activities? If so, what 

types of funds, and should the Agencies 

modify the definition to exclude them? 

Are there funds that engage in those 

investment activities but are not 

included in the definition of ‘‘covered 

fund’’? If so, what types of funds and 

should the Agencies modify the 

definition to include them? If the 

Agencies should modify the definition, 

how should it be modified? 

Question 133. In the preamble to the 

2013 final rule, the Agencies stated that 

tailoring the scope of the definition of 

‘‘covered fund’’ would allow the 

Agencies to avoid unintended results 

that might follow from a definition that 

is ‘‘inappropriately imprecise.’’ 152 Has 

the final definition been 

‘‘inappropriately imprecise’’ in practice? 

If so, how? Should the Agencies modify 

the base definition to be more precise? 

If so, how? Alternatively or in addition 

to modifying the base definition, could 

the Agencies modify or add any 

exclusions to make the definition more 

precise, as discussed below? 

Question 134. The 2013 final rule’s 

definition of ‘‘covered fund’’ includes 

certain funds organized and offered 

outside of the United States with respect 

to a U.S. banking entity that sponsors or 

invests in the fund in order to address 

structures that might otherwise allow 

circumvention of the restrictions of 

section 13. Does this ‘‘foreign covered 

fund’’ provision effectively address 

those circumvention concerns? If not, 

should the Agencies modify this 

provision to address those 

circumvention concerns more directly 

or in some other way? If so, how? 

Question 135. The 2013 final rule’s 

definition of ‘‘covered fund’’ includes 

certain commodity pools in order to 

address structures that might otherwise 

allow circumvention of the restrictions 

in section 13. In adopting this ‘‘covered 

commodity pool’’ provision, the 

Agencies sought to take a tailored 

approach that is designed to accurately 

identify those commodity pools that are 

similar to issuers that would be 

investment companies as defined in the 

Investment Company Act but for section 

3(c)(1) or 3(c)(7) of that Act, consistent 

with section 13(h)(2) of the BHC Act. 

Does this ‘‘covered commodity pool’’ 

provision effectively address those 

circumvention concerns? If not, should 

the Agencies modify this provision to 

address those circumvention concerns 

more directly or in some other way? If 

so, how? Has the covered commodity 

pool provision been effective in 

including in the covered fund base 

definition those commodity pools that 

are similar to issuers that would be 

investment companies but for section 

3(c)(1) or 3(c)(7)? Has it been under- or 

over-inclusive? What kinds of 

commodity pools have been included in 

or excluded from the covered fund base 

definition and are these inclusions or 

exclusions appropriate? If the covered 

commodity pool provision is under- or 

over-inclusive, what changes should the 

Agencies make and how would those 

changes be more effective? 

Question 136. What kinds of 

compliance and other costs have 

banking entities incurred in analyzing 

whether particular issuers are covered 

funds and implementing compliance 

programs for covered fund activities? 

Has the breadth of the base definition 

raised particular compliance 

challenges? Have the 2013 final rule’s 

exclusions from the covered fund 

definition helped to reduce compliance 

costs or provided greater certainty as to 

the scope of the covered fund 

definition? 

Question 137. 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 become compliant? 

That is, after having established 

compliance, trading, risk management, 

and other systems predicated on the 

2013 final rule’s covered fund 

definition, what are the kinds of costs 

and any other burdens and their 

magnitude that banking entities would 

experience if the Agencies were to 

modify the covered fund base 

definition? 

Question 138. The Agencies 

understand that banking entities have 

already expended resources in 

reviewing a wide range of issuers to 

determine if they are covered funds, as 

defined in the 2013 final rule. What 

kinds of costs and burdens would 

banking entities and others expect to 

incur if the Agencies were to modify the 

covered fund base definition to the 

extent any modifications were to require 

banking entities to reevaluate issuers to 

determine if they meet any revised 

covered fund definition? To what extent 

would modifying the covered fund base 

definition require banking entities to 

reevaluate issuers that a banking entity 

previously had determined are not 

covered funds? Would any costs and 

burdens be justified to the extent the 

Agencies more effectively tailor the 

covered fund definition to focus on the 

concerns underlying section 13? Could 

any costs and burdens be mitigated if 

the Agencies further tailored or added 

exclusions from the covered fund 

definition or developed new exclusions, 

as opposed to changing the covered 

fund base definition? 

Question 139. To what extent do the 

proposed modifications to other 

provisions of the 2013 final rule affect 

the impact of the scope of the covered 

fund definition? For example, as 

described below, the Agencies are 

proposing to eliminate some of the 

additional, covered-fund specific 

limitations that apply under the 2013 

final rule to a banking entity’s 

underwriting, market making, and riskmitigating hedging activities. As another 

example, the Agencies are requesting 

comment below about whether to 

incorporate into § ll.14’s limitations 

on covered transactions the exemptions 

provided in section 23A of the Federal 

Reserve Act (‘‘FR Act’’) and the Board’s 

Regulation W. To the extent 

commenters have concerns regarding 

the breadth of the covered fund 

definition, would these concerns be 

addressed or mitigated by the changes 

the Agencies are proposing to the other 

covered fund provisions or on which 

the Agencies are seeking comment? 

ii. Particular Exclusions From the 

Covered Fund Definition 

As discussed above, the 2013 final 

rule contains exclusions from the base 

definition of ‘‘covered fund’’ that tailor 

the covered fund definition. The 

Agencies designed these exclusions to 

avoid any unintended results that might 

follow from a definition of ‘‘covered 

fund’’ that was inappropriately 

imprecise. In this section, the Agencies 

request comment on whether to modify 

certain existing exclusions from the 

covered fund definition. The Agencies 

also request comment on whether to 

provide new exclusions in order to more 

effectively tailor the definition. Finally, 

with respect to all of the potential 

modifications the Agencies discuss in 

this section, the Agencies seek comment 

as to the potential effect of the other 

changes the Agencies are proposing 

today to the covered fund provisions 

and on additional changes on which the 

Agencies seek comment. That is, would 

these proposed changes address in 

whole or in part any concerns about the 

breadth of the covered fund definition? 

iii. Foreign Public Funds 

The 2013 final rule generally excludes 

from the definition of ‘‘covered fund’’ 

any issuer that is organized or 

established outside of the United States 

and the ownership interests of which 

are (i) authorized to be offered and sold 

to retail investors in the issuer’s home 

jurisdiction and (ii) sold predominantly 


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153See 2013 final rule §ll.10(c)(1); See also 79 

FR at 5678 (‘‘For purposes of this exclusion, the 

Agencies note that the reference to retail investors, 

while not defined, should be construed to refer to 

members of the general public who do not possess 

the level of sophistication and investment 

experience typically found among institutional 

investors, professional investors or high net worth 

investors who may be permitted to invest in 

complex investments or private placements in 

various jurisdictions. Retail investors would 

therefore be expected to be entitled to the full 

protection of securities laws in the home 

jurisdiction of the fund, and the Agencies would 

expect a fund authorized to sell ownership interests 

to such retail investors to be of a type that is more 

similar to a [RIC] rather than to a U.S. covered 

fund.’’); 2013 final rule §ll.10(c)(1)(iii) (defining 

the term ‘‘public offering’’ for purposes of this 

exclusion to mean a ‘‘distribution,’’ as defined in 

§ll.4(a)(3) of subpart B, of securities in any 

jurisdiction outside the United States to investors, 

including retail investors, provided that, the 

distribution complies with all applicable 

requirements in the jurisdiction in which such 

distribution is being made; the distribution does not 

restrict availability to investors having a minimum 

level of net worth or net investment assets; and the 

issuer has filed or submitted, with the appropriate 

regulatory authority in such jurisdiction, offering 

disclosure documents that are publicly available). 

154 79 FR at 5678. 

155Although the discussion of this condition 

generally refers to U.S. banking entities for ease of 

reading, the condition also applies to foreign 

affiliates of a U.S. banking entity. See 2013 final 

rule §ll.10(c)(1)(ii) (applying this limitation 

‘‘[w]ith respect to a banking entity that is, or is 

controlled directly or indirectly by a banking entity 

that is, located in or organized under the laws of 

the United States or of any State and any issuer for 

which such banking entity acts as sponsor’’). 

156See 2013 final rule §ll.10(c)(1)(ii). 

157 79 FR at 5678. 158 Id. (‘‘The requirements that a foreign public 

fund both be authorized for sale to retail investors 

and sold predominantly in public offerings outside 

of the United States are based in part on the 

Agencies’ view that foreign funds that meet these 

requirements generally will be sufficiently similar 

to [RICs] such that it is appropriate to exclude these 

foreign funds from the covered fund definition.’’) 159 Id. (‘‘This additional condition reflects the 

Agencies’ view that the foreign public fund 

exclusion is designed to treat foreign public funds 

consistently with similar U.S. funds and to limit the 

extraterritorial application of section 13 of the BHC 

Act, including by permitting U.S. banking entities 

and their foreign affiliates to carry on traditional 

asset management businesses outside of the United 

States. The exclusion is not intended to permit a 

U.S. banking entity to establish a foreign fund for 

the purpose of investing in the fund as a means of 

avoiding the restrictions imposed by section 13.’’). 

160Section ll.21 of the 2013 final rule provides 

in part that whenever an Agency finds reasonable 

cause to believe any banking entity has engaged in 

Continued 

through one or more public offerings 

outside of the United States.153 The 

Agencies stated in the preamble to the 

2013 final rule that they generally 

expect that an offering is made 

predominantly outside of the United 

States if 85 percent or more of the fund’s 

interests are sold to investors that are 

not residents of the United States.154

The 2013 final rule places an 

additional condition on a U.S. banking 

entity’s ability to rely on the FPF 

exclusion with respect to any FPF it 

sponsors.155 The FPF exclusion is only 

available to a U.S. banking entity with 

respect to a foreign fund sponsored by 

the U.S. banking entity if, in addition to 

the requirements discussed above, the 

fund’s ownership interests are sold 

predominantly to persons other than the 

sponsoring banking entity, affiliates of 

the issuer and the sponsoring banking 

entity, and employees and directors of 

such entities.156 The Agencies stated in 

the preamble to the 2013 final rule that, 

consistent with the Agencies’ view 

concerning whether an FPF has been 

sold predominantly outside of the 

United States, the Agencies generally 

expect that an FPF will satisfy this 

additional condition if 85 percent or 

more of the fund’s interests are sold to 

persons other than the sponsoring U.S. 

banking entity and the specified persons 

connected to that banking entity.157

In adopting the FPF exclusion, the 

Agencies’ view was that it is appropriate 

to exclude these funds from the 

‘‘covered fund’’ definition because they 

are sufficiently similar to U.S. RICs.158

The Agencies also expressed the view 

that the additional condition applicable 

to U.S. banking entities is designed to 

treat FPFs consistently with similar U.S. 

funds and to limit the extraterritorial 

application of section 13 of the BHC 

Act, including by permitting U.S. 

banking entities and their foreign 

affiliates to carry on traditional asset 

management businesses outside of the 

United States, while also seeking to 

limit the possibility for evasion through 

foreign public funds.159

The Agencies request comment on all 

aspects of the FPF exclusion, including 

whether the exclusion is effective in 

identifying foreign funds that may be 

sufficiently similar to RICs and 

permitting U.S. banking entities and 

their foreign affiliates to carry on 

traditional asset management businesses 

outside of the United States, as the 

Agencies contemplated in adopting this 

exclusion. As reflected in the detailed 

questions that follow, the Agencies seek 

comment on a range of possible ways to 

modify this exclusion, including: (i) 

Whether the Agencies could simplify or 

omit certain of the exclusion’s 

conditions—including those not 

applicable to excluded RICs—while still 

identifying funds that should be 

excluded and addressing the possibility 

for evasion through the Agencies’ broad 

anti-evasion authority; (ii) whether the 

exclusion’s conditions requiring a fund 

to be authorized for sale to retail 

investors in the issuer’s home 

jurisdiction and sold predominantly in 

public offerings outside of the United 

States should be retained and, if so, 

whether the Agencies should modify or 

clarify these conditions; and (iii) 

whether the additional conditions for 

U.S. banking entities with respect to the 

FPFs they sponsor are appropriate. 

Specifically, in considering whether to 

further tailor the FPF exclusion, the 

Agencies seek comment below on the 

following: 

Question 140. 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? Are 

there foreign funds that cannot satisfy 

the exclusion’s conditions but that are 

nonetheless sufficiently similar to RICs 

such that it is appropriate to exclude 

these foreign funds from the covered 

fund definition? If so, how should the 

Agencies modify the exclusion’s 

conditions to permit these funds to rely 

on it? Conversely, are there foreign 

funds that satisfy the exclusion’s 

conditions but are not sufficiently 

similar to RICs such that it is not 

appropriate to exclude these funds from 

the covered fund definition? If so, how 

should the Agencies modify the 

exclusion’s conditions to prohibit these 

funds from relying on it? Conversely, 

are changes to the FPF exclusion 

necessary given the other changes the 

Agencies are proposing today and on 

which the Agencies seek comment? 

Question 141. RICs are excluded from 

the covered fund definition regardless of 

whether their ownership interests are 

sold in public offerings or whether their 

ownership interests are sold 

predominantly to persons other than the 

sponsoring banking entity, affiliates of 

the issuer and the sponsoring banking 

entity, and employees and directors of 

such entities. Is such an exclusion 

appropriate? Why or why not? 

Question 142: As discussed above, the 

Agencies designed the FPF exclusion to 

identify foreign funds that are 

sufficiently similar to RICs such that it 

is appropriate to exclude these foreign 

funds from the covered fund definition, 

but included additional conditions not 

applicable to RICs in part to limit the 

possibility for evasion of the 2013 final 

rule. 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? 

Why or why not? 

Question 143: As an alternative, 

should the Agencies address concerns 

about evasion through other means, 

such as the anti-evasion provisions in 

§ ll.21 of the 2013 final rule? 160 The 


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an activity or made an investment in violation of 

section 13 of the BHC Act or the 2013 final rule, 

or engaged in any activity or made any investment 

that functions as an evasion of the requirements of 

section 13 of the BHC Act or the 2013 final rule, 

the Agency may take any action permitted by law 

to enforce compliance with section 13 of the BHC 

Act and the 2013 final rule, including directing the 

banking entity to restrict, limit, or terminate any or 

all activities under the 2013 final rule and dispose 

of any investment. 

161See 2013 final rule §ll.20(e). 

162See supra note 153. 

2013 final rule includes recordkeeping 

requirements designed to facilitate the 

Agencies’ ability to monitor banking 

entities’ investments in FPFs to ensure 

that banking entities do not use the 

exclusion for FPFs in a manner that 

functions as an evasion of section 13. 

Specifically, under the 2013 final rule, 

a U.S. banking entity with more than 

$10 billion in total consolidated assets 

is required to document its investments 

in foreign public funds, broken out by 

each FPF and each foreign jurisdiction 

in which any FPF is organized, if the 

U.S. banking entity and its affiliates’ 

ownership interests in FPFs exceed $50 

million at the end of two or more 

consecutive calendar quarters.161 The 

Agencies are proposing to retain these 

and other covered fund recordkeeping 

requirements with respect to banking 

entities with significant trading assets 

and liabilities. 

Alternatively, would retaining 

specific provisions designed to address 

anti-evasion concerns, whether as they 

currently exist or modified, provide 

greater clarity as to the scope of foreign 

funds excluded from the definition and 

avoid uncertainty that could result from 

a less prescriptive exclusion? 

Question 144. One condition of the 

FPF exclusion is that the fund must be 

‘‘authorized to offer and sell ownership 

interests to retail investors in the 

issuer’s home jurisdiction.’’ The 

Agencies understand that banking 

entities generally interpret the 2013 

final rule’s reference to the issuer’s 

‘‘home jurisdiction’’ to mean the 

jurisdiction in which the issuer is 

organized. Is this condition helpful in 

identifying FPFs that should be 

excluded from the covered fund 

definition? Why or why not? The 

Agencies provided guidance regarding 

the 2013 final rule’s current reference to 

‘‘retail investors.’’ 162 Has this provided 

sufficient clarity? Additionally, as 

discussed below, the 2013 final rule 

contains an additional condition 

requiring that to meet the exclusion, a 

fund must sell ownership interests 

predominantly through one or more 

public offerings outside the United 

States. As an alternative to requiring 

that the fund be authorized to sell 

interests to retail investors, should the 

Agencies instead require that the fund 

be authorized to sell interests in a 

‘‘public offering’’? 

Question 145. 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. For example, 

Undertakings for Collective Investment 

in Transferable Securities (‘‘UCITS’’) 

funds and investment companies with 

variable capital, or SICAVs, may be 

domiciled in one jurisdiction in the 

European Union, such as Ireland or 

Luxembourg, but may be offered and 

sold in one or more other E.U. member 

states. 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? 

Question 146. Should the Agencies, 

for example, modify the condition to 

omit any reference to the 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 

primary jurisdiction’’ in which the 

issuer’s ownership interests are offered 

and sold? Would that or a similar 

approach effectively identify funds that 

are sufficiently similar to RICs, 

including funds that are formed under 

the laws of one jurisdiction and offered 

and sold in another? For purposes of 

determining the primary jurisdiction, 

would the Agencies need to define the 

term ‘‘primary’’ or a similar term to 

provide sufficient clarity? If so, how 

should the Agencies define this or a 

similar term? Are there funds for which 

it could be difficult to identify a 

‘‘primary’’ jurisdiction? Does the 

condition need to refer to a ‘‘primary 

jurisdiction,’’ or would it be sufficient to 

require that the fund be authorized to 

offer and sell ownership interests to 

retail investors in ‘‘any jurisdiction’’ in 

which the issuer’s ownership interests 

are offered and sold? Should the 

exclusion focus on whether the fund is 

authorized to make a public offering in 

the primary, or any, jurisdiction in 

which it is offered and sold as a proxy 

for whether it is authorized for sale to 

retail investors? 

If the Agencies were to make a 

modification like the one described 

immediately above, should the 

exclusion retain the reference to the 

issuer’s ‘‘home’’ jurisdiction? For 

example, should the Agencies modify 

this condition to require that the fund 

be ‘‘authorized to offer and sell 

ownership interests to retail investors in 

the primary jurisdiction in which the 

issuer’s ownership interests are offered 

and sold,’’ without any reference to the 

home jurisdiction? Would this 

modification be effective, or does the 

exclusion need to retain a reference to 

an issuer the ownership interests of 

which are authorized for sale to retail 

investors in the home jurisdiction, as 

well as the primary jurisdiction in 

which the issuer’s ownership interests 

are offered and sold? Why? If the rule 

retained a reference to authorization in 

the fund’s home jurisdiction, would this 

raise concerns if a fund were authorized 

to be sold to retail investors in the 

fund’s home jurisdiction, but was not 

sold in that jurisdiction and instead was 

sold to institutions or other non-retail 

investors in a different jurisdiction in 

which the fund was not authorized to 

sell interests to retail investors or to 

make a public offering? Are there other 

formulations the Agencies should make 

to identify foreign funds that are 

authorized to offer and sell their 

ownership interests to retail investors? 

Which formulations and why? 

Question 147. Under the 2013 final 

rule, a foreign public fund’s ownership 

interests must be sold predominantly 

through one or more ‘‘public offerings’’ 

outside of the United States, in addition 

to the condition discussed above that 

the fund must be authorized for sale to 

retail investors. One result of this 

‘‘public offerings’’ condition is that a 

fund that is authorized for sale to retail 

investors—including a fund authorized 

to make a public offering—cannot rely 

on the exclusion if the fund does not in 

fact offer and sell ownership interests in 

public offerings. Some foreign funds, 

like some RICs, may be authorized for 

sale to retail investors but may choose 

to offer ownership interests to high-net 

worth individuals or institutions in nonpublic offerings. Do commenters believe 

it is appropriate that these foreign funds 

cannot rely on the FPF exclusion? 

Should the Agencies further tailor the 

FPF exclusion to focus on whether the 

fund’s ownership interests are 

authorized for sale to retail investors or 

the fund is authorized to conduct a 

public offering, as discussed above, 

rather than whether the fund interests 

were actually sold in a public offering? 

Would the investor protection and other 

regulatory requirements that would tend 

to make foreign funds similar to a U.S. 

registered fund generally be a 

consequence of a fund’s authorization 

for sale to retail investors or 

authorization to make a public offering? 

If a fund is authorized to conduct a 

public offering in a non-U.S. 

jurisdiction, would the fund be subject 

to all of the regulatory requirements that 

apply in that jurisdiction for funds 


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163See 2013 final rule §ll.10(c)(1)(iii). 164See 2013 final rule §ll.2(j). 

intended for broad distribution, 

including to retail investors, even if the 

fund is not in fact sold in a public 

offering to retail investors? 

Question 148. The 2013 final rule 

defines the term ‘‘public offering’’ for 

purposes of this exclusion to mean a 

‘‘distribution’’ (as defined in 

§ ll.4(a)(3) of the 2013 final rule) of 

securities in any jurisdiction outside the 

United States to investors, including 

retail investors, provided that (i) the 

distribution complies with all 

applicable requirements in the 

jurisdiction in which such distribution 

is being made; (ii) the distribution does 

not restrict availability to investors 

having a minimum level of net worth or 

net investment assets; and (iii) the 

issuer has filed or submitted, with the 

appropriate regulatory authority in such 

jurisdiction, offering disclosure 

documents that are publicly 

available.163 If the Agencies were to 

modify the FPF exclusion to focus on 

whether the fund’s ownership interests 

are authorized for sale to retail investors 

or the fund is authorized to conduct a 

public offering—rather than whether the 

fund’s interests were actually sold in a 

public offering—should the Agencies 

retain some or all of the conditions 

included in the 2013 final rule’s 

definition of the term ‘‘public offering’’? 

For example, should the Agencies retain 

the requirement that a public offering is 

one that does not restrict availability to 

investors having a minimum level of net 

worth or net investment assets; and/or 

the requirement that an FPF file or 

submit, with the appropriate regulatory 

authority in such jurisdiction, offering 

disclosure documents that are publicly 

available? Would either of these two 

conditions, either alone or together, 

help to identify foreign funds that are 

sufficiently similar to RICs? Why or why 

not? Is the reference to a ‘‘distribution’’ 

(as defined in §ll.4(a)(3) of the 2013 

final rule) effective? Should the 

Agencies modify the reference to a 

‘‘distribution’’ to address instances in 

which a fund’s ownership interests 

generally are sold to retail investors in 

secondary market transactions, as with 

exchange-traded funds, for example? 

Should the definition of ‘‘public 

offering’’ also take into account whether 

a fund’s interests are listed on an 

exchange? 

Question 149. The public offering 

definition provides in part that the 

distribution does not restrict availability 

to investors having a minimum level of 

net worth or net investment assets. Are 

there jurisdictions that permit offerings 

that would otherwise meet the 

definition of a public offering but that 

restrict availability to investors having a 

minimum level of net worth or net 

investment assets or that otherwise 

restrict the types of investors who can 

participate? 

Conversely, should the Agencies 

retain the requirement that an FPF 

actually conduct a public offering 

outside of the United States? Would a 

foreign fund that actually sells 

ownership interests in public offerings 

outside of the United States tend to 

provide greater information to the 

public or be subject to additional 

regulatory requirements than a fund that 

is authorized to conduct a public 

offering but offers and sells its 

ownership interests in non-public 

offerings? 

Question 150. If the Agencies retain 

the requirement that an FPF actually 

conduct a public offering outside of the 

United States, should the Agencies 

retain the requirement that the fund’s 

ownership interests must be sold 

‘‘predominantly’’ through one or more 

such offerings? Why or why not? As 

mentioned above, the Agencies stated in 

the preamble to the 2013 final rule that 

they generally expect a fund’s offering 

would satisfy this requirement if 85 

percent or more of the fund’s interests 

are sold to investors that are not 

residents of the United States. Has this 

guidance been helpful in identifying 

FPFs that should be excluded, if the 

Agencies retain the requirement that an 

FPF actually conduct a public offering 

outside of the United States? 

Question 151. The Agencies 

understand that some banking entities 

have faced compliance challenges in 

determining whether 85 percent or more 

of the fund’s interests are sold to 

investors that are not residents of the 

United States. Where foreign funds are 

listed on a foreign exchange, for 

example, it may not be feasible to obtain 

sufficient information about a fund’s 

owners to make these determinations. 

The Agencies understand that banking 

entities also have experienced 

difficulties in obtaining sufficient 

information about a fund’s owners in 

some cases where the foreign fund is 

sold through intermediaries. What sorts 

of compliance and other costs have 

banking entities incurred in developing 

and maintaining compliance systems to 

track foreign public funds’ compliance 

with this condition? To the extent that 

commenters have experienced these or 

other compliance challenges, how have 

commenters addressed them? Have 

funds failed to qualify for the FPF 

exclusion because of this condition? 

Which kinds of funds and why? Do 

commenters believe that these funds 

should nonetheless be treated as FPFs? 

Why? If the Agencies retain this 

condition, should they reduce the 

required percentage of a fund’s 

ownership interests that must be sold to 

investors that are not residents of the 

United States? Which percentage would 

be appropriate? Should the percentage 

be more than 50 percent, for example? 

Would a lower percentage mitigate the 

compliance challenges discussed above? 

If the Agencies do not retain the 

condition that an FPF must be sold 

predominantly through one or more 

public offerings outside of the United 

States, should the Agencies impose any 

limitations on the extent to which the 

fund can be offered in private offerings 

in the United States? 

Question 152. The 2013 final rule 

places an additional condition on a U.S. 

banking entity’s ability to rely on the 

FPF exclusion with respect to any FPF 

it sponsors: The fund’s ownership 

interests must be sold predominantly to 

persons other than the sponsoring 

banking entity and certain persons 

connected to that banking entity. Has 

this additional condition been effective 

in identifying FPFs that should be 

excluded from the covered fund 

definition? Has it been effective in 

permitting U.S. banking entities to 

continue their asset management 

businesses outside of the United States 

while also limiting the opportunity for 

evasion of section 13? Conversely, has 

this additional condition resulted in the 

compliance challenges discussed above 

in connection with the Agencies’ view 

that a fund generally is sold 

‘‘predominantly’’ in public offerings 

outside of the United States if 85 

percent or more of the fund’s interests 

are sold to investors that are not 

residents of the United States? The 

Agencies understand that determining 

whether the employees and directors of 

a banking entity and its affiliates have 

invested in a foreign fund has been 

particularly challenging for banking 

entities because the 2013 final rule 

defines the term ‘‘employee’’ to include 

a member of the immediate family of the 

employee.164 Is there a more direct way 

to define the term ‘‘employee’’ to 

mitigate the compliance challenges but 

still be effective in limiting the 

opportunity for evasion of section 13? If 

so, how? Should a revised definition 

specify who is included in an 

employee’s immediate family for this 

purpose? Should a revised definition 

exclude immediate family members? If 

so, why? 

Question 153. What other aspects of 

the conditions for FPFs have resulted in 


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165The limitation on a banking entity’s 

investment in a U.S. registered fund under the 2013 

final rule results from the definition of ‘‘banking 

entity.’’ If a banking entity owns, controls, or has 

power to vote 25 percent or more of any class of 

voting securities of another company, including a 

U.S. registered fund after a seeding period, that 

other company will itself be a banking entity under 

the 2013 final rule. 

166All the Agencies have published all FAQs on 

each of their public websites. See Frequently Asked 

Question number 5, available at https://

www.federalreserve.gov/bankinforeg/volcker-rule/ 

faq.htm#5; Covered Fund Definition, available at 

https://www.sec.gov/divisions/marketreg/faqvolcker-rule-section13.htm; Foreign Public Fund 

Seeding Vehicles, available at https://www.fdic.gov/ 

regulations/reform/volcker/faq/foreign.html; 

Foreign Public Fund Seeding Vehicles, available at 

https://occ.gov/topics/capital-markets/financialmarkets/trading-volcker-rule/volcker-ruleimplementation-faqs.html#foreign; Foreign Public 

Fund Seeding Vehicles, available at https://

www.cftc.gov/sites/default/files/idc/groups/public/ 

@externalaffairs/documents/file/volckerrule_

faq060914.pdf. 

167Section 3(a)(2) of the Investment Company Act 

defines ‘‘investment securities’’ to include all 

securities except Government securities, securities 

issued by employees’ securities companies, and 

majority-owned subsidiaries of the owner which are 

not investment companies, and are not relying on 

the exception from the definition of investment 

company in section 3(c)(1) or 3(c)(7). Section 

3(a)(1)(C) defines an investment company, in part, 

as any issuer that is engaged or proposes to engage 

in the business of investing, reinvesting, owning, 

holding, or trading in securities, and owns or 

proposes to acquire investment securities having a 

value exceeding 40 per centum of the value of each 

such issuer’s total assets (exclusive of Government 

securities and cash items) on an unconsolidated 

basis. 

compliance challenges? Has the 

condition that FPFs be sold 

predominantly through public offerings 

outside of the United States resulted in 

U.S. banking entities, including their 

foreign affiliates and subsidiaries, 

determining not to sponsor new FPFs 

because of concerns about compliance 

challenges and costs? If the Agencies 

retain this additional condition, should 

they reduce the required percentage of 

a fund’s ownership interests sold to 

persons other than the sponsoring U.S. 

banking entity and certain persons 

connected to that banking entity? Which 

percentage would be appropriate? 

Would a lower percentage mitigate the 

compliance challenges discussed above? 

Are there other conditions that might 

better serve the same purpose but 

reduce the challenges presented by this 

condition? One effect of this condition 

is that a U.S. banking entity can own up 

to 15 percent of an FPF that it sponsors, 

but can own up to 25 percent of a RIC 

after the seeding period.165 Is this 

disparate treatment appropriate? 

Another effect of this condition is that 

a U.S. banking entity can own up to 15 

percent of an FPF that it sponsors, but 

a foreign banking entity can own up to 

25 percent of an FPF that it sponsors. Is 

this disparate treatment appropriate? 

Question 154. Following the adoption 

of the 2013 final rule, staffs of the 

Agencies provided responses to certain 

FAQs, including whether an entity that 

is formed and operated pursuant to a 

written plan to become an FPF would 

receive the same treatment as an entity 

formed and operated pursuant to a 

written plan to become a RIC or BDC.166

The staffs observed that the 2013 final 

rule explicitly excludes from the 

covered fund definition an issuer that is 

formed and operated pursuant to a 

written plan to become a RIC or BDC in 

accordance with the banking entity’s 

compliance program as described in 

§ ll.20(e)(3) of the 2013 final rule and 

that complies with the requirements of 

section 18 of the Investment Company 

Act. The staffs observed that the 2013 

final rule does not include a parallel 

provision for an issuer that will become 

a foreign public fund. The staffs stated 

that they do not intend to advise the 

Agencies to treat as a covered fund 

under the 2013 final rule an issuer that 

is formed and operated pursuant to a 

written plan to become a qualifying 

foreign public fund. The staffs observed 

that any written plan would be expected 

to document the banking entity’s 

determination that the seeding vehicle 

will become a foreign public fund, the 

period of time during which the seeding 

vehicle will operate as a seeding 

vehicle, the banking entity’s plan to 

market the seeding vehicle to thirdparty investors and convert it into an 

FPF within the time period specified in 

§ ll.12(a)(2)(i)(B) of the 2013 final 

rule, and the banking entity’s plan to 

operate the seeding vehicle in a manner 

consistent with the investment strategy, 

including leverage, of the seeding 

vehicle upon becoming a foreign public 

fund. Has the staffs’ position facilitated 

consistent treatment for seeding 

vehicles that operate pursuant to a plan 

to become an FPF as that provided for 

seeding vehicles that operate pursuant 

to plans to become RICs or BDCs? Why 

or why not? Should the Agencies amend 

the 2013 final rule to implement this or 

a different approach for seeding vehicles 

that will become foreign public funds? 

What other approaches should the 

Agencies take and why? Should the 

Agencies amend the 2013 final rule to 

require seeding vehicles that operate 

pursuant to a written plan to become an 

FPF to include in such written plan the 

same or different types of 

documentation as the documentation 

required of seeding vehicles that operate 

pursuant to plans to become RICs or 

BDCs? If different types of 

documentation should be required of 

seeding vehicles that will become 

foreign public funds, why would those 

different types of documentation be 

appropriate? Would requiring those 

different types of documentation impose 

costs or burdens on the issuers that are 

greater or less than the costs and 

burdens imposed on issuers that will 

become RICs or BDCs? 

iv. Family Wealth Management Vehicles 

Some families manage their wealth by 

establishing and acquiring ownership 

interests in ‘‘family wealth management 

vehicles.’’ Family wealth management 

vehicles take a variety of legal forms, 

including limited liability companies, 

limited partnerships, other pooled 

investment vehicles, and trusts. The 

structures in which these vehicles 

operate vary in complexity, ranging 

from simple standalone arrangements 

covering a single beneficiary to complex 

multi-tier structures intended to benefit 

multiple generations of family members. 

In some cases, these vehicles have been 

in existence for more than 100 years 

while in other cases, they are nascent 

entities with little to no operating 

history. The Agencies are aware of no 

set of consistent standards that govern 

the characteristics of family wealth 

management vehicles or the manner in 

which they operate. 

Because family wealth management 

vehicles might hold assets that meet the 

definition of ‘‘investment securities’’ 167

in the Investment Company Act, they 

may be investment companies that 

either need to register as such or 

otherwise rely on an exclusion from the 

definition of investment company. 

Many family wealth management 

vehicles rely on the exclusions provided 

by sections 3(c)(1) or 3(c)(7) of the 

Investment Company Act. Family 

wealth management vehicles that would 

be investment companies but for 

sections 3(c)(1) or 3(c)(7) will therefore 

be covered funds unless they satisfy the 

conditions for one of the 2013 final 

rule’s exclusions from the covered fund 

definition. Concerns regarding family 

wealth management vehicles were 

raised to the Agencies following the 

adoption of the 2013 final rule, which 

does not provide an exclusion from the 

covered fund definition specifically 

designed to address these vehicles. 

Family wealth management vehicles 

also often maintain accounts and 

advisory arrangements with banking 

entities. These banking entities may 

provide a range of services to family 

wealth management vehicles, including 

investment advice, brokerage execution, 

financing, and clearance and settlement 

services. Family wealth management 

vehicles structured as trusts for the 

benefit of family members also often 


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168See 2013 final rule §ll.14(a). 169See 79 FR at 5671. 

appoint banking entities, acting in a 

fiduciary capacity, as trustees for the 

trusts. 

Section ll.14 of the 2013 final rule 

provides, in part, that no banking entity 

that serves, directly or indirectly, as the 

investment manager, investment 

adviser, commodity trading advisor, or 

sponsor to a covered fund, or that 

organizes and offers the fund under 

§ ll.11 of the 2013 final rule, may 

enter into a transaction with the covered 

fund that would be a ‘‘covered 

transaction,’’ as defined in section 23A 

of the FR Act.168 To the extent that a 

family wealth management vehicle is a 

covered fund, then §ll.14 would 

apply. Specifically, if a banking entity 

provides services, such as advisory 

services, that trigger application of 

§ ll.14, the banking entity would be 

prohibited from providing the family 

wealth management vehicle a range of 

customer-facing banking services that 

involve ‘‘covered transactions.’’ 

Examples of these prohibited covered 

transactions include intraday or shortterm extensions of credit in connection 

with the clearance and settlement of 

securities transactions executed by the 

banking entity for the family wealth 

management vehicle. 

The Agencies are not proposing 

changes in the status of family wealth 

management vehicles in the proposal, 

but are seeking comment on their 

reliance on exclusions in the Investment 

Company Act, whether or not they 

should be excluded from the definition 

of covered fund, the role of banking 

entities with respect to family wealth 

management vehicles, and the potential 

implications of changes in their status 

under the 2013 final rule. In considering 

whether to address the status of family 

wealth management vehicles, the 

Agencies seek comment on the 

following: 

Question 155. Do family wealth 

management vehicles typically rely on 

the exclusions in sections 3(c)(1) or 

3(c)(7) under the Investment Company 

Act? Are there other exclusions from the 

definition of ‘‘investment company’’ in 

the Investment Company Act upon 

which family wealth management 

vehicles can rely? What have been the 

additional challenges for family wealth 

management vehicles and the banking 

entities that service them when 

considering whether these vehicles rely 

on the exclusions in sections 3(c)(1) or 

3(c)(7)? 

Question 156. Should the Agencies 

exclude family wealth management 

vehicles from the definition of ‘‘covered 

fund’’? If so, how should the Agencies 

define ‘‘family wealth management 

vehicle,’’ and is this the appropriate 

terminology? What factors should the 

Agencies consider to distinguish a 

family wealth management vehicle from 

a hedge fund or private equity fund, as 

contemplated by the statute, given that 

these vehicles may utilize identical 

structures and pursue comparable 

investment strategies? Would any of the 

definitions in rule 202(a)(11)(G)–1 

under the Investment Advisers Act of 

1940 effectively define family wealth 

management vehicle? Should the 

Agencies, for example, define a family 

wealth management vehicle to mean an 

issuer that would be a ‘‘family client,’’ 

as defined in rule 202(a)(11)(G)–1(d)(4)? 

What modifications to that definition 

would be appropriate for purposes of 

any exclusion from the covered fund 

definition? For example, that definition 

defines a ‘‘family client,’’ in part, to 

include any company wholly owned 

(directly or indirectly) exclusively by, 

and operated for the sole benefit of, one 

or more other family clients, which 

include any family member or former 

family member. That rule defines a 

‘‘family member’’ to mean ‘‘all lineal 

descendants (including by adoption, 

stepchildren, foster children, and 

individuals that were a minor when 

another family member became a legal 

guardian of that individual) of a 

common ancestor (who may be living or 

deceased), and such lineal descendants’ 

spouses or spousal equivalents; 

provided that the common ancestor is 

no more than 10 generations removed 

from the youngest generation of family 

members.’’ Would this approach to 

defining a ‘‘family member’’ be 

appropriate in the context of an 

exclusion from the covered fund 

definition? Why or why not and, if not, 

what other approaches should the 

Agencies take? Are there any family 

wealth management vehicles organized 

or managed outside of the United States 

that raise similar concerns? If so, should 

the Agencies define these family wealth 

management vehicles differently? 

Question 157. Would an exclusion for 

family wealth management vehicles 

create any opportunities for evasion, for 

example, by allowing a banking entity to 

structure investment vehicles in a 

manner to evade the restrictions of 

section 13 on covered fund activities? 

Why or why not? If so, how could such 

concerns be addressed? Please explain. 

Question 158. What services do 

banking entities provide to family 

wealth management vehicles? Below, 

the Agencies seek comment on whether 

section 14 of the implementing 

regulation should incorporate the 

exemptions within section 23A of the 

FR Act and the Board’s Regulation W. 

Would this approach permit banking 

entities to provide these services to 

family wealth management vehicles? 

Are there other ways in which the 

Agencies should address the issue of 

banking entities being prohibited from 

providing services to family wealth 

vehicles that would be covered 

transactions? 

Question 159. Are there any similar 

vehicles outside of the family wealth 

management context that pose similar 

issues? 

v. Fund Characteristics 

As the Agencies stated in the 

preamble to the 2013 final rule, an 

alternative to the 2013 final rule’s 

approach of defining a covered fund 

would be to reference fund 

characteristics. In the preamble to the 

2013 final rule, the Agencies stated that 

a characteristics-based definition could 

be less effective than the approach taken 

in the 2013 final rule as a means to 

prohibit banking entities, either directly 

or indirectly, from engaging in the 

covered fund activities limited or 

proscribed by section 13.169 The 

Agencies also stated that a 

characteristics-based approach could 

require more analysis by banking 

entities to apply those characteristics to 

every potential covered fund on a caseby-case basis and could create greater 

opportunity for evasion. Finally, the 

Agencies stated that although a 

characteristics-based approach could 

mitigate the costs associated with an 

investment company analysis, 

depending on the characteristics, such 

an approach could result in additional 

compliance costs in some cases to the 

extent banking entities would be 

required to implement policies and 

procedures to prevent issuers from 

having characteristics that would bring 

them within the covered fund 

definition. 

As the Agencies consider whether to 

further tailor the covered fund 

definition, the Agencies invite 

commenters’ views and request 

comment on whether it may be 

appropriate to exclude from the 

definition of ‘‘covered fund’’ entities 

that lack certain characteristics 

commonly associated with being a 

hedge fund or a private equity fund: 

Question 160. Should the Agencies 

exclude from the definition of ‘‘covered 

fund’’ entities that lack certain 

enumerated traits or factors of a hedge 

fund or private equity fund? If so, what 

traits or factors should be incorporated 

and why? For instance, the SEC’s Form 


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170See Form PF, Glossary of Terms. Form PF uses 

a characteristics-based approach to define different 

types of private funds. A ‘‘private fund’’ for 

purposes of Form PF is any issuer that would be 

an investment company, as defined in section 3 of 

the Investment Company Act, but for section 3(c)(1) 

or 3(c)(7) of that Act. Form PF defines the following 

types of private funds: Hedge funds, private equity 

funds, liquidity funds, real estate funds, securitized 

asset funds, venture capital funds, and other private 

funds. See infra at note 167. 

171Form PF defines ‘‘commodity pool’’ by 

reference to the definition in section 1a(10) of the 

Commodity Exchange Act. See 7 U.S.C. 1a(10). 

172Form PF defines ‘‘liquidity fund’’ to mean any 

private fund that seeks to generate income by 

investing in a portfolio of short term obligations in 

order to maintain a stable net asset value per unit 

or minimize principal volatility for investors; ‘‘real 

estate fund’’ to mean any private fund that is not 

a hedge fund, that does not provide investors with 

redemption rights in the ordinary course and that 

invests primarily in real estate and real estate 

related assets; ‘‘securitized asset fund’’ to mean any 

private fund whose primary purpose is to issue 

asset backed securities and whose investors are 

primarily debt-holders; and ‘‘venture capital fund’’ 

to mean any private fund meeting the definition of 

venture capital fund in rule 203(l)–1 under the 

Investment Advisers Act of 1940. 

173See 79 FR at 5704 (‘‘The final rule does not 

provide an exclusion for venture capital funds. The 

Agencies believe that the statutory language of 

section 13 does not support providing an exclusion 

for venture capital funds from the definition of 

covered fund. Congress explicitly recognized and 

treated venture capital funds as a subset of private 

equity funds in various parts of the Dodd-Frank Act 

and accorded distinct treatment for venture capital 

fund advisers by exempting them from registration 

requirements under the Investment Advisers Act. 

This indicates that Congress knew how to 

distinguish venture capital funds from other types 

of private equity funds when it desired to do so. No 

such distinction appears in section 13 of the BHC 

Act. Because Congress chose to distinguish between 

private equity and venture capital in one part of the 

Dodd-Frank Act, but chose not to do so for purposes 

of section 13, the Agencies believe it is appropriate 

to follow this Congressional determination.’’) 

(footnotes omitted). Section 13 also provides an 

extended transition period for ‘‘illiquid funds,’’ 

which section 13 defines, in part, as a hedge fund 

or private equity fund that, as of May 1, 2010, was 

principally invested in, or was invested and 

contractually committed to principally invest in, 

illiquid assets, such as portfolio companies, real 

estate investments, and venture capital investments. 

Congress appears to have contemplated that 

covered funds would include funds principally 

invested in venture capital investments. 

PF defines the terms ‘‘hedge fund’’ and 

‘‘private equity fund,’’ as described 

below.170 Would it be appropriate to 

exclude from the definition of ‘‘covered 

fund’’ an entity that does not meet 

either of the Form PF definitions of 

‘‘hedge fund’’ and ‘‘private equity 

fund’’? If the Agencies were to take this 

approach, should we, for example, 

modify the 2013 final rule to provide 

that an issuer is excluded from the 

covered fund definition if that issuer is 

neither a ‘‘hedge fund’’ nor a ‘‘private 

equity fund,’’ as defined in Form PF, or 

should the Agencies incorporate some 

or all of the substance of the definitions 

in Form PF into the 2013 final rule? 

Question 161. If the Agencies were to 

incorporate the substance of the 

definitions of hedge fund and private 

equity fund in Form PF, should the 

Agencies make any modifications to 

these definitions for purposes of the 

2013 final rule? Also, Form PF is 

designed for reporting by funds advised 

by SEC-registered advisers. Would any 

modifications be needed to have the 

characteristics-based exclusion apply to 

funds not advised by SEC-registered 

advisers, in particular foreign funds 

with non-U.S. advisers not registered 

with the SEC? 

Question 162. Form PF defines 

‘‘hedge fund’’ to mean any private fund 

(other than a securitized asset fund): (a) 

With respect to which one or more 

investment advisers (or related persons 

of investment advisers) may be paid a 

performance fee or allocation calculated 

by taking into account unrealized gains 

(other than a fee or allocation the 

calculation of which may take into 

account unrealized gains solely for the 

purpose of reducing such fee or 

allocation to reflect net unrealized 

losses); (b) that may borrow an amount 

in excess of one-half of its net asset 

value (including any committed capital) 

or may have gross notional exposure in 

excess of twice its net asset value 

(including any committed capital); or (c) 

that may sell securities or other assets 

short or enter into similar transactions 

(other than for the purpose of hedging 

currency exposure or managing 

duration). If the Agencies were to 

incorporate these provisions as part of a 

characteristics-based exclusion, should 

any of these provisions be modified? If 

so, how? Additionally, Form PF’s 

definition of the term ‘‘hedge fund’’ 

provides that, solely for purposes of 

Form PF, any commodity pool is 

categorized as a hedge fund.171 If the 

Agencies were to define the term ‘‘hedge 

fund’’ based on the definition in Form 

PF, should the term include only those 

commodity pools that come within the 

‘‘hedge fund’’ definition without regard 

to this clause in the Form PF definition 

that treats every commodity pool as a 

hedge fund for purposes of Form PF? 

Why or why not? 

Question 163. By contrast, Form PF 

primarily defines ‘‘private equity fund’’ 

not by affirmative characteristics, but as 

any private fund that is not a hedge 

fund, liquidity fund, real estate fund, 

securitized asset fund or venture capital 

fund, as those terms are defined in Form 

PF,172 and that does not provide 

investors with redemption rights in the 

ordinary course. If the Agencies were to 

provide a characteristics-based 

exclusion, should the Agencies do so by 

incorporating the definitions of these 

other private funds? If so, should the 

Agencies modify such definitions, and if 

so, how? Alternatively, rather than 

referencing the definition of private 

equity fund in Form PF in a 

characteristics-based exclusion, the 

Agencies could design their own 

definition of a private equity fund based 

on traits and factors commonly 

associated with a private equity fund. 

For example, the Agencies understand 

that private equity funds commonly (i) 

have restricted or limited investor 

redemption rights; (ii) invest in public 

and non-public companies through 

privately negotiated transactions 

resulting in private ownership of the 

business; (iii) acquire the unregistered 

equity or equity-like securities of such 

companies that are illiquid as there is 

no public market and third party 

valuations are not readily available; (iv) 

require holding investments long-term; 

(v) have a limited duration of ten years 

or less; and (vi) realize returns on 

investments and distribute the proceeds 

to investors before the anticipated 

expiration of the fund’s duration. Are 

there other traits or factors the Agencies 

should incorporate if the Agencies were 

to provide a characteristics-based 

exclusion? Should any of these traits or 

factors be omitted? 

Question 164. A venture capital fund, 

as defined in rule 203(l)–1 under the 

Advisers Act, is not a ‘‘private equity 

fund’’ or ‘‘hedge fund,’’ as those terms 

are defined in Form PF. In the preamble 

to the 2013 final rule, the Agencies 

explained why they believed that the 

statutory language of section 13 did not 

support providing an exclusion for 

venture capital funds from the 

definition of ‘‘covered fund.’’ 173 If the 

Agencies were to adopt a 

characteristics-based exclusion based on 

the definition of private equity fund in 

Form PF, should the Agencies specify 

that venture capital funds are private 

equity funds for purposes of this rule so 

that venture capital funds would not be 

excluded from the covered fund 

definition? Do commenters believe that 

this approach would be consistent with 

the statutory language of section 13? 

Question 165. 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 

the commenters’ suggested approach, 

and why that would be appropriate. 

Question 166. If the Agencies were to 

provide a characteristics-based 

exclusion, should it exclude only funds 

that have none of the enumerated 


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174See 12 U.S.C. 1851(h)(4) (defining 

‘‘proprietary trading’’); 12 U.S.C. 1851(h)(6) 

(defining ‘‘trading account’’). 

175 12 U.S.C. 1851(c)(3). 176See supra Part III.C.1.a.i. 

177See 2013 final rule §ll.10(c)(3). 178 79 FR at 5681. 179See supra note. 21. 180 79 FR at 5681. The Agencies also observed 

that, ‘‘[c]onsistent with this restriction and to 

prevent evasion of section 13, a banking entity may 

not use a joint venture to engage in merchant 

banking activities because that involves acquiring 

or retaining shares, assets, or ownership interests 

for the purpose of ultimate resale or disposition of 

the investment.’’ Id. 

characteristics? Alternatively, are there 

any circumstances where a fund should 

be able to rely on a characteristics-based 

exclusion if it had some, but not most, 

of the characteristics? 

Question 167. Would a 

characteristics-based exclusion present 

opportunities for evasion? Should the 

Agencies address any concerns about 

evasion through other means, such as 

the anti-evasion provisions in §ll.21 

of the 2013 final rule, rather than by 

including a broader range of funds in 

the covered fund definition? 

Question 168. If the Agencies were to 

provide a characteristics-based 

exclusion, would any existing 

exclusions from the definition of 

‘‘covered fund’’ be unnecessary? If so, 

which ones and why? 

Question 169. 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? 

For example, section 13 limits a banking 

entity’s ability to engage in proprietary 

trading, which section 13 defines as 

engaging as a principal for the trading 

account, and defines the term ‘‘trading 

account’’ generally as any account used 

for acquiring or taking positions in the 

securities and the instruments specified 

in the proprietary trading definition 

principally for the purpose of selling in 

the near term (or otherwise with the 

intent to resell in order to profit from 

short-term price movements).174 This 

suggests that a fund engaged in selling 

financial instruments in the near term, 

or otherwise with the intent to resell in 

order to profit from short-term price 

movements, should be included in the 

covered fund definition in order to 

prevent a banking entity from evading 

the limitations in section 13 through 

investments in funds. The statute also, 

however, contemplates that the covered 

fund definition would include funds 

that make longer-term investments and 

specifically references private equity 

funds. For example, the statute provides 

for an extended conformance period for 

‘‘illiquid funds,’’ which section 13 

defines, in part, as hedge funds or 

private equity funds that, as of May 1, 

2010, were principally invested in, or 

were invested and contractually 

committed to principally invest in, 

illiquid assets, such as portfolio 

companies, real estate investments, and 

venture capital investments.175 Trading 

strategies involving these and other 

types of illiquid assets generally do not 

involve selling financial instruments in 

the near term, or otherwise with the 

intent to resell in order to profit from 

short-term price movements. 

Question 170. Should the Agencies 

therefore provide an exclusion from the 

covered fund definition for a fund that 

(i) is not engaged in selling financial 

instruments in the near term, or 

otherwise with the intent to resell in 

order to profit from short-term price 

movements; and (ii) does not invest, or 

principally invest, in illiquid assets, 

such as portfolio companies, real estate 

investments, and venture capital 

investments? Would this or a similar 

approach help to exclude from the 

covered fund definition issuers that do 

not engage in the investment activities 

contemplated by section 13? Would 

such an approach be sufficiently clear? 

Would it be clear when a fund is and 

is not engaged in selling financial 

instruments in the near term, or 

otherwise with the intent to resell in 

order to profit from short-term price 

movements? Would this approach result 

in funds being excluded from the 

definition that commenters believe 

should be covered funds under the rule? 

The Agencies similarly request 

comment as to whether a reference to 

illiquid assets, with the examples drawn 

from section 13, would be sufficiently 

clear and, if not, how the Agencies 

could provide greater clarity. 

Question 171. Rather than providing a 

characteristics-based exclusion, should 

the Agencies instead revise the base 

definition of ‘‘covered fund’’ using a 

characteristics-based approach? 176 That 

is, should the Agencies provide that 

none of the types of funds currently 

included in the base definition— 

investment companies but for section 

3(c)(1) or 3(c)(7) and certain commodity 

pools and foreign funds—will be 

covered funds in the first instance 

unless they have characteristics of a 

hedge fund or private equity fund? 

vi. Joint Ventures 

The Agencies, in tailoring the covered 

fund definition, noted that many joint 

ventures rely on section 3(c)(1) or 

3(c)(7). Under the 2013 final rule, a joint 

venture is excluded from the covered 

fund definition if the joint venture (i) is 

between the banking entity or any of its 

affiliates and no more than 10 

unaffiliated co-venturers; (ii) is in the 

business of engaging in activities that 

are permissible for the banking entity 

other than investing in securities for 

resale or other disposition; and (iii) is 

not, and does not hold itself out as 

being, an entity or arrangement that 

raises money from investors primarily 

for the purpose of investing in securities 

for resale or other disposition or 

otherwise trading in securities.177 The 

Agencies observed in the preamble to 

the 2013 final rule that, with this 

exclusion, banking entities ‘‘will 

continue to be able to share the risk and 

cost of financing their banking activities 

through these types of entities which 

. . . may allow banking entities to more 

efficiently manage the risk of their 

operations.’’ 178

In 2015, the staffs of the Agencies 

provided a response to FAQs regarding 

the extent to which an excluded joint 

venture could invest in securities, 

consistent with the condition in the 

2013 final rule that an excluded joint 

venture may not be an entity or 

arrangement that raises money from 

investors primarily for the purpose of 

investing in securities for resale or other 

disposition or otherwise trading in 

securities.179 The Agencies observed in 

the preamble to the 2013 final rule that 

this condition ‘‘prevents a banking 

entity from relying on this exclusion to 

evade section 13 of the BHC Act by 

owning or sponsoring what is or will 

become a covered fund.’’ 180 The staffs 

expressed the view in their response to 

a FAQ that this condition generally 

could not be met by, and the exclusion 

would therefore not be available to, an 

issuer that: 

Æ ‘‘[R]aise[s] money from investors 

primarily for the purpose of investing in 

securities for the benefit of one or more 

investors and sharing the income, gain 

or losses on securities acquired by that 

entity,’’ observing that ‘‘[t]he limitations 

in the joint venture exclusion are meant 

to ensure that the joint venture is not an 

investment vehicle and that the joint 

venture exclusion is not used as a 

means to evade the limitations in the 

BHC Act on investing in covered 

funds’’; 

Æ ‘‘[R]aises money from a small 

number of investors primarily for the 

purpose of investing in securities, 

whether the securities are intended to 

be traded frequently, held for a longer 

duration, held to maturity, or held until 

the dissolution of the entity’’; or 

Æ ‘‘[R]aises funds from investors 

primarily for the purpose of sharing in 


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181The 2013 final rule does, however, permit an 

excluded loan securitization to hold cash 

equivalents for purposes of the rights and assets in 

paragraph (c)(8)(i)(B) of the final rule, and securities 

received in lieu of debts previously contracted with 

respect to the loans supporting the asset-backed 

securities. See 2013 final rule §ll.10(c)(8)(iii). 

the benefits, income, gains or losses 

from ownership of securities—as 

opposed to conducting a business or 

engaging in operations or other noninvestment activities,’’ reasoning that 

such an issuer ‘‘would be raising money 

from investors primarily for the purpose 

of ‘investing in securities,’ even if the 

vehicle may have other purposes,’’ and 

that the exclusion ‘‘also is not met by an 

entity that raises money from investors 

primarily for the purpose of investing in 

securities for resale or other disposition 

or otherwise trading in securities merely 

because one of the purposes for 

establishing the vehicle may be to 

provide financing to an entity to obtain 

and hold securities.’’ 

The staffs also observed that, in 

addition to the conditions in the joint 

venture exclusion, as an initial matter, 

an entity seeking to rely on the 

exclusion must be a joint venture. The 

staffs observed that the basic elements 

of a joint venture are well recognized, 

including under state law, although the 

term is not defined in the 2013 final 

rule. The staffs also observed that 

although any determination of whether 

an arrangement is a joint venture will 

depend on the facts and circumstances, 

the staffs generally would not expect 

that a person that does not have some 

degree of control over the business of an 

entity would be considered to be 

participating in ‘‘a joint venture 

between a banking entity or any of its 

affiliates and one or more unaffiliated 

persons,’’ as specified in the 2013 final 

rule’s joint venture exclusion. 

The Agencies request comment on all 

aspects of the 2013 final rule’s exclusion 

for joint ventures, including the extent 

to which the Agencies should modify 

the joint venture exclusion: 

Question 172. Has the 2013 final 

rule’s exclusion for joint ventures 

allowed banking entities to continue 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 this exclusion? If 

not, what modifications should the 

Agencies make to the joint venture 

exclusion? 

Question 173. Should the Agencies 

make any changes to the joint venture 

exclusion to clarify the condition that a 

joint venture may not be an entity or 

arrangement that raises money from 

investors primarily for the purpose of 

investing in securities for resale or other 

disposition or otherwise trading in 

securities? Should the Agencies 

incorporate some or all of the views 

expressed by the staffs in their FAQ 

response? If so, which views and why? 

Should the Agencies, for example, 

modify the conditions to clarify that an 

excluded joint venture may not be, or 

hold itself out as being, an entity or 

arrangement that raises money from 

investors primarily for the purpose of 

investing in securities, whether the 

securities are intended to be traded 

frequently, held for a longer duration, 

held to maturity, or held until the 

dissolution of the entity? Conversely, do 

the views expressed by the staffs in their 

FAQ response, or similar conditions the 

Agencies might add to the joint venture 

exclusion, affect the utility of the joint 

venture exclusion? If so, how could the 

Agencies increase or preserve the utility 

of the joint venture exclusion as a 

means of structuring business 

arrangements without allowing an 

excluded joint venture to be used by a 

banking entity to invest in or sponsor 

what is in effect a covered fund that 

merely has no more than ten 

unaffiliated investors? 

Question 174. Are there other 

conditions the Agencies should include, 

or modifications to the exclusion’s 

current conditions that the Agencies 

should make, to clarify that the joint 

venture exclusion is designed to allow 

banking entities to structure business 

ventures, as opposed to an entity that 

may be labelled a joint venture but that 

is in reality a hedge fund or private 

equity fund established for investment 

purposes? 

Question 175. The 2013 final rule 

does not define the term ‘‘joint 

venture.’’ Should the Agencies define 

that term? If so, how should the 

Agencies define the term? Should the 

Agencies, for example, modify the 2013 

final rule to reflect the view expressed 

by the staffs that a person that does not 

have some degree of control over the 

business of an entity would generally 

not be considered to be participating in 

‘‘a joint venture between a banking 

entity or any of its affiliates and one or 

more unaffiliated persons’’? Would this 

modification serve to differentiate a 

participant in a joint venture from an 

investor in what would otherwise be a 

covered fund? Has state law been useful 

in determining whether a structure is a 

joint venture for purposes of the 2013 

final rule? Are there other changes to 

the joint venture exclusion the Agencies 

should make on this point? 

vii. Securitizations 

The 2013 final rule contains several 

provisions designed to address 

securitizations and to implement the 

rule of construction in section 13(g)(2) 

of the BHC Act, which provides that 

nothing in section 13 shall be construed 

to limit or restrict the ability of a 

banking entity to sell or securitize loans 

in a manner that is otherwise permitted 

by law. These provisions include the 

2013 final rule’s exclusions from the 

covered fund definition for loan 

securitizations, qualifying asset-backed 

commercial paper conduits, and 

qualifying covered bonds. The Agencies 

request comment on all aspects of the 

2013 final rule’s application to 

securitizations, including: 

Question 176. Are there any concerns 

about how the 2013 final rule’s 

exclusions from the covered fund 

definition for loan securitizations, 

qualifying asset-backed commercial 

paper conduits, and qualifying covered 

bonds work in practice? If commenters 

believe the Agencies can make these 

provisions more effective, what 

modifications should the Agencies make 

and why? 

Question 177. The 2013 final rule’s 

loan securitization exclusion excludes 

an issuing entity for asset-backed 

securities that, among other things, has 

assets or holdings consisting solely of 

certain types of permissible assets 

enumerated in the 2013 final rule. These 

permissible assets generally are loans, 

certain servicing assets, and special 

units of beneficial interest and collateral 

certificates. Are there particular issues 

with complying with the terms of this 

exclusion for vehicles that are holding 

loans? Are there any modifications the 

Agencies should make and if so, why 

and what are they? How would such 

modifications be consistent with the 

statutory provisions? For example, debt 

securities generally are not permissible 

assets for an excluded loan 

securitization.181 What effect does this 

limitation have on loan securitization 

vehicles? 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? Are there other types of 

similar assets that are not ‘‘loans,’’ as 

defined in the 2013 final rule, but that 

have similar financial characteristics 

that an excluded loan securitization 

vehicle should be permitted to own as 

5 percent or 10 percent of the vehicle’s 

assets? Conversely, would this 

additional flexibility be necessary or 

appropriate now that banking entities 

have restructured loan securitizations as 

necessary to comply with the 2013 final 


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182See supra note 22. 

183 In the preamble to the 2013 final rule, the 

Agencies noted commenters’ description of a 

‘‘typical tender option bond transaction’’ as 

consisting of ‘‘the deposit of a single issue of 

highly-rated, long-term municipal bonds in a trust 

and the issuance by the trust of two classes of 

securities: a floating rate, puttable security (the 

‘‘floaters’’), and an inverse floating rate security (the 

‘‘residual’’) with no tranching involved. According 

to commenters, the holders of the floaters have the 

right, generally on a daily or weekly basis, to put 

the floaters for purchase at par. The put right is 

supported by a liquidity facility delivered by a 

highly-rated provider (in many cases, the banking 

entity sponsoring the trust) and allows the floaters 

to be treated as a short-term security. The floaters 

are in large part purchased and held by money 

market mutual funds. The residual is held by a 

longer-term investor (in many cases the banking 

entity sponsoring the trust, or an insurance 

Continued 

rule and structured loan securitizations 

formed after the 2013 final rule was 

adopted in order to comply with the 

2013 final rule? After banking entities 

have undertaken these efforts, would 

allowing an excluded loan 

securitization to hold additional types 

of assets allow a banking entity 

indirectly to engage in investment 

activities that may implicate section 13 

rather than as an alternative way for a 

banking entity either to securitize or 

own loans through a securitization, as 

contemplated by the rule of 

construction in section 13(g)(2) of the 

BHC Act? 

Question 178. Should the Agencies 

modify the loan securitization exclusion 

to reflect the views expressed by the 

Agencies’ staffs in response to a FAQ 182

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 under 

paragraph 10(c)(8)(iii) of the 2013 final 

rule? Should the Agencies, for example, 

modify paragraph 10(c)(8)(i)(B) of the 

2013 final rule to add the underlined 

text: ‘‘Rights or other assets designed to 

assure the servicing or timely 

distribution of proceeds to holders of 

such securities and rights or other assets 

that are related or incidental to 

purchasing or otherwise acquiring and 

holding the loans, provided that each 

asset that is a security meets the 

requirements of paragraph (c)(8)(iii) of 

this section.’’ Should the 2013 final rule 

be amended to include this language? 

Are there other clarifying modifications 

that would better address the expressed 

concern? 

Question 179. Are there modifications 

the Agencies should make to the 2013 

final rule’s definition of the term 

‘‘ownership interest’’ in the context of 

securitizations? If so, what 

modifications should the Agencies make 

and how would they be consistent with 

the ownership interest restrictions? 

Banking entities have raised questions 

regarding the scope of the provision of 

the 2013 final rule that provides that an 

ownership interest includes an interest 

that has, among other characteristics, 

‘‘the right to participate in the selection 

or removal of a general partner, 

managing member, member of the board 

of directors or trustees, investment 

manager, investment adviser, or 

commodity trading advisor of the 

covered fund (excluding the rights of a 

creditor to exercise remedies upon the 

occurrence of an event of default or an 

acceleration event)’’ in the context of 

creditor rights. Should the Agencies 

modify this parenthetical to provide 

greater clarity to banking entities 

regarding this parenthetical? For 

example, should the Agencies modify 

the parenthetical to provide that the 

‘‘rights of a creditor to exercise remedies 

upon the occurrence of an event of 

default or an acceleration event’’ 

include the right to participate in the 

removal of an investment manager for 

cause, or to nominate or vote on a 

nominated replacement manager upon 

an investment manager’s resignation or 

removal? Would the ability to 

participate in the removal or 

replacement of an investment manager 

under these limited circumstances more 

closely resemble a creditor’s rights upon 

default to protect its interest, as opposed 

to the right to vote on matters affecting 

the management of an issuer that may 

be more typically associated with equity 

or partnership interests? Why or why 

not? What actions do holders of 

interests in loan securitizations today 

take with respect to investment 

managers and under what 

circumstances? Are such rights limited 

to certain classes of holders? 

Question 180. The Agencies 

understand that in many securitization 

transactions, there are multiple tranches 

of interests that are sold. The Agencies 

also understand that some of these 

interests may have characteristics that 

are the same as debt securities with 

fixed maturities and fixed rates of 

interest, and with no other residual 

interest or payment. In the context of 

the definition of ownership interest for 

securitization vehicles, should the 

Agencies consider whether 

securitization interests that have only 

these types of characteristics be 

considered ‘‘other similar interests’’ for 

purposes of the ownership interest 

definition? If so, why or why not? If so, 

why should a distribution of profits 

from a passive investment such as a 

securitization be treated differently than 

a distribution of profits from any other 

type of passive investment? Please 

explain why securitization vehicles 

should be treated differently than other 

covered funds, some of which also 

could have tranched investment 

interests. 

viii. Selected Other Issuers 

In this section the Agencies request 

comment on the 2013 final rule’s 

application to certain types of issuers 

for which banking entities and others 

have expressed concern to one or more 

of the Agencies: 

Question 181. The 2013 final rule 

excludes from the covered fund 

definition an issuer that is a small 

business investment company, as 

defined in section 103(3) of the Small 

Business Investment Act of 1958, or that 

has received from the Small Business 

Administration notice to proceed to 

qualify for a license as a small business 

investment company, which notice or 

license has not been revoked. A small 

business investment company that 

relinquishes its license as the company 

liquidates its holdings, however, will no 

longer be a ‘‘small business investment 

company,’’ as defined in section 103(3) 

of the Small Business Investment Act of 

1958, and will therefore no longer be 

excluded from the covered fund 

definition. Should the Agencies modify 

the exclusion to provide that the 

exclusion will remain available under 

these circumstances when a small 

business investment company 

relinquishes or voluntarily surrenders 

its license? If so, how should the 

Agencies specify the circumstances 

under which the company may operate 

after relinquishing or voluntarily 

surrendering its license while still 

relying on the exclusion? Does the 

absence of a license from the Small 

Business Administration under these 

circumstances affect whether the 

company is engaged in the investment 

activities contemplated by section 13? 

Why or why not? Are there other 

examples of an entity that is excluded 

from the covered fund definition and 

that could no longer satisfy the relevant 

exclusion as the entity is liquidated? 

Which kinds of entities, what causes 

them to no longer satisfy the exclusion, 

and what modifications to the 2013 final 

rule do commenters believe would be 

appropriate to address them? For 

example, have banking entities 

encountered any difficulties with 

respect to RICs that use liquidating 

trusts? 

Question 182. The 2013 final rule 

does not provide a specific exclusion 

from the definition of ‘‘covered fund’’ 

for an issuer that is a municipal 

securities tender option bond vehicle.183


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company, mutual fund, or hedge fund). According 

to commenters, the residual investors take all of the 

market and structural risk related to the tender 

option bonds structure, with the investors in 

floaters taking only limited, well-defined 

insolvency and default risks associated with the 

underlying municipal bonds generally equivalent to 

the risks associated with investing in the municipal 

bonds directly. According to commenters, the 

structure of tender option bond transactions is 

governed by certain provisions of the Internal 

Revenue Code in order to preserve the tax-exempt 

treatment of the underlying municipal securities.’’ 

See 79 FR at 5702. 

184See 79 FR at 5703. 

185 12 U.S.C. 1851(d)(1)(B). 

186See 2013 final rule §ll.12(a)(iii). 

187See 2013 final rule §ll.12(d). 188See 2013 final rule §ll.11(c). 

The 2013 final rule ‘‘does not prevent a 

banking entity from owning or 

otherwise participating in a tender 

option bond vehicle; it requires that 

these activities be conducted in the 

same manner as with other covered 

funds.’’ 184 To the extent that a tender 

option bond vehicle is a covered fund, 

then, §ll.14 would apply. If a 

banking entity organizes and offers or 

sponsors a tender option bond vehicle, 

for example, § ll.14 of the 2013 final 

rule prohibits the banking entity from 

engaging in any ‘‘covered transaction’’ 

with the vehicle. Such a ‘‘covered 

transaction’’ could include the 

sponsoring banking entity providing a 

liquidity facility to support the put right 

that is a key feature of the ‘‘floater’’ 

security issued by a tender option bond 

vehicle. The Agencies understand that 

after adoption of the 2013 final rule, 

banking entities restructured tender 

option bond vehicles, or structured new 

tender option bond vehicles formed 

after adoption, in order to comply with 

the 2013 final rule. What role do 

banking entities play in creating the 

tender option bond trust and how have 

the restrictions on ‘‘covered 

transactions’’ affected the continuing 

use of this financing structure? Why 

should tender option bond vehicles 

sponsored by banking entities be viewed 

differently than other types of covered 

funds sponsored by banking entities? As 

discussed above, the Agencies are 

requesting comment about whether to 

incorporate into § ll.14’s limitations 

on covered transactions the exemptions 

provided in section 23A of the FR Act 

and the Board’s Regulation W. Would 

incorporating some or all of these 

exemptions address any challenges 

banking entities that sponsor tender 

option bond trusts have faced with 

respect to subsequent and ongoing 

covered transactions with such tender 

option bond vehicles? 

2. Section ll.11: Activities Permitted 

in Connection With Organizing and 

Offering a Covered Fund 

a. Underwriting and Market Making for 

a Covered Fund 

Section 13(d)(1)(B) of the BHC Act 

permits a banking entity to purchase 

and sell securities and other 

instruments described in 13(h)(4) in 

connection with certain underwriting or 

market making-related activities.185 The 

2013 final rule addressed how this 

exemption applied in the context of 

underwriting or market making of 

ownership interests in covered funds. In 

particular, §ll.11(c) of the 2013 final 

rule provides that the prohibition in 

§ ll.10(a) on ownership or 

sponsorship of a covered fund does not 

apply to a banking entity’s underwriting 

and market making-related activities 

involving a covered fund so long as: 

The banking entity conducts the 

activities in accordance with the 

requirements of the underwriting 

exemption in § ll.4(a) of the 2013 

final rule or market-making exemption 

in §ll.4(b) of the 2013 final rule, 

respectively; 

The banking entity includes the 

aggregate value of all ownership 

interests of the covered fund acquired or 

retained by the banking entity and its 

affiliates for purposes of the limitation 

on aggregate investments in covered 

funds (the ‘‘aggregate-fund limit’’) 186

and capital deduction requirement; 187

and 

The banking entity includes any 

ownership interests that it acquires or 

retains for purposes of the limitation on 

investments in a single covered fund 

(the ‘‘per-fund limit’’) if the banking 

entity (or an affiliate): (i) Acts as a 

sponsor, investment adviser, or 

commodity trading advisor to the 

covered fund; (ii) otherwise acquires 

and retains an ownership interest in the 

covered fund in reliance on the 

exemption for organizing and offering a 

covered fund in §ll.11(a) of the 2013 

final rule; (iii) acquires and retains an 

ownership interest in such covered fund 

and is either a securitizer, as that term 

is used in section 15G(a)(3) of the 

Exchange Act, or is acquiring and 

retaining an ownership interest in such 

covered fund in compliance with 

section 15G of that Act and the 

implementing regulations issued 

thereunder, each as permitted by 

§ ll.11(b) of the 2013 final rule; or (iv) 

directly or indirectly, guarantees, 

assumes, or otherwise insures the 

obligations or performance of the 

covered fund or of any covered fund in 

which such fund invests.188

The Agencies continue to believe that 

providing a separate provision relating 

to permitted underwriting and market 

making-related activities for ownership 

interests in covered funds is supported 

by section 13(d)(1)(B) of the BHC Act. 

The exemption for underwriting and 

market making-related activities under 

section 13(d)(1)(B), by its terms, is a 

statutorily permitted activity and 

exemption from the prohibitions in 

section 13(a), whether on proprietary 

trading or on covered fund activities. 

Applying the statutory exemption in 

this manner accommodates the capital 

raising activities of covered funds and 

other issuers in accordance with the 

underwriting and market making 

provisions under the statute. 

The proposed amendments to 

§ ll.11(c) are intended to better 

achieve these objectives, consistent with 

the requirements of the statute and 

based on the experience of the Agencies 

following implementation of the 2013 

final rule. Specifically, for a covered 

fund that the banking entity does not 

organize or offer pursuant to 

§ ll.11(a) or (b) of the 2013 final rule, 

the proposal would remove the 

requirement that the banking entity 

include for purposes of the aggregate 

fund limit and capital deduction the 

value of any ownership interests of the 

covered fund acquired or retained in 

accordance with the underwriting or 

market-making exemption. Under the 

proposed amendments, these limits, as 

well as the per fund limit, would only 

apply to a covered fund that the banking 

entity organizes or offers and in which 

the banking entity retains an ownership 

interest pursuant to §ll.11(a) or (b) of 

the 2013 final rule. The Agencies seek 

with this change to more closely align 

the requirements for engaging in 

underwriting or market-making-related 

activities with respect to ownership 

interests in a covered fund with the 

requirements for engaging in these 

activities with respect to other financial 

instruments. The Agencies expect this 

change would reduce compliance costs 

for banking entities that engage in these 

activities without exposing banking 

entities to additional risks beyond those 

inherent in underwriting and market 

making-related activities involving 

otherwise similar financial instruments 

as permitted by the statute. This is 

because banking entities that engage in 

underwriting or market making-related 

activities with respect to covered funds 

would remain subject to the 


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189See 12 U.S.C. 1851(d)(1)(C). 

190See 2011 proposal. 

191See 79 FR at 5737. 

requirements of those exemptions in 

subpart B, as modified by the proposal, 

including requirements relating to risk 

management and limitations based on 

the reasonably expected near term 

demand of clients, customers, or 

counterparties. 

The proposal would retain the 

requirements of the 2013 final rule 

associated with the per-fund limit, 

aggregate fund limit, and capital 

deduction where the banking entity 

engages in activity in reliance on 

§ ll.11(a) or (b) with respect to a 

covered fund, consistent with the 

limitations of section 13(d)(1)(G)(iii) of 

the BHC Act that restrict a banking 

entity that relies on this exemption from 

acquiring or retaining an ownership 

interest in a covered fund beyond a de 

minimis investment amount. 

In addition, the proposal would 

maintain the requirement that the 

underwriting or market-making-related 

activities be conducted in accordance 

with the requirements of §ll.4(a) or 

§ ll4(b) of the 2013 final rule (as 

modified by the proposal), respectively. 

These requirements are designed 

specifically to address a banking entity’s 

underwriting and market making-related 

activities and to permit holding 

exposures consistent with the 

reasonably expected near term demand 

of clients, customers and counterparties. 

Question 183. What effects do 

commenters believe the proposed 

changes to the requirements for 

engaging in underwriting or marketmaking-related activities with respect to 

ownership interests in covered funds 

would have on the capital raising 

activities of covered funds and other 

issuers? What other changes should the 

Agencies consider, if any, to more 

closely align the requirements for 

engaging in underwriting or marketmaking-related activities with respect to 

ownership interests in a covered fund 

with the requirements for engaging in 

these activities with respect to other 

financial instruments? For example, 

because the exemption for underwriting 

and market making-related activities 

under section 13(d)(1)(B), by its terms, 

is a statutorily permitted activity and an 

exemption from the prohibitions in 

section 13(a), is it necessary to continue 

to retain the per-fund limit, aggregate 

fund limit, and capital deduction where 

the banking entity engages in activity in 

reliance on § ll.11(a) or (b)? Should 

these limitations apply only with 

respect to covered fund interests 

acquired or retained by the banking 

entity in reliance on section 

13(d)(1)(G)(iii) of the BHC Act, and not 

to interests held in reliance on the 

separate exemption provided for 

underwriting and market making 

activities, where the banking entity 

seeks to rely on separate exemptions for 

permitted activities related to the same 

covered fund? That is, should we 

remove the requirement that the 

banking entity include for purposes of 

the per fund limit, aggregate fund limit, 

and capital deduction the value of any 

ownership interests of the covered fund 

acquired or retained in accordance with 

the underwriting or market-making 

exemption, regardless of whether the 

banking entity engages in activity in 

reliance on § ll.11(a) or (b) with 

respect to the fund? Why or why not? 

Conversely, should the Agencies retain 

the requirement that all covered fund 

ownership interests acquired or retained 

in connection with underwriting or 

market-making-related activities be 

included for purposes of the aggregate 

fund limit and capital deduction as a 

means to effectuate the limitations on 

permitted activities in section (d)(2)(A) 

of the BHC Act? 

Question 184. Please describe 

whether the restrictions on 

underwriting or market making of 

ownership interests in covered funds 

are appropriate. Why or why not? 

Question 185. Please describe any 

potential restrictions that commenters 

believe should be included or indicate 

any restrictions that should be removed, 

along with the commenter’s rationale for 

such changes, and how such changes 

would be consistent with the statute. 

3. Section ll.13: Other Permitted 

Covered Fund Activities 

a. Permitted Risk-Mitigating Hedging 

Activities 

Section 13(d)(1)(C) of the BHC Act 

provides an exemption for certain riskmitigating hedging activities.189 In the 

context of covered fund activities, the 

2013 final rule implemented this 

authority narrowly, permitting only 

limited risk-mitigating hedging 

activities involving ownership interests 

in covered funds for hedging employee 

compensation arrangements. In 

particular, §ll.13(a) of the 2013 final 

rule permits a banking entity to acquire 

or retain an ownership interest in a 

covered fund provided that the 

ownership interest is designed to 

demonstrably reduce or otherwise 

significantly mitigate the specific, 

identifiable risks to the banking entity 

in connection with a compensation 

arrangement with an employee who 

directly provides investment advisory or 

other services to the covered fund. 

In the 2011 proposal, the Agencies 

considered permitting a banking entity 

to acquire or retain an ownership 

interest in a covered fund as a hedge in 

a second context, in addition to hedging 

employee compensation arrangements. 

Specifically, the 2011 proposal included 

a provision that would have allowed a 

banking entity to acquire or retain an 

ownership interest in a covered fund as 

a risk-mitigating hedge when acting as 

an intermediary on behalf of a customer 

that is not itself a banking entity to 

facilitate the exposure by the customer 

to the profits and losses of the covered 

fund.190 After receiving comments on 

the 2011 proposal, the Agencies 

determined not to include this second 

provision in the 2013 final rule. At the 

time, the Agencies determined based on 

information available and comments 

received, that transactions by a banking 

entity to act as principal in providing 

exposure to the profits and losses of a 

covered fund for a customer, even if 

hedged by the entity with ownership 

interests of the covered fund, 

constituted a high-risk strategy that 

could threaten the safety and soundness 

of the banking entity. The Agencies 

were concerned that these transactions 

could expose the banking entity to the 

risk that the customer will fail to 

perform, thereby effectively exposing 

the banking entity to the risks of the 

covered fund, and that a customer’s 

failure to perform may be concurrent 

with a decline in value of the covered 

fund, which could expose the banking 

entity to additional losses. The Agencies 

therefore concluded that these 

transactions could pose a significant 

potential to expose banking entities to 

the same or similar economic risks that 

section 13 of the BHC Act sought to 

eliminate.191

Since the Agencies’ adoption of the 

2013 final rule, some market 

participants have argued that the 2013 

final rule should be modified to permit 

a banking entity to acquire or retain an 

ownership interest in a covered fund as 

a risk-mitigating hedge when acting as 

an intermediary on behalf of a customer 

that is not itself a banking entity to 

facilitate the exposure by the customer 

to the profits and losses of the covered 

fund. These market participants have 

urged that allowing banking entities to 

facilitate customer activity would be 

consistent with the intent of the statute. 

In the view of these market participants, 

permitting such activity would not be 

inconsistent with safety and soundness 

because it would be conducted 

consistent with the requirements of the 

2013 final rule, as modified by the 

proposal, including the requirements 


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192The proposal would also amend §ll.13(a) to 

align with the proposed modifications to §ll5. In 

particular, the proposal would require that a riskmitigating hedging transaction pursuant to 

§ll.13(a) be designed to reduce or otherwise 

significantly mitigate one or more specific, 

identifiable risks to the banking entity. It would 

also remove the requirement that the hedging 

transaction ‘‘demonstrably reduces or otherwise 

significantly mitigates’’ the relevant risks, 

consistent with the proposed modifications to 

§ll.5. See supra Part III.B.3 of this 

Supplementary Information section. 

193Section 13(d)(1)(I) of the BHC Act permits a 

banking entity to acquire or retain an ownership 

interest in or have certain relationships with, a 

covered fund notwithstanding the restrictions on 

investments in, and relationships with, a covered 

fund, if: (i) Such activity or investment is 

conducted by a banking entity pursuant to 

paragraph (9) or (13) of section 4(c) of the BHC Act; 

(ii) the activity occurs solely outside of the United 

States; (iii) no ownership interest in such fund is 

offered for sale or sold to a resident of the United 

States; and (iv) the banking entity is not directly or 

indirectly controlled by a banking entity that is 

organized under the laws of the United States or of 

one or more States. See 12 U.S.C. 1851(d)(1)(I). 

194This section’s discussion of the concept 

‘‘solely outside of the United States’’ is provided 

solely for purposes of the proposal’s 

implementation of section 13(d)(1)(I) of the BHC 

Act, and does not affect a banking entity’s 

obligation to comply with additional or different 

requirements under applicable securities, banking, 

or other laws. 

195See 156 Cong. Rec. S5897 (daily ed. July 15, 

2010) (statement of Sen. Merkley). (‘‘Subparagraphs 

(H) and (I) recognize rules of international 

regulatory comity by permitting foreign banks, 

regulated and backed by foreign taxpayers, in the 

course of operating outside of the United States to 

engage in activities permitted under relevant 

foreign law. However, these subparagraphs are not 

intended to permit a U.S. banking entity to avoid 

the restrictions on proprietary trading simply by 

setting up an offshore subsidiary or reincorporating 

offshore, and regulators should enforce them 

accordingly. In addition, the subparagraphs seek to 

maintain a level playing field by prohibiting a 

foreign bank from improperly offering its hedge 

fund and private equity fund services to U.S. 

persons when such offering could not be made in 

the United States.’’). 

with respect to risk-mitigating hedging 

transactions. For example, such 

exposures would be subject to required 

risk limits and policies and procedures 

and must be appropriately monitored 

and risk managed. Although a banking 

entity could be exposed to the risk of 

the covered fund if the customer fails to 

perform, this counterparty default risk 

would be present whenever a banking 

entity facilitates the exposure by the 

customer to the profits and losses of a 

financial instrument and seeks to hedge 

its own exposure by investing in the 

financial instrument. 

Accordingly, the Agencies are 

including this provision in the proposal 

and requesting comment below as to 

whether the 2013 final rule should be 

modified to permit this additional 

category of risk-mitigating hedging 

transactions. 

As in the 2011 proposal, this proposal 

would allow a banking entity to acquire 

a covered fund interest as a hedge when 

acting as an intermediary on behalf of a 

customer that is not itself a banking 

entity to facilitate the exposure by the 

customer to the profits and losses of the 

covered fund. The hedging of employee 

compensation arrangements involving 

covered fund interests would remain 

unchanged from the 2013 final rule. 

Moreover, a banking entity that seeks to 

use a covered fund interest to hedge on 

behalf of a customer would need to 

comply with all of the requirements of 

§ ll.13(a), which generally track the 

requirements of § ll.5, as modified by 

this proposal.192 The Agencies believe 

that to effectively implement the statute, 

banking entities should have a broader 

ability to acquire or retain a covered 

fund interest as a permissible hedging 

activity. 

In addition to those questions raised 

in connection with the proposed 

implementation of the risk-mitigating 

hedging exemption under §ll.5 of the 

proposal, the Agencies request comment 

on the proposed implementation of that 

same exemption with respect to covered 

fund activities. In particular, the 

Agencies request comment on the 

following questions: 

Question 186. Should a banking entity 

be permitted to acquire or retain an 

ownership interest in a covered fund as 

a hedge when acting as an intermediary 

on behalf of a customer that is not itself 

a banking entity to facilitate the 

exposure by the customer to the profits 

and losses of the covered fund? If so, 

what kinds of transactions would 

banking entities enter into to facilitate 

the exposure by the customer to the 

profits and losses of the covered fund, 

what types of covered funds would be 

used to hedge, how would they be used 

to hedge, and what kinds of customers 

would be involved? Should the 

Agencies place additional limitations on 

these arrangements, such as a 

requirement for a banking entity to take 

prompt action to hedge or eliminate its 

covered fund exposure if the customer 

fails to perform? 

Question 187. At the time the 

Agencies adopted the 2013 final rule, 

they determined that transactions by a 

banking entity to act as principal in 

providing exposure to the profits and 

losses of a covered fund for a customer, 

even if hedged by the entity with 

ownership interests of the covered fund, 

constituted a high-risk strategy that 

could threaten the safety and soundness 

of the banking entity. Do these 

arrangements constitute a high-risk 

strategy, threaten the safety and 

soundness of a banking entity, and pose 

significant potential to expose banking 

entities to the same or similar economic 

risks that section 13 of the BHC Act 

sought to eliminate? Why or why not? 

Commenters are encouraged to provide 

specific information that would help the 

Agencies’ analysis of this question. 

Question 188. Are there other 

circumstances on which a banking 

entity should be permitted to acquire or 

retain an ownership interest in a 

covered fund? If so, please explain. For 

example, should the Agencies amend 

the 2013 final rule to provide that, in 

addition to the proposed amendment, 

banking entities be permitted to acquire 

or retain ownership interests in covered 

funds where the acquisition or retention 

meets the requirements of §ll.5 of the 

2013 final rule, as modified by the 

proposal? 

b. Permitted Covered Fund Activities 

and Investments Outside of the United 

States 

Section 13(d)(1)(I) of the BHC Act 193

permits foreign banking entities to 

acquire or retain an ownership interest 

in, or act as sponsor to, a covered fund, 

so long as those activities and 

investments occur solely outside the 

United States and certain other 

conditions are met (the foreign fund 

exemption).194 The purpose of this 

statutory exemption appears to be to 

limit the extraterritorial application of 

the statutory restrictions on covered 

fund activities and investments, while 

preserving national treatment and 

competitive equity among U.S. and 

foreign banking entities within the 

United States.195 The statute does not 

explicitly define what is meant by 

‘‘solely outside of the United States.’’ 

i. Activities or Investments Solely 

Outside of the United States 

The 2013 final rule establishes several 

conditions on the availability of the 

foreign fund exemption. Specifically, 

the 2013 final rule provides that an 

activity or investment occurs solely 

outside the United States for purposes 

of the foreign fund exemption only if: 

• The banking entity acting as 

sponsor, or engaging as principal in the 

acquisition or retention of an ownership 

interest in the covered fund, is not itself, 

and is not controlled directly or 

indirectly by, a banking entity that is 

located in the United States or 

established under the laws of the United 

States or of any State; 

• The banking entity (including 

relevant personnel) that makes the 

decision to acquire or retain the 

ownership interest or act as sponsor to 

the covered fund is not located in the 


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196See final rule §ll.13(b)(4). 

197See 12 U.S.C. 1851(d)(1)(I). 

198 2013 final rule §ll.13(b)(3). 

199https://www.federalreserve.gov/bankinforeg/ 

volcker-rule/faq.htm#13. 

200See proposal §ll.13(b)(3). 

201The Agencies note that foreign funds that sell 

securities to residents of the United States in an 

offering that targets residents of the United States 

will be covered funds under §ll.10(b)(i) of the 

2013 final rule if such funds are unable to rely on 

an exclusion or exemption under the Investment 

Company Act other than section 3(c)(1) or 3(c)(7) 

of that Act. If the marketing restriction were to 

apply more generally to the activities of any person 

(including the covered fund itself), the applicability 

of the foreign fund exemption would be 

significantly limited because a third-party foreign 

fund’s offering that targets residents of the United 

Continued 

United States or organized under the 

laws of the United States or of any State; 

• The investment or sponsorship, 

including any transaction arising from 

risk-mitigating hedging related to an 

ownership interest, is not accounted for 

as principal directly or indirectly on a 

consolidated basis by any branch or 

affiliate that is located in the United 

States or organized under the laws of 

the United States or of any State; and 

• No financing for the banking 

entity’s ownership or sponsorship is 

provided, directly or indirectly, by any 

branch or affiliate that is located in the 

United States or organized under the 

laws of the United States or of any State 

(the ‘‘financing prong’’).196

Much like the similar requirement 

under the exemption for permitted 

trading activities of a foreign banking 

entity, experience since adoption of the 

2013 final rule has indicated that the 

financing prong has been difficult to 

comply with in practice. As a result, the 

proposal would remove the financing 

prong of the foreign fund exemption for 

the same reasons as described above for 

the trading outside of the United States 

exemption. This modification would 

streamline the requirements of this 

exemption with the intention of 

improving implementation of the 

statutory exemption. Although a U.S. 

branch or affiliate that extends financing 

for a covered fund investment solely 

outside of the United States could bear 

some risks—for example, if the U.S. 

branch of an affiliate provides a loan 

secured by a covered fund interest that 

then declines in value—the conditions 

to the foreign fund exemption, as 

modified by the proposal, are designed 

to require that the principal risks of 

covered fund investments and 

sponsorship by foreign banking entities 

permitted under the foreign fund 

exemption occur and remain solely 

outside of the United States. For 

example, the foreign fund exemption 

would continue to provide that the 

investment or sponsorship, including 

any transaction arising from riskmitigating hedging related to an 

ownership interest, may not be 

accounted for as principal directly or 

indirectly on a consolidated basis by 

any U.S. branch or affiliate. One of the 

principal purposes of section 13 of the 

BHC Act appears to be to limit the risks 

that covered fund investments and 

activities may pose to the safety and 

soundness of U.S. banking entities and 

the U.S. financial system. A purpose of 

the foreign fund exemption appears to 

be to limit the extraterritorial 

application of section 13 as it applies to 

foreign banking entities subject to 

section 13. The modifications to these 

requirements under the proposal are 

intended to ensure that any foreign 

banking entity engaging in activity 

under the foreign fund exemption does 

so in a manner that ensures the risk and 

sponsorship of the activity or 

investment occurs and resides solely 

outside of the United States. 

ii. Offered for Sale or Sold to a Resident 

of the United States 

One of the restrictions of the 

exemption for covered fund activities 

conducted by foreign banking entities 

outside the United States is the 

restriction that no ownership interest in 

the covered fund may be offered for sale 

or sold to a resident of the United 

States.197 To implement this restriction, 

§ ll.13(b) of the 2013 final rule 

requires, as one condition of the foreign 

fund exemption, that ‘‘no ownership 

interest in such hedge fund or private 

equity fund is offered for sale or sold to 

a resident of the United States’’ (the 

‘‘marketing restriction’’). Section 

ll.13(b)(3) of the 2013 final rule 

further specifies that an ownership 

interest in a covered fund is not offered 

for sale or sold to a resident of the 

United States for purposes of the 

marketing restriction if it is sold or has 

been sold pursuant to an offering that 

does not target residents of the United 

States.198

After issuance of the 2013 final rule, 

foreign banking entities requested 

clarification from the Agencies 

regarding whether the marketing 

restriction applied only to the activities 

of a foreign banking entity that is 

seeking to rely on the foreign fund 

exemption or whether it applied more 

generally to the activities of any person 

offering for sale or selling ownership 

interests in the covered fund. 

Specifically, sponsors of covered funds 

and foreign banking entities asked how 

this condition would apply to a foreign 

banking entity that has made, or intends 

to make, an investment in a covered 

fund where the foreign banking entity 

(including its affiliates) does not 

sponsor, or serve, directly or indirectly, 

as the investment manager, investment 

adviser, commodity pool operator, or 

commodity trading advisor to the 

covered fund (a third-party covered 

fund). 

After issuance of the 2013 final rule, 

the staffs of the Agencies issued 

guidance to address these issues, and 

the proposal would amend the 2013 

final rule to clearly incorporate this 

guidance.199 The proposal therefore 

provides that an ownership interest in a 

covered fund is not offered for sale or 

sold to a resident of the United States 

for purposes of the marketing restriction 

only if it is not sold and has not been 

sold pursuant to an offering that targets 

residents of the United States in which 

the banking entity or any affiliate of the 

banking entity participates. If the 

banking entity or an affiliate sponsors or 

serves, directly or indirectly, as the 

investment manager, investment 

adviser, commodity pool operator, or 

commodity trading advisor to a covered 

fund, then the banking entity or affiliate 

will be deemed for purposes of the 

marketing restriction to participate in 

any offer or sale by the covered fund of 

ownership interests in the covered 

fund.200

The purpose of this provision is to 

make clear that the marketing restriction 

applies to the activity of the foreign 

banking entity that is seeking to rely on 

the exemption (including its affiliates). 

The marketing restriction constrains the 

foreign banking entity in connection 

with its own activities with respect to 

covered funds rather than the activities 

of unaffiliated third parties, thereby 

requiring that the foreign banking entity 

seeking to rely on this exemption does 

not engage in an offering of ownership 

interests that targets residents of the 

United States. This view is consistent 

with limiting the extraterritorial 

application of section 13 to foreign 

banking entities while seeking to ensure 

that the risks of covered fund 

investments by foreign banking entities 

occur and remain solely outside of the 

United States. If the marketing 

restriction were applied to the activities 

of third parties, such as the sponsor of 

a third-party covered fund (rather than 

the foreign banking entity investing in a 

third-party covered fund), this 

exemption may not be available in 

certain circumstances where the risks 

and activities of a foreign banking entity 

with respect to its investment in the 

covered fund are solely outside the 

United States.201 In describing the 


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States would make the foreign fund exemption 

unavailable for all foreign banking entity investors 

in the fund. 

202See, 79 FR at 5742 (emphasis added). 

203 12 U.S.C. 371c. The Agencies note that this 

does not alter the applicability of section 23A of the 

FR Act and the Board’s Regulation W to covered 

transactions between insured depository 

institutions and their affiliates. 

204 79 FR at 5746. 

205 Id. 

206 Id. 

207 Id. 

208 12 U.S.C. 371c–1. 

209See 2013 final rule §ll.14. 

210See 12 U.S.C. 1851(f)(3). 

marketing restriction in the preamble to 

the 2013 final rule, the Agencies stated 

that the marketing restriction serves to 

limit the foreign fund exemption so that 

it ‘‘does not advantage foreign banking 

entities relative to U.S. banking entities 

with respect to providing their covered 

fund services in the United States by 

prohibiting the offer or sale of 

ownership interests in related covered 

funds to residents of the United 

States.’’ 202

A foreign banking entity (including its 

affiliates) that seeks to rely on the 

foreign fund exemption must comply 

with all of the conditions to that 

exemption, including the marketing 

restriction. A foreign banking entity that 

participates in an offer or sale of 

covered fund interests to a resident of 

the United States thus cannot rely on 

the foreign fund exemption with respect 

to that covered fund. Further, where a 

banking entity sponsors or serves, 

directly or indirectly, as the investment 

manager, investment adviser, 

commodity pool operator, or commodity 

trading advisor to a covered fund, that 

banking entity will be viewed as 

participating in an offer or sale by the 

covered fund of ownership interests in 

the covered fund, and therefore such 

foreign banking entity would not qualify 

for the foreign fund exemption for that 

covered fund if that covered fund offers 

or sells covered fund ownership 

interests to a resident of the United 

States. The Agencies request comment 

on the proposal’s approach to 

implementing the foreign fund 

exemption. In particular, the Agencies 

request comment on the following 

questions: 

Question 189. Is the proposal’s 

implementation of the foreign fund 

exemption effective? If not, what 

alternative would be more effective and/ 

or clearer? 

Question 190. Are the proposal’s 

provisions effective and sufficiently 

clear regarding when a transaction or 

activity will be considered to have 

occurred solely outside the United 

States? If not, what alternative would be 

more effective and/or clearer? 

Question 191. Should the financing 

prong of the foreign fund exemption be 

retained? Why or why not? Should 

additional requirements be added to the 

foreign fund exemption? If so, what 

requirements and why? Should 

additional requirements be modified or 

removed? If so, what requirements and 

why and how? How would such 

changes be consistent with the statute? 

Question 192. Is the proposed 

exemption consistent with limiting the 

extraterritorial reach of the rule with 

respect to FBOs? Does the proposed 

exemption create competitive 

advantages for foreign banking entities 

with respect to U.S. banking entities? 

Why or why not? 

Question 193. Is the Agencies’ 

proposal regarding the 2013 final rule’s 

marketing restriction, which reflects the 

staff interpretations incorporated within 

previous FAQs, sufficiently clear? 

Should the marketing restriction apply 

more broadly to third-party funds that 

the foreign banking entity does not 

advise or sponsor? Why or why not? 

4. Section ll.14: Limitations on 

Relationships With a Covered Fund 

Section 13(f) of the BHC Act generally 

prohibits a banking entity that, directly 

or indirectly, serves as investment 

manager, investment adviser, or sponsor 

to a covered fund (or that organizes and 

offers a covered fund pursuant to 

section 13(d)(1)(G) of the BHC Act) from 

entering into a transaction with such 

covered fund that would be a covered 

transaction as defined in section 23A of 

the FR Act.203 In the 2013 final rule, the 

Agencies noted that ‘‘[s]ection 13(f) of 

the BHC Act does not incorporate or 

reference the exemptions contained in 

section 23A of the FR Act or the Board’s 

Regulation W.’’ 204 However, the 

Agencies also noted that 

notwithstanding the prohibition in 

section 13(f)(1) of the BHC Act, ‘‘other 

specific portions of the statute permit a 

banking entity to engage in certain 

transactions or relationships’’ with a 

related covered fund.205 The Agencies 

addressed the apparent conflict between 

section 13(f)(1) and particular 

provisions in section 13(d)(1) of the 

BHC Act in the 2013 final rule by 

interpreting the statutory language to 

permit a banking entity ‘‘to acquire or 

retain an ownership interest in a 

covered fund in accordance with the 

requirements of section 13.’’ 206 In doing 

so, the Agencies noted that a contrary 

interpretation would make the ‘‘specific 

transactions that permit covered 

transactions between a banking entity 

and a covered fund mere 

surplusage.’’ 207 In light of the apparent 

conflict and ambiguity between 

particular provisions in sections 

13(d)(1) and 13(f)(1) of the BHC Act, the 

Agencies solicit comment below on the 

approach adopted in the 2013 final rule 

and potential alternative approaches to 

interpreting these provisions and 

reconciling any apparent conflicts or 

redundancies between these provisions. 

Section 13(f) also provides an 

exemption for prime brokerage 

transactions between a banking entity 

and a covered fund in which a covered 

fund managed, sponsored, or advised by 

that banking entity has taken an 

ownership interest. In addition, section 

13(f) subjects any transaction permitted 

under section 13(f) of the BHC Act 

(including a permitted prime brokerage 

transaction) between a banking entity 

and covered fund to section 23B of the 

FR Act.208

In general, section 23B of the FR Act 

requires that the transaction be on 

market terms or on terms at least as 

favorable to the banking entity as a 

comparable transaction by the banking 

entity with an unaffiliated third party. 

Section ll.14 of the 2013 final rule 

implemented these provisions.209

a. Prime Brokerage Transactions 

Section 13(f) of the BHC Act provides 

an exemption from the prohibition on 

covered transactions with a covered 

fund for any prime brokerage 

transaction with a covered fund in 

which a covered fund managed, 

sponsored, or advised by a banking 

entity has taken an ownership interest (a 

‘‘second-tier fund’’). The statute by its 

terms permits a banking entity with a 

relationship to a covered fund described 

in section 13(f) of the BHC Act to engage 

in prime brokerage transactions (that are 

covered transactions) only with secondtier funds and does not extend to 

covered funds more generally. Neither 

the statute nor the proposal limits 

covered transactions between a banking 

entity and a covered fund for which the 

banking entity does not serve as 

investment manager, investment 

adviser, or sponsor (as defined in 

section 13 of the BHC Act) or have an 

interest in reliance on section 

13(d)(1)(G) of the BHC Act. Under the 

statute, the exemption for prime 

brokerage transactions is available only 

so long as certain enumerated 

conditions are satisfied.210 The 

conditions are that (i) the banking entity 

is in compliance with each of the 

limitations set forth in §ll.11 of the 

2013 final rule with respect to a covered 


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211https://www.federalreserve.gov/bankinforeg/ 

volcker-rule/faq.htm#18. 

212CFTC Staff Letter 17–18 (Mar. 29, 2017). 

213The OCC, Board and FDIC statement on the 

2013 final rule’s applicability to community banks 

recognized that ‘‘[t]he vast majority of these 

community banks have little or no involvement in 

prohibited proprietary trading or investment 

activities in covered funds. Accordingly, 

community banks do not have any compliance 

obligations under the final rule if they do not 

engage in any covered activities other than trading 

Continued 

fund organized and offered by the 

banking entity or any of its affiliates; (ii) 

the CEO (or equivalent officer) of the 

banking entity certifies in writing 

annually that the banking entity does 

not, directly or indirectly, guarantee, 

assume, or otherwise insure the 

obligations or performance of the 

covered fund or of any covered fund in 

which such covered fund invests; and 

(iii) the Board has not determined that 

such transaction is inconsistent with the 

safe and sound operation and condition 

of the banking entity. The proposal 

would retain each of these provisions, 

including that the required certification 

be made to the appropriate Agency for 

the banking entity. 

The staffs of the Agencies previously 

issued guidance explaining when a 

banking entity was required to provide 

this certification during the 

conformance period.211 To reflect this 

guidance, the Agencies are proposing a 

change to the rule that provides the 

timing for when a banking entity must 

submit such certification. In particular, 

the proposal provides a banking entity 

must provide the CEO certification 

annually no later than March 31 of the 

relevant year. As under the 2013 final 

rule, under the proposal, the CEO would 

have a duty to update the certification 

if the information in the certification 

materially changes at any time during 

the year when he or she becomes aware 

of the material change. This change is 

intended to provide banking entities 

with certainty about when the required 

certification must be provided to the 

appropriate Agency in order to comply 

with the prime brokerage exemption. 

b. FCM Clearing Services 

On March 29, 2017, the CFTC’s 

Division of Swap Dealer and 

Intermediary Oversight (‘‘DSIO’’) issued 

a letter to a futures commission 

merchant (‘‘FCM’’) stating that the DSIO 

would not recommend that an 

enforcement action against the FCM be 

initiated in connection with §ll.14(a) 

of the 2013 final rule. The letter 

provides relief for futures, options, and 

swaps clearing services provided by a 

registered FCM to covered funds for 

which affiliates of the FCM are engaged 

in the services identified in § ll.14(a) 

including, for example, investment 

management services.212

The CFTC believes the relief provided 

to the FCM is warranted and would 

extend the relief from the requirements 

of §ll.14(a) of the 2013 final rule to 

all FCMs performing futures, options, 

and swaps clearing services. Providing 

such clearing services to customers of 

affiliates does not appear to be the type 

of relationship that was intended to be 

limited under section 13(f) of the BHCA. 

The provision of futures, options, and 

swaps clearing services by an FCM is a 

facilitation service that the CFTC 

believes would not give rise to a 

relationship that might evade the 

prohibition against acquiring or 

retaining an interest in or sponsoring a 

covered fund. An FCM earns clearing 

fees and is not in a position to profit 

from any gain or loss that the customer 

may have on its cleared futures, options, 

or swaps positions. The other Agencies 

do not object to the relief provided to 

the FCMs as described above. 

Question 194. Are clearing services 

provided by an FCM to its customers a 

relationship that would give rise to the 

policy concerns addressed by §ll.14 

of the 2013 final rule? 

Question 195. Does the no-action 

relief provided by the CFTC staff 

together with the statement herein 

provide sufficient certainty for market 

participants regarding the application of 

§ ll.14(a) of the 2013 final rule to 

FCM clearing services? 

Question 196. If the exemptions in 

section 23A of the FR Act and the 

Board’s Regulation W are made 

available under a modification to 

§ ll.14 of the 2013 final rule, what 

would be the effect, if any, for FCM 

clearing services? Would incorporating 

those exemptions further support the 

relief provided by the CFTC? If so, how? 

The Agencies request comment on all 

aspects of the proposal’s approach to 

implementing the limitations on certain 

relationships with covered funds. In 

particular, the Agencies request 

comment on the following questions: 

Question 197. Is the proposal’s 

approach to implementing the 

limitations on certain transactions with 

a covered fund effective? If not, what 

alternative approach would be more 

effective and why? 

Question 198. Should the Agencies 

adopt a different interpretation of 

section 13(f)(1) of the BHC Act than the 

interpretation adopted in the preamble 

to the 2013 final rule? For example, 

should the Agencies amend §ll.14 of 

the 2013 final rule to incorporate some 

or all of the exemptions in section 23A 

of the FR Act and the Board’s 

Regulation W? Why or why not? Why 

should these transactions be permitted? 

For example, what would be the effect 

on banking entities’ ability to meet the 

needs and demands of their clients and 

how would incorporating some or all of 

the exemptions that exist in section 23A 

of the FR Act and the Board’s 

Regulation W facilitate a banking 

entity’s ability to meet client needs and 

demands? If permitted, should these 

additional transactions be subject to any 

limitations? 

Question 199. Should the Agencies 

amend §ll.14 of the 2013 final rule 

to incorporate the quantitative limits in 

section 23A of the Federal Reserve and 

the Board’s Regulation W? Why or why 

not? Are there any other elements of 

section 23A and the Board’s Regulation 

W that the Agencies should consider 

incorporating? Please explain. 

Question 200. Are there other 

transactions between a banking entity 

and covered funds that should be 

prohibited or limited as part of this 

rulemaking? 

Question 201. Is the definition of 

‘‘prime brokerage transaction’’ under the 

proposal appropriate? If not, what 

definition would be appropriate? Are 

there any transactions that should be 

included in the definition of ‘‘prime 

brokerage transaction’’ that are not 

currently included? 

Question 202. With respect to the 

CEO (or equivalent officer) certification 

required under section 13(f)(3)(A)(ii) 

and §ll.14(a)(2)(ii)(B) of this 

proposal, what would be the most 

useful, efficient method of certification 

(e.g., a new stand-alone certification, a 

certification incorporated into an 

existing form or filing, website 

certification or certification filed 

directly with the relevant Agency?) Is it 

sufficiently clear by when a certification 

must be provided by a banking entity? 

If not, how could the Agencies provide 

additional clarity? 

D. Subpart D—Compliance Program 

Requirements; Violations 

1. Section ll.20: Program for 

Compliance; Reporting 

Section ll.20 of the 2013 final rule 

contains compliance program and 

metrics collection and reporting 

requirements. These requirements are 

tailored based on banking entity size 

and complexity of activity. The 2013 

final rule was intended to focus the 

most significant compliance obligations 

on the largest and most complex 

organizations, while minimizing the 

economic impact on small banking 

entities.213 However, public feedback 


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in certain government, agency, State or municipal 

obligations.’’ Board of Governors of the Federal 

Reserve System, Federal Deposit Insurance 

Corporation, and Office of the Comptroller of the 

Currency, The Volcker Rule: Community Bank 

Applicability (Dec. 10, 2013). 

has indicated that even determining 

whether a banking entity is eligible for 

the simplified compliance program can 

require significant analysis for small 

banking entities. In addition, certain 

traditional banking activities of small 

banks have fallen within the scope of 

the proprietary trading and covered 

fund prohibitions and exemptions, 

making them ineligible for the 

simplified program available to banking 

entities with no covered activities. 

Public feedback has indicated that the 

compliance program requirements are 

also significant for larger banking 

entities that must implement the rule’s 

enhanced compliance program, metrics, 

and CEO attestation requirements. The 

Agencies propose to revise the 

compliance program requirements to 

allow greater flexibility and focus the 

requirements on the banking entities 

with the most significant and complex 

activities. 

Specifically, the Agencies propose to 

apply the compliance program 

requirement to banking entities as 

follows: 

• Banking entities with significant 

trading assets and liabilities. Banking 

entities with significant trading assets 

and liabilities would be subject to the 

six-pillar compliance program 

requirement (currently set forth in 

§ ll.20(b) of the 2013 final rule), the 

metrics reporting requirements 

(§ ll.20(d) of the 2013 final rule), the 

covered fund documentation 

requirements (§ll.20(e) of the 2013 

final rule), and the CEO attestation 

requirement (currently in Appendix B of 

the 2013 final rule). 

• Banking entities with moderate 

trading assets and liabilities. Banking 

entities with moderate trading assets 

and liabilities would be required to 

establish the simplified compliance 

program (currently described in 

§ ll.20(f)(2) of the 2013 final rule), 

and comply with the CEO attestation 

requirement (currently in Appendix B of 

the 2013 final rule). 

• Banking entities with limited 

trading assets and liabilities. Banking 

entities with limited trading assets and 

liabilities would be presumed to be in 

compliance with the proposal and 

would have no obligation to 

demonstrate compliance with subpart B 

and subpart C of the implementing 

regulations on an ongoing basis. These 

banking entities would not be required 

to demonstrate compliance with the rule 

unless and until the appropriate 

Agency, based upon a review of the 

banking entity’s activities, determines 

that the banking entity must establish 

the simplified compliance program 

(currently described in §§ ll.20(b) or 

ll.20(f)(2) of the 2013 final rule). 

a. Compliance Program Requirements 

for Banking Entities With Significant 

Trading Assets and Liabilities 

i. Section 20(b)—Six-Pillar Compliance 

Program 

Section ll.20(b) of the 2013 final 

rule specifies six elements that each 

compliance program required under that 

section must at a minimum contain. 

The six elements specified in 

§ ll.20(b) are: 

• Written policies and procedures 

reasonably designed to document, 

describe, monitor and limit trading 

activities and covered fund activities 

and investments conducted by the 

banking entity to ensure that all 

activities and investments that are 

subject to section 13 of the BHC Act and 

the rule comply with section 13 of the 

BHC Act and the 2013 final rule; 

• A system of internal controls 

reasonably designed to monitor 

compliance with section 13 of the BHC 

Act and the rule and to prevent the 

occurrence of activities or investments 

that are prohibited by section 13 of the 

BHC Act and the 2013 final rule; 

• A management framework that 

clearly delineates responsibility and 

accountability for compliance with 

section 13 of the BHC Act and the 2013 

final rule and includes appropriate 

management review of trading limits, 

strategies, hedging activities, 

investments, incentive compensation 

and other matters identified in the rule 

or by management as requiring 

attention; 

• Independent testing and audit of 

the effectiveness of the compliance 

program conducted periodically by 

qualified personnel of the banking 

entity or by a qualified outside party; 

• Training for trading personnel and 

managers, as well as other appropriate 

personnel, to effectively implement and 

enforce the compliance program; and 

• Records sufficient to demonstrate 

compliance with section 13 of the BHC 

Act and the 2013 final rule, which a 

banking entity must promptly provide 

to the relevant Agency upon request and 

retain for a period of no less than 5 

years. 

Under the 2013 final rule, these six 

elements must be part of the compliance 

program of each banking entity with 

total consolidated assets greater than 

$10 billion that engages in covered 

trading activities and investments 

subject to section 13 of the BHC Act and 

the implementing regulations. 

The Agencies are proposing to apply 

the six-pillar compliance program 

requirements only to banking entities 

with significant trading assets and 

liabilities. The Agencies preliminarily 

believe these banking entities are 

engaged in activities at a scale that 

warrants the costs of establishing the 

compliance program elements described 

in §§ll.20(b) and ll.20(e) of the 

2013 final rule. Accordingly, the 

Agencies believe it is appropriate to 

require banking entities with significant 

trading assets and liabilities to maintain 

a six-pillar compliance program to 

ensure that banking entities’ activities 

are conducted in compliance with 

section 13 of the BHC Act and the 

implementing regulations. 

As described further in the 

‘‘Enhanced Minimum Standards for 

Compliance Programs’’ below, the 

Agencies are proposing to eliminate the 

current enhanced compliance program 

requirements found in Appendix B of 

the 2013 final rule. The Agencies 

believe that the six-pillar compliance 

program requirements (currently in 

§ ll.20(b) of the 2013 final rule) can 

be appropriately tailored to the size and 

activities of each banking entity that is 

subject to these requirements. The 

proposed approach would afford 

banking entities flexibility to integrate 

the §ll.20 compliance program 

requirements into other compliance 

programs of the banking entity, which 

may reduce complexity for banking 

entities currently subject to the 

enhanced compliance program 

requirements. 

Question 203. Should the six-pillar 

compliance program requirements apply 

only to banking entities with significant 

trading assets and liabilities? Is the 

scope of the six-pillar compliance 

program appropriate? Why or why not? 

Are there particular aspects of this 

requirement that should be modified or 

eliminated? If so, which ones and why? 

ii. CEO Attestation Requirement 

The 2013 final rule includes a 

requirement, currently included in 

Appendix B, that a banking entity CEO 

must review and annually attest in 

writing to the appropriate Agency that 

the banking entity has in place 

processes to establish, maintain, 

enforce, review, test and modify the 

compliance program established 

pursuant to Appendix B and § ll.20 of 

the 2013 final rule in a manner 

reasonably designed to achieve 

compliance with section 13 of the BHC 

Act and the implementing regulations. 


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214 12 CFR 44.20(f)(2). 

The Agencies are proposing to eliminate 

the current Appendix B (as described 

further below) but to apply a modified 

CEO attestation requirement for banking 

entities other than those with limited 

trading assets and liabilities. While the 

Agencies believe the revisions to the 

compliance program requirements 

under the proposal generally simplify 

the compliance program requirements, 

this simplification should be balanced 

against the requirement for all banking 

entities to maintain compliance with 

section 13 of the BHC Act and the 

implementing regulations. Accordingly, 

the Agencies believe that applying the 

CEO attestation requirement for banking 

entities with meaningful trading 

activities would ensure that the 

compliance programs established by 

these banking entities pursuant to 

§ ll.20(b) or §ll.20(f)(2) of the 

proposal are reasonably designed to 

achieve compliance with section 13 of 

the BHC Act and the implementing 

regulations as proposed. The Agencies 

propose limiting the CEO attestation 

requirement to banking entities with 

significant trading assets and liabilities 

or moderate trading assets and liabilities 

because, if the Agencies’ proposal is 

adopted, banking entities with limited 

trading assets and liabilities would be 

subject to a rebuttable presumption of 

compliance, as described below. The 

Agencies do not believe it is necessary 

to require a CEO attestation for banking 

entities with limited trading assets and 

liabilities as those banking entities 

would not be subject to the express 

requirement to maintain a compliance 

program pursuant to §ll.20 under the 

proposal. 

Question 204. What are the costs 

associated with preparing the required 

CEO attestation? How significant are 

those costs relative to the potential 

benefits of requiring a CEO attestation? 

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. 

Question 205. Are there existing 

business practices and procedures that 

render the CEO attestation requirement 

redundant and/or unnecessary? If so, 

please identify and describe those 

existing business practices. 

Alternatively, are there other regulatory 

requirements that fulfill the same 

purpose as the CEO attestation with 

respect to a compliance program? Please 

explain. 

Question 206. Is the scope of the CEO 

attestation requirements appropriate? 

Should banking entities with limited 

trading assets and liabilities, but with a 

large amount of consolidated assets, for 

example consolidated assets in excess of 

$50 billion be required to provide a CEO 

attestation with respect to the banking 

entity’s compliance program 

notwithstanding that such institution 

may be entitled to the rebuttable 

presumption of compliance under the 

proposal? 

Question 207. How costly are the 

existing CEO attestation requirements 

for banking entities, broken down based 

on whether they are categorized as 

having significant, moderate, and 

limited trading assets and liabilities 

under the proposal? How would those 

annual costs change if the modifications 

described in the proposal were adopted? 

Can the costs described above, both as 

the requirement is currently drafted and 

as proposed to be amended, be broken 

down based on the type of banking 

entity involved, such as for brokerdealers and registered investment 

advisers? Please be as specific as 

possible. 

Question 208. Under the proposal, 

banking entities with limited trading 

assets and liabilities (for which the 

presumption of compliance has not 

been rebutted) would not be subject to 

the CEO attestation requirement? Do 

commenters agree with that approach? 

As an alternative, should a banking 

entity with limited trading assets and 

liabilities be subject to a similar 

requirement? For example, should these 

types of banking entities be required to 

conduct an annual review, to be 

performed by objective, qualified 

personnel, of its compliance with the 

rule and submit such annual review to 

its Board of Directors and the Agencies? 

Why or why not? What are the costs and 

benefits of such requirement? 

iii. Covered Fund Documentation 

Requirements 

Currently, §ll.20(e) of the 2013 

final rule requires banking entities with 

greater than $10 billion in total 

consolidated assets to maintain 

additional documentation related to 

covered funds as part of their 

compliance program. The Agencies are 

proposing to apply the covered fund 

documentation requirements only to 

banking entities with significant trading 

assets and liabilities. The Agencies do 

not believe that these additional 

documentation requirements are 

necessary for banking entities without 

significant trading assets and liabilities 

because the Agencies expect that their 

covered funds activities may generally 

be smaller in scale and less complex 

than banking entities with significant 

trading assets and liabilities. 

Accordingly, the Agencies believe these 

banking entities’ activities are unlikely 

to justify the costs associated with 

complying with these documentation 

requirements. Furthermore, the 

Agencies expect they would be able to 

examine and supervise these banking 

entities’ compliance with the covered 

fund prohibition without requiring such 

additional documentation as part of the 

banking entities’ compliance program. 

b. Compliance Program Requirements 

for Banking Entities With Moderate 

Trading Assets and Liabilities 

The 2013 final rule provides that a 

banking entity with total consolidated 

assets of $10 billion or less as measured 

on December 31 of the previous two 

years that engages in covered activities 

or investments pursuant to subpart B or 

subpart C of the 2013 final rule (other 

than trading activities permitted under 

§ ll.6(a) of the 2013 final rule) may 

satisfy the compliance program 

requirements by including in its existing 

compliance policies and procedures 

references to the requirements of section 

13 of the BHC Act and subpart D of the 

implementing regulations and 

adjustments as appropriate given the 

activities, size, scope, and complexity of 

the banking entity.214

The Agencies propose to extend 

availability of this simplified 

compliance program to all banking 

entities with moderate trading assets 

and liabilities. The Agencies believe 

that streamlining the compliance 

program requirements for banking 

entities with moderate trading assets 

and liabilities is appropriate. The scale 

and nature of the activities and 

investments in which these banking 

entities are engaged may not justify the 

additional costs associated with 

establishing the compliance program 

elements under §§ ll.20(b) and (e) of 

the 2013 final rule and may be 

appropriately examined and supervised 

through an appropriately tailored 

simplified compliance program. 

Consistent with the compliance program 

requirements for banking entities with 

significant trading assets and liabilities, 

the Agencies note that banking entities 

with moderate trading assets and 

liabilities would be able to incorporate 

their simplified compliance program as 

part of any existing compliance policies 

and procedures and tailor their 

compliance program to the size and 

nature of their activities. 


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c. Compliance Program Requirements 

for Banking Entities With Limited 

Trading Assets and Liabilities 

The proposal would include a 

presumption of compliance for certain 

banking entities with limited trading 

assets and liabilities. Under the 

proposal, a banking entity that, together 

with its affiliates and subsidiaries on a 

worldwide basis, has trading assets and 

liabilities (excluding obligations of or 

guaranteed by the United States or any 

agency of the United States) the average 

gross sum of which over the previous 

four quarters, as measured as of the last 

day of each of the four previous 

calendar quarters, is less than $1 billion, 

would be presumed to be in compliance 

with the proposal. Banking entities 

meeting these conditions would have no 

obligation to demonstrate compliance 

with subpart B and subpart C of the 

implementing regulations on an ongoing 

basis. The Agencies believe, based on 

experience implementing and 

supervising compliance with the 2013 

final rule, that these banking entities are 

generally engaged in traditional banking 

activities. The Agencies do not believe 

it is necessary to require banking 

entities with limited trading assets and 

liabilities to demonstrate compliance 

with the prohibitions of section 13 of 

the BHC Act by establishing a 

compliance program, given the limited 

scale of their trading operations. 

Further, the Agencies believe that the 

limited trading assets and liabilities of 

the banking entities qualifying for the 

presumption of compliance are unlikely 

to warrant the costs of establishing a 

compliance program under §ll.20. 

A banking entity that meets the 

proposed criteria for the presumption of 

compliance would be subject to the 

statutory prohibitions of section 13 of 

the BHC Act and the implementing 

regulations on an ongoing basis. The 

Agencies would not expect a banking 

entity that meets the proposed criteria 

for the presumption of compliance to 

demonstrate compliance with the 

proposal in conjunction with the 

Agencies’ normal supervisory and 

examination processes. However, the 

appropriate Agency may exercise its 

authority to treat the banking entity as 

if it does not have limited trading assets 

and liabilities if, upon review of the 

banking entity’s activities, the relevant 

Agency determines that the banking 

entity has engaged in proprietary 

trading or covered fund activities that 

are otherwise prohibited under subpart 

B or subpart C. A banking entity would 

be expected to remediate any 

impermissible activity upon being 

notified of such determination by the 

Agency. A banking entity would be 

required to remediate the impermissible 

activity within a period of time deemed 

appropriate by the relevant Agency. 

The Agencies believe this 

presumption of compliance for certain 

banking entities with limited trading 

assets and liabilities would allow 

flexibility for these banking entities to 

operate under their existing internal 

policies and procedures. The Agencies 

generally expect these banking entities, 

in the ordinary course of business, to 

develop and adhere to internal policies 

and procedures that promote prudent 

risk management practices. 

Irrespective of whether a banking 

entity has engaged in activities in 

violation of subpart B or C of this 

proposal, the relevant Agency retains its 

authority to require a banking entity to 

apply the compliance program 

requirements that would otherwise 

apply if the banking entity had 

significant or moderate trading assets 

and liabilities if the relevant Agency 

determines that the size or complexity 

of the banking entities trading or 

investment activities, or the risk of 

evasion, does not warrant a 

presumption of compliance. 

Question 209. Should the Agencies 

specify the notice and response 

procedures in connection with an 

Agency determination that the 

presumption pursuant to ll.20(g)(2) is 

rebutted? Why or why not? 

d. Enhanced Minimum Standards 

i. Enhanced Minimum Standards for 

Compliance Programs 

Section ll. 20(c) of the 2013 final 

rule requires certain banking entities to 

establish, maintain and enforce an 

enhanced compliance program that 

includes the requirements and 

standards. Appendix B of the 2013 final 

rule specifies the enhanced minimum 

standards applicable to the compliance 

programs of large banking entities and 

banking entities engaged in significant 

trading activities. Section I.a of 

Appendix B provides that the enhanced 

compliance program must: 

• Be reasonably designed to identify, 

document, monitor, and report the 

covered trading and covered fund 

activities and investments of the 

banking entity; identify, monitor and 

promptly address the risks of these 

covered activities and investments and 

potential areas of noncompliance; and 

prevent activities or investments 

prohibited by, or that do not comply 

with, section 13 of the BHC Act and the 

2013 final rule; 

• Establish and enforce appropriate 

limits on the covered activities and 

investments of the banking entity, 

including limits on the size, scope, 

complexity, and risks of the individual 

activities or investments consistent with 

the requirements of section 13 of the 

BHC Act and the 2013 final rule; 

• Subject the effectiveness of the 

compliance program to periodic 

independent review and testing, and 

ensure that the entity’s internal audit, 

corporate compliance and internal 

control functions involved in review 

and testing are effective and 

independent; 

• Make senior management, and 

others as appropriate, accountable for 

the effective implementation of the 

compliance program, and ensure that 

the board of directors and CEO (or 

equivalent) of the banking entity review 

the effectiveness of the compliance 

program; and 

• Facilitate supervision and 

examination by the Agencies of the 

banking entity’s covered trading and 

covered fund activities and investments. 

The Agencies continue to believe that 

banking entities with significant trading 

assets and liabilities should have 

detailed and comprehensive programs 

for ensuring compliance with the 

requirements of section 13 of the BHC 

Act. The Agencies recognize, however, 

that many banking entities have found 

implementing certain aspects of the 

enhanced compliance program 

requirements of Appendix B to be 

inefficient, duplicative of, and in some 

instances inconsistent with, their 

existing compliance regimes and risk 

management programs. 

While recognizing the need to 

establish and maintain an appropriate 

compliance program, the Agencies also 

believe that banking entities should be 

provided discretion to tailor their 

compliance programs to the structure 

and activities of their organizations. The 

flexibility to build on compliance 

regimes that already exist at banking 

entities, including risk limits, risk 

management systems, board-level 

governance protocols, and the level at 

which compliance is monitored, may 

reduce the costs and complexity of 

compliance while also enabling a robust 

compliance mechanism for section 13 of 

the BHC Act. After carefully considering 

the overall effects of the enhanced 

compliance program standards in the 

context of existing banking entity 

compliance frameworks, the Agencies 

are proposing certain modifications to 

limit the implementation, operational or 

other complexities associated with the 

compliance program requirements set 

forth in § ll.20. 

The Agencies believe that many of the 

compliance requirements of the current 


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enhanced compliance program could be 

implemented effectively if incorporated 

into a risk management framework 

already developed and designed to fit a 

banking entity’s organizational and 

reporting structure. The prescribed sixpillar compliance requirements in 

§ ll.20 are consistent with general 

standards of safety and soundness as 

well as diligent supervision, the 

implementation of which conforms with 

the traditional risk management 

processes of ensuring governance, 

controls, and records appropriately 

tailored to the risks and activities of 

each banking entity. Accordingly, the 

Agencies propose to eliminate the 

requirements of Appendix B (other than 

the CEO attestation) and permit banking 

entities with significant trading assets 

and liabilities to satisfy compliance 

program requirements by meeting the 

six elements currently specified in 

§ ll.20(b) of the 2013 final rule, 

commensurate with the size, scope, and 

complexity of their activities and 

business structure, and subject to a CEO 

attestation requirement. 

A banking entity that does not have 

significant trading assets and liabilities 

under the proposal, but which is 

currently subject to Appendix B under 

the 2013 final rule, would be permitted 

to satisfy its compliance requirements in 

the proposal by including in its existing 

compliance policies and procedures 

appropriate references to the 

requirements of section 13 of the BHC 

Act as appropriate given the activities, 

size, scope, and complexity of the 

banking entity. 

ii. Proprietary Trading Activities 

Section II.a of Appendix B of the 2013 

final rule generally requires a banking 

entity subject to the Appendix, in 

addition to the requirements of 

§ ll.20, to: (1) Have written policies 

and procedures governing each trading 

desk; (2) include a comprehensive 

description of the risk management 

program for the trading activity of the 

banking entity; (3) implement and 

enforce limits and internal controls for 

each trading desk that are reasonably 

designed to ensure that trading activity 

is conducted in conformance with 

section 13 of the BHC Act and subpart 

B and with the banking entity’s policies 

and procedures; (4) establish, maintain 

and enforce policies and procedures 

regarding the use of risk-mitigating 

hedging instruments and strategies; (5) 

perform robust analysis and quantitative 

measurement of its trading activities 

that is reasonably designed to ensure 

that the trading activity of each trading 

desk is consistent with the banking 

entity’s compliance program, monitor 

and assist in the identification of 

potential and actual prohibited 

proprietary trading activity, and prevent 

the occurrence of prohibited proprietary 

trading; (6) identify the activities of each 

trading desk that will be conducted in 

reliance on the exemptions contained in 

§§ ll.4 through ll.6; and (7) be 

reasonably designed and established to 

effectively monitor and identify for 

further analysis any proprietary trading 

activity that may indicate potential 

violations of section 13 of the BHC Act 

and subpart B and to prevent violations 

of section 13 of the BHC Act and 

subpart B. 

These requirements of Appendix B in 

the 2013 final rule reflect the Agencies’ 

expectation that banking organizations 

with significant trading activities adopt 

compliance regimes that, among other 

things, take into account the size and 

complexity of the banking entity’s 

activities and structure of its business. 

However, the Agencies recognize that 

operationalizing the prescriptive 

requirements of Appendix B may limit 

the ability of banking entities to adapt 

their existing risk management 

frameworks for purposes of compliance 

with the 2013 final rule. Therefore, 

based on experience since the adoption 

of the 2013 final rule, the Agencies 

believe that a banking entity currently 

subject to Appendix B requirements 

under the 2013 final rule should be 

permitted to implement an 

appropriately robust compliance 

program by tailoring the requirements of 

§ ll.20 to the type, size, scope, and 

complexity of its activities and business 

structure. The Agencies are therefore 

proposing to eliminate the requirements 

of section II.a of Appendix B in order to 

reduce the operational complexities 

associated with the compliance 

requirements of the 2013 final rule. As 

described above, the Agencies believe 

that the compliance program 

requirements in §§ ll.20 can be 

appropriately scaled (pursuant to 

§ ll.20(a)) to the size, scope, and 

complexity of each banking entity and 

should afford banking entities flexibility 

to integrate their §ll.20 compliance 

program into their other compliance 

programs. 

The Agencies believe that, under the 

proposal, compliance programs that 

satisfy §ll.20 and that are 

appropriately tailored to the size, scope, 

and complexity of the banking entity’s 

activities, would be effective in meeting 

the objectives underlying the enhanced 

requirements set forth in Appendix B of 

the 2013 final rule with respect to 

proprietary trading activities. 

Furthermore, affording banking entities 

the flexibility to adapt their existing risk 

management frameworks to satisfy the 

requirements of § ll.20 would reduce 

the complexity of compliance with 

section 13 of the BHC Act and the 

implementing regulations. 

Question 210. The Agencies are 

requesting comment on whether the 

requirements of § ll.20 of the 

proposal would be effective in ensuring 

that banking entities with significant 

trading assets and liabilities and 

banking entities with moderate trading 

assets and liabilities comply with the 

proprietary trading requirements and 

restrictions of section 13 of the BHC Act 

and the proposal. In addition to the CEO 

attestation requirement in proposed 

§ ll.20(c), are there certain 

requirements included in Appendix B 

that should be incorporated into the 

requirements of § ll.20, particularly 

with respect to banking entities with 

significant trading assets and liabilities, 

in order to ensure compliance with the 

proprietary trading requirements and 

restrictions of section 13 of the BHC Act 

and the proposal? To what extent would 

the elimination of Appendix B reduce 

the complexity of compliance with 

section 13 of the BHC Act? What other 

options should the Agencies consider in 

order to reduce complexity while still 

ensuring robust compliance with the 

proprietary trading requirements and 

restrictions of section 13 of the BHC Act 

and the implementing regulations? 

iii. Covered Fund Activities and 

Investments 

The enhanced minimum standards in 

section II.b of Appendix B of the 2013 

final rule prescribe the establishment, 

maintenance and enforcement of a 

compliance program that includes 

written policies and procedures that are 

appropriate for the type, size, 

complexity, and risks of the covered 

fund and related activities conducted 

and investments made, by a banking 

entity. In addition to the requirements 

of §ll.20, § II.b of Appendix B 

requires that compliance programs be 

designed to: (1) Include appropriate 

management review and independent 

testing for identifying and documenting 

covered funds in which the banking 

entity invests, or that each unit within 

the banking entity’s organization 

sponsors or organizes and offers, and 

covered funds in which each such unit 

invests; (2) identify, document, and map 

each unit within the organization that is 

permitted to acquire or hold an interest 

in any covered fund or sponsor any 

covered fund; (3) explain the banking 

entity’s strategy for monitoring, 

mitigating, or prohibiting conflicts of 

interest, transactions or covered fund 

activities and investments that may 


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threaten safety and soundness, and 

exposure to high-risk assets and trading 

strategies presented by its covered fund 

activities and investments; (4) document 

the covered fund activities and 

investments that each organizational 

unit is authorized to conduct, the 

banking entity’s plan for actively 

seeking unaffiliated investors to ensure 

that any investment by the banking 

entity conforms to the limits contained 

in section 12 or registered in 

compliance with the securities laws and 

is thereby exempt from those limits 

within the time periods allotted in 

section 12, and how it complies with 

the requirements of subpart C; (5) 

establish, maintain, and enforce internal 

controls that are reasonably designed to 

ensure that the banking entity’s covered 

fund activities or investments are 

compliant and to detect potential 

compliance violations; and (6) identify, 

document, address, and remedy any 

compliance violations. 

The 2013 final rule subjects certain 

banking entities to the enhanced 

minimum compliance standards of 

Appendix B to reflect the Agencies’ 

expectation that banking entities with 

significant covered fund activities or 

investments adopt sophisticated 

compliance regimes. However, the 

Agencies recognize that operationalizing 

these requirements may restrict the 

flexibility of banking entities to adapt 

their existing risk management 

frameworks for purposes of compliance 

with the 2013 final rule. The Agencies 

believe that a banking entity with 

significant trading assets and liabilities 

or moderate trading assets and liabilities 

currently subject to Appendix B 

requirements could effectively 

implement an appropriately robust 

compliance program by tailoring the 

requirements of § ll.20 to the type, 

size, scope, and complexity of its 

covered fund activities and business 

structure. Accordingly, the Agencies 

propose to eliminate the requirements of 

§ II.b of Appendix B to the 2013 final 

rule. 

Under the proposal, a banking entity 

with significant trading assets and 

liabilities or with moderate trading 

assets and liabilities would satisfy the 

compliance program requirements by 

appropriately scaling the compliance 

program requirements in § ll.20. A 

banking entity with significant trading 

assets and liabilities would also be 

required to adopt the covered fund 

documentation requirements in 

§ ll.20(e) of the proposal. 

The Agencies believe that, under the 

proposal, compliance programs that 

satisfy the foregoing requirements and 

that are appropriately tailored to the 

size, scope, and complexity of the 

banking entity’s activities, would be 

effective in meeting the objectives 

underlying the enhanced requirements 

set forth in Appendix B of the 2013 final 

rule with respect to covered fund 

investments and activities. Furthermore, 

affording banking entities the flexibility 

to adapt their existing risk management 

frameworks to satisfy the §ll.20 

compliance program requirements 

would reduce the complexity of 

compliance with section 13 of the BHC 

Act. 

Question 211. The Agencies are 

requesting comment on whether the 

requirements of § ll.20 of the 

proposal would, if appropriately 

tailored to the size, scope, and 

complexity of the banking entity’s 

activities, be effective in ensuring that 

banking entities with significant trading 

assets and liabilities and banking 

entities with moderate trading assets 

and liabilities comply with the covered 

fund requirements and restrictions of 

section 13 of the BHC Act and the 

implementing regulations. In addition to 

CEO attestation requirement in 

proposed §ll.20(c), are there certain 

requirements included in Appendix B 

that should be incorporated into the 

requirements of § ll.20, particularly 

with respect to banking entities with 

significant trading assets and liabilities, 

in order to ensure compliance with the 

covered fund requirements and 

restrictions of section 13 of the BHC Act 

and the implementing regulations? To 

what extent would the elimination of 

Appendix B reduce the complexity of 

compliance with section 13 of the BHC 

Act? What other options should the 

Agencies consider in order to reduce 

complexity while still ensuring robust 

compliance with the covered fund 

requirements and restrictions of section 

13 of the BHC Act and the 

implementing regulations? 

Question 212. How do banking 

entities that are registered investment 

advisers currently meet their 

compliance program obligations? That 

is, to what extent are banking entities’ 

compliance programs related to the 

covered fund prohibitions of the 2013 

final rule implemented by the registered 

investment adviser as opposed to the 

other affiliates or subsidiaries that are 

part of the banking entity? How costly 

are the existing compliance program 

requirements for banking entities that 

are registered investment advisers, 

broken down based on whether they are 

categorized as having significant, 

moderate, and limited trading assets and 

liabilities under the proposal? How 

would those annual costs change if the 

modifications described in the proposal 

were adopted? 

iv. Responsibility and Accountability 

Appendix B of the 2013 final rule 

contains a CEO attestation requirement 

as part of the enhanced minimum 

standards for compliance programs as a 

means to ensure that a strong 

governance framework is implemented 

with respect to compliance with section 

13 of the BHC Act. This provision 

requires a banking entity’s CEO to 

review and annually attest in writing to 

the appropriate Agency that the banking 

entity has in place processes to 

establish, maintain, enforce, review, test 

and modify the compliance program 

established pursuant to Appendix B and 

§ ll.20 of the 2013 final rule in a 

manner reasonably designed to achieve 

compliance with section 13 of the BHC 

Act and the 2013 final rule. Appendix 

B of the 2013 final rule also specifies 

that in the case of the U.S. operations of 

a foreign banking entity, including a 

U.S. branch or agency of a foreign 

banking entity, the attestation may be 

provided for the entire U.S. operations 

of the foreign banking entity by the 

senior management officer of the U.S. 

operations of the foreign banking entity 

who is located in the United States. 

Consistent with the Agencies’ 

proposal to remove the specific, 

enhanced minimum standards included 

in Appendix B of the 2013 final rule, the 

Agencies propose to incorporate the 

CEO attestation requirement within 

§ ll.20(c) so that it will to apply to 

banking entities with significant trading 

assets and liabilities and banking 

entities with moderate trading assets 

and liabilities. Further, the Agencies 

propose that the CEO attestation 

requirement in § ll.20(c) specify that 

in the case of the U.S. operations of a 

foreign banking entity, including a U.S. 

branch or agency of a foreign banking 

entity, the attestation may be provided 

for the entire U.S. operations of the 

foreign banking entity by the senior 

management officer of the U.S. 

operations of the foreign banking entity 

who is located in the United States. 

Preserving the CEO attestation 

requirement and incorporating it within 

the proposal underscores the 

importance of CEO engagement within 

the overall compliance framework for 

banking entities with significant trading 

assets and liabilities and for banking 

entities with moderate trading assets 

and liabilities. The Agencies believe 

that the CEO attestation requirement 

may reinforce the importance of creating 

and communicating an appropriate 

‘‘tone at the top,’’ setting an appropriate 

culture of compliance, and establishing 


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clear policies regarding the management 

of the firm’s covered trading activities 

and its covered fund activities and 

investments. 

The Agencies believe that 

incorporating the CEO attestation 

requirement into proposed § ll.20(c) 

could help to ensure that the 

compliance program established 

pursuant to that section is reasonably 

designed to achieve compliance with 

section 13 of the BHC Act and the 

implementing regulations, while the 

removal of the specific, enhanced 

minimum standards in Appendix B will 

afford a banking entity considerable 

flexibility to satisfy the elements of 

§ ll.20 in a manner that it determines 

to be most appropriate given its existing 

compliance regimes, organizational 

structure, and activities. 

Question 213. The Agencies are 

requesting comment on whether 

incorporating the CEO attestation 

requirement in proposed § ll.20(c) 

would ensure that a strong governance 

framework is implemented with respect 

to compliance with section 13 of the 

BHC Act and the proposal. What other 

options should the Agencies consider in 

order to encourage CEO engagement in 

ensuring robust compliance with 

section 13 of the BHC Act and the 

proposal? 

v. Independent Testing 

After careful consideration, the 

Agencies propose to eliminate the 

specific enhanced minimum standards 

for independent testing prescribed in 

Appendix B, section IV of the 2013 final 

rule and permit banking entities with 

significant trading assets and liabilities 

to satisfy the compliance program 

requirements by meeting the 

independent testing requirements 

outlined in § ll.20(b)(4) of the 

proposal. Section ll.20(b)(4) of the 

proposal specifies that the contents of 

the compliance program shall include 

independent testing and audit of the 

effectiveness of the compliance program 

conducted periodically by qualified 

personnel of the banking entity or by a 

qualified outside party. As with all 

elements of the required compliance 

program under proposed § ll.20(b), 

independent testing should be designed 

and implemented in a manner that is 

appropriate for the type, size, scope, and 

complexity of activities and business 

structure of the banking entity. Section 

ll.20(b)(4) allows for a tailored 

approach to ensure that the 

effectiveness of the compliance program 

is subject to an objective review with 

appropriate frequency and depth. Under 

the proposal, a banking entity with 

moderate trading assets and liabilities 

would be permitted to incorporate 

independent testing into its existing 

compliance programs as appropriate 

given the activities, size, scope, and 

complexity of the banking entity. 

vi. Training 

After careful consideration, the 

Agencies propose to eliminate the 

training element of the enhanced 

compliance program of Appendix B, 

section V of the 2013 final rule and 

permit banking entities to satisfy 

compliance program requirements by 

meeting the training requirements 

outlined in § ll.20(b)(5) of the 

proposal. Section ll.20(b)(5) specifies 

that the contents of the compliance 

program shall include training for 

trading personnel and managers, as well 

as other appropriate personnel, to 

effectively implement and enforce the 

compliance program. As with all 

elements of the required compliance 

program under § ll.20(b), the 

Agencies expect the training regimen to 

be designed and implemented in a 

manner that is appropriate for the type, 

size, scope, and complexity of activities 

and business structure of the banking 

entity. Under the proposal, a banking 

entity with moderate trading assets and 

liabilities would be permitted to 

incorporate training into its existing 

compliance programs as appropriate 

given the activities, size, scope and 

complexity of the banking entity. 

vii. Recordkeeping 

Appendix B, section VI of the 2013 

final rule requires banking entities to 

create and retain records sufficient to 

demonstrate compliance and support 

the operations and effectiveness of the 

compliance program. After careful 

consideration, the Agencies believe that 

the enhanced minimum standards 

under Appendix B, section VI can be 

replaced by the requirements prescribed 

in §ll.20(b)(6) of the proposal. 

Section ll.20(b)(6) of the proposal 

specifies that the banking entity must 

establish records sufficient to 

demonstrate compliance with section 13 

of the BHC Act and subpart D and 

promptly provide to the relevant 

Agency upon request and retain such 

records for no less than 5 years or for 

such longer period as required by the 

relevant Agency. As with all elements of 

the required compliance program under 

§ ll.20(b), the Agencies expect the 

record keeping requirement to be 

designed and implemented in a manner 

that is appropriate for the type, size, 

scope, and complexity of activity and 

business structure of the banking entity. 

A banking entity with moderate trading 

assets and liabilities would be permitted 

to incorporate recordkeeping into its 

existing compliance programs as 

appropriate given the activities, size, 

scope, and complexity of the banking 

entity. 

Question 214. The Agencies are 

requesting comment on whether the 

existing independent testing, training, 

and recordkeeping requirements of 

§ ll.20(b) would, if appropriately 

tailored to the size, scope, and 

complexity of the banking entity’s 

activities, be effective in ensuring that 

banking entities with significant trading 

assets and liabilities and moderate 

trading assets and liabilities comply 

with the requirements and restrictions 

of section 13 of the BHC Act and the 

implementing regulations. Are there 

certain requirements included in 

independent testing, training, and 

recordkeeping requirements of 

Appendix B that should be incorporated 

into the requirements of §ll.20, 

particularly with respect to banking 

entities with significant trading, in order 

to ensure compliance with the 

requirements and restrictions of section 

13 of the BHC Act and the 

implementing regulations? To what 

extent would the elimination of the 

independent testing, training, and 

recordkeeping requirements of 

Appendix B reduce the complexity of 

complying with section 13 of the BHC 

Act? What other options should the 

Agencies consider with respect to 

independent testing, training, and 

recordkeeping in order to reduce 

complexity while still ensuring robust 

compliance with the requirements and 

restrictions of section 13 of the BHC Act 

and the implementing regulations? 

e. Summary of Proposed Revisions to 

Compliance Program Requirements 

The following table provides a 

summary of the proposed changes to the 

compliance program requirements: 


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215See 79 FR at 5772. 

216 Id. 

217 In connection with the Appendix, the 

following documents have also been published and 

made available on each Agency’s respective 

website: Instructions for Preparing and Submitting 

Quantitative Measurement Information 

(‘‘Instructions’’), Technical Specifications 

Guidance, and an eXtensible Markup Language 

Schema (‘‘XML Schema’’). 

SUMMARY OF PROPOSED CHANGES TO COMPLIANCE PROGRAM REQUIREMENTS

Requirement (citation to 

2013 final rule) 

Banking entities subject to requirement in 2013 final 

rule Banking entities subject to requirement in proposal 

6 Pillar Compliance Program 

(Section ll.20(b)).

Banking entities with more than $10 billion in total consolidated assets.Banking entities with significant trading assets and liabilities. 

Enhanced compliance program (Section ll.20(c), 

Appendix B).

Banking entities with: Not applicable. Enhanced compliance program eliminated (but see CEO Attestation Requirement below). 

• $50 billion or more in total consolidated assets, 

or.

• Trading assets and liabilities of $10 billion or 

greater over the previous consecutive four quarters, as measured as of the last day of each of 

the four prior calendar quarters, if the banking 

entity engages in proprietary trading activity permitted under subpart B.

• Additionally, any other banking entity notified in 

writing by the Agency.

CEO Attestation Requirement (Section ll.20(c), 

Appendix B).

Banking entities with: • Banking entities with significant trading assets and liabilities. 

• $50 billion or more in total consolidated assets, 

or.

• Trading assets and liabilities of $10 billion or 

greater over the previous consecutive four quarters, as measured as of the last day of each of 

the four prior calendar quarters.

• Banking entities with moderate trading assets and liabilities. 

• Additionally, any other banking entity notified in 

writing by the Agency.

• Any other banking entity notified in writing by the 

Agencythe Agency. 

Metrics Reporting Requirements (Section ll.20(d), 

Appendix A).

• Banking entities with trading assets and liabilities the 

average gross sum of which over the previous consecutive four quarters, as measured as of the last 

day of each of the four prior calendar quarters, is $10 

billion or greater, if the banking entity engages in proprietary trading activity permitted under subpart B.

• Banking entities with significant trading assets and liabilities. 

• Any other banking entity notified in writing by the 

Agency.

Additional covered fund documentation requirements 

(Section ll.20(e)).

Banking entities with more than $10 billion in total consolidated assets as reported on December 31 of the 

previous two calendar years.

Banking entities with significant trading assets and liabilities. 

Simplified program for banking entities with no covered activities (Section l

l.20(f)(1)).

Banking entities that do not engage in activities or investments pursuant to subpart B or subpart C (other 

than trading activities permitted pursuant to §l

l.6(a) of subpart B).

Banking entities that do not engage in activities or investments pursuant to subpart B or subpart C (other 

than trading activities permitted pursuant to §l

l.6(a) of subpart B). 

Simplified program for banking entities with modest 

activities (Section l

l.20(f)(2)).

Banking entities with $10 billion or less in total consolidated assets as reported on December 31 of the previous two calendar years that engage in activities or 

investments pursuant to subpart B or subpart C 

(other than trading activities permitted pursuant to 

§ll.6(a) of subpart B).

Banking entities with moderate trading assets and liabilities. 

No compliance program requirement unless Agency 

directs otherwise (N/A).

Not applicable ................................................................. Banking entities with limited trading assets and liabilities subject to the presumption of compliance. 

E. Appendix to Part [•]—Reporting and 

Recordkeeping Requirements 

1. Overview of the Proposal and 

Significant Changes From the 2013 

Final Rule 

As provided in the preamble to the 

2013 final rule, the Agencies have 

assessed the metrics data for its 

effectiveness in monitoring covered 

trading activities for compliance with 

section 13 of the BHC Act and for its 

costs.215 The Agencies have also 

considered whether all of the 

quantitative measurements are useful 

for all asset classes and markets, as well 

as for all the trading activities subject to 

the metrics requirement, or whether 

modifications are appropriate.216 As a 

result of this evaluation, and as 

described in detail below, the Agencies 

are proposing the following 

amendments to Appendix A of the 2013 

final rule:217

• Limit the applicability of certain 

metrics only to market making and 

underwriting desks. 

• Replace the Customer-Facing Trade 

Ratio with a new Transaction Volumes 

metric to more precisely cover types of 

trading desk transactions with 

counterparties. 

• Replace Inventory Turnover with a 

new Positions metric, which measures 

the value of all securities and 

derivatives positions. 


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218The Instructions are available on each 

Agency’s respective website at the addresses 

specified in the Paperwork Reduction Act section 

of this SUPPLEMENTARY INFORMATION. For the SEC 

and CFTC, this document represents the views of 

SEC staff and CFTC staff, and neither Commission 

has approved nor disapproved the Staff Instructions 

for Preparing and Submitting Quantitative 

Measurement Information. 

219The staff-level Technical Specifications 

Guidance describes the XML Schema. The 

Technical Specifications Guidance and the XML 

Schema are available on each Agency’s respective 

website at the addresses specified in the Paperwork 

Reduction Act section of this Supplementary 

Information. 

220As previously noted in the section entitled 

‘‘Enhanced Minimum Standards for Compliance 

Programs,’’ the Agencies are proposing to eliminate 

Appendix B of the 2013 final rule. If that aspect of 

the proposal is adopted, current Appendix A, as 

modified by the proposal, would be re-designated 

as the ‘‘Appendix.’’ 

221The proposed amendment to paragraph I.c. of 

Appendix A would make clear that none of the 

information that a banking entity would be required 

to report under the proposal is intended to serve as 

a dispositive tool for identifying permissible or 

impermissible activities. Currently, that qualifying 

language only applies to the quantitative 

measurements. As proposed, that information 

would continue to be used to monitor patterns and 

identify activity that may warrant further review. 

222As a general matter, a trading desk is not 

considered to be open for trading on a weekend. 

• Remove the requirement to 

separately report values that can be 

easily calculated from other quantitative 

measurements already reported. 

• Streamline and make consistent 

value calculations for different product 

types, using both notional value and 

market value to facilitate better 

comparison of metrics across trading 

desks and banking entities. 

• Eliminate inventory aging data for 

derivatives because aging, as applied to 

derivatives, does not appear to provide 

a meaningful indicator of potential 

impermissible trading activity or 

excessive risk-taking. 

• Require banking entities to provide 

qualitative information specifying for 

each trading desk the types of financial 

instruments traded, the types of covered 

trading activity the desk conducts, and 

the legal entities into which the trading 

desk books trades. 

• Require a Narrative Statement 

describing changes in calculation 

methods, trading desk structure, or 

trading desk strategies. 

• Remove the paragraphs labeled 

‘‘General Calculation Guidance’’ from 

the regulation. The Instructions 

generally would provide calculation 

guidance.218

• Remove the requirement that 

banking entities establish and report 

limits on Stressed Value-at-Risk at the 

trading desk-level because trading desks 

do not typically use such limits to 

manage and control risk-taking. 

• Require banking entities to provide 

descriptive information about their 

reported metrics, including information 

uniquely identifying and describing 

certain risk measurements and 

information identifying the 

relationships of these measurements 

within a trading desk and across trading 

desks. 

• Require electronic submission of 

the Trading Desk Information, 

Quantitative Measurements Identifying 

Information, and each applicable 

quantitative measurement in accordance 

with the XML Schema specified and 

published on each Agency’s website.219

Taken together, these changes— 

particularly limiting the applicability of 

certain metrics requirements only to 

trading desks engaged in certain types of 

covered trading activity—are designed 

to reduce compliance-related 

inefficiencies relative to the 2013 final 

rule. The proposed amendments to 

Appendix A of the 2013 final rule 

should allow collection of data that 

permits the Agencies to better monitor 

compliance with section 13 of the BHC 

Act.220

2. Summary of the Proposal 

a. Purpose 

Paragraph I.c of Appendix A of the 

2013 final rule provides that the 

quantitative measurements that are 

required to be reported under the rule 

are not intended to serve as a 

dispositive tool for identifying 

permissible or impermissible activities. 

The Agencies propose to expand 

paragraph I.c of Appendix A of the 2013 

final rule to cover all information that 

must be furnished pursuant to the 

appendix, rather than only to the 

quantitative measurements themselves. 

221

The Agencies propose to remove 

paragraph I.d. in Appendix A of the 

2013 final rule, which provides for an 

initial review by the Agencies of the 

metrics data and revision of the 

collection requirement as appropriate. 

The Agencies have conducted this 

preliminary evaluation of the 

effectiveness of the quantitative 

measurements collected to date and are 

proposing modifications to Appendix A 

of the 2013 final rule where appropriate. 

The Agencies are, however, requesting 

comment on whether the rule should 

provide for a subsequent Agency review 

within a fixed period of time after 

adoption to consider whether further 

changes are warranted. The Agencies 

further note that they continue to 

monitor and review the effectiveness of 

the data as part of their ongoing 

oversight of the banking entities and 

will continue to do so should the 

proposed changes to Appendix A be 

adopted. 

b. Definitions 

The Agencies are proposing a 

clarifying change to the definition of 

‘‘covered trading activity.’’ The 

Agencies are proposing to add the 

phrase ‘‘in its covered trading activity’’ 

to clarify that the term ‘‘covered trading 

activity,’’ as used in the proposed 

appendix, may include trading 

conducted under §§ ll.3(e), ll.6(c), 

ll.6(d), or ll.6(e) of the proposal. 

The proposed change would simply 

clarify that banking entities would have 

the discretion (but not the obligation) to 

report metrics with respect to a broader 

range of activities. 

In addition, the proposal defines two 

additional terms for purposes of the 

appendix, ‘‘applicability’’ and ‘‘trading 

day,’’ that were not defined in the 2013 

final rule. In particular, the proposal 

provides: 

• Applicability identifies the trading 

desks for which a banking entity is 

required to calculate and report a 

particular quantitative measurement 

based on the type of covered trading 

activity conducted by the trading desk. 

• Trading day means a calendar day 

on which a trading desk is open for 

trading. 

‘‘Applicability’’ is defined in this 

proposal to clarify when certain metrics 

are required to be reported for specific 

trading desks. As described further 

below, this proposal would make 

several metrics applicable only to desks 

engaged in market making or 

underwriting. 

The Agencies are proposing to create 

a definition of ‘‘trading day’’ to clarify 

the meaning of a term that is used 

throughout Appendix A of the 2013 

final rule. Appendix A provides that the 

calculation period for each quantitative 

measurement is one trading day. The 

proposal would make clear that a 

banking entity would be required to 

calculate each metric for each calendar 

day on which a trading desk is open for 

trading.222 If a trading desk books 

positions to a banking entity on a 

calendar day that is not a business day 

(e.g., a day that falls on a weekend), 

then the desk is considered open for 

trading on that day. Even if a trading 

desk does not conduct any trades on a 

business day, the banking entity would 

be required to report metrics on the 

trading desk’s existing positions for that 

calendar day because the trading desk is 

open to conduct trading. Similarly, if a 

trading desk spans a U.S. entity and a 


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223See infra Part III.E.2.i.v (discussing the 

Securities Inventory Aging quantitative 

measurement). The definition of ‘‘security’’ and 

‘‘derivative’’ are set forth in §ll.2 of the 2013 

final rule. See 2013 final rule §§ll.2 (h), (y). 

224As discussed below, the proposed Positions, 

Transaction Volumes, and Securities Inventory 

Aging quantitative measurements generally apply 

only to trading desks that rely on §ll.4(a) or §l

l.4(b) to conduct underwriting activity or market 

making-related activity, respectively. See infra Part 

III.E.2.i.iii (discussing the Positions, Transaction 

Volumes, and Securities Inventory Aging 

quantitative measurements). 

225See 79 FR at 5616. 

226 In addition, the Agencies propose to add to 

paragraph III.a. a requirement that banking entities 

include file identifying information in each 

submission to the relevant Agency pursuant to 

Appendix A of the 2013 final rule. File identifying 

information reflects administrative information 

needed to identify the reporting requirement that is 

being met and distinguish between files submitted 

pursuant to Appendix A. File identifying 

information must include the name of the banking 

entity, the RSSD ID assigned to the top-tier banking 

entity by the Board, the reporting period, and the 

creation date and time. 

227See supra Part III.E.2.b (discussing the covered 

trading activity definition). 

foreign entity and a national holiday 

occurs on a business day in the United 

States but not in the foreign jurisdiction 

(or vice versa), the banking entity would 

be required to report metrics for the 

trading desk on that calendar day 

because the trading desk is open to 

conduct trading in at least one 

jurisdiction. The Agencies believe that 

the proposed definition of trading day is 

both objective and transparent, while 

also providing flexibility to banking 

entities by tying the definition directly 

to the schedule in which they operate 

their trading desks. 

The Agencies request comments on 

the definitions in this proposal, 

including comments on the following 

questions: 

Question 215. Is the proposed 

definition of ‘‘Applicability’’ effective 

and clear? If not, what alternative 

definition would be more effective and/ 

or clearer? 

Question 216. Is the proposed 

definition of ‘‘Trading day’’ effective 

and clear? If not, what alternative 

definition would be more effective and/ 

or clearer? 

Question 217. Is the proposed 

modification of ‘‘Covered trading 

activity’’ effective and clear? If not, what 

alternative definition would be more 

effective and/or clearer? 

Question 218. Should any other terms 

be defined? If so, are there existing 

definitions in other rules or regulations 

that could be used in this context? Why 

would the use of such other definitions 

be appropriate? 

c. Reporting and Recordkeeping 

i. Scope of Required Reporting 

The Agencies are proposing several 

modifications to paragraph III.a of 

Appendix A of the 2013 final rule. The 

Agencies are proposing to remove the 

Inventory Turnover and CustomerFacing Trade Ratio metrics and replace 

them with the Positions and Transaction 

Volumes quantitative measurements, 

respectively. In addition, as discussed 

below, the proposal provides that the 

Inventory Aging metric would only 

apply to securities, and would not apply 

to derivatives or securities that also 

meet the 2013 final rule’s definition of 

a derivative.223 As a result, the Agencies 

are proposing to change the name of the 

Inventory Aging quantitative 

measurement to the Securities Inventory 

Aging metric. Moreover, as described in 

more detail below, the Agencies are 

proposing amendments to Appendix A 

that would limit the application of 

certain quantitative measurements to 

trading desks that engage in specific 

covered trading activities.224 As a result, 

the Agencies are proposing to add the 

phrase ‘‘as applicable’’ to paragraph 

III.a.225 Finally, the Agencies are 

proposing to add references in 

paragraph III.a to the proposed Trading 

Desk Information, Quantitative 

Measurements Identifying Information, 

and Narrative Statement 

requirements.226

d. Trading Desk Information 

The Agencies are proposing to add 

new paragraph III.b to Appendix A to 

require banking entities to report certain 

descriptive information regarding each 

trading desk engaged in covered trading 

activity: 

i. Trading Desk Name and Trading Desk 

Identifier 

Under paragraph III.b. of the proposed 

Appendix, the banking entity would be 

required to provide the trading desk 

name and trading desk identifier for 

each desk engaged in covered trading 

activities. While this proposed 

requirement may affect the banking 

entity’s overall reporting obligations, 

this identifying information should 

enable the Agencies to track a banking 

entity’s trading desk structure over time, 

which the Agencies believe will help 

identify situations when a significant 

data change is the result of a structural 

change and assist the Agencies’ ability 

to monitor patterns in the quantitative 

measurements. The Agencies also 

believe that the proposed qualitative 

information, including the items 

identified in the sections below, 

potentially could provide the Agencies 

with enough contextual basis to 

facilitate the examination and 

supervisory processes. Such context 

also could potentially lessen the need 

for Agency follow-up in when a red flag 

is identified. 

The trading desk name must be the 

name of the trading desk used internally 

by the banking entity. The trading desk 

identifier is a unique identification label 

that should be permanently assigned to 

a desk by the banking entity. A trading 

desk at a banking entity may not have 

the same trading desk identifier as 

another desk at that banking entity. The 

trading desk identifier that is assigned 

to each desk should remain the same for 

each submission of quantitative 

measurements. In the event a banking 

entity restructures its operations and 

merges two or more trading desks, the 

banking entity should assign a new 

trading desk identifier to the merged 

desk (i.e., the merged desk’s identifier 

should not replicate a trading desk 

identifier assigned to a previously 

unmerged trading desk) and 

permanently retire the unmerged desks’ 

identifiers. Similarly, if a banking entity 

eliminates a trading desk, the trading 

desk identifier assigned to the 

eliminated desk should be permanently 

retired (i.e., the eliminated desk’s 

identifier should not be reassigned to a 

current or future trading desk). 

Question 219. Should the Agencies 

require banking entities to report 

changes in desk structure in the XML 

reporting format in addition to a 

description of the changes in the 

Narrative Statement? For example, a 

‘‘change event’’ element could be added 

to the proposal that would link the 

trading desk identifiers of predecessor 

and successor desks before and after 

trading desk mergers and splits. Would 

the modifications improve the banking 

entities’ and the Agencies’ ability to 

track changes in trading desk structure 

and strategy across reporting periods? 

How significant are any potential costs 

relative to the potential benefits in 

facilitating the tracking of trading desk 

changes? Please quantify your answers, 

to the extent feasible. 

ii. Type of Covered Trading Activity 

Proposed paragraph III.b. would 

require a banking entity to identify each 

type of covered trading activity that the 

trading desk conducts. As previously 

discussed, the proposal defines 

‘‘covered trading activity,’’ in part, as 

trading conducted by a trading desk 

under §§ll.4, ll.5, ll.6(a), or 

ll.6(b).227 To the extent a trading desk 

relies on one or more of these permitted 

activity exemptions, the banking entity 

would be required to identify the type(s) 


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228For example, a banking entity may specify that 

its high grade credit trading desk purchases and 

sells the following types of financial instruments: 

U.S. corporate debt, convertible bonds, credit 

default swaps, and credit default swap indices. 

229The term ‘‘market-maker positions’’ means all 

of the positions in the financial instruments for 

which the trading desk stands ready to make a 

market in accordance with paragraph §ll

.4(b)(2)(i) of the proposal, that are managed by the 

trading desk, including the trading desk’s open 

positions or exposures arising from open 

transactions. See proposal §ll.4(b)(5). 

230See 2013 final rule §ll.3(c)(2). 

231The Agencies note that banking entities are 

not required to calculate quantitative measurements 

based on positions in products that are not 

‘‘financial instruments,’’ as defined under 

§ll.3(c)(2) of the 2013 final rule, or positions that 

do not represent ‘‘covered trading activity.’’ 

However, a banking entity may decide to include 

exposures in products that are not financial 

instruments in a trading desk’s calculations where 

doing so provides a more accurate picture of the 

risks associated with the trading desk. For example, 

a market maker in foreign exchange forwards or 

swaps that mitigates the risks of its market-maker 

inventory with spot foreign exchange may include 

spot foreign exchange positions in its metrics 

calculations. 

232A banking entity generally should not 

incorporate excluded products in the quantitative 

measurements of a trading desk one month, and 

omit these products from the trading desk’s 

measurements the following month. Excluded 

products generally should be reported consistently 

from period to period. Any change in reporting 

practice for excluded products must be identified 

in the banking entity’s Narrative Statement for the 

relevant trading desk(s). See infra Part III.E.2.f 

(discussing the Narrative Statement). 

233 79 FR at 5591. 

234The Agencies are not proposing to require 

each legal entity that serves as a booking entity to 

obtain an entity identifier to comply with the 

proposed appendix. If a legal entity does not have 

an applicable entity identifier, it should report 

‘‘None’’ in the appropriate field. 

of covered trading activity (e.g., 

underwriting, market making, riskmitigating hedging, etc.) in which the 

trading desk is engaged. 

The proposed definition of ‘‘covered 

trading activity’’ also provides that a 

banking entity may include in its 

covered trading activity trading 

conducted under §§ ll.3(e), ll.6(c), 

ll.6(d), or ll.6(e). If a trading desk 

relies on any of the exclusions 

discussed in § ll.3(e) or the permitted 

activity exemptions discussed in 

§§ ll.6(c) through ll.6(e) and the 

banking entity includes such activity as 

‘‘covered trading activity’’ for the desk 

under the proposed Appendix, the 

banking entity would need to identify 

these activity types (e.g., securities 

lending, liquidity management, 

fiduciary transactions, etc.) for the 

trading desk. 

While this proposed requirement may 

impact a firm’s overall reporting 

obligations, the Agencies believe the 

identification of each desk’s covered 

trading activity will help the relevant 

Agency establish the appropriate scope 

of examination of such activity and 

assist with identifying the relevant 

exemptions or exclusions for a 

particular trading desk, which in turn 

enables an evaluation of a desk’s 

reported data in the context of those 

exemptions or exclusions. 

iii. Trading Desk Description 

Proposed paragraph III.b. would 

require a banking entity to provide a 

description of each trading desk 

engaged in covered trading activities. 

Specifically, the banking entity would 

be required to provide a brief 

description of the trading desk’s general 

strategy (i.e., the method for conducting 

authorized trading activities). The 

Agencies believe this descriptive 

information would improve the 

Agencies ability to assess the risks 

associated with a given covered trading 

activity and would further assist the 

relevant Agency in determining the 

appropriate frequency and scope of 

examination of such activity. 

iv. Types of Financial Instruments and 

Other Products 

Proposed paragraph III.b. would 

require a banking entity to provide 

descriptive information regarding the 

financial instruments and other 

products traded by each desk engaged in 

covered trading activities. Under the 

proposal, a banking entity would be 

required to prepare a list identifying all 

the types of financial instruments 

purchased and sold by the trading 

desk.228 The banking entity may include 

other products that are not defined as 

financial instruments under 

§ ll.3(c)(1) of the 2013 final rule in 

this list. In addition, the proposal 

requires a banking entity to indicate 

which of these financial instruments 

and other products (if applicable) are 

the main instruments and products 

purchased and sold by the trading desk. 

If the trading desk relies on the 

permitted activity exemption for market 

making-related activities, the banking 

entity would be required to specify 

whether each type of financial 

instrument included in the listing of all 

financial instruments is or is not 

included in the trading desk’s marketmaking positions.229

The proposal also addresses 

‘‘excluded products’’ traded by desks 

engaged in covered trading activities. 

The definition of the term ‘‘financial 

instrument’’ in the 2013 final rule does 

not include loans, spot commodities, 

and spot foreign exchange or currency 

(collectively, ‘‘excluded products’’).230

While positions in excluded products 

are not subject to the 2013 final rule’s 

restrictions on proprietary trading, a 

banking entity may decide to include 

exposures in excluded products that are 

related to a trading desk’s covered 

trading activities in its quantitative 

measurements.231 A banking entity 

generally should use a consistent 

approach for including or excluding 

positions in products that are not 

financial instruments when calculating 

metrics for a trading desk.232

In recognition that a banking entity 

may include excluded products in its 

quantitative measurements, proposed 

paragraph III.b. would require a banking 

entity to indicate whether each trading 

desk engaged in covered trading 

activities is including excluded 

products in its quantitative 

measurements. If excluded products are 

included in a trading desk’s metrics, the 

banking entity would have to identify 

the specific products that are included. 

This information should enable the 

Agencies to better understand the scope 

of covered trading activities, and thus 

help in identifying the profile of 

particular covered trading activities of a 

banking entity and its individual trading 

desks. Such identification is necessary 

to establish the appropriate frequency 

and scope of examination by the 

relevant Agency of such activity, 

evaluate whether a banking entity’s 

covered trading activity is consistent 

with the 2013 final rule, and assess the 

risks associated with the activity. 

v. Legal Entities the Trading Desk Uses 

As discussed in the preamble to the 

2013 final rule, the Agencies recognize 

that a trading desk may book positions 

into a single legal entity or into multiple 

affiliated legal entities.233 To assist in 

establishing the appropriate scope of 

examination by the relevant Agency of 

a banking entity’s covered trading 

activities, the Agencies are proposing to 

require each banking entity to identify 

each legal entity that serves as a booking 

entity for each trading desk engaged in 

covered trading activities, and to 

indicate which of these legal entities are 

the main booking entities for covered 

trading activities of each desk. The 

banking entity would have to provide 

the complete name for each legal entity 

(i.e., the banking entity could not use 

abbreviations or acronyms), and the 

banking entity would have to provide 

any applicable entity identifiers.234

vi. Legal Entity Type Identification 

The Agencies are proposing to require 

each banking entity to specify any 

applicable entity type for each legal 

entity that serves as a booking entity for 


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235See 79 FR at 5758. The Agencies expect to 

continue to coordinate their efforts related to 

section 13 of the BHC Act and to share information 

as appropriate in order to effectively implement the 

requirements of that section and the 2013 final rule. 

See id. 

trading desks engaged in covered 

trading activities. The proposal provides 

a list of key entity types for this 

purpose. For example, if a trading desk 

books trades into a legal entity that is a 

U.S.-registered broker-dealer, the 

banking entity would indicate ‘‘U.S.- 

registered broker-dealer’’ in the entity 

type identification field for that 

particular trading desk. If more than one 

entity type applies to a particular legal 

entity that serves as a booking entity, 

the banking entity must specify any 

applicable entity type for that legal 

entity. For example, if a trading desk 

books trades into a legal entity that is a 

U.S.-registered broker-dealer and a 

registered futures commission 

merchant, the banking entity would 

indicate ‘‘U.S.-registered broker-dealer’’ 

and ‘‘futures commission merchant’’ in 

the entity type identification field for 

that particular trading desk. 

The proposal also requires that a 

banking entity identify entity types that 

are not otherwise enumerated in the 

proposed Appendix, including a 

subsidiary of a legal entity that is listed 

where the subsidiary itself is not 

included in the list. For example, the 

Agencies understand that a trading desk 

may book some or all of its positions 

into a legal entity that is incorporated 

under foreign law. In this situation, the 

banking entity should provide a brief 

description of the entity (e.g., foreignregistered securities dealer) in the entity 

type identification field for that trading 

desk. The Agencies believe that the 

information collected under this section 

would assist banking entities and the 

Agencies in monitoring and 

understanding the scope of covered 

trading activities. In particular, the 

proposed entity type information, in 

conjunction with the identification of 

legal entities used by the trading desk 

(discussed above), would facilitate the 

Agencies’ ability to coordinate with 

each other, as appropriate.235

vii. Trading Day Indicator 

In order to facilitate metrics reporting, 

paragraph III.b. of the proposed 

Appendix requires a banking entity to 

indicate whether each calendar date is 

a trading day or not a trading day for 

each trading desk engaged in covered 

trading activities. The Agencies believe 

that this information would assist 

banking entities and the Agencies in 

monitoring covered trading activities. 

Specifically, the identification of trading 

days and non-trading days will allow 

the Agencies to understand why metrics 

may not be reported on a particular day 

for a particular trading desk. In 

addition, the Agencies expect that this 

information would improve consistency 

in metrics reports by requiring banking 

entities to determine whether metrics 

are, or are not, required to be reported 

for each calendar day. 

viii. Currency Reported and Currency 

Conversion Rate 

In recognition that a banking entity 

may report quantitative measurements 

for a trading desk engaged in covered 

trading activities in a currency other 

than U.S. dollars, paragraph III.b. of the 

proposed Appendix requires a banking 

entity to specify the currency used by 

that trading desk as well as the 

conversion rate to U.S. dollars. Under 

the proposal, the banking entity would 

be required to provide the currency 

reported on a monthly basis and the 

currency conversion rate for each 

trading day. The Agencies believe this 

information would assist banking 

entities and the Agencies in monitoring 

covered trading activities by facilitating 

the identification of quantitative 

measurements reported in a currency 

other than U.S. dollars and the 

conversion of such measurements to 

U.S. dollars. The ability to convert a 

banking entity’s reported quantitative 

measurements into one consistent 

currency enhances the ability of the 

Agencies to evaluate the metrics and 

facilitates cross-desk comparisons. 

Question 220. Is the description of the 

proposal’s Trading Desk Information 

requirement effective and sufficiently 

clear? If not, what alternative would be 

more effective or clearer? Is more or less 

specific guidance necessary? If so, what 

level of specificity is needed to prepare 

the proposed Trading Desk Information? 

If the proposed Trading Desk 

Information is not sufficiently specific, 

how should it be modified to reach the 

appropriate level of specificity? If the 

proposed Trading Desk Information is 

overly specific, why is it too specific 

and how should it be modified to reach 

the appropriate level of specificity? 

Question 221. Is the proposed Trading 

Desk Information helpful to 

understanding the scope, type, and 

profile of a trading desk’s covered 

trading activities and associated risks? 

Why or why not? Does the proposed 

Trading Desk Information appropriately 

highlight relevant changes in a banking 

entity’s trading desk structure and 

covered trading activities over time? 

Why or why not? Do banking entities 

expect that the proposed Trading Desk 

Information would reduce, increase, or 

have no effect on the number of 

information requests from the Agencies 

regarding the quantitative 

measurements? Please explain. 

Question 222. Is any of the 

information required by the proposed 

Trading Desk Information already 

available to banking entities? Please 

explain. 

Question 223. Does the proposed 

Trading Desk Information strike the 

appropriate balance between the 

potential benefits of the reporting 

requirements for monitoring and 

assuring compliance and the potential 

costs of those reporting requirements? If 

not, how could that balance be 

improved? 

Question 224. Are there burdens or 

costs associated with preparing the 

proposed Trading Desk Information, and 

if so, how burdensome or costly would 

it be to prepare such information? What 

are the additional burdens or costs 

associated with preparing this 

information for particular trading desks? 

How significant are those potential costs 

relative to the potential benefits of the 

information in understanding the scope, 

type, and profile of a trading desk’s 

covered trading activities and associated 

risks? Are there potential modifications 

that could be made to the proposed 

Trading Desk Information that would 

reduce the burden or cost while 

achieving the purpose of the proposal? 

If so, what are those modifications? 

Please quantify your answers, to the 

extent feasible. 

Question 225. In light of the size, 

scope, complexity, and risk of covered 

trading activities, do commenters 

anticipate the need to hire new staff 

with particular expertise in order to 

prepare the proposed Trading Desk 

Information (e.g., collect data and map 

legal entities)? Do commenters 

anticipate the need to develop 

additional infrastructure to obtain and 

retain data necessary to prepare this 

schedule? Please explain and quantify 

your answers, to the extent feasible. 

Question 226. What operational or 

logistical challenges might be associated 

with preparing the proposed Trading 

Desk Information and obtaining any 

necessary informational inputs? 

Question 227. How might the 

proposed Trading Desk Information 

affect the behavior of banking entities? 

To what extent and in what ways might 

uncertainty as to how the Agencies will 

review and evaluate the proposed 

Trading Desk Information affect the 

behavior of banking entities? 

Question 228. Is the meaning of the 

term ‘‘main,’’ as that term is used in the 

proposed Trading Desk Information 

(e.g., main financial instruments or 


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236For example, the risk factor change unit for the 

dollar value of a one-basis point change (DV01) 

could be reported as ‘‘basis point.’’ Similarly, the 

risk factor change unit for equity delta could be 

reported as ‘‘dollar change in equity prices’’ or 

‘‘percentage change in equity prices.’’ 

237See supra note 236. 

products, main booking entities), 

effective and sufficiently clear? If not, 

how should the Agencies define this 

term such that it is more effective and/ 

or clearer? Should the meaning of the 

term ‘‘main’’ be the same with respect 

to: (i) Main financial instruments or 

other products; and (ii) main booking 

entities? Why or why not? 

Question 229. In addition to reporting 

‘‘main’’ financial instruments or 

products and ‘‘main’’ booking entities, 

should banking entities be required to 

report the amount of profit and loss 

attributable to each ‘‘main’’ financial 

instrument or product and/or ‘‘main’’ 

booking entity utilized by the trading 

desk in the Trading Desk Information? 

Why or why not? 

Question 230. Is the proposal’s 

requirement that a banking entity 

identify all financial instruments or 

other products traded on a desk 

effective and clear? Why or why not? 

Should the Agencies provide a specific 

list of financial instruments or other 

product types from which to choose 

when identifying financial instruments 

or other products traded on a desk? If 

so, please provide examples. 

Question 231. Should banking entities 

be required to report at least one valid 

unique entity identifier (e.g., LEI, CRD, 

RSSD, or CIK) for each legal entity 

identified as a booking entity for 

covered trading activities of a desk? 

How burdensome and costly would it be 

for a banking entity to obtain an entity 

identifier for each legal entity serving as 

a booking entity that does not already 

have an identifier? What are the 

additional burdens or costs associated 

with obtaining an entity identifier for 

particular legal entities? How significant 

are those potential costs relative to the 

potential benefits in facilitating the 

identification of legal entities? Please 

quantify your answers, to the extent 

feasible. 

Question 232. Is more guidance 

needed on what a banking entity should 

report in response to the proposed 

requirement to specify the applicable 

entity type(s) for each legal entity that 

serves as a booking entity for covered 

trading activities of a trading desk? If so, 

please explain. 

Question 233. How burdensome and 

costly would it be for banking entities 

to report which Agencies receive 

reported quantitative measurements for 

each specific trading desk? 

e. Quantitative Measurements 

Identifying Information 

The Agencies are proposing to add 

new paragraph III.c. to the proposed 

Appendix to require banking entities to 

prepare and report descriptive 

information regarding their quantitative 

measurements. This information would 

have to be reported collectively for all 

relevant trading desks. For example, a 

banking entity would report one Risk 

and Position Limits Information 

Schedule, rather than separate Risk and 

Position Limits Information Schedules 

for each of those trading desks. 

i. Risk and Position Limits Information 

Schedule 

The proposed Risk and Position 

Limits Information Schedule requires 

banking entities to provide detailed 

information regarding each limit 

reported in the Risk and Position Limits 

and Usage quantitative measurement, 

including the unique identification label 

for the limit, the limit name, limit 

description, whether the limit is 

intraday or end-of-day, the unit of 

measurement for the limit, whether the 

limit measures risk on a net or gross 

basis, and the type of limit. The unique 

identification label for the limit should 

be a character string identifier that 

remains consistent across all trading 

desks and reporting periods. When 

reporting the type of limit, the banking 

entity would identify which of the 

following categories best describes the 

limit: Value-at-Risk, position limit, 

sensitivity limit, stress scenario, or 

other. If ‘‘other’’ is reported, the banking 

entity would provide a brief description 

of the type of limit. The Agencies 

believe this more detailed limit 

information would enable the Agencies 

to better understand how banking 

entities assess and address risks 

associated with their covered trading 

activities. 

ii. Risk Factor Sensitivities Information 

Schedule 

The proposed Risk Factor 

Sensitivities Information Schedule 

requires banking entities to provide 

detailed information regarding each risk 

factor sensitivity reported in the Risk 

Factor Sensitivities quantitative 

measurement, including the unique 

identification label for the risk factor 

sensitivity, the name of the risk factor 

sensitivity, a description of the risk 

factor sensitivity, and the risk factor 

sensitivity’s risk factor change unit. The 

unique identification label for the risk 

factor sensitivity should be a character 

string identifier that remains consistent 

across all trading desks and reporting 

periods. The risk factor change unit is 

the measurement unit of the risk factor 

change that impacts the trading desk’s 

portfolio value.236 This proposed 

schedule should enable the Agencies to 

better understand the exposure of a 

banking entity’s trading desks to 

individual risk factors. 

iii. Risk Factor Attribution Information 

Schedule 

The proposed Risk Factor Attribution 

Information Schedule requires banking 

entities to provide detailed information 

regarding each attribution of existing 

position profit and loss to risk factor 

reported in the Comprehensive Profit 

and Loss Attribution quantitative 

measurement, including the unique 

identification label for each risk factor 

or other factor attribution, the name of 

the risk factor or other factor, a 

description of the risk factor or other 

factor, and the risk factor or other 

factor’s change unit. The unique 

identification label for the risk factor or 

other factor attribution should be a 

character string identifier that remains 

consistent across all trading desks and 

reporting periods. The factor change 

unit is the measurement unit of the risk 

factor or other factor change that 

impacts the trading desk’s portfolio 

value.237 This proposed schedule 

should improve the Agencies’ 

understanding of the individual risk 

factors and other factors that contribute 

to the daily profit and loss of trading 

desks engaged in covered trading 

activities. 

iv. Limit/Sensitivity Cross-Reference 

Schedule 

The Agencies recognize that risk 

factor sensitivities that are reported in 

the Risk Factor Sensitivities quantitative 

measurement frequently relate to, or are 

associated with, risk and position limits 

that are reported in the Risk and 

Position Limits and Usage metric. In 

recognition of the relationship between 

risk and position limits and associated 

risk factor sensitivities, the Agencies 

propose an amendment to Appendix A 

of the 2013 final rule that would require 

banking entities to prepare a Limit/ 

Sensitivity Cross-Reference Schedule. 

Specifically, banking entities would be 

required to cross-reference, by unique 

identification label, a limit reported in 

the Risk and Position Limits 

Information Schedule to any associated 

risk factor sensitivity reported in the 

Risk Factor Sensitivities Information 

Schedule. 

Highlighting the relationship between 

limits and risk factor sensitivities 

should provide a broader picture of a 


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33500 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

trading desk’s covered trading activities 

and improve the Agencies’ 

understanding of the quantitative 

measurements. For example, the 

proposed Limit/Sensitivity CrossReference Schedule should help the 

Agencies better evaluate a reported limit 

on a risk factor sensitivity by allowing 

the Agencies to efficiently identify 

additional contextual information about 

the risk factor sensitivity in the banking 

entity’s metrics submission. 

v. Risk Factor Sensitivity/Attribution 

Cross-Reference Schedule 

The Agencies note that the specific 

risk factors and other factors that are 

reported in the Comprehensive Profit 

and Loss Attribution quantitative 

measurement may relate to the risk 

factor sensitivities reported in the Risk 

Factor Sensitivities metric. As a result, 

the Agencies are proposing an 

amendment to Appendix A of the 2013 

final rule that would require banking 

entities to prepare a Risk Factor 

Sensitivity/Attribution Cross-Reference 

Schedule. Specifically, banking entities 

would be required to cross-reference, by 

unique identification label, a risk factor 

sensitivity reported in the Risk Factor 

Sensitivities Information Schedule to 

any associated risk factor attribution 

reported in the Risk Factor Attribution 

Information Schedule. This proposed 

cross-reference schedule is intended to 

clarify the relationship between risk 

factors that serve as sensitivities and the 

profit and loss that is attributed to those 

risk factors. In conjunction with the 

Limit/Sensitivity Cross-Reference 

Schedule, the Risk Factor Sensitivity/ 

Attribution Cross-Reference Schedule 

should assist the Agencies in 

understanding the broader scope, type, 

and profile of a banking entity’s covered 

trading activities and assessing 

associated risks, and facilitate the 

relevant Agency’s efforts in monitoring 

those covered trading activities. For 

example, the proposed Risk Factor 

Sensitivity/Attribution Cross-Reference 

Schedule should help the Agencies 

compare the variables that a banking 

entity has identified as significant 

sources of its trading desks’ profitability 

and risk for purposes of the Risk Factor 

Sensitivities metric to the factor(s) that 

account for actual changes in the 

banking entity’s trading desk-level profit 

and loss, as reported in the 

Comprehensive Profit and Loss 

Attribution metric. This comparison 

will allow the Agencies to evaluate 

whether a banking entity has identified 

risk factors in the Risk Factor 

Sensitivities metric of a trading desk 

that help explain the trading desk’s 

profit and loss. 

Question 234. Is the information 

required by the proposed Quantitative 

Measurements Identifying Information 

effective and sufficiently clear? If not, 

what alternative would be more 

effective or clearer? Is more or less 

specific guidance necessary? If so, what 

level of specificity is needed to prepare 

the relevant schedule? If the proposed 

Quantitative Measurements Identifying 

Information is not sufficiently specific, 

how should it be modified to reach the 

appropriate level of specificity? If the 

proposed Quantitative Measurements 

Identifying Information is overly 

specific, why is it too specific and how 

should it be modified to reach the 

appropriate level of specificity? 

Question 235. Is the information 

required by the proposed Quantitative 

Measurements Identifying Information 

helpful or not helpful to understanding 

a banking entity’s covered trading 

activities and associated risks? Identify 

which specific pieces of information are 

helpful or not helpful and explain why. 

Does the information provide necessary 

clarity about a banking entity’s risk 

measures and how such risk measures 

relate to one another over time and 

within and across trading desks? Do 

banking entities expect that the 

schedules will reduce, increase, or have 

no effect on the number of information 

requests from the Agencies regarding 

the quantitative measurements? Please 

explain. 

Question 236. Is the information 

required by the proposed Quantitative 

Measurements Identifying Information 

already available to banking entities? 

Please explain. 

Question 237. Does the proposed 

Quantitative Measurements Identifying 

Information strike the appropriate 

balance between the potential benefits 

of the reporting requirements for 

monitoring and assuring compliance 

and the potential costs of those 

reporting requirements? If not, how 

could that balance be improved? 

Question 238. How burdensome and 

costly would it be to prepare each 

schedule within the proposed 

Quantitative Measurements Identifying 

Information? What are the additional 

burdens costs associated with preparing 

these schedules for particular trading 

desks? How significant are those 

potential costs relative to the potential 

benefits of the schedules in monitoring 

covered trading activities and assessing 

risks associated with those activities? 

Are there potential modifications that 

could be made to these schedules that 

would reduce the burden or cost? If so, 

what are those modifications? Please 

quantify your answers, to the extent 

feasible. 

Question 239. In light of the size, 

scope, complexity, and risk of covered 

trading activities, do commenters 

anticipate the need to hire new staff 

with particular expertise in order to 

prepare the information required by the 

proposed Quantitative Measurements 

Identifying Information (e.g., to program 

information systems and collect data)? 

Do commenters anticipate the need to 

develop additional infrastructure to 

obtain and retain data necessary to 

prepare these schedules? Please explain 

and quantify your answers, to the extent 

feasible. 

Question 240. What operational or 

logistical challenges might be associated 

with preparing the information required 

by the proposed Quantitative 

Measurements Identifying Information 

and obtaining any necessary 

informational inputs? 

Question 241. How might the 

proposed Quantitative Measurements 

Identifying Information affect the 

behavior of banking entities? To what 

extent and in what ways might 

uncertainty as to how the Agencies will 

review and evaluate the proposed 

Quantitative Measurements Identifying 

Information affect the behavior of 

banking entities? 

f. Narrative Statement 

The proposed paragraph III.d. requires 

a banking entity to submit a Narrative 

Statement in a separate electronic 

document to the relevant Agency that 

describes any changes in calculation 

methods used for its quantitative 

measurements and to indicate when this 

change occurred. In addition, a banking 

entity would have to prepare and 

submit a Narrative Statement when 

there are any changes in the banking 

entity’s trading desk structure (e.g., 

adding, terminating, or merging preexisting desks) or trading desk 

strategies. Under these circumstances, 

the Narrative Statement would have to 

describe the change, document the 

reasons for the change, and specify 

when the change occurred. 

Under the proposal, the banking 

entity would have to report in a 

Narrative Statement any other 

information the banking entity views as 

relevant for assessing the information 

schedules or quantitative 

measurements, such as a further 

description of calculation methods that 

the banking entity is using. In addition, 

a banking entity would have to explain 

its inability to report a particular 

quantitative measurement in the 

Narrative Statement. A banking entity 

also would have to provide notice in its 

Narrative Statement if a trading desk 

changes its approach to including or 


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238See §ll.20(d) of the proposal. 

239To the extent the XML Schema is updated, the 

version of the XML Schema that must be used by 

banking entities would be specified on the relevant 

Agency’s website. A banking entity must not use an 

outdated version of the XML Schema to report the 

Trading Desk Information, Quantitative 

Measurements Identifying Information, and 

applicable quantitative measurements to the 

relevant Agency. 

excluding products that are not 

financial instruments in its metrics. 

If a banking entity does not have any 

information to report in a Narrative 

Statement, the banking entity would 

have to submit an electronic document 

stating that it does not have any 

information to report in a Narrative 

Statement. 

Question 242. Should the Narrative 

Statement be required? If so, why? 

Should the proposed requirement apply 

to all changes in the calculation 

methods a banking entity uses for its 

quantitative measurements or should 

the proposed rule text be revised to 

apply only to changes that rise to a 

certain level of significance? Please 

explain. 

Question 243. Is the proposed 

Narrative Statement requirement 

effective and sufficiently clear? If not, 

what alternative would be more 

effective or clearer? Are there other 

circumstances in which a Narrative 

Statement should be required? If so, 

what are those circumstances? 

Question 244. How burdensome or 

costly is the proposed Narrative 

Statement to prepare? Are there 

potential benefits of the Narrative 

Statement to banking entities, 

particularly as it relates to the ability of 

banking entities and the Agencies to 

monitor a firm’s covered trading 

activities? 

g. Frequency and Method of Required 

Calculation and Reporting 

The 2013 final rule established a 

reporting schedule in §ll.20 that 

required banking entities with $50 

billion or more in trading assets and 

liabilities to report the information 

required by Appendix A of the 2013 

final rule within 10 days of the end of 

each calendar month. The Agencies are 

proposing to adjust this reporting 

schedule to extend the time to be within 

20 days of the end of each calendar 

month.238 Experience with 

implementing the 2013 final rule has 

shown that the information submitted 

within ten days is often incomplete or 

contains errors. Banking entities must 

regularly provide resubmissions to 

correct or complete their initial 

information submission. This extension 

of the time for reporting is expected to 

reduce compliance costs as the 

additional time would allow the 

required workflow to be conducted 

under less time pressure and with 

greater efficiency and fewer 

resubmissions should be necessary. The 

schedule for banking entities with less 

than $50 billion in trading assets and 

liabilities would remain unchanged. 

Question 245. Is the proposed 

frequency of reporting the Trading Desk 

Information, Quantitative Measurements 

Identifying Information, and Narrative 

Statement appropriate and effective? If 

not, what frequency would be more 

effective? Should the information be 

required to be reported quarterly, 

annually, or upon the request of the 

applicable Agency and, if so, why? 

Question 246. Would providing 

banking entities with additional time to 

report quantitative measurements 

meaningfully reduce resubmissions? If 

so, would the additional time reduce 

burdens on banking entities? Please 

provide quantitative data to the extent 

feasible. 

Question 247. Is there a calculation 

period other than daily that would 

provide more meaningful data for 

certain metrics? For example, would 

weekly inventory aging instead of daily 

inventory aging be more effective? Why 

or why not? 

Appendix A of the 2013 final rule did 

not specify a format in which metrics 

should be reported. As a technical 

matter, banking entities may currently 

report quantitative measurements to the 

relevant Agency using various formats 

and conventions. After consultation 

with staffs of the Agencies, the reporting 

banking entities submitted their 

quantitative measurement data 

electronically in a pipe-delimited flat 

file format. However, this flat file format 

has proved to be unwieldy and its 

syntactical requirements have been 

unclear. There has been no easy way for 

banking entities to validate that their 

data files are in the correct format before 

submitting them, and so banking 

entities have often needed to resubmit 

their quantitative measurements to 

address formatting issues. 

To make the formatting requirements 

for the data submissions clearer, and to 

help ensure the quality and consistency 

of data submissions across banking 

entities, the Agencies are proposing to 

require that the Trading Desk 

Information, the Quantitative 

Measurements Identifying Information, 

and each applicable quantitative 

measurement be reported in accordance 

with an XML Schema to be specified 

and published on the relevant Agency’s 

website.239 By requiring the XML 

Schema, the Agencies look to establish 

a structured model through which 

reported data can be recognized and 

processed by standard computer code or 

software (i.e., made machine-readable). 

The proposed reporting format should 

promote complete and intelligible 

records of covered trading activities and 

facilitate the reporting of key identifying 

and descriptive information. 

Submissions structured according to the 

XML Schema should enhance the 

Agencies’ ability to normalize, 

aggregate, and analyze reported metrics. 

In turn, the proposed reporting format 

should facilitate monitoring of covered 

trading activities and enable the 

relevant Agency to more efficiently 

interpret and evaluate reported metrics. 

For example, the proposed reporting 

format should enhance the Agencies’ 

ability to compare data across trading 

desks and analyze data over different 

time horizons. 

Question 248. How burdensome and 

costly would it be to develop new 

systems, or modify existing systems, to 

implement the proposed Appendix’s 

electronic reporting requirement and 

XML Schema? How significant are those 

potential costs relative to the potential 

benefits of electronic reporting and the 

XML Schema in facilitating review and 

analysis of a banking entity’s covered 

trading activities? Are there potential 

modifications that could be made to the 

proposal’s electronic reporting 

requirement or XML Schema that would 

reduce the burden or cost? If so, what 

are those modifications? Please quantify 

your answers, to the extent feasible. 

Question 249. Is the proposed XML 

reporting format for submission of the 

Trading Desk Information, applicable 

quantitative measurements, and the 

Quantitative Measurements Identifying 

Information appropriate and effective? 

Why or why not? 

Question 250. Is there a reporting 

format other than the XML Schema that 

the Agencies should consider as 

acceptable? Should the Agencies allow 

banking entities to develop their own 

reporting formats? If so, are there any 

general reporting standards that should 

be included in the rule to facilitate the 

Agencies’ ability to normalize, 

aggregate, and analyze data that is 

reported pursuant to different electronic 

formats or schemas? Please explain in 

detail. 

Question 251. What would be the 

costs to a banking entity to provide 

quantitative measurements data 

according to the proposed XML 

reporting format? Please quantify your 

answers, to the extent feasible. 

Question 252. For a banking entity 

currently reporting quantitative 


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240 If a limit is introduced or discontinued during 

a calendar month, the banking entity must report 

this information for each trading day that the 

trading desk used the limit during the calendar 

month. 

241Such information includes the name of the 

limit, a description of the limit, whether the limit 

is intraday or end-of-day, the unit of measurement 

for the limit, whether the limit measures risk on a 

net or gross basis, and the type of limit. 

measurements in some other electronic 

format, what would be the costs (such 

as equipment, systems, training, or 

ongoing staffing or maintenance) to 

convert current systems to use the 

proposed XML reporting format? Please 

quantify your answers, to the extent 

feasible. 

Question 253. Is there a more effective 

way to distribute the XML Schema than 

the current proposal of having each 

Agency host a copy of the XML Schema 

on its respective website? For example, 

would it be more effective for all 

Agencies to point to only one location 

where the XML Schema will be hosted? 

If so, please identify how the alternative 

would improve data quality and 

accessibility. How long should the 

implementation period be? 

Question 254. Currently banking 

entities are reporting quantitative 

measurements separately to each 

Agency using tailored data files 

containing only the measurements for 

the trading desks that book into legal 

entities for which an Agency is the 

primary supervisor. Would it be more 

effective for all Agencies to use a single 

point of collection for the quantitative 

measurements? If so, would there be any 

impact on Agencies ability to review 

and analyze a banking entity’s covered 

trading activities? How significant are 

the costs of reporting separately to each 

Agency? Please quantify your answers, 

to the extent feasible. Are there any 

other ways to make the metrics 

requirements more efficient? For 

example, are any banking entities 

subject to any separate or related data 

reporting requirements that could be 

leveraged to make the proposal more 

efficient? 

h. Recordkeeping 

Under paragraph III.c. of Appendix A 

of the 2013 final rule, a banking entity’s 

reported quantitative measurements are 

subject to the record retention 

requirements provided in the appendix. 

Under the proposal, this provision 

would be in paragraph III.f. of the 

appendix. The Agencies propose to 

expand this provision to include the 

Narrative Statement, the Trading Desk 

Information, and the Quantitative 

Measurements Identifying Information 

in the appendix’s record retention 

requirements. 

Question 255. Is the proposed 

application of Appendix A’s record 

retention requirement to the Trading 

Desk Information, Quantitative 

Measurements Identifying Information, 

and Narrative Statement appropriate? If 

not, what alternatives would be more 

appropriate? What costs would be 

associated with retaining the Narrative 

Statements and information schedules 

on that basis, and how could those costs 

be reduced or eliminated? Please 

quantify your answers, to the extent 

feasible. 

Question 256. Should the proposed 

Trading Desk Information, Quantitative 

Measurements Identifying Information, 

and Narrative Statement be subject to 

the same five-year retention requirement 

that applies to the quantitative 

measurements? Why or why not? If not, 

how long should the information 

schedules and Narrative Statements be 

retained, and why? 

i. Quantitative Measurements 

Section IV of Appendix A of the 2013 

final rule sets forth the individual 

quantitative measurements required by 

the appendix. The Agencies are 

proposing to add an ‘‘Applicability’’ 

paragraph to each quantitative 

measurement that identifies the trading 

desks for which a banking entity would 

be required to calculate and report a 

particular metric based on the type of 

covered trading activity conducted by 

the desk. In addition, the Agencies are 

proposing to remove the ‘‘General 

Calculation Guidance’’ paragraphs that 

appear in section IV of Appendix A of 

the 2013 final rule for each quantitative 

measurement. Content of these General 

Calculation Guidance paragraphs would 

instead generally be addressed in the 

Instructions. 

i. Risk-Management Measurements 

A. Risk and Position Limits and Usage 

The Agencies are proposing to remove 

references to Stressed Value-at-Risk 

(Stressed VaR) in the Risk and Position 

Limits and Usage metric. Eliminating 

the requirement to report desk-level 

limits for Stressed VaR should reduce 

reporting obligations for banking 

entities without reducing the Agencies’ 

ability to monitor proprietary trading. 

The proposal clarifies in new 

‘‘Applicability’’ paragraph IV.a.1.iv. 

that, as in the 2013 final rule, the Risk 

and Position Limits and Usage metric 

applies to all trading desks engaged in 

covered trading activities. For each 

trading desk, the proposal requires that 

a banking entity report the unique 

identification label for each limit as 

listed in the Risk and Position Limits 

Information Schedule, the limit size 

(distinguishing between the upper 

bound and lower bound of the limit, 

where applicable), and the value of 

usage of the limit.240 The unique 

identification label should allow the 

Agencies to efficiently obtain the 

descriptive information regarding the 

limit that is separately reported in the 

Risk and Position Limits Information 

Schedule.241 The proposal requires a 

banking entity to report this descriptive 

information in the Risk and Position 

Limits Information Schedule for the 

entire banking entity’s covered trading 

activity, rather than multiple times in 

the Risk and Position Limits and Usage 

metric for different trading desks, to 

help alleviate inefficiencies associated 

with reporting redundant information 

and reduce electronic file submission 

sizes. 

Unlike the 2013 final rule, the 

proposal requires a banking entity to 

report the limit size of both the upper 

bound and the lower bound of a limit 

if a trading desk has both an upper and 

lower limit. The Agencies understand 

that, based on a review of the collected 

data and discussions with banking 

entities, trading desks may have upper 

and lower limits. An upper limit means 

the value of risk cannot go above the 

limit, while a lower limit means the 

value of risk cannot go below the limit. 

This proposed amendment is intended 

to help identify when a trading desk has 

both an upper limit and a lower limit 

and avoid incomplete or unclear 

reporting under these circumstances. In 

addition, receipt of information about 

upper and lower limits, where 

applicable, should allow the Agencies to 

better evaluate the constraints that a 

banking entity places on the risks of a 

trading desk. For example, if a trading 

desk has both upper and lower limits 

but only one such limit is reported, the 

Agencies would not have complete 

information about the desk’s limits or 

the usage of such limits, including 

potential limit breaches that may 

warrant further review. 

The proposal also clarifies the 2013 

final rule’s requirement to separately 

report a trading desk’s usage of its limit. 

As noted above, usage is the value of the 

trading desk’s risk or positions that are 

accounted for by the current activity of 

the desk. The value of the usage 

generally should be reported as of the 

end of the day for limits that are 

accounted for at the end of the day; 

conversely, banking entities generally 

should report the maximum value of the 

usage for limits accounted for intraday. 


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242 If a risk factor sensitivity is introduced or 

discontinued during a calendar month, the banking 

entity must report this information for each trading 

day that the trading desk used the sensitivity during 

the calendar month. 

243Such information includes the name of the 

sensitivity, a description of the sensitivity, and the 

sensitivity’s risk factor change unit. 

244Such information includes the name of the 

risk factor or other factor, a description of the risk 

factor or other factor, and the change unit of the risk 

factor or other factor. 

Question 257. Should Stressed VaR 

limits be removed as a reporting 

requirement for desks engaged in 

permitted market making-related 

activity or risk-mitigating hedging 

activity? Are VaR limits without 

accompanying Stressed VaR limits 

adequate for these desks? Should 

another type of limit be required to 

replace Stressed VaR, such as expected 

shortfall? Should Stressed VaR limits 

instead be required for other types of 

covered trading activities besides 

market making-related activity or riskmitigating hedging activity? 

Question 258. Should VaR limits be 

removed as a reporting requirement for 

trading desks engaged in permitted 

market making-related activity or riskmitigating hedging activity? Why or 

why not? 

Question 259. The proposal requires a 

banking entity to report the limit size of 

both the upper bound and the lower 

bound of a limit if a trading desk has 

both an upper and lower limit. Should 

banking entities be required to report 

both the upper bound and the lower 

bound of a limit (if applicable) or 

should the requirement only apply to 

the upper limit? Please discuss the 

anticipated costs and other burdens of 

this new requirement and how they 

compare to the benefits. 

B. Risk Factor Sensitivities 

The proposed ‘‘Applicability’’ 

paragraph IV.a.2.iv. provides that, as in 

the 2013 final rule, the Risk Factor 

Sensitivities metric applies to all trading 

desks engaged in covered trading 

activities. Under the proposal, a banking 

entity would have to report for each 

trading desk the unique identification 

label associated with each risk factor 

sensitivity of the desk, the magnitude of 

the change in the risk factor, and the 

aggregate change in value across all 

positions of the desk given the change 

in risk factor.242

The proposed unique identification 

label should allow the Agencies to 

efficiently obtain the descriptive 

information for the Risk Factor 

Sensitivity that is separately reported in 

the Risk Factor Sensitivities Information 

Schedule.243 The proposal requires a 

banking entity to report this descriptive 

information in the Risk Factor 

Sensitivities Information Schedule for 

the entire banking entity’s covered 

trading activity, rather than multiple 

times in the Risk Factor Sensitivities 

metric for different trading desks, to 

help alleviate inefficiencies associated 

with reporting redundant information 

and reduce electronic file submission 

sizes. 

C. Value-at-Risk and Stressed Value-atRisk 

The proposal modifies the description 

of Stressed VaR to align its calculation 

with that of Value-at-Risk and removes 

the General Calculation Guidance. A 

new ‘‘Applicability’’ paragraph 

IV.a.3.iv. provides that Stressed VaR is 

not required to be reported for trading 

desks whose covered trading activity is 

conducted exclusively to hedge 

products excluded from the definition 

of financial instrument in §ll.3(d)(2) 

of the proposal. The Agencies believe 

that limiting the applicability of the 

Stressed VaR metric in this manner may 

reduce burden without impacting the 

ability of the Agencies to monitor for 

prohibited proprietary trading. In 

particular, the Agencies believe that 

applying Stressed VaR to trading desks 

whose covered trading activity is 

conducted exclusively to hedge 

excluded products does not provide 

meaningful information about whether 

the trading desk is engaged in 

proprietary trading. For example, when 

Stressed VaR is applied to hedges of 

loans held-to-maturity on a trading 

desk, Stressed VaR is unlikely to 

provide an accurate indication of the 

risk taken on that desk. Thus, the 

Agencies are providing that Stressed 

VaR need not be reported under these 

circumstances. 

Question 260. Is Stressed VaR a useful 

metric for monitoring covered trading 

activity for trading desks engaged in 

permitted market making-related 

activity or underwriting activity? Why 

or why not? Are there other covered 

trading activities for which Stressed 

VaR is useful or not useful? 

ii. Source-of-Revenue Measurements 

A. Comprehensive Profit and Loss 

Attribution 

It is unnecessary for banking entities 

to calculate and report volatility of 

comprehensive profit and loss because 

the measurement can be calculated from 

the profit and loss amounts reported 

under the Comprehensive Profit and 

Loss Attribution metric. Thus, the 

proposed Appendix would remove this 

requirement. 

With respect to the profit and loss 

attribution to individual risk factors and 

other factors, the Agencies are 

proposing to add to the proposed 

Appendix a new paragraph IV.b.1.B. 

Under the proposal, a banking entity 

would be required to provide, for one or 

more factors that explain the 

preponderance of the profit or loss 

changes due to risk factor changes, a 

unique identification label for the factor 

and the profit or loss due to the factor 

change. The proposal requires a banking 

entity to report a unique identification 

label for the factor so the Agencies can 

efficiently obtain the descriptive 

information regarding the factor that is 

separately reported in the Risk Factor 

Attribution Information Schedule.244

The proposal requires a banking entity 

to report this descriptive information in 

the Risk Factor Attribution Information 

Schedule for the entire banking entity’s 

covered trading activity, rather than 

multiple times in the Comprehensive 

Profit and Loss Attribution metric for 

different trading desks, to help alleviate 

inefficiencies associated with reporting 

redundant information and reduce 

electronic file submission sizes. 

A new ‘‘Applicability’’ paragraph 

IV.b.1.iv provides that, as in the 2013 

final rule, the Comprehensive Profit and 

Loss Attribution metric applies to all 

trading desks engaged in covered 

trading activities. 

Question 261. Appendix A of the 

2013 final rule specified under Sourceof-Revenue Measurements that 

Comprehensive Profit and Loss be 

divided into three categories: (i) Profit 

and loss attributable to existing 

positions; (ii) profit and loss attributable 

to new positions; and (iii) residual profit 

and loss that cannot be specifically 

attributed to existing positions or new 

positions. The sum of (i), (ii), and (iii) 

must equal the trading desk’s 

comprehensive profit and loss at each 

point in time. Appendix A of the 2013 

final rule further required that the 

portion of comprehensive profit and 

loss that cannot be specifically 

attributed to known sources must be 

allocated to a residual category 

identified as an unexplained portion of 

the comprehensive profit and loss. The 

proposed Appendix does not change 

these specifications. However, the 

Agencies’ experience implementing the 

2013 final rule has shown that the two 

statements about residual profit and loss 

can give rise to conflicting 

interpretations. The Agencies see value 

in monitoring any profit and loss that 

cannot be attributed to existing or new 

positions. The Agencies also see value 

in monitoring the profit and loss 


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245For example, a trading desk that relies solely 

on §ll.5 to conduct risk-mitigating hedging 

activity is not subject to the proposed Positions 

metric. 

246For example, if a trading desk relies on 

§ll.4(b) and §ll.5 to conduct market makingrelated activity and risk-mitigating hedging activity, 

respectively, the reported Positions metric for the 

desk would be required to reflect its risk-mitigating 

hedging activity in addition to its market makingrelated activity. The Agencies note, however, that 

a trading desk would not be required to include 

trading activity conducted under §§ll.3(e), 

ll6(c), ll.6(d), or ll.6(e) in the proposed 

Positions metric, unless the banking entity includes 

such activity as ‘‘covered trading activity’’ for the 

desk under the appendix. This is consistent with 

the proposed definition of ‘‘covered trading 

activity,’’ which provides that a banking entity may 

include in its covered trading activity trading 

conducted under §§ll.3(e), ll.6(c), ll.6(d), 

or ll.6(e). 

247The Agencies note that banking entities must 

report the effective notional value of derivatives 

receivables and derivatives payables for those 

derivatives whose stated notional amount is 

leveraged. For example, if an exchange of payments 

associated with a $2 million notional equity swap 

is based on three times the return associated with 

the underlying equity, the effective notional amount 

of the equity swap would be $6 million. 

248See 2013 final rule §§ll.2(h), (y). 

249The term ‘‘security’’ is defined in the 2013 

final rule by reference to section 3(a)(10) of the 

Securities Exchange Act of 1934 (the ‘‘Exchange 

Act’’). See 2013 final rule §ll.2(y). Under the 

Exchange Act, the term ‘‘security’’ means, in part, 

any security-based swap. See 15 U.S.C. 78c(a)(10). 

The term ‘‘security-based swap’’ is defined in 

section 3(a)(68) of the Exchange Act. See 15 U.S.C. 

78c(a)(68). Under the 2013 final rule, the term 

‘‘derivative’’ means, in part, any security-based 

swap as that term is defined in section 3(a)(68) of 

the Exchange Act. See 2013 final rule §ll.2(h). 

attribution to risk factors, and the 

Agencies’ experience is that many 

reporters of quantitative measurements 

include the remainder from profit and 

loss attribution in the item for Residual 

Profit and Loss. In practice, however, 

profit and loss attribution is performed 

on existing position profit and loss, so 

this interpretation breaks the additivity 

of (i), (ii), and (iii) above. A potential 

resolution of this conflict would be to 

clarify in the Instructions for Preparing 

and Submitting Quantitative 

Measurements Information that 

Residual Profit and Loss is only profit 

and loss that cannot be attributed to 

existing or new positions, and to add a 

separate reporting item for Unexplained 

Profit and Loss from Existing Positions. 

The Agencies are seeking comment on 

how beneficial for institutions and 

regulators this additional item would be 

to show and assess banking entities’ 

profit and loss attribution analysis. How 

much would adding this item consume 

additional compliance resources of 

reporters? 

Question 262. Appendix A of the 

2013 final rule specified that profit and 

loss from existing positions be further 

attributed to (i) the specific risk factors 

and other factors that are monitored and 

managed as part of the trading desk’s 

overall risk management policies and 

procedures; and (ii) any other applicable 

elements, such as cash flows, carry, 

changes in reserves, and the correction, 

cancellation, or exercise of a trade. The 

metrics reporting instructions further 

specified that the preponderance of 

profit and loss due to risk factor changes 

should be reported as profit and loss 

attributions to individual factors. The 

proposed Appendix and metrics 

instructions do not change these 

requirements. However, experience 

implementing the 2013 final rule has 

shown that the definition of Profit and 

Loss Due to Changes in Risk Factors is 

vague and open to multiple 

interpretations. The Agencies see value 

in monitoring the total profit and loss 

attribution to risk factors that banking 

entities use to monitor their sources of 

revenue, which may go beyond the 

preponderance of profit and loss that is 

reported as attributions to individual 

factors. Moreover, in practice profit and 

loss attribution is often sensitivity-based 

and an approximation. Banking entities 

also routinely calculate ‘‘hypothetical’’ 

or ‘‘clean’’ profit and loss, which is the 

full revaluation of existing positions 

under all risk factor changes, and is 

used in banking entities’ risk 

management to compare to VaR. The 

Agencies are seeking comment on how 

best to specify the calculation for Profit 

and Loss Due to Risk Factor Changes. 

Do commenters expect that 

‘‘hypothetical’’ profit and loss can be 

derived from other items already 

reported? If not, what are the costs and 

benefits of clarifying the definition of 

Profit and Loss Due to Risk Factor 

Changes to make it align with 

‘‘hypothetical’’ or ‘‘Clean P&L’’ as 

prescribed by market risk capital rules? 

Alternatively, what are the costs and 

benefits of clarifying the definition to be 

the sum of all profit and loss 

attributions regardless of whether they 

are reported individually? What would 

be the additional compliance costs of 

requiring that both ‘‘hypothetical’’ profit 

and loss and the sum of all profit and 

loss attributions be reported as separate 

items in the quantitative measurements? 

iii. Positions, Transaction Volumes, and 

Securities Inventory Aging 

Measurements 

A. Positions and Inventory Turnover 

Paragraph IV.c.1. of Appendix A of 

the 2013 final rule requires banking 

entities to calculate and report 

Inventory Turnover. This metric is 

required to be calculated on a daily 

basis for 30-day, 60-day, and 90-day 

calculation periods. The Agencies are 

proposing to replace the Inventory 

Turnover metric with the daily data 

underlying that metric, rather than 

proposing specific calculation periods, 

because the Agencies may choose to use 

different inventory turnover calculation 

periods depending on the particular 

trading desk or covered trading activity 

under review. The proposal replaces 

Inventory Turnover with the daily 

Positions quantitative measurement. In 

conjunction with the proposed 

Transaction Volumes metric (discussed 

below), the proposed Positions metric 

would provide the Agencies with 

flexibility to calculate inventory 

turnover ratios over any period of time, 

including a single trading day. 

Based on an evaluation of the 

information collected pursuant to the 

Inventory Turnover quantitative 

measurement, the Agencies are 

proposing to limit the scope of 

applicability of the Positions metric to 

trading desks that rely on § ll.4(a) or 

§ ll.4(b) to conduct underwriting 

activity or market making-related 

activity, respectively. As a result, a 

trading desk that does not rely on 

§ ll.4(a) or §ll.4(b) would not be 

subject to the proposed Positions 

metric.245 The proposed Positions 

metric would require a banking entity to 

report the value of securities and 

derivatives positions managed by an 

applicable trading desk. Thus, if a 

trading desk relies on §ll.4(a) or 

§ ll.4(b) and engages in other covered 

trading activity, the reported Positions 

metric would have to reflect all of the 

covered trading activities conducted by 

the desk.246

The proposal provides that banking 

entities subject to the appendix would 

have to separately report the market 

value of all long securities positions, the 

market value of all short securities 

positions, the market value of all 

derivatives receivables, the market value 

of all derivatives payables, the notional 

value of all derivatives receivables, and 

the notional value of all derivatives 

payables.247

Finally, the proposal addresses the 

classification of securities and 

derivatives for purposes of the proposed 

Positions quantitative measurement. 

The Agencies recognize that the 2013 

final rule’s definition of ‘‘security’’ and 

‘‘derivative’’ overlap.248 For example, 

under the 2013 final rule a securitybased swap is both a ‘‘security’’ and a 

‘‘derivative.’’ 249 The proposed Positions 

quantitative measurement would 

require banking entities to separately 

report the value of all securities and 

derivatives positions managed by a 


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250For purposes of the proposed Transaction 

Volumes metric, value means gross market value 

with respect to securities. For commodity 

derivatives, value means the gross notional value 

(i.e., the current dollar market value of the quantity 

of the commodity underlying the derivative). For all 

other derivatives, value means the gross notional 

value. 

trading desk. To avoid double-counting 

financial instruments, the proposed 

Positions metric would require banking 

entities subject to the appendix to not 

include in the Positions calculation for 

‘‘securities’’ those securities that are 

also ‘‘derivatives,’’ as those terms are 

defined under the final rule. Instead, 

securities that are also derivatives under 

the final rule are required to be reported 

as ‘‘derivatives’’ for purposes of the 

proposed Positions metric. 

Question 263. Should the Agencies 

eliminate the Inventory Turnover 

quantitative measurement? Why or why 

not? Should the Agencies replace 

Inventory Turnover with the proposed 

Positions metric in the proposed 

Appendix? Why or why not? Should the 

Agencies modify the Inventory 

Turnover metric rather than remove it 

from the proposed Appendix? If so, 

what modifications should the Agencies 

make to the Inventory Turnover metric, 

and why? 

Question 264. What are the current 

benefits and costs associated with 

calculating the Inventory Turnover 

metric? To what extent would the 

removal of this metric reduce the costs 

of compliance with the proposed 

Appendix? Please quantify your 

answers, to the extent feasible. 

Question 265. Is the use of the 

proposed Positions metric to help 

distinguish between permitted and 

prohibited trading activities effective? If 

not, what alternative would be more 

effective? What factors should be 

considered in order to further refine the 

proposed Positions metric to better 

distinguish prohibited proprietary 

trading from permitted trading activity? 

Does the proposed Positions metric 

provide any additional information of 

value relative to other quantitative 

measurements? 

Question 266. Is the use of the 

proposed Positions metric to help 

determine whether an otherwisepermitted trading strategy is consistent 

with the requirement that such activity 

not result, directly or indirectly, in a 

material exposure by the banking entity 

to high-risk assets and high-risk trading 

strategies effective? If not, what 

alternative would be more effective? 

Question 267. Is the proposed 

Positions metric substantially likely to 

frequently produce false negatives or 

false positives that suggest that 

prohibited proprietary trading is 

occurring when it is not, or vice versa? 

If so, why? If so, how should the 

Agencies modify this quantitative 

measurement, and why? If so, what 

alternative quantitative measurement 

would better help identify prohibited 

proprietary trading? 

Question 268. How beneficial is the 

information that the proposed Positions 

metric provides for evaluating 

underwriting activity or market makingrelated activity? Does the proposed 

Positions metric, alone or coupled with 

other required metrics, provide 

information that is useful in evaluating 

the customer-facing activity of a trading 

desk? Do any of the other quantitative 

measurements provide the same level of 

beneficial information for underwriting 

activity or market making-related 

activity? Would the proposed Positions 

metric be useful to evaluate other types 

of covered trading activity? 

Question 269. How burdensome and 

costly would it be to calculate the 

proposed Positions metric at the 

specified calculation frequency and 

calculation period? What are the 

additional burdens or costs associated 

with calculating the measurement for 

particular trading desks? How 

significant are those potential costs 

relative to the potential benefits of the 

measurement in monitoring for 

impermissible proprietary trading? Are 

there potential modifications that could 

be made to the measurement that would 

reduce the burden or cost? If so, what 

are those modifications? Please quantify 

your answers, to the extent feasible. 

Question 270. How will the proposed 

Positions and Inventory Turnover 

requirements impact burdens as 

compared to benefits? Would the 

proposed changes affect a firm’s 

confidential business information? 

iv. Transaction Volumes and the 

Customer-Facing Trade Ratio 

Paragraph IV.c.3. of Appendix A of 

the 2013 final rule requires banking 

entities to calculate and report a 

Customer-Facing Trade Ratio comparing 

transactions involving a counterparty 

that is a customer of the trading desk to 

transactions with a counterparty that is 

not a customer of the desk. Appendix A 

of the 2013 final rule requires the 

Customer-Facing Trade Ratio to be 

computed by measuring trades on both 

a trade count basis and value basis. In 

addition, Appendix A of the 2013 final 

rule provides that the term ‘‘customer’’ 

for purposes of the Customer-Facing 

Trade Ratio is defined in the same 

manner as the terms ‘‘client, customer, 

and counterparty’’ used in §ll.4(b) of 

the 2013 final rule describing the 

permitted activity exemption for market 

making-related activities. This metric is 

required to be calculated on a daily 

basis for 30-day, 60-day, and 90-day 

calculation periods. 

While the Customer-Facing Trade 

Ratio may provide directionally useful 

information in some circumstances 

regarding the extent to which trades are 

conducted with customers, the Agencies 

are proposing to replace this metric with 

the daily Transaction Volumes 

quantitative measurement, set out in 

paragraph IV.c.2. of the proposed 

Appendix, for two reasons. First, the 

information provided by the CustomerFacing Trade Ratio metric has not been 

sufficiently granular to permit the 

Agencies to effectively assess the extent 

to which a trading desk’s covered 

trading activities are focused on 

servicing customer demand. Reviewing 

and analyzing data representing trading 

activity that occurs over a single trading 

day should be more effective. The 

proposed Transaction Volumes metric 

will provide the Agencies with 

flexibility to calculate customer-facing 

trade ratios over any period of time, 

including a single trading day. This will 

assist banking entities and the Agencies 

in monitoring covered trading activities. 

The Agencies are proposing to replace 

the Customer-Facing Trade Ratio with 

the daily data underlying that metric 

rather than proposing a daily 

calculation period for the CustomerFacing Trade Ratio because the 

Agencies may choose to use different 

customer-facing trade ratio calculation 

periods depending on the particular 

trading desk or covered trading activity 

under review. 

Second, based on a review of the 

collected data, the Agencies recognize 

that the current Customer-Facing Trade 

Ratio metric does not provide 

meaningful information when a trading 

desk only conducts customer-facing 

trading activity. The numerator of the 

ratio represents transactions with 

counterparties that are customers, while 

the denominator represents transactions 

with counterparties that are not 

customers. If a trading desk only trades 

with customers, it will not be able to 

calculate this ratio because the 

denominator will be zero. The proposed 

Transaction Volumes metric enables the 

analysis of customer-facing activity 

using more meaningful and appropriate 

calculations. 

The proposed Transaction Volumes 

metric measures the number and 

value 250 of all securities and derivatives 

transactions conducted by a trading 

desk engaged in permitted underwriting 

activity or market making-related 

activity under the 2013 final rule with 


daltland on DSKBBV9HB2PROD with PROPOSALS3
33506 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

251For example, a trading desk that relies solely 

on §ll.5 to conduct risk-mitigating hedging 

activity would not be subject to the proposed 

Transaction Volumes metric. 

252For example, if a trading desk relies on 

§ll.4(b) and §ll.5 to conduct market makingrelated activity and risk-mitigating hedging activity, 

respectively, the reported Transaction Volumes 

metric for the desk would have to reflect its riskmitigating hedging activity in addition to its market 

making-related activity. The Agencies note, 

however, that a trading desk would not be required 

to include trading activity conducted under 

§§ll.3(e), ll.6(c), ll.6(d), or ll.6(e) in the 

proposed Transaction Volumes metric, unless the 

banking entity includes such activity as ‘‘covered 

trading activity’’ for the desk under the proposed 

Appendix. The Agencies note that this is consistent 

with the definition of ‘‘covered trading activity,’’ 

which provides that a banking entity may include 

in its covered trading activity trading conducted 

under §§ll.3(e), ll.6(c), ll.6(d), or ll.6(e). 

253See 2013 final rule §§ll.4(a)(2)(ii) and 

ll.4(b)(2)(ii). 

254Under the proposal, the calculation guidance 

regarding reporting of transactions with another 

banking entity with trading assets and liabilities of 

$50 billion or more would be moved from 

Appendix A of the 2013 final rule into the reporting 

instructions. The proposed instructions for the 

Transaction Volumes quantitative measurement 

would clarify that any transaction with another 

banking entity with trading assets and liabilities of 

$50 billion or more would be included in one of 

the four categories noted above, including: (i) 

Customers (excluding internal transactions); (ii) 

non-customers (excluding internal transactions); 

(iii) trading desks and other organizational units 

where the transaction is booked into the same 

banking entity; and (iv) trading desks and other 

organizational units where the transaction is 

booked into an affiliated banking entity. 

255See 2013 final rule §§ll.2(h), (y). See also 

supra Part III.E.2.i (discussing the classification of 

securities and derivatives for purposes of the 

proposed Positions quantitative measurement). 

four categories of counterparties: (i) 

Customers (excluding internal 

transactions); (ii) non-customers 

(excluding internal transactions); (iii) 

trading desks and other organizational 

units where the transaction is booked 

into the same banking entity; and (iv) 

trading desks and other organizational 

units where the transaction is booked 

into an affiliated banking entity. To 

avoid double-counting transactions, 

these four categories are exclusive of 

each other (i.e., a transaction must only 

be reported in one category). The 

proposal requires this quantitative 

measurement to be calculated each 

trading day. 

As described above, the Agencies 

have evaluated the data collected under 

Appendix A of the 2013 final rule to 

determine whether certain quantitative 

measurements should be tailored to 

specific covered trading activities. The 

Customer-Facing Trade Ratio metric has 

primarily been used to assist in the 

evaluation of a trading desk’s customerfacing activity, which is a relevant 

consideration for desks engaged in 

underwriting or market making-related 

activity under § ll.4 of the 2013 final 

rule. Such analysis is less relevant to, 

for example, desks that use only the 

risk-mitigating hedging exemption 

under §ll.5 of the 2013 final rule. 

Based on an evaluation of the 

information collected under the 

Customer-Facing Trade Ratio, the 

Agencies are proposing to limit the 

applicability of the proposed 

Transaction Volumes metric. 

Specifically, the proposal provides 

that a banking entity would be required 

to calculate and report the proposed 

Transaction Volumes metric for all 

trading desks that rely on § ll.4(a) or 

§ ll.4(b) to conduct underwriting 

activity or market making-related 

activity, respectively. This means that a 

trading desk that does not rely on 

§ ll.4(a) or §ll.4(b) would not be 

subject to the proposed Transaction 

Volumes metric.251 The proposed 

Transaction Volumes metric measures 

covered trading activity conducted by 

an applicable trading desk with specific 

categories of counterparties. Thus, if a 

trading desk relies on §ll.4(a) or 

§ ll.4(b) and engages in other covered 

trading activity, the reported 

Transaction Volumes metric would have 

to reflect all of the covered trading 

activities conducted by the desk.252

Limiting the scope of the Transaction 

Volumes metric to only those trading 

desks engaged in market-making activity 

or underwriting activity may reduce 

reporting inefficiencies for banking 

entities. 

This metric should provide 

meaningful information regarding the 

extent to which a trading desk facilitates 

demand for each category of 

counterparty. While the Agencies 

recognize that the requirement to 

provide additional granularity may 

require banking entities to expend 

additional compliance resources, the 

Agencies believe the information would 

enhance compliance efficiencies. In 

particular, by requiring transactions to 

be separated into these four categories, 

the information collected under this 

metric will facilitate better classification 

of internal trades, and thus, will assist 

banking entities and the Agencies in 

evaluating whether the covered trading 

activities of desks engaged in 

underwriting or market making-related 

activities are consistent with the final 

rule’s requirements governing those 

activities. For example, the Agencies 

believe that this metric could be helpful 

in evaluating the extent to which a 

market making desk routinely stands 

ready to purchase and sell financial 

instruments related to its financial 

exposure, as well as the extent to which 

a trading desk engaged in underwriting 

or market making-related activity 

facilitates customer demand in 

accordance with the reasonably 

expected near term demand 

requirements under the relevant 

exemption.253

The definition of the term ‘‘customer’’ 

that is used for purposes of this 

quantitative measurement depends on 

the type of covered trading activity a 

desk conducts. For a trading desk 

engaged in market making-related 

activity pursuant to §ll.4(b) of the 

2013 final rule, the desk must construe 

the term ‘‘customer’’ in the same 

manner as the terms ‘‘client, customer, 

and counterparty’’ used for purposes of 

the market-making exemption under the 

2013 final rule. For a trading desk 

engaged in underwriting activity 

pursuant to § ll.4(a) of the 2013 final 

rule, the desk must construe the term 

‘‘customer’’ in the same manner as the 

terms ‘‘client, customer, and 

counterparty’’ used for purposes of the 

underwriting exemption under the final 

rule.254

Similar to the proposed Positions 

metric, the proposed Transaction 

Volumes metric addresses the 

classification of securities and 

derivatives for purposes of the proposed 

Transaction Volumes quantitative 

measurement. The proposed 

Transaction Volumes metric requires 

banking entities to separately report the 

value and number of securities and 

derivatives transactions conducted by a 

trading desk with the four categories of 

counterparties described above. To 

avoid double-counting financial 

instruments, the proposed Transaction 

Volumes metric would require banking 

entities subject to the appendix to not 

include in the Transaction Volumes 

calculation for ‘‘securities’’ those 

securities that are also ‘‘derivatives,’’ as 

those terms are defined under the 2013 

final rule.255 Instead, securities that are 

also derivatives under the final rule 

would be required to be reported as 

‘‘derivatives’’ for purposes of the 

proposed Transaction Volumes metric. 

Question 271. Should the Agencies 

eliminate the Customer-Facing Trade 

Ratio? Why or why not? Should the 

Agencies replace the Customer-Facing 

Trade Ratio with the proposed 

Transaction Volumes metric in the 

proposed Appendix? Why or why not? 

Should the Agencies modify the 

Customer-Facing Trade Ratio rather 

than remove it from the proposed 

Appendix? If so, what modifications 

should the Agencies make to the 

Customer-Facing Trade Ratio, and why? 

Question 272. What are the current 

benefits and costs associated with 


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256See 2013 final rule §§ll.2(h), (y). See also 

supra Part III.E.2.i (discussing the classification of 

securities and derivatives for purposes of the 

proposed Positions quantitative measurement). 

257For example, a trading desk that relies solely 

on §ll.5 to conduct risk-mitigating hedging 

activity would not be subject to the proposed 

Securities Inventory Aging metric. 258The Agencies note that a banking entity would 

not be required to prepare an Inventory Aging 

schedule for any derivatives traded by a trading 

desk, including ‘‘securities’’ that are also 

‘‘derivatives’’ as those terms are defined under the 

2013 final rule, in the event the trading desk relies 

on §ll.4(a) or §ll.4(b) and another permitted 

activity exemption. 

259For example, if a trading desk relies on 

§ll.4(b) and §ll.5 to conduct market makingrelated activity and risk-mitigating hedging activity, 

respectively, the reported Securities Inventory 

Aging metric for the desk would have to reflect the 

risk-mitigating hedging activity and market makingrelated activity associated with the desk’s securities 

positions. The Agencies note, however, that a 

trading desk would not be required to include 

trading activity conducted under §§ll.3(e), 

ll.6(c), ll.6(d), or ll.6(e) in the proposed 

Securities Inventory Aging metric, unless the 

banking entity includes such activity as ‘‘covered 

trading activity’’ for the desk under the proposed 

Appendix. The Agencies note that this is consistent 

with the definition of ‘‘covered trading activity,’’ 

which provides that a banking entity may include 

in its covered trading activity trading conducted 

under §§ll.3(e), ll.6(c), ll.6(d), or ll.6(e). 

calculating the Customer-Facing Trade 

Ratio? To what extent would the 

removal of this metric reduce the costs 

of compliance with the proposed 

Appendix? Please quantify your 

answers, to the extent feasible. 

Question 273. Would the use of the 

proposed Transaction Volumes metric 

to help distinguish between permitted 

and prohibited trading activities be 

effective? If not, what alternative would 

be more effective? What factors should 

be considered in order to further refine 

the proposed Transaction Volumes 

metric to better distinguish prohibited 

proprietary trading from permitted 

trading activity? Does the proposed 

Transaction Volumes metric provide 

any additional information of value 

relative to other quantitative 

measurements? 

Question 274. Is the scope of the four 

categories of counterparties set forth in 

the proposed Transaction Volumes 

metric appropriate and effective? Why 

or why not? 

Question 275. Is the proposed 

Transaction Volumes metric 

substantially likely to frequently 

produce false negatives or false 

positives that suggest that prohibited 

proprietary trading is occurring when it 

is not, or vice versa? If so, why? If so, 

how should the Agencies modify this 

quantitative measurement, and why? If 

so, what alternative quantitative 

measurement would better help identify 

prohibited proprietary trading? 

Question 276. How beneficial is the 

information that the proposed 

Transaction Volumes metric provides 

for evaluating underwriting activity or 

market making-related activity? Could 

these changes affect legitimate 

underwriting activity or market makingrelated activity? If so, how? Do any of 

the other quantitative measurements 

provide the same level of beneficial 

information for underwriting activity or 

market making-related activity? Would 

this metric be useful to evaluate other 

types of covered trading activity? 

Question 277. What operational or 

logistical challenges might be associated 

with performing the calculation of the 

proposed Transaction Volumes metric 

and obtaining any necessary 

informational inputs? Please explain. 

Question 278. How burdensome and 

costly would it be to calculate the 

proposed Transaction Volumes metric at 

the specified calculation frequency and 

calculation period? What are the 

additional burdens or costs associated 

with calculating the measurement for 

particular trading desks? How 

significant are those potential costs 

relative to the potential benefits of the 

measurement in monitoring for 

impermissible proprietary trading? Are 

there potential modifications that could 

be made to the measurement that would 

reduce the burden or cost? If so, what 

are those modifications? Please quantify 

your answers, to the extent feasible. 

Question 279. Should the Agencies 

develop and publish more detailed 

instructions for how different 

transaction life cycle events such as 

amendments, novations, compressions, 

maturations, allocations, unwinds, 

terminations, option exercises, option 

expirations, and partial amendments 

affect the calculation of Transaction 

Volumes and the Comprehensive Profit 

and Loss Attribution? Please explain. 

v. Securities Inventory Aging 

The Agencies have evaluated whether 

the Inventory Aging metric is useful for 

all financial instruments, as well as for 

all covered trading activities. Based on 

this evaluation and a review of the data 

collected under this quantitative 

measurement, the Agencies understand 

that, with respect to derivatives, 

Inventory Aging is not easily calculated 

and does not provide useful risk or 

customer-facing activity information. 

Thus, the Agencies are proposing 

several modifications to the Inventory 

Aging metric. 

First, the scope of the proposed 

Securities Inventory Aging metric, set 

forth in proposed paragraph IV.c.3., 

would be limited to a trading desk’s 

securities positions. Under the proposal, 

banking entities subject to the Appendix 

would be required to measure and 

report the age profile of a trading desk’s 

securities positions through a securityasset aging schedule and a security 

liability-aging schedule. The proposed 

Securities Inventory Aging metric 

would not require banking entities to 

prepare an aging schedule for 

derivatives or include in its securities 

aging schedules those ‘‘securities’’ that 

are also ‘‘derivatives,’’ as those terms are 

defined under the 2013 final rule.256

Second, the Agencies are proposing to 

limit the applicability of the Securities 

Inventory Aging metric to trading desks 

that engage in specific covered trading 

activities. Consistent with the proposed 

Positions and Transaction Volumes 

metrics, the proposal provides that a 

banking entity would be required to 

calculate and report the Securities 

Inventory Aging metric for all trading 

desks that rely on §ll.4(a) or 

§ ll.4(b) to conduct underwriting 

activity or market making-related 

activity, respectively. This means that a 

trading desk that does not rely on § l

l.4(a) or § ll.4(b) would not be 

subject to the proposed Securities 

Inventory Aging metric.257 The proposal 

would require that the Securities 

Inventory Aging metric measure the age 

profile of an applicable trading desk’s 

securities positions. Thus, if a trading 

desk relies on §ll.4(a) or §ll.4(b) 

and engages in other covered trading 

activity, the reported Securities 

Inventory Aging metric would have to 

reflect all of the covered trading 

activities in securities 258 conducted by 

the desk.259 Narrowing the scope of the 

Inventory Aging metric to securities 

inventory and to desks that engage in 

market-making and underwriting 

activities should reduce reporting 

inefficiencies for banking entities 

without reducing the usefulness of the 

metric, as it has proved to be of limited 

utility for derivative positions or trading 

desks that engage in other types of 

covered trading activity. 

Finally, the proposal would require a 

banking entity to calculate and report 

the Securities Inventory Aging metric 

according to a specific set of age ranges. 

Specifically, banking entities would 

have to calculate and report the market 

value of security assets and security 

liabilities over the following holding 

periods: 0–30 calendar days; 31–60 

calendar days; 61–90 calendar days; 91– 

180 calendar days; 181–360 calendar 

days; and greater than 360 calendar 

days. 

Question 280. How beneficial is the 

information that the proposed Securities 

Inventory Aging metric provides for 

evaluating underwriting activity or 


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market making-related activity? Do any 

of the other quantitative measurements 

provide the same level of beneficial 

information for underwriting activity or 

market making-related activity? 

Question 281. Is inventory aging of 

derivatives a useful metric for 

monitoring covered trading activity at 

trading desks? Why or why not? 

Question 282. Is inventory aging of 

futures a useful metric for monitoring 

covered trading activity at trading 

desks? Why or why not? 

Question 283. Would it reduce the 

calculation burden on banking entities 

to limit the scope of the Inventory Aging 

metric to securities inventory and to 

trading desks engaged in market-making 

and underwriting activities? Why or 

why not? 

Question 284. Should the Agencies 

require banking entities to report the 

Securities Inventory Aging metric 

according to a specific set of age ranges? 

Why or why not? If so, taken together, 

are the proposed age ranges appropriate 

and effective, or should the proposed 

Securities Inventory Aging metric 

require different age ranges? Do banking 

entities already routinely measure their 

securities positions using the same, or 

similar, age ranges? 

j. Request for Comment 

The Agencies request comment on the 

costs and benefits of the proposal’s 

revised approach under revisions to 

Appendix A of the 2013 final rule. In 

particular, the Agencies request 

comment on the following questions: 

Question 285. Are the quantitative 

measurements, both as currently 

existing and as proposed to be modified, 

appropriate in general? If not, is there an 

alternative(s) approach that the banking 

entities and the Agencies could use to 

more effectively and efficiently identify 

potentially prohibited proprietary 

trading? If so, being as specific as 

possible, please describe that 

alternative. Should certain proposed 

quantitative measurements be 

eliminated? If so, which requirements, 

and why? Should additional 

quantitative measurements be added? If 

so, which measurements, and why? 

How would those additional 

measurements be described and 

calculated? 

Question 286. What are the current 

annual compliance costs for banking 

entities to comply with the 

requirements in Appendix A of the 2013 

final rule to calculate and report certain 

quantitative measurements to the 

Agencies? Please discuss the benefits of 

the proposal, including but not limited 

to the benefits derived from qualitative 

information, such as narratives and 

trading desk information, as compared 

to the costs and burdens of preparing 

such information. How would those 

annual compliance costs change if the 

modifications described in the proposal 

were adopted? Please be as specific as 

possible and, where feasible, provide 

quantitative data broken out by 

requirement. Would this proposal affect 

certain types of banking entities, such as 

broker-dealers and registered 

investment advisers, differently as 

compared to other banking entities in 

terms of annual compliance costs? 

Question 287. In addition to the 

proposed changes to the requirement to 

calculate and report quantitative 

measurements to the Agencies, the 

proposed Appendix contains new 

qualitative requirements that are not 

currently required in Appendix A of the 

2013 final rule, including, but not 

limited to, trading desk information, 

quantitative measurements identifying 

information, and a narrative statement. 

Please discuss the benefits and costs 

associated with such proposed 

requirements. How would the overall 

burden change, in terms of both costs 

and benefits, as a result of the proposal, 

taken as a whole, as compared to the 

existing requirements under Appendix 

A? Please provide quantitative data to 

the extent feasible. 

Question 288. Which of the proposed 

quantitative measurements do banking 

entities currently use? What are the 

current benefits, and would the 

proposed revisions result in increased 

compliance costs associated with 

calculating such quantitative 

measurements? Would the reporting and 

recordkeeping requirements in the 

proposed Appendix for such 

quantitative measurements generate any 

significant, additional benefits or costs? 

Please quantify your answers, to the 

extent feasible. 

Question 289. How are the ongoing 

costs of compliance associated with the 

requirements of Appendix A of the 2013 

final rule allocated among the different 

steps in the process (e.g., calculating 

quantitative measurements, preparing 

reports, delivering reports to the 

relevant Agencies, etc.)? 

Question 290. Which requirements of 

Appendix A of the 2013 final rule are 

costliest to comply with, and what are 

those burdens? Please be as specific as 

possible. Does the proposal 

meaningfully reduce these aspects? Why 

or why not? Please quantify your 

answers, to the extent feasible. 

Question 291. Which of the proposed 

quantitative measurements do banking 

entities currently not use? What are the 

potential benefits and costs of 

calculating these quantitative 

measurements and complying with the 

proposed reporting and recordkeeping 

requirements? Please quantify your 

answers, to the extent feasible. 

Question 292. For each individual 

quantitative measurement that is 

proposed, is the description sufficiently 

clear? Is there an alternative that would 

be more appropriate or clearer? Is the 

description of the quantitative 

measurement appropriate, or is it overly 

broad or narrow? If it is overly broad, 

what additional clarification is needed? 

If the description is overly narrow, how 

should it be modified to appropriately 

describe the quantitative measurement, 

and why? Should the Agencies provide 

any additional clarification to the 

Appendix’s description of the 

quantitative measurement, and why? 

Question 293. For each individual 

quantitative measurement that is 

proposed, is the calculation guidance 

provided in the proposal effective and 

sufficiently clear? If not, what 

alternative would be more effective or 

clearer? Is more or less specific 

calculation guidance necessary? If so, 

what level of specificity is needed to 

calculate the quantitative measurement? 

If the proposed calculation guidance is 

not sufficiently specific, how should the 

calculation guidance be modified to 

reach the appropriate level of 

specificity? If the proposed calculation 

guidance is overly specific, why is it too 

specific and how should it be modified 

to reach the appropriate level of 

specificity? 

Question 294. Does the use of the 

proposed Appendix as part of the multifaceted approach to implementing the 

prohibition on proprietary trading 

continue to be appropriate? Why or why 

not? 

Question 295. Should a trading desk 

be permitted not to furnish a 

quantitative measurement otherwise 

required under the proposed Appendix 

if it can demonstrate that the 

measurement is not, as applied to that 

desk, calculable or useful in achieving 

the purposes of the Appendix with 

respect to the trading desk’s covered 

trading activities? How might a banking 

entity make such a demonstration? 

Question 296. Where a trading desk 

engages in more than one type of 

covered trading activity, such as activity 

conducted under the underwriting and 

risk-mitigating hedging exemptions, 

should the quantitative measurements 

be calculated, reported, and recorded 

separately for trading activity conducted 

under each exemption relied on by the 

trading desk? What are the costs and 

benefits of such an approach? Please 

explain. 


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Question 297. How much time do 

banking entities need to develop new 

systems and processes, or modify 

existing systems and processes, to 

implement for banking entities that are 

subject to the proposed Appendix’s 

reporting and recordkeeping 

requirements, and why? Does the 

amount of time needed to develop or 

modify information systems to comply 

with proposed Appendix, including the 

electronic reporting and XML Schema 

requirements, vary based on the size of 

a banking entity’s trading assets and 

liabilities? Why or why not? What are 

the costs associated with such 

requirements? 

Question 298. Under both the 2013 

final rule and the proposal, banking 

entities that, together with their 

affiliates and subsidiaries, have 

significant trading assets and liabilities 

are required to calculate, maintain, and 

report a number of quantitative 

measurements. Should the Agencies 

eliminate this metrics reporting 

requirement and instead require 

banking entities to: (1) Calculate the 

required quantitative measurements 

data, in the same form, manner, and 

timeframes as they would otherwise be 

required to under the rule; (2) maintain 

the required quantitative measurements 

data; and (3) provide the relevant 

Agency or Agencies with the data upon 

request for examination and review? 

Question 299. Should the requirement 

to calculate and report quantitative 

metrics be eliminated and replaced by a 

different method for assisting banking 

entities and the Agencies in monitoring 

covered trading activities for 

compliance with section 13 of the BHC 

Act and the 2013 final rule? If so, what 

alternative approaches should the 

Agencies consider? 

Question 300. Should some or all 

reported quantitative measurements be 

made publicly available? Why or why 

not? If so, which quantitative 

measurements should be made publicly 

available, and what are the benefits and 

costs of making such measurements 

publicly available? If so, how should 

quantitative measurements be made 

publicly available? Should quantitative 

measurements be made publicly 

available in the same form they are 

furnished to the Agencies, or should 

information be aggregated before it is 

made publicly available? If information 

should be aggregated, how should it be 

aggregated, and what are the benefits 

and costs associated with aggregate data 

being available to the public? Should 

quantitative measurements be made 

publicly available at-or-near the same 

time such measurements are reported to 

the Agencies, or should information be 

made publicly available on a delayed 

basis? If information should be made 

public on a delayed basis, how much 

time should pass before information is 

publicly available, and what are the 

benefits and costs associated with noncurrent metrics information being 

available to the public? Are there other 

approaches the Agencies should 

consider to make the quantitative 

measurements publicly available, and if 

so, what are the benefits and costs 

associated with each approach? What 

are the costs and benefits of such an 

approach? Please discuss and provide 

detailed examples of any costs or 

benefits identified. 

Question 301. Do commenters have 

concerns about the potential for the 

inadvertent exposure of confidential 

business information, either as part of 

the reporting process or to the extent 

that any of the quantitative 

measurements (or related information) 

are made publicly available? If so, what 

are the risks involved and how might 

they be mitigated? Are certain 

quantitative measurements more likely 

to contain confidential information? If 

so, which ones and why? 

IV. The Economic Impact of the 

Proposal Under Section 13 of the BHC 

Act—Request for Comment 

The Agencies are proposing a number 

of changes to the 2013 final rule that are 

intended to reduce the costs of 

compliance while continuing the rule’s 

effectiveness in limiting prohibited 

activities. In what follows, the key 

proposed changes to the regulation that 

are expected to have a material impact 

on the costs of implementing the 

regulation are discussed as is the 

rationale for expecting a material 

reduction in the costs associated with 

compliance. The Agencies seek broad 

comment from the public on any and all 

aspects of the proposed changes to the 

regulation and the extent to which these 

changes will reduce compliance costs 

and improve the effectiveness of the 

implementing regulations. The Agencies 

also seek comment on whether there are 

any additional ways to reduce 

compliance costs while effectively 

implementing the statute. Finally, 

commenters are encouraged to provide 

the Agencies with any specific data or 

information that could be useful for 

quantifying the reductions or increases 

in costs associated with the proposed 

changes. 

A key proposed change to the rule 

relates to the treatment of banking 

entities with limited trading activities, 

which under the 2013 final rule can face 

compliance costs that are 

disproportionately high relative to the 

amount of trading activity typically 

undertaken and the amount of risk the 

activities of these firms that are subject 

to section 13 pose to financial stability. 

More specifically, the Agencies are 

proposing to identify those banking 

entities with total consolidated trading 

assets and liabilities (excluding trading 

assets and liabilities involving 

obligations of, or guaranteed by, the 

United States or any agency of the 

United States) the average gross sum of 

which (on a worldwide consolidated 

basis) over the previous consecutive 

four quarters, as measured as of the last 

day of each of the four previous 

calendar quarters, is less than $1 billion. 

These banking entities with limited 

trading assets and liabilities would be 

subject to a presumption of compliance 

under the proposal, while remaining 

subject to the rule’s prohibitions in 

subparts B and C. The relevant Agency 

may rebut the presumption of 

compliance by providing written notice 

to the banking entity that it has 

determined that one or more of the 

banking entity’s activities violates the 

prohibitions under subparts B or C. 

The Agencies expect that this 

presumption would materially reduce 

the costs associated with complying 

with the rule for two reasons. First, as 

a result of presumed compliance, these 

banking entities would not be required 

to demonstrate compliance with many 

of the rule’s specific requirements on an 

ongoing basis. As a specific example, 

entities with limited trading assets and 

liabilities would not be required to 

comply with the documentation 

requirements associated with the 

hedging exemption. Additionally, these 

entities would not be required to specify 

and maintain trading risk limits to 

comply with the rule’s market making 

exemption. As a result, this proposed 

change is expected to meaningfully 

reduce the costs associated with rule 

compliance for smaller banking entities 

that do not engage in the types of 

trading the rule seeks to address. 

Second, these banking entities would 

not be subject to the express 

requirement to maintain a compliance 

program pursuant to §ll.20 under the 

proposal to demonstrate compliance 

with the rule. The presumption would 

be rebuttable, so firms may need to 

maintain a certain level of resources to 

respond to supervisory requests for 

information in the event that the 

Agencies exercise their authority to 

rebut the presumption of compliance for 

any activity that they determine to 

violate prohibitions under subparts B 

and C. The amount of resources 

required for such purposes is expected 

to be significantly smaller than the 


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amount of resources that would be 

required to maintain and execute an 

ongoing compliance program. 

Question 302. Do commenters agree 

that the proposed establishment of a 

presumption of compliance for certain 

banking entities would meaningfully 

reduce the compliance costs associated 

with the rule relative to the 

requirements of the 2013 final rule? 

Question 303. Have commenters 

quantified the extent to which such 

costs are reduced? If so, could this 

information be provided to the Agencies 

during the notice and comment period? 

Question 304. Do commenters believe 

that any aspect of the proposed 

establishment of a presumption of 

compliance would increase the costs 

associated with rule compliance? If so, 

which aspects of the presumption 

would raise costs, why, and to what 

extent? How could these compliance 

costs be addressed or reduced? 

Question 305. What costs do 

commenters anticipate a banking entity 

subject to presumed compliance would 

bear to respond to possible questions 

from the Agencies about the banking 

entity’s compliance with the statute and 

the sections of the regulation that 

remain applicable to it? In general, how 

and to what extent does a shifting of the 

burden from banking entity to Agencies 

affect compliance costs? What steps 

could the Agencies take to appropriately 

reduce compliance burdens in this 

regard—especially for banking entities 

that engage in less trading activity? 

The Agencies are also proposing two 

changes related to the 2013 final rule’s 

definition of ‘‘trading account’’ that are 

expected to simplify the analysis 

associated with determining whether or 

not a banking entity’s purchase or sale 

of a financial instrument is for the 

trading account, and thereby are 

expected to reduce the costs associated 

with complying with the rule. 

Specifically, the Agencies are proposing 

to add an accounting prong to the 

definition of ‘‘trading account’’ and to 

remove the short-term intent prong and 

the 60-day rebuttable presumption. The 

Agencies expect that the removal of the 

short-term intent prong will 

substantially reduce the costs of 

complying with the rule. 

In the case of the short-term intent 

prong and the 60-day rebuttable 

presumption, the Agencies’ experience 

with implementing the 2013 final rule 

strongly suggests that application of the 

short-term intent prong resulted in a 

variety of analyses to determine if a 

financial position was taken with the 

‘‘intent’’ of generating short-term profits, 

or benefitting from short-term price 

movements. Assessing intent is 

qualitative and can be subject to 

significant interpretation. Accordingly, 

experience suggests that banking 

entities engage in a number of lengthy 

analyses to determine whether or not a 

financial position needs to be included 

in the trading account, and that these 

analyses may not always result in a 

clear indication. 

In the case of the 60-day rebuttable 

presumption, the Agencies’ experience 

suggests that the 60-day rebuttable 

presumption may be an overly inclusive 

instrument to determine whether a 

financial instrument is in the trading 

account. Many financial positions are 

scoped into the trading account 

automatically due to the 60-day 

presumption, and banking entities 

routinely conduct detailed and lengthy 

assessments of transactions to document 

that these positions should not be 

included in the trading account. 

However, experience indicates that 

there is no clear set of analyses that may 

be conducted to rebut the presumption 

and a clear standard for successfully 

rebutting the presumption has been 

difficult to establish in practice. 

Accordingly, the Agencies expect that 

removing the 60-day rebuttable 

presumption would materially reduce 

the costs associated with complying 

with the rule and determining whether 

a financial instrument is in the trading 

account. 

The Agencies expect that this 

proposal would reduce the costs of rule 

compliance since banking entities are 

already familiar with accounting 

standards and use these standards to 

classify financial instruments on a 

regular basis to satisfy reporting and 

related requirements. The Agencies 

would expect that no new compliance 

costs would result from using 

accounting concepts that are already 

familiar to banking entities for purposes 

of identifying activity in the trading 

account. 

The Agencies are also proposing to 

include a presumption of compliance 

for trading desks, the positions of which 

are included in the trading account due 

to the accounting prong, so long as the 

profit and loss of the desk does not 

exceed a certain threshold. Specifically, 

the trading activity conducted by a 

trading desk is presumed to be in 

compliance with the prohibition on 

proprietary trading if (i) none of the 

financial instruments of the desk are 

included in the trading account 

pursuant to the market risk capital 

prong, (ii) none of the financial 

instruments of the desk are booked in a 

dealer, swap dealer, or security-based 

swap dealer, and (iii) the sum over the 

preceding 90-calendar-day period of the 

absolute values of the daily net realized 

and unrealized gains and losses of the 

desk’s portfolio of financial instruments 

does not exceed $25 million. Banking 

entities and supervisors will only need 

to consider cases in which the size of 

trading activity exceeds the $25 million 

threshold for these desks. Moreover, this 

analysis draws on profit and loss 

metrics that banking entities already 

regularly maintain and consequently 

would not be expected to contribute to 

any increased regulatory costs. 

The Agencies recognize that 

implementing the new definition of 

‘‘trading account’’ and the presumption 

of compliance would result in some 

amount of compliance costs. However, 

the Agencies expect that the compliance 

costs associated with this new 

definition and presumption of 

compliance would be significantly less 

than the compliance costs of either the 

short-term intent prong or the 60-day 

rebuttable presumption. As noted above, 

the new trading account definition ties 

to accounting concepts that are already 

familiar to banking entities. Similarly, 

the new presumption of compliance ties 

to profit and loss metrics that banking 

entities already maintain. As such, the 

Agencies expect that the new trading 

account definition and the presumption 

of compliance would materially reduce 

the costs of rule compliance relative to 

the 2013 final rule’s existing 

requirements. 

Question 306. Do commenters believe 

that the proposed changes to the trading 

account definition would materially 

reduce costs associated with rule 

compliance relative to the final rule? 

Why or why not? 

Question 307. Do commenters have 

any specific data or information that 

could be used to quantify the extent to 

which such costs would be reduced 

under the proposal? 

Question 308. Do commenters believe 

that any aspect of the proposed changes 

to the trading account definition 

increase the costs associated with rule 

compliance? If so, which aspects of the 

proposed changes raise costs, why, and 

to what extent? 

As described in section 1(d)(3) of this 

Supplementary Information, the 

Agencies are proposing a specific 

alternative to allow banking entities to 

define trading desks in a manner 

consistent with their own internal 

business unit organization. The 

Agencies request comment regarding the 

relative costs and benefits of this 

possible alternative. 

Question 309. Do commenters believe 

that the relative benefits of the 

definition of ‘‘trading desk’’ in the 

current 2013 final rule outweigh any 


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potential cost reductions for banking 

entities under the alternative? 

Question 310. Do commenters have 

any specific data or information that 

could be used to quantify the extent to 

which such costs would be reduced? 

Question 311. Do commenters think 

that any aspect of the proposed changes 

to the trading desk definition increases 

the regulatory burden associated with 

rule compliance? If so which aspects of 

the proposed changes raise the 

regulatory burden, why, and to what 

extent? 

A key statutory exemption from the 

prohibition on proprietary trading is the 

exemption for underwriting. The 2013 

final rule contains a number of complex 

requirements that are intended to ensure 

that banking entities comply with the 

underwriting exemption and that 

proprietary trading activity is not 

conducted under the guise of 

underwriting. Since adoption of the 

2013 final rule, banking entities have 

communicated to the Agencies that 

complying with all of the 2013 final 

rule’s underwriting requirements can be 

difficult and costly relative to the 

underlying activities. In particular, 

banking entities have communicated 

that they believe they must engage in a 

number of complex and intensive 

analyses to gain comfort that their 

underwriting activities meets all of the 

2013 final rule’s requirements. 

Moreover, banking entities have 

communicated that they find the 

requirements of the 2013 final rule 

ambiguous to apply in practice and do 

not provide sufficiently bright-line 

conditions under which trading activity 

can clearly be classified as permissible 

underwriting. 

The Agencies are proposing to 

establish the articulation and use of 

internal risk limits as a key mechanism 

for conducting trading activity in 

accordance with the underwriting 

exemption. These risk limits would be 

established by the banking entity at the 

trading desk level and designed not to 

exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties. The proposed risk limits 

would not be required to be based on 

any specific or mandated analysis. 

Rather, a banking entity would be 

permitted to establish the risk limits 

according to its own internal analyses 

and processes around conducting its 

underwriting activities. Banking entities 

would be expected to maintain internal 

policies and procedures for setting and 

reviewing desk-level risk limits in a 

manner consistent with the applicable 

statutory factor. A banking entity’s risk 

limits would be subject to general 

supervisory review and oversight, but 

the limit-setting process would not be 

required to adhere to specific, predefined requirements beyond adherence 

to the banking entity’s own ongoing and 

internal assessment of the reasonably 

expected near-term demands of clients, 

customers, or counterparties. So long as 

a banking entity maintains an ongoing 

and consistent process for setting such 

limits in accordance with the proposal, 

then the Agencies anticipate that trading 

activity conducted within the limits 

would generally be presumed to be 

underwriting. 

The Agencies expect that the 

proposed reliance on risk limits to 

satisfy the underwriting exemption will 

materially reduce the costs of complying 

with the final rule’s underwriting 

exemption. In particular, the limitsetting process is intended to leverage a 

banking entity’s existing internal risk 

management and capital allocation 

processes, and would not be required to 

conform to any specific or pre-defined 

requirements other than being set in 

accordance with RENTD. The Agencies 

expect that reliance on risk limits would 

therefore align with the firm’s internal 

policies and procedures for conducting 

underwriting in a manner consistent 

with the requirements of section 13 of 

the BHC Act. Accordingly, the Agencies 

expect that this proposed approach 

would generally be more efficient and 

less costly than the practices required 

by the 2013 final rule as they rely to a 

greater extent on the banking entity’s 

own internal policies, procedures, and 

processes. 

Question 312. The Agencies are also 

proposing to further tailor the 

requirements for banking entities with 

moderate trading activities and 

liabilities. In particular, the compliance 

program requirements that are part of 

the underwriting exemption would not 

apply to these firms. Do commenters 

believe that the proposed changes 

related to the use of risk limits in 

satisfying the underwriting exemption 

would materially reduce the costs 

associated with rule compliance relative 

to the 2013 final rule? 

Question 313. Do commenters believe 

there are any benefits of the approach in 

the 2013 final rule that would be 

forgone with the proposed changes 

related to the use of risk limits in 

satisfying the underwriting exemption? 

Question 314. Do commenters have 

any specific data or information that 

could be used to quantify the extent to 

which such costs are reduced? 

Question 315. Do commenters believe 

that any aspect of the proposed changes 

related to the use of risk limits in 

satisfying the underwriting exemption 

increases the costs associated with rule 

compliance? If so which aspects of the 

proposed changes raise compliance 

costs, why, and to what extent? 

Question 316. Do commenters believe 

that the proposed changes related to the 

reduced compliance program 

requirements for banking entities with 

moderate trading assets and liabilities to 

satisfy the underwriting exemption 

would materially reduce the costs 

associated with rule compliance relative 

to the 2013 final rule? 

Question 317. Do commenters believe 

there are any benefits to the approach in 

the 2013 final rule that would be 

forgone with the proposed changes 

related to the compliance requirements 

in satisfying the underwriting 

exemption? 

Question 318. Do commenters have 

any specific data or information that 

could be used to quantify the extent to 

which such costs are reduced? 

Question 319. Do commenters think 

that any aspect of the proposed changes 

related to the use of compliance 

program requirements in satisfying the 

underwriting exemption would increase 

the costs associated with rule 

compliance? If so, which aspects of the 

proposed changes would increase 

compliance costs, why, and to what 

extent? 

Another key statutory exemption from 

the prohibition on proprietary trading is 

the exemption for market making. The 

2013 final rule contains a number of 

complex requirements that are intended 

to ensure that proprietary trading 

activity is not conducted under the 

guise of market making. Since adoption 

of the 2013 final rule, banking entities 

have communicated that complying 

with all of the 2013 final rule’s market 

making requirements can be difficult 

and costly. In particular, banking 

entities have communicated that they 

believe they must engage in a number of 

complex and intensive analyses to gain 

comfort that their bona fide market 

making activity meets all of the 2013 

final rule’s requirements. Moreover, 

banking entities have communicated 

that they view the requirements of the 

2013 final rule as ambiguous and not 

providing sufficiently bright-line 

conditions under which trading activity 

can clearly be classified as permissible 

market making. 

The Agencies are proposing to 

establish the articulation and use of 

internal risk limits as the key 

mechanism for conducting trading 

activity in accordance with the rule’s 

exemption for market making-related 

activities. These risk limits would be 

established by the banking entity at the 

trading desk level and be designed not 

to exceed the reasonably expected near 


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term demands of clients, customers, or 

counterparties. Banking entities would 

be expected to maintain internal 

policies and procedures for setting and 

reviewing desk-level risk limits in a 

manner consistent with the applicable 

statutory factor. Moreover, the proposed 

risk limits would not be required to be 

based on any specific or mandated 

analysis. Rather, a banking entity would 

be permitted to establish the risk limits 

according to its own internal analyses 

and processes around conducting its 

market making activities as market 

making is defined by the applicable 

statutory factor. A banking entity’s risk 

limits would be subject to supervisory 

review and oversight, but the limitsetting process would not be required to 

adhere to any specific, pre-defined 

requirements beyond adherence to the 

banking entity’s own ongoing and 

internal assessment of the reasonably 

expected near-term demand of clients, 

customers, or counterparties. So long as 

a banking entity maintains an ongoing 

and consistent process for setting such 

limits in accordance with the proposal, 

then the Agencies anticipate that trading 

activity conducted within the limits 

would generally be presumed to be 

market making. 

The Agencies expect that the 

proposed reliance on internal risk limits 

to satisfy the statutory requirement that 

market making-related activities be 

designed not to exceed the reasonably 

expected near term demands of clients, 

customers, or counterparties would 

materially reduce the costs of complying 

with the 2013 final rule’s market making 

exemption. In particular, the limitsetting process would be intended to 

leverage a banking entity’s existing 

internal risk management and capital 

allocation processes and would not be 

required to conform to specific or predefined requirements. The Agencies 

expect that reliance on risk limits would 

therefore align with the firm’s internal 

policies and procedures for conducting 

market making in a manner consistent 

with the requirements of section 13 of 

the BHC Act. Accordingly, the agencies 

expect that this proposed approach 

would generally be more efficient and 

less costly than the practices required 

by the 2013 final rule as they rely to a 

greater extent on the banking entity’s 

own internal policies, procedures, and 

processes. 

The Agencies are also proposing to 

further tailor the requirements for 

banking entities with moderate trading 

activities and liabilities. In particular, 

the compliance program requirements 

that are part of the market making 

exemption would not apply to these 

firms. 

Question 320. Do commenters believe 

that the proposed changes related to the 

use of risk limits in satisfying the 

market making exemption would 

materially reduce the costs associated 

with rule compliance relative to the 

2013 final rule? 

Question 321. Do commenters believe 

there are any benefits of the approach in 

the 2013 final rule that would be 

forgone with the proposed changes 

related to the use of risk limits in 

satisfying the market making 

exemption? 

Question 322. Do commenters have 

any specific data or information that 

could be used to quantify the extent to 

which such costs are reduced? 

Question 323. Do commenters believe 

that any aspect of the proposed changes 

related to the use of risk limits in 

satisfying the market making exemption 

increases the costs associated with rule 

compliance? If so, which aspects of the 

proposed changes raise compliance 

costs, why, and to what extent? 

Question 324. Do commenters agree 

that the proposed changes related to the 

reduced compliance program 

requirements for banking entities with 

moderate trading assets and liabilities to 

satisfy the market making exemption 

materially reduce the costs associated 

with rule compliance relative to the 

2013 final rule? 

Question 325. Do commenters believe 

there are any benefits of the approach in 

the 2013 final rule that would be 

forgone with the proposed changes 

related to the compliance requirements 

in satisfying the market making 

exemption? 

Question 326. Do commenters have 

any specific data or information that 

could be used to quantify the extent to 

which such costs are reduced? 

Question 327. Do commenters believe 

that any aspect of the proposed changes 

related to the use of risk limits in 

satisfying the market making exemption 

increases the costs associated with rule 

compliance? If so, which aspects of the 

proposed changes raise compliance 

costs, why, and to what extent? 

The agencies are proposing a number 

of changes to the requirements of the 

2013 final rule’s exemption for riskmitigating hedging activities that are 

expected to reduce the costs associated 

with complying with the final rule’s 

requirements. 

First, for banking entities with 

significant trading assets and liabilities, 

the 2013 final rule’s requirement in the 

risk mitigating hedging exemption to 

conduct a correlation analysis would be 

removed. Since adoption of the 2013 

final rule, banking entities have 

communicated that this requirement has 

in practice been unclear and often not 

useful in determining whether or not a 

given transaction provides meaningful 

hedging benefits. The Agencies expect 

that the proposed removal of this 

requirement from the final rule would 

materially reduce the costs of rule 

compliance since larger banking entities 

would not be required to conduct a 

specific analysis that is currently 

required under the 2013 final rule. 

Second, for these banking entities 

with significant trading assets and 

liabilities, the Agencies are proposing 

that the requirement that the hedging 

transaction ‘‘demonstrably reduce (or 

otherwise significantly mitigate)’’ risk 

be removed. Banking entities have 

communicated that these requirements 

can be unclear and these banking 

entities must often engage in a number 

of complex and time-intensive analyses 

to assess whether these standards have 

been met. Moreover, the above hedging 

standards have not aligned well with 

banking entities’ internal processes for 

assessing the economic value of a 

hedging transaction. Accordingly, the 

Agencies expect that eliminating these 

requirements would materially reduce 

the costs associated with complying 

with the requirements of the rule’s 

hedging exemption. 

Third, for banking entities with 

moderate trading assets and liabilities, 

the Agencies are proposing to remove 

all of the hedging requirements under 

the 2013 final rule except for the 

requirement that the transaction be 

designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks in connection 

with and related to one or more 

identified positions and that the 

hedging activity be recalibrated to 

maintain compliance with the rule. The 

Agencies expect this proposed change to 

materially reduce the costs of rule 

compliance since no additional 

documentation or prescribed analyses 

would be required beyond a banking 

entity’s already existing practices and 

whatever analyses are required to 

ascertain that the remaining factors are 

satisfied, consistent with the statute. In 

light of Agency experience with the 

hedging requirements of the 2013 final 

rule, the Agencies expect that this 

proposed change would result in a 

material reduction in the costs 

associated with complying with the 

rule’s hedging requirements. 

Question 328. Do commenters believe 

that the proposed changes that 

streamline the hedging requirements of 

the rule materially reduce the costs 

associated with rule compliance relative 

to the 2013 final rule? 


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Question 329. Do commenters have 

any specific data or information that 

could be used to quantify the extent to 

which such costs are reduced? 

Question 330. Do commenters believe 

that any aspect of the proposed changes 

to streamline the hedging requirements 

of the rule increases the costs associated 

with rule compliance? If so, which 

aspects of the proposed changes raise 

costs, why, and to what extent? 

The Agencies are proposing to 

eliminate a number of requirements 

related to the foreign trading exemption. 

These proposed changes are intended to 

respond to concerns raised by FBOs 

subject to the 2013 final rule that they 

find its foreign trading exemption to be 

difficult to comply with in practice. 

The Agencies are proposing to modify 

the requirement of this exemption that 

personnel of the banking entity who 

arrange, negotiate, or execute a purchase 

or sale must be outside the United 

States and to eliminate the requirements 

that: (1) No financing be provided by a 

U.S. affiliate or branch, and (2) a 

transaction with a U.S. counterparty 

must be executed through an 

unaffiliated intermediary and an 

anonymous exchange. 

The Agencies expect that the 

modification and removal of these 

requirements would materially reduce 

the compliance costs associated with 

the foreign trading exemption. 

In addition, banking entities have 

communicated that the requirement that 

any transaction with a U.S. counterparty 

be executed without involvement of 

U.S. personnel of the counterparty or 

through an unaffiliated intermediary 

and an anonymous exchange may in 

some cases significantly reduce the 

range of counterparties with which 

transactions can be conducted as well as 

increase the cost of those transactions, 

including with respect to counterparties 

seeking to do business with a foreign 

banking entity in foreign jurisdictions. 

Therefore, the Agencies also expect that 

removing this requirement would 

materially reduce the costs associated 

with rule compliance. 

Question 331. Do commenters believe 

that the proposed changes to modify 

and eliminate certain requirements from 

the foreign trading exemption would 

materially reduce the regulatory burden 

associated with rule compliance relative 

to the 2013 final rule? 

Question 332. Do commenters have 

any specific data or information that 

could be used to quantify the extent to 

which such costs are reduced? 

Question 333. Do commenters believe 

that any aspect of the proposed changes 

to eliminate certain requirements from 

the foreign trading exemption increases 

the costs associated with rule 

compliance? If so which aspects of the 

proposed changes raise costs, why, and 

to what extent? 

The Agencies are proposing to make 

a number of changes to the metrics 

reporting requirements that are intended 

to improve the effectiveness of the 

metrics. On the whole, these changes 

are also expected to reduce the 

compliance costs associated with the 

metrics reporting requirements. In 

particular, the Agencies are proposing to 

add qualitative information schedules 

that would improve the Agencies’ 

ability to understand and analyze the 

quantitative measurements. The 

Agencies are also proposing to remove 

certain metrics, such as inventory aging 

for derivatives and stressed value-at-risk 

for risk mitigating hedging desks, that 

based on experience with implementing 

the 2013 final rule, are not effective for 

identifying whether a banking entity’s 

trading activity is consistent with the 

requirements of the 2013 final rule. In 

addition, the Agencies are proposing to 

switch to a standard XML format for the 

metrics data file. The Agencies expect 

this to improve consistency and data 

quality by both clarifying the format 

specification and making it possible to 

check the validity of data files against a 

published template using generally 

available software. Finally, the Agencies 

are proposing to make a number of 

changes to the technical calculation 

guidance for a number of metrics that 

should make the required calculations 

clearer and less complicated. 

The Agencies are also proposing to 

provide certain banking entities that 

must report metrics with additional 

time to report metrics. Specifically, the 

firms with $50 billion in trading assets 

and liabilities would have 20 days 

instead of 10 days to report metrics to 

the Agencies. This change is expected to 

reduce compliance costs as the 

additional time would allow the 

required workflow to be conducted 

under less time pressure and with 

greater efficiency and accuracy. 

Question 334. Do commenters believe 

that the proposed changes to the metrics 

reporting requirements would 

materially reduce the costs associated 

with rule compliance relative to the 

2013 final rule? 

Question 335. Do commenters have 

any specific data or information that 

could be used to quantify the extent to 

which such costs are reduced? 

Question 336. Do commenters believe 

that any aspect of the proposed changes 

to the metrics reporting requirements 

would increase the costs associated with 

rule compliance? If so, which aspects of 

the proposed changes increase costs, 

why, and to what extent? 

The Agencies are proposing to modify 

certain requirements regarding the 

ability of banking entities to engage in 

underwriting and market-making of 

third-party covered funds that would 

remove some of the restrictions on 

activities with respect to covered fund 

interests. The Agencies expect that this 

proposed change would reduce the costs 

of compliance with the 2013 final rule’s 

requirements. In particular, the 2013 

final rule places a number of restrictions 

on underwriting and market-making of 

covered fund interests that banking 

entities have indicated are costly to 

comply with and view as unduly 

limiting activity that is otherwise 

consistent with bona fide underwriting 

and market-making activity that would 

be allowed with respect to any other 

type of financial instrument, consistent 

with the statutory factors defining these 

activities. 

Question 337. Do commenters believe 

that the proposed changes to certain 

restrictions on covered fund related 

activities would materially reduce the 

costs associated with rule compliance 

relative to the 2013 final rule? 

Question 338. Do commenters have 

any specific data or information that 

could be used to quantify the extent to 

which such costs are reduced? 

Question 339. Do commenters believe 

that any aspect of the proposed changes 

to certain restrictions on covered fund 

related activities would increase the 

costs associated with rule compliance? 

If so, which aspects of the proposed 

changes would raise costs, why, and to 

what extent? 

The Agencies are proposing several 

changes to the required compliance 

program requirements that are expected 

to materially reduce the costs associated 

with complying with the rule’s 

requirements. Specifically, banking 

entities with significant trading assets 

and liabilities would only need to 

maintain a standard six-pillar 

compliance program (i.e., written 

policies and procedures, internal 

controls, management framework, 

independent testing, training, and 

records) and would not be required to 

maintain most aspects of the enhanced 

compliance program that is required by 

the 2013 final rule for such large 

banking entities. Agency experience 

with implementing the 2013 final rule 

indicates that the operation of the 2013 

final rule’s enhanced compliance 

program can be costly and unrelated to 

other compliance efforts that these 

banking entities routinely conduct. 

Accordingly, eliminating this 

requirement would be expected to 


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materially reduce the costs of complying 

with the rule. 

In the case of banking entities with 

moderate trading assets and liabilities, 

these banking entities would only be 

required to maintain the simplified 

compliance program that is described in 

the 2013 final rule. Namely, these 

entities would only be required to 

update their existing compliance 

policies and procedures and would not 

be required to maintain a standard sixpillar compliance program as is required 

under the 2013 final rule. Since the 

simplified compliance program is much 

less intensive and costly to implement 

than the standard six-pillar compliance 

program, the Agencies expect that this 

proposed change would materially 

reduce the costs associated with 

complying with the 2013 final rule’s 

compliance program requirements for 

these smaller banking entities. 

Question 340. Do commenters agree 

that the proposed changes to the 

compliance program requirements 

would materially reduce the costs 

associated with rule compliance relative 

to the 2013 final rule? 

Question 341. Do commenters have 

any specific data or information that 

could be used to quantify the extent to 

which such costs are reduced? 

Question 342. Do commenters believe 

that any aspect of the proposed changes 

to the compliance program requirements 

increases the costs associated with rule 

compliance? If so which aspects of the 

proposed changes would raise costs, 

why, and to what extent? 

The above discussion outlines the 

Agencies’ views on the most significant 

sources of cost reduction that arise from 

this proposal. At the same time, the 

Agencies are aware that there may be 

other aspects of the proposal that 

commenters view as either decreasing or 

increasing costs associated with the 

2013 final rule. Accordingly, the 

Agencies seek broad comment on any 

other aspects of the proposal that would 

either increase or decrease the costs 

associated with the rule. Commenters 

are encouraged to be specific and to 

provide any data or information that 

would help demonstrate their views as 

well as potential ways to mitigate costs. 

V. Administrative Law Matters 

A. Solicitation of Comments on Use of 

Plain Language 

Section 722 of the Gramm-LeachBliley Act (Pub. L. 106–102, 113 Stat. 

1338, 1471, 12 U.S.C. 4809), requires the 

Federal banking agencies to use plain 

language in all proposed and final rules 

published after January 1, 2000. The 

Federal banking agencies have sought to 

present the proposal in a simple and 

straightforward manner, and invite your 

comments on how to make this proposal 

easier to understand. 

For example: 

• Have the agencies organized the 

material to suit your needs? If not, how 

could this material be better organized? 

• Are the requirements in the 

proposal clearly stated? If not, how 

could the proposal be more clearly 

stated? 

• Does the proposal contain language 

or jargon that is not clear? If so, which 

language requires clarification? 

• Would a different format (e.g., 

grouping and order of sections, use of 

headings, paragraphing) make the 

proposal easier to understand? If so, 

what changes to the format would make 

the proposal easier to understand? 

• Would more, but shorter, sections 

be better? If so, which sections should be 

changed? 

• What else could the agencies do to 

make the regulation easier to 

understand? 

B. Paperwork Reduction Act Analysis 

Request for Comment on Proposed 

Information Collection 

Certain provisions of the proposed 

rule contain ‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act (PRA) of 1995 

(44 U.S.C. 3501–3521). In accordance 

with the requirements of the PRA, the 

agencies may not conduct or sponsor, 

and a respondent is not required to 

respond to, an information collection 

unless it displays a currently valid 

Office of Management and Budget 

(OMB) control number. The agencies 

reviewed the proposed rule and 

determined that the proposed rule 

revises certain reporting and 

recordkeeping requirements that have 

been previously cleared under various 

OMB control numbers. The agencies are 

proposing to extend for three years, with 

revision, these information collections. 

The information collection requirements 

contained in this joint notice of 

proposed rulemaking have been 

submitted by the OCC and FDIC to OMB 

for review and approval under section 

3507(d) of the PRA (44 U.S.C. 3507(d)) 

and section 1320.11 of the OMB’s 

implementing regulations (5 CFR 1320). 

The Board reviewed the proposed rule 

under the authority delegated to the 

Board by OMB. The Board will submit 

information collection burden estimates 

to OMB and the submission will include 

burden for Federal Reserve-supervised 

institutions, as well as burden for 

OCC-, FDIC-, SEC-, and CFTCsupervised institutions under a holding 

company. The OCC and the FDIC will 

take burden for banking entities that are 

not under a holding company. 

Comments are invited on: 

a. Whether the collections of 

information are necessary for the proper 

performance of the agencies’ functions, 

including whether the information has 

practical utility; 

b. The accuracy of the estimates of the 

burden of the information collections, 

including the validity of the 

methodology and assumptions used; 

c. Ways to enhance the quality, 

utility, and clarity of the information to 

be collected; 

d. Ways to minimize the burden of the 

information collections on respondents, 

including through the use of automated 

collection techniques or other forms of 

information technology; and 

e. Estimates of capital or startup costs 

and costs of operation, maintenance, 

and purchase of services to provide 

information. 

All comments will become a matter of 

public record. Comments on aspects of 

this notice that may affect reporting, 

recordkeeping, or disclosure 

requirements and burden estimates 

should be sent to the addresses listed in 

the ADDRESSES section. A copy of the 

comments may also be submitted to the 

OMB desk officer for the Agencies by 

mail to U.S. Office of Management and 

Budget, 725 17th Street NW, #10235, 

Washington, DC 20503, by facsimile to 

202–395–5806, or by email to oira_

submission@omb.eop.gov, Attention, 

Commission and Federal Banking 

Agency Desk Officer. 

Abstract 

Section 619 of the Dodd-Frank Act 

added section 13 to the BHC Act, which 

generally prohibits any banking entity 

from engaging in proprietary trading or 

from acquiring or retaining an 

ownership interest in, sponsoring, or 

having certain relationships with a 

covered fund, subject to certain 

exemptions. The exemptions allow 

certain types of permissible trading 

activities such as underwriting, market 

making, and risk-mitigating hedging, 

among others. Each agency issued a 

common final rule implementing 

section 619 that became effective on 

April 1, 2014. Section ll.20(d) and 

Appendix A of the final rule require 

certain of the largest banking entities to 

report to the appropriate agency certain 

quantitative measurements. 

Current Actions 

The proposed rule contains 

requirements subject to the PRA and the 

changes relative to the current final rule 

are discussed herein. The new and 

modified reporting requirements are 


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260 In an effort to provide transparency, the total 

cumulative burden for each agency is shown. In 

addition to the changes resulting from the proposed 

rule, the agencies are also applying a conforming 

methodology for calculating the burden estimates in 

order to be consistent across the agencies. 

found in sections ll.3(c), ll.3(g), 

ll.4(a)(8)(iii), ll.4(a)(8)(iv), 

ll.4(b)(6)(iii), ll.4(b)(6)(iv), 

ll.20(d), and ll.20(g)(3). The 

modified recordkeeping requirements 

are found in sections ll.5(c), ll

.20(b), ll.20(c), ll.20 (d), ll.20(e), 

and ll.20(f)(2). The modified 

information collection requirements 260

would implement section 619 of the 

Dodd-Frank Act. The respondents are 

for-profit financial institutions, 

including small businesses. A covered 

entity must retain these records for a 

period that is no less than 5 years in a 

form that allows it to promptly produce 

such records to the relevant Agency on 

request. 

Reporting Requirements 

Section ll.3(c) would require that 

under the revised short-term prong, 

certain banking entities to report to the 

appropriate agency when a trading desk 

exceeds $25 million in absolute values 

of the daily net realized and unrealized 

gain and loss over the preceding 90 day 

period if the banking entity chooses to 

perform this calculation for a trading 

desk in order to meet the presumption 

of compliance. The agencies estimate 

that the new reporting requirement 

would be collected twice a year with an 

average hour per response of 1 hour. 

Section ll.3(g) would require that 

notice and response procedures be 

followed under the reservation of 

authority provision. The agencies 

estimate that the new reporting 

requirement would be collected once a 

year with an average hours per response 

of 2 hours. 

Sections ll.4(a)(8)(iii) and 

ll.4(b)(6)(iii) would require that 

banking entities report to the 

appropriate agency when their internal 

risk limits under the RENTD framework 

for market-making and underwriting 

have been exceeded. These reporting 

requirements would be included in the 

section 

ll.20(d) reporting requirements. 

Section ll.20(d) would be modified 

by extending the reporting period for 

banking entities with $50 billion or 

more in trading assets and liabilities 

from within 10 days of the end of each 

calendar month to 20 days of the end of 

each calendar month. The agencies 

estimate that the current average hours 

per response would decrease by 14 

hours (decrease 40 hours for initial setup). 

Sections ll.3(c)(2), ll.3(g)(2), 

ll.4(a)(8)(iv), ll.4(b)(6)(iv), and 

ll.20(g)(3) would set forth proposed 

notice and response procedures that an 

agency would follow when exercising 

its reservation of authority to modify 

what is in or out of the trading account. 

These reporting requirements would be 

included in the section ll.3(c) 

reporting requirements for section 

ll.3(c)(2); the section ll.3(g) 

reporting requirements for section 

ll.3(g)(2); and the section ll.20(d) 

reporting requirements for section 

ll.4(a)(8)(iv), ll.4(b)(6)(iv), and 

ll.20(g)(3). 

Recordkeeping Requirements 

Section ll.5(c) would be modified 

by reducing the requirements for 

banking entities that do not have 

significant trading assets and liabilities 

and eliminating documentation 

requirements for certain hedging 

activities. The agencies estimate that the 

current average hours per response 

would decrease by 20 hours (decrease 

10 hours for initial set-up). 

Section ll.20(b) would be modified 

by limiting the requirement only to 

banking entities with significant trading 

assets and liabilities. The agencies 

estimate that the current average hour 

per response would not change. 

Section ll.20(c) would be modified 

by limiting the CEO attestation 

requirement to a banking entity that has 

significant trading assets and liabilities 

or moderate trading assets and 

liabilities. The agencies estimate that 

the current average hours per response 

would decrease by 1,100 hours 

(decrease 3,300 hours for initial set-up). 

Section ll.20(d) would be modified 

by extending the time period for 

reporting for banking entities with $50 

billion or more in trading assets and 

liabilities from within 10 days of the 

end of each calendar month to 20 days 

of the end of each calendar month. The 

agencies estimate that the current 

average hours per response would 

decrease by 3 hours. 

Section ll.20(e) would be modified 

by limiting the requirement to banking 

entities with significant trading assets 

and liabilities. The agencies estimate 

that the current average hours per 

response would not change. 

Section ll.20(f)(2) would be 

modified by limiting the requirement to 

banking entities with moderate trading 

assets and liabilities. The agencies 

estimate that the current average hours 

per response would not change. 

The Instructions for Preparing and 

Submitting Quantitative Measurement 

Information, Technical Specifications 

Guidance, and XML Schema are 

available for review on each agency’s 

public website: 

• OCC: http://www.occ.treas.gov/ 

topics/capital-markets/financialmarkets/trading/volcker-ruleimplementation/index-volcker-ruleimplementation.html; 

• Board: https://

www.federalreserve.gov/apps/ 

reportforms/review.aspx; 

• FDIC: https://www.fdic.gov/ 

regulations/reform/volcker/index.html; 

• CFTC: https://www.cftc.gov/ 

LawRegulation/DoddFrankAct/ 

Rulemakings/DFl28lVolckerRule/ 

index.htm; 

• SEC: https://www.sec.gov/ 

structureddata/deraltaxonomies. 

Proposed Revision, With Extension, of 

the Following Information Collections 

Estimated average hours per response: 

Reporting 

Section ll.3(c)—1 hour for an 

average of 2 times per year. 

Section ll.3(g)—2 hours. 

Section ll.12(e)—20 hours (Initial 

set-up 50 hours) for an average of 10 

times per year. 

Section ll.20(d)—41 hours (Initial 

set-up 125 hours) for quarterly and 

monthly filers. 

Recordkeeping 

Section ll.3(e)(3)—1 hour (Initial 

set-up 3 hours). 

Section ll.4(b)(3)(i)(A)—2 hours for 

quarterly filers. 

Section ll.5(c)—80 hours (Initial 

setup 40 hours). 

Section ll.11(a)(2)—10 hours. 

Section ll.20(b)—265 hours (Initial 

set-up 795 hours). 

Section ll.20(c)—100 hours (Initial 

set-up 300 hours). 

Section ll.20(d) (entities with $50 

billion or more in trading assets and 

liabilities)—13 hours. 

Section ll.20(d) (entities with at 

least $10 billion and less than $50 

billion in trading assets and 

liabilities)—10 hours. 

Section ll.20(e)—200 hours. 

Section ll.20(f)(1)—8 hours. 

Section ll.20(f)(2)—40 hours 

(Initial set-up 100 hours). 

Disclosure 

Section ll.11(a)(8)(i)—0.1 hours for 

an average of 26 times per year. 

OCC 

Title of Information Collection: 

Reporting, Recordkeeping, and 

Disclosure Requirements Associated 

with Restrictions on Proprietary Trading 

and Certain Relationships with Hedge 

Funds and Private Equity Funds. 

Frequency: Annual, monthly, 

quarterly, and on occasion. 


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261 5 U.S.C. 601 et seq. 

262U.S. SBA, Table of Small Business Size 

Standards Matched to North American Industry 

Classification System Codes, available at https://

www.sba.gov/sites/default/files/files/Size_

Standards_Table.pdf. 

263See id. Pursuant to SBA regulations, the asset 

size of a concern includes the assets of the concern 

whose size is at issue and all of its domestic and 

foreign affiliates. 13 CFR 121.103(6). 

264 12 U.S.C. 1851(b)(2). 

265Public Law 115–174, 132 Stat. 1296–1368 

(2018). 

Affected Public: Businesses or other 

for-profit. 

Respondents: National banks, state 

member banks, state nonmember banks, 

and state and federal savings 

associations. 

OMB control number: 1557–0309. 

Estimated number of respondents: 38. 

Proposed revisions estimated annual 

burden: ¥469 hours. 

Estimated annual burden hours: 

20,712 hours (1,784 hour for initial setup and 18,928 hours for ongoing). 

Board 

Title of Information Collection: 

Reporting, Recordkeeping, and 

Disclosure Requirements Associated 

with Regulation VV. 

Frequency: Annual, monthly, 

quarterly, and on occasion. 

Affected Public: Businesses or other 

for-profit. 

Respondents: State member banks, 

bank holding companies, savings and 

loan holding companies, foreign 

banking organizations, U.S. State 

branches or agencies of foreign banks, 

and other holding companies that 

control an insured depository 

institution and any subsidiary of the 

foregoing other than a subsidiary for 

which the OCC, FDIC, CFTC, or SEC is 

the primary financial regulatory agency. 

The Board will take burden for all 

institutions under a holding company 

including: 

• OCC-supervised institutions, 

• FDIC-supervised institutions, 

• Banking entities for which the 

CFTC is the primary financial regulatory 

agency, as defined in section 2(12)(C) of 

the Dodd-Frank Act, and 

• Banking entities for which the SEC 

is the primary financial regulatory 

agency, as defined in section 2(12)(B) of 

the Dodd-Frank Act. 

Legal authorization and 

confidentiality: This information 

collection is authorized by section 13 of 

the Bank Holding Company Act (BHC 

Act) (12 U.S.C. 1851(b)(2) and 12 U.S.C. 

1851(e)(1)). The information collection 

is required in order for covered entities 

to obtain the benefit of engaging in 

certain types of proprietary trading or 

investing in, sponsoring, or having 

certain relationships with a hedge fund 

or private equity fund, under the 

restrictions set forth in section 13 and 

the final rule. If a respondent considers 

the information to be trade secrets and/ 

or privileged such information could be 

withheld from the public under the 

authority of the Freedom of Information 

Act (5 U.S.C. 552(b)(4)). Additionally, to 

the extent that such information may be 

contained in an examination report such 

information could also be withheld from 

the public (5 U.S.C. 552 (b)(8)). 

Agency form number: FR VV. 

OMB control number: 7100–0360. 

Estimated number of respondents: 41. 

Proposed revisions estimated annual 

burden: ¥51,219 hours. 

Estimated annual burden hours: 

45,558 hours (1,784 hour for initial setup and 43,774 hours for ongoing). 

FDIC 

Title of Information Collection: 

Volcker Rule Restrictions on Proprietary 

Trading and Relationships with Hedge 

Funds and Private Equity Funds. 

Frequency: Annual, monthly, 

quarterly, and on occasion. 

Affected Public: Businesses or other 

for-profit. 

Respondents: State nonmember 

banks, state savings associations, and 

certain subsidiaries of those entities. 

OMB control number: 3064–0184. 

Estimated number of respondents: 53. 

Proposed revisions estimated annual 

burden: ¥10,305 hours. 

Estimated annual burden hours: 

10,632 hours (1,784 hours for initial setup and 8,848 hours for ongoing). 

C. Initial Regulatory Flexibility Act 

Analysis 

The Regulatory Flexibility Act 

(‘‘RFA’’) 261 requires an agency to either 

provide an initial regulatory flexibility 

analysis with a proposal or certify that 

the proposal will not have a significant 

economic impact on a substantial 

number of small entities. The U.S. Small 

Business Administration (‘‘SBA’’) 

establishes size standards that define 

which entities are small businesses for 

purposes of the RFA.262 Except as 

otherwise specified below, the size 

standard to be considered a small 

business for banking entities subject to 

the proposal is $550 million or less in 

consolidated assets.263 The Agencies are 

separately publishing initial regulatory 

flexibility analyses for the proposals as 

set forth in this NPR. 

Board 

The Board has considered the 

potential impact of the proposed rule on 

small entities in accordance with the 

RFA. Based on the Board’s analysis, and 

for the reasons stated below, the Board 

believes that this proposed rule will not 

have a significant economic impact on 

a substantial of number of small entities. 

Nevertheless, the Board is publishing 

and inviting comment on this initial 

regulatory flexibility analysis. A final 

regulatory flexibility analysis will be 

conducted after comments received 

during the public comment period have 

been considered. 

The Board welcomes comment on all 

aspects of its analysis. In particular, the 

Board requests that commenters 

describe the nature of any impact on 

small entities and provide empirical 

data to illustrate and support the extent 

of the impact. 

1. Reasons for the Proposal 

As discussed in the SUPPLEMENTARY

INFORMATION, the Agencies are proposing 

to revise the 2013 final rule in order to 

provide clarity to banking entities about 

what activities are prohibited, reduce 

compliance costs, and improve the 

ability of the Agencies to make 

supervisory assessments regarding 

compliance relative to the 2013 final 

rule. To minimize the costs associated 

with the 2013 final rule in a manner 

consistent with section 13 of the BHC 

Act, the Agencies are proposing to 

simplify and tailor the rule in a manner 

that would substantially reduce 

compliance costs for all banking entities 

and, in particular, small banking entities 

and banking entities without significant 

trading operations. 

2. Statement of Objectives and Legal 

Basis 

As discussed above, the Agencies’ 

objective in proposing this rule is to 

reduce the compliance costs for all 

banking entities and, in particular, to 

tailor the rule based on the size of the 

banking entity and the complexity of its 

trading operations. The Agencies are 

explicitly authorized under section 

13(b)(2) of the BHC Act to adopt rules 

implementing section 13.264

3. Description of Small Entities to 

Which the Regulation Applies 

The Board’s proposal would apply to 

state-chartered banks that are members 

of the Federal Reserve System (state 

member banks), bank holding 

companies, foreign banking 

organizations, and nonbank financial 

companies supervised by the Board 

(collectively, ‘‘Board-regulated banking 

entities’’). However, the Board notes 

that the Economic Growth, Regulatory 

Relief, and Consumer Protection Act,265

which was enacted on May 24, 2018, 


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266The number of small entities supervised by 

the OCC is determined using the SBA’s size 

thresholds for commercial banks and savings 

institutions, and trust companies, which are $550 

million and $38.5 million, respectively. Consistent 

with the General Principles of Affiliation 13 CFR 

121.103(a), the OCC counts the assets of affiliated 

financial institutions when determining if we 

should classify an OCC-supervised institution as a 

small entity. The OCC used December 31, 2017, to 

determine size because a ‘‘financial institution’s 

assets are determined by averaging the assets 

reported on its four quarterly financial statements 

for the preceding year.’’ See footnote 8 of the U.S. 

Small Business Administration’s Table of Size 

Standards. 

267 5 U.S.C. 601 et seq. 

268 13 CFR 121.201 (as amended, effective 

December 2, 2014). 

269The FDIC has issued twenty-one FAQs since 

inception of the 2013 rule. 

amends section 13 of the BHC Act by 

narrowing the definition of banking 

entity. Accordingly, no small top-tier 

bank holding company would meet the 

threshold criteria for application of the 

provisions provided in this proposal 

and, therefore, the proposed 

amendments to the 2013 final rule 

would not have a significant economic 

impact on a substantial number of small 

entities. 

4. Projected Reporting, Recordkeeping, 

and Other Compliance Requirements 

The proposal would reduce reporting, 

recordkeeping, and other compliance 

requirements for small entities. First, 

banking entities with consolidated gross 

trading assets and liabilities below $10 

billion would be subject to reduced 

requirements and a tailored approach in 

light of their significantly smaller and 

less complex trading activities. Second, 

in order to further reduce compliance 

requirements for small and mid-sized 

banking entities, the Agencies have 

proposed a rebuttable presumption of 

compliance for firms that do not have 

consolidated gross trading assets and 

liabilities in excess of $1 billion. All 

Board-regulated banking entities that 

meet the SBA definition of small 

entities (i.e., those with consolidated 

assets of $550 million or less) have 

consolidated gross trading assets and 

liabilities below $1 billion and thus 

would be subject to the presumption of 

compliance. 

As discussed in the SUPPLEMENTARY

INFORMATION, the Agencies expect that 

this rebuttable presumption of 

compliance would materially reduce the 

costs associated with complying with 

the rule. As a result of this presumed 

compliance, these banking entities 

would not be required to comply with 

many of the rule’s specific requirements 

to demonstrate compliance, such as the 

documentation requirements associated 

with the hedging exemption. 

Additionally, these entities would not 

be required to specify and maintain 

trading risk limits to comply with the 

rule’s market making exemption. 

Accordingly, these smaller entities 

would generally not be required to 

devote resources to demonstrate 

compliance with any of the rule’s 

requirements. 

Without this presumption of 

compliance, these banking entities 

would generally be required to comply 

with the rule’s applicable substantive 

requirements to demonstrate 

compliance with the rule. As a result, 

this proposed change is expected to 

meaningfully reduce the costs 

associated with rule compliance for 

small banking entities. The presumption 

would be rebuttable, so a banking entity 

would need to maintain a certain level 

of resources to respond to supervisory 

requests for information in the event 

that the presumption of compliance is 

rebutted; however, the Agencies would 

not expect these banking entities to 

maintain anything other than what they 

would normally maintain in the 

ordinary course. The amount of 

resources required for such purposes is 

expected to be significantly smaller than 

the amount of resources that would be 

required to maintain and execute 

ongoing compliance with the 2013 final 

rule’s requirements. 

5. Identification of Duplicative, 

Overlapping, or Conflicting Federal 

Regulations 

The Board has not identified any 

federal statutes or regulations that 

would duplicate, overlap, or conflict 

with the proposed revisions. 

6. Discussion of Significant Alternatives 

The Board believes the proposed 

amendments to the 2013 final rule will 

not have a significant economic impact 

on small banking entities supervised by 

the Board and therefore believes that 

there are no significant alternatives to 

the proposal that would reduce the 

economic impact on small banking 

entities supervised by the Board. 

OCC 

The RFA, requires an agency, in 

connection with a proposed rule, to 

prepare an Initial Regulatory Flexibility 

Analysis describing the impact of the 

proposed rule on small entities, or to 

certify that the proposed rule would not 

have a significant economic impact on 

a substantial number of small entities. 

For purposes of the RFA, the SBA 

defines small entities as those with $550 

million or less in assets for commercial 

banks and savings institutions, and 

$38.5 million or less in assets for trust 

companies. 

The OCC currently supervises 

approximately 886 small entities.266

Pursuant to section 203 of the Economic 

Growth, Regulatory Relief, and 

Consumer Protection Act (May 24, 

2018), OCC-supervised institutions with 

total consolidated assets of $10 billion 

or less are not ‘‘banking entities’’ within 

the scope of Section 13 of the BHCA, if 

their trading assets and trading 

liabilities do not exceed 5 percent of 

their total consolidated assets, and they 

are not controlled by a company that 

has total consolidated assets over $10 

billion or total trading assets and trading 

liabilities that exceed 5 percent of total 

consolidated assets. The proposal may 

impact two OCC-supervised small 

entities, which is not a substantial 

number. Therefore, the OCC certifies 

that the proposal would not have a 

significant economic impact on a 

substantial number of small entities. 

FDIC 

a. Regulatory Flexibility Act 

The RFA, generally requires an 

agency, in connection with a proposed 

rule, to prepare and make available for 

public comment an initial regulatory 

flexibility analysis that describes the 

impact of a proposed rule on small 

entities.267 However, a regulatory 

flexibility analysis is not required if the 

agency certifies that the rule will not 

have a significant economic impact on 

a substantial number of small entities. 

The SBA has defined ‘‘small entities’’ to 

include banking organizations with total 

assets of less than or equal to $550 

million.268 As discussed further below, 

the FDIC certifies that this proposed 

rule would not have a significant 

economic impact on a substantial 

number of FDIC-supervised small 

entities. 

b. Reasons for and Policy Objectives of 

the Proposed Rule 

The Agencies are issuing this 

proposal to amend the 2013 final rule in 

order to provide banking entities with 

additional certainty and reduce 

compliance obligations and costs where 

possible. The Agencies acknowledge 

that many small banking entities have 

found certain aspects of the 2013 final 

rule to be complex or difficult to apply 

in practice.269 The proposed rule 

amends existing requirements in order 

the make them more efficient. However, 

the proposed amendments do not alter 

the Volcker Rule’s existing restrictions 

on the ability of banking entities to 

engage in proprietary trading and have 


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270 13 CFR 121.201. 

271FDIC-supervised institutions are set forth in 12 

U.S.C. 1813(q)(2). 

272FDIC Call Report, March 31, 2018. 

273Based on data from the December 31, 2017 

Call Reports and Y9C reports. Top tier institutions 

that have a four-quarter average trading assets and 

liabilities, excluding U.S. treasuries and obligations 

or guarantees of government agencies, exceeding 

$10 billion have ‘‘significant’’ trading activity while 

those between $1 billion and $10 billion have 

‘‘moderate’’ trading activity and those below $1 

billion have ‘‘limited’’ trading activity. 274 Id. 

275Notwithstanding S.2155, the rule does provide 

benefits to a substantial number of moderate sized 

banks above $550 million in total assets and below 

$1 billion in trading assets and liabilities as well as 

to large banks with very little trading activity. 

certain interests in, and relationships 

with, covered funds. 

c. Description of the Rule 

The Agencies are proposing to tailor 

the application of the 2013 final rule 

based on a banking entity’s risk profile 

and the size and scope of its trading 

activities. Second, the Agencies aim to 

further streamline compliance 

obligations, particularly for entities 

without large trading operations. Third, 

the agencies seek to streamline and 

refine certain definitions and 

requirements related to the proprietary 

trading prohibition and limitations on 

covered fund activities and investments. 

Please refer to Section II: Overview of 

Proposal, for further information. 

d. Other Statutes and Federal Rules 

The FDIC has not identified any likely 

duplication, overlap, and/or potential 

conflict between the proposed rule and 

any other federal rule. 

On May 24, 2018, the Economic 

Growth, Regulatory Relief, and 

Consumer Protection Act was enacted, 

which, among other things, amends 

section 13 of the BHC Act. As a result, 

section 13 excludes from the definition 

of banking entity any institution that, 

together with their affiliates and 

subsidiaries, has: (1) Total assets of $10 

billion or less, and (2) trading assets and 

liabilities that comprise 5 percent or less 

of total assets. This excludes every 

FDIC-supervised small entity from the 

statutory definition of banking entity, 

except those that are controlled by a 

company that is not excluded. The SBA 

has defined ‘‘small entities’’ to include 

banking organizations with total assets 

less than or equal to $550 million.270

e. Small Entities Affected 

The FDIC supervises 3,597 depository 

institutions,271 of which, 2,885 are 

defined as small entity.272 There are no 

FDIC-supervised small entities that 

engage in significant or moderate 

trading of assets and liabilities at the 

depository institution level.273 There are 

only five FDIC-supervised small 

entities, which are controlled by 

companies not excluded by section 13, 

as amended, that would be required to 

implement compliance elements 

prescribed by the proposed rule and 

would have compliance obligations 

under the proposed rule, of which one 

is categorized as having ‘‘significant’’ 

trading, one is categorized as having 

‘‘moderate’’ trading and three are 

categorized as having ‘‘limited’’ trading 

activity.274

f. Expected Effects of the Proposed Rule 

The potential benefits of this 

proposed rule consist of any reduction 

in the regulatory costs borne by covered 

entities. The potential costs of this rule 

consist of any reduction in the efficacy 

of the objectives in the existing 

regulatory framework. As explained in 

the following sections, certain of these 

potential costs and benefits are difficult 

to quantify. 

1. Expected Costs 

By reducing the reporting 

requirements of the 2013 final rule, 

there is a chance that the Agencies 

would fail to recognize prohibited 

proprietary trading, resulting in 

additional risk of loss to an institution, 

the Deposit Insurance Fund (DIF), the 

financial sector, and the economy. The 

FDIC believes the potential costs 

associated with these risks are minimal. 

First, the reporting metrics that would 

be removed or replaced by the proposed 

rule have contributed little as indicators 

of risk, and there would be no cost 

associated with replacing them. Second, 

the banking entities that would be 

relieved from compliance requirements 

under section ll.20 of the proposed 

rule are primarily small entities that 

conduct limited to no trading activity, 

and which are therefore excluded from 

Section 13 by the Economic Growth, 

Regulatory Relief, and Consumer 

Protection Act. The FDIC would 

maintain its ability to recognize and 

respond to potential risks of prohibited 

activity by these small entities through 

off-site monitoring of Call Reports as 

well as periodic on-site examinations. 

The proposed rule has no additional or 

transition costs because the new 

reporting metrics in the proposed rule 

consist of data that covered entities 

already collect in the course of business 

and for regulatory compliance. 

2. Expected Benefits 

The potential benefits of the proposed 

rule can be expressed in terms of the 

potential reduction in the costs of 

compliance incurred by small, FDICsupervised affected banking entities 

under the proposed rule. These benefits 

cannot be quantified because covered 

institutions do not collect data and 

report to the FDIC the precise burden 

relating to parts of the 2013 final rule. 

Nevertheless, supervisory experience 

and feedback received from FDICsupervised banking entities have 

demonstrated that these burdens exist. 

The proposed rule clarifies many 

requirements and definitions that are 

expected to enable banking entities to 

more efficiently and effectively comply 

with the rule, thus providing benefits to 

those entities. 

g. Alternatives Considered 

The primary alternative to the 

proposed rule is to maintain the status 

quo under the 2013 final rule. As 

discussed above, however, the proposed 

rule implements the statutory 

requirements, but is expected to provide 

more certainty and result in lower costs. 

The proposed rule also seeks public 

comment on alternative regulatory 

approaches that would reduce the 

compliance burden of the 2013 final 

rule without reducing its effectiveness 

in eliminating the moral hazard of 

proprietary trading. 

h. Certification Statement 

Section 13, as amended, exempts 

almost all of the FDIC-supervised small 

institutions from compliance with the 

Volcker Rule. The proposed rule 

provides benefits to the remaining five 

FDIC-supervised small institutions with 

parent companies subject to the rule. 

Therefore, the FDIC certifies that this 

proposed rule will not have a significant 

economic impact on a substantial 

number of FDIC-supervised small 

entities.275

i. Request for Comments 

The FDIC invites comments on all 

aspects of the supporting information 

provided in this RFA section. In 

particular, would this rule have any 

significant effect on small entities that 

the FDIC has not identified? If the 

proposed rule is implemented, how 

many hours of burden would small 

institutions save? 

SEC 

Pursuant to 5 U.S.C. 605(b), the SEC 

hereby certifies that the proposed 

amendments to the 2013 final rule 

would not, if adopted, have a significant 

economic impact on a substantial 

number of small entities. 

As discussed in the SUPPLEMENTARY

INFORMATION, the Agencies are proposing 


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276For the purposes of an SEC rulemaking in 

connection with the RFA, an investment adviser 

generally is a small entity if it: (1) Has assets under 

management having a total value of less than $25 

million; (2) did not have total assets of $5 million 

or more on the last day of the most recent fiscal 

year; and (3) does not control, is not controlled by, 

and is not under common control with another 

investment adviser that has assets under 

management of $25 million or more, or any person 

(other than a natural person) that had total assets 

of $5 million or more on the last day of its most 

recent fiscal year. See 17 CFR 275.0–7. 

277For the purposes of an SEC rulemaking in 

connection with the RFA, a broker-dealer will be 

deemed a small entity if it: (1) Had total capital (net 

worth plus subordinated liabilities) of less than 

$500,000 on the date in the prior fiscal year as of 

which its audited financial statements were 

prepared pursuant to 17 CFR 240.17a–5(d), or, if not 

required to file such statements, had total capital 

(net worth plus subordinated liabilities) of less than 

$500,000 on the last day of the preceding fiscal year 

(or in the time that it has been in business, if 

shorter); and (2) is not affiliated with any person 

(other than a natural person) that is not a small 

business or small organization. See 17 CFR 240.0– 

10(c). Under the standards adopted by the SBA, 

small entities also include entities engaged in 

financial investments and related activities with 

$38.5 million or less in annual receipts. See 13 CFR 

121.201 (Subsector 523). 

278Based on SEC analysis of Form ADV data, the 

SEC preliminarily believes that there are not a 

substantial number of registered investment 

advisers affected by the proposed amendments that 

would qualify as small entities under RFA. Based 

on SEC analysis of broker-dealer FOCUS filings and 

NIC relationship data, the SEC preliminarily 

believes that there are no SEC-registered brokerdealers affected by the proposed amendments that 

would qualify as small entities under RFA. With 

respect to security-based swap dealers, based on 

feedback from market participants and our 

information about the security-based swap markets, 

the Commission believes that the types of entities 

that would engage in more than a de minims 

amount of dealing activity involving security-based 

swaps—which generally would be large financial 

institutions—would not be ‘‘small entities’’ for 

purposes of the RFA. 

279The proposed revisions may also apply to 

other types of CFTC registrants that are banking 

entities, such as introducing brokers, but the CFTC 

believes it is unlikely that such other registrants 

will have significant activities that would implicate 

the proposed revisions. See 79 FR 5808, 5813 (Jan. 

31, 2014) (CFTC version of 2013 final rule). 

280See Policy Statement and Establishment of 

Definitions of ‘‘Small Entities’’ for Purposes of the 

Regulatory Flexibility Act, 47 FR 18618 (Apr. 30, 

1982) (futures commission merchants and 

commodity pool operators); Registration of Swap 

Dealers and Major Swap Participants, 77 FR 2613, 

2620 (Jan. 19, 2012) (swap dealers and major swap 

participants). 

281See Policy Statement and Establishment of 

Definitions of ‘‘Small Entities’’ for Purposes of the 

Regulatory Flexibility Act, 47 FR 18618, 18620 

(Apr. 30, 1982). 

to revise the 2013 final rule in order to 

provide clarity to banking entities about 

what activities are prohibited, reduce 

compliance costs, and improve the 

ability of the Agencies to make 

assessments regarding compliance 

relative to the 2013 final rule. To 

minimize the costs associated with the 

2013 final rule in a manner consistent 

with section 13 of the BHC Act, the 

Agencies are proposing to simplify and 

tailor the rule in a manner that would 

substantially reduce compliance costs 

for all banking entities and, in 

particular, small banking entities and 

banking entities without significant 

trading operations. 

The proposed revisions would 

generally apply to banking entities, 

including certain SEC-registered 

entities. These entities include bankaffiliated SEC-registered broker-dealers, 

investment advisers, and security-based 

swap dealers. Based on information in 

filings submitted by these entities, the 

SEC preliminarily believes that there are 

no banking entity registered investment 

advisers 276 or broker-dealers 277 that are 

small entities for purposes of the 

RFA.278 For this reason, the SEC 

believes that the proposed amendments 

to the 2013 final rule would not, if 

adopted, have a significant economic 

impact on a substantial number of small 

entities. 

The SEC encourages written 

comments regarding this certification. 

Specifically, the SEC solicits comment 

as to whether the proposed amendments 

could have an impact on small entities 

that has not been considered. 

Commenters should describe the nature 

of any impact on small entities and 

provide empirical data to support the 

extent of such impact. 

CFTC 

Pursuant to 5 U.S.C. 605(b), the CFTC 

hereby certifies that the proposed 

amendments to the 2013 final rule 

would not, if adopted, have a significant 

economic impact on a substantial 

number of small entities for which the 

CFTC is the primary financial regulatory 

agency. 

As discussed in this SUPPLEMENTARY

INFORMATION, the Agencies are proposing 

to revise the 2013 final rule in order to 

provide clarity to banking entities about 

what activities are prohibited, reduce 

compliance costs, and improve the 

ability of the Agencies to make 

assessments regarding compliance 

relative to the 2013 final rule. To 

minimize the costs associated with the 

2013 final rule in a manner consistent 

with section 13 of the BHC Act, the 

Agencies are proposing to simplify and 

tailor the rule in a manner that would 

substantially reduce compliance costs 

for all banking entities and, in 

particular, small banking entities and 

banking entities without significant 

trading operations. 

The proposed revisions would 

generally apply to banking entities, 

including certain CFTC-registered 

entities. These entities include bankaffiliated CFTC-registered swap dealers, 

FCMs, commodity trading advisors and 

commodity pool operators.279 The CFTC 

has previously determined that swap 

dealers, futures commission merchants 

and commodity pool operators are not 

small entities for purposes of the RFA 

and, therefore, the requirements of the 

RFA do not apply to those entities.280

As for commodity trading advisors, the 

CFTC has found it appropriate to 

consider whether such registrants 

should be deemed small entities for 

purposes of the RFA on a case-by-case 

basis, in the context of the particular 

regulation at issue.281

In the context of the proposed 

revisions to the 2013 final rule, the 

CFTC believes it is unlikely that a 

substantial number of the commodity 

trading advisors that are potentially 

affected are small entities for purposes 

of the RFA. In this regard, the CFTC 

notes that only commodity trading 

advisors that are registered with the 

CFTC are covered by the 2013 final rule, 

and generally those that are registered 

have larger businesses. Similarly, the 

2013 final rule applies to only those 

commodity trading advisors that are 

affiliated with banks, which the CFTC 

expects are larger businesses. The CFTC 

requests that commenters address in 

particular whether any of these 

commodity trading advisors, or other 

CFTC registrants covered by the 

proposed revisions to the 2013 final 

rule, are small entities for purposes of 

the RFA. 

Because the CFTC believes that there 

are not a substantial number of 

registered, banking entity-affiliated 

commodity trading advisors that are 

small entities for purposes of the RFA, 

and the other CFTC registrants that may 

be affected by the proposed revisions 

have been determined not to be small 

entities, the CFTC believes that the 

proposed revisions to the 2013 final rule 

would not, if adopted, have a significant 

economic impact on a substantial 

number of small entities for which the 

CFTC is the primary financial regulatory 

agency. 

The CFTC encourages written 

comments regarding this certification. 

Specifically, the CFTC solicits comment 

as to whether the proposed amendments 

could have a direct impact on small 

entities that were not considered. 

Commenters should describe the nature 

of any impact on small entities and 

provide empirical data to support the 

extent of such impact. 

A. OCC Unfunded Mandates Reform Act 

of 1995 Determination 

The OCC analyzed the proposed rule 

under the factors set forth in the 


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33520 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

282Public Law 104–121, Title II, 110 Stat. 857 

(1996) (codified in various sections of 5 U.S.C., 15 

U.S.C. and as a note to 5 U.S.C. 601). 

283See 12 U.S.C. 1851(h)(1). 

284Throughout this economic analysis, the term 

‘‘banking entity’’ generally refers only to banking 

entities for which the SEC is the primary financial 

regulatory agency unless otherwise noted. While 

section 13 of the BHC Act and its associated rules 

apply to a broader set of banking entities, this 

economic analysis is limited to those banking 

entities for which the SEC is the primary financial 

regulatory agency as defined in section 2(12)(B) of 

the Dodd-Frank Act. See 12 U.S.C. 1851(b)(2); 12 

U.S.C. 5301(12)(B). 

We recognize that compliance with SBSD 

registration requirements is not yet required and 

that there are currently no registered SBSDs. 

However, the SEC has previously estimated that as 

many as 50 entities may potentially register as 

security-based swap dealers and that as many as 16 

of these entities may already be SEC-registered 

broker-dealers. See Registration Process for 

Security-Based Swap Dealers and Major SecurityBased Swap Participants, Exchange Act Release No. 

75611 (Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015) 

(‘‘SBSD and MSP Registration Release’’). 

For the purposes of this economic analysis, the 

term ‘‘dealer’’ generally refers to SEC-registered 

broker-dealers and SBSDs. 

Throughout this economic analysis, ‘‘we’’ refers 

only to the SEC and not the other Agencies, except 

where otherwise indicated. 

285The legislation also alters the name sharing 

provisions in section 13(d)(1)(G)(vi). This economic 

analysis assumes that the legislation’s changes to 

section 13 of the BHC Act are in effect. 

286See 79 FR at 5536. The 2013 final rule was 

published in the Federal Register on January 31, 

2014, and became effective on April 1, 2014. 

Banking entities were required to fully conform 

their proprietary trading activities and their new 

covered fund investments and activities to the 

requirements of the final rule by the end of the 

conformance period, which the Board extended to 

July 21, 2015. The Board extended the conformance 

period for legacy-covered fund activities until July 

21, 2017. Upon application, banking entities also 

have an additional period to conform certain 

illiquid funds to the requirements of section 13 and 

implementing regulations. 

287See 2013 final rule §ll.10(b). 

288See 2013 final rule §ll.10(c). 

289See, e.g., 79 FR at 5666, 5574, 5541, 5659. An 

extensive body of research has examined moral 

hazard arising out of federal deposit insurance, 

implicit bailout guarantees, and systemic risk 

issues. See, e.g., Atkeson, d’Avernas, Eisfeldt, and 

Weill, 2018, ‘‘Government Guarantees and the 

Valuation of American Banks,’’ working paper. See 

also Bianchi, 2016, ‘‘Efficient Bailouts?’’ American 

Economic Review 106 (12), 3607–3659; Kelly, 

Lustig, and Van Nieuwerburgh, 2016, ‘‘TooSystematic-to-Fail: What Option Markets Imply 

about Sector-Wide Government Guarantees,’’ 

American Economic Review 106(6), 1278–1319; 

Anginer, Demirguc-Kunt, and Zhu, 2014, ‘‘How 

Does Deposit Insurance Affect Bank Risk? Evidence 

from the Recent Crisis,’’ Journal of Banking and 

Finance 48, 312–321; Beltratti and Stulz, 2012, 

‘‘The Credit Crisis Around the Globe: Why Did 

Some Banks Perform Better?’’ Journal of Financial 

Economics 105, 1–17; Veronesi and Zingales, 2010, 

‘‘Paulson’s Gift,’’ Journal of Financial Economics 

97(3), 339–368. For a literature review, see, e.g., 

Benoit, Colliard, Hurlin, and Perignon, 2017, 

‘‘Where the Risks Lie: A Survey on Systemic Risk,’’ 

Review of Finance 21(1), 109–152. 

See also, e.g., Avci, Schipani, and Seyhun, 2017, 

‘‘Eliminating Conflicts of Interests in Banks: The 

Significance of the Volcker Rule,’’ Yale Journal on 

Regulation 35 (2). 

290See, e.g., 79 FR at 5541, 5546, 5561. In 

addition, a significant amount of research has 

focused on changes in liquidity provision following 

the financial crisis and regulatory reforms. See, e.g., 

Bessembinder, Jacobsen, Maxwell, and 

Venkataraman 2017, ‘‘Capital Commitment and 

Illiquidity in Corporate Bonds,’’ Journal of Finance, 

forthcoming. See also Bao, O’Hara and Zhou, 2017, 

‘‘The Volcker Rule and Corporate Bond Market 

Unfunded Mandates Reform Act of 1995 

(2 U.S.C. 1532). Under this analysis, the 

OCC considered whether the proposed 

rule includes a federal mandate that 

may result in the expenditure by state, 

local, and Tribal governments, in the 

aggregate, or by the private sector, of 

$100 million or more in any one year 

(adjusted annually for inflation). 

The OCC has determined this 

proposed rule is likely to result in the 

expenditure by the private sector of 

approximately $11.6 million in the first 

year. Therefore, the OCC concludes that 

implementation of the proposed rule 

would not result in an expenditure of 

$100 million or more annually by state, 

local, and tribal governments, or by the 

private sector. 

B. SEC: Small Business Regulatory 

Enforcement Fairness Act 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996, or ‘‘SBREFA,’’ 282 the SEC 

requests comment on the potential effect 

of the proposed amendments on the 

U.S. economy on an annual basis; any 

potential increase in costs or prices for 

consumers or individual industries; and 

any potential effect on competition, 

investment or innovation. Commenters 

are requested to provide empirical data 

and other factual support for their views 

to the extent possible. 

D. SEC Economic Analysis 

1. Broad Economic Considerations 

Section 13 of the BHC Act generally 

prohibits banking entities from engaging 

in proprietary trading and from 

acquiring or retaining an ownership 

interest in, sponsoring, or having certain 

relationships with covered funds, 

subject to certain exemptions. Under the 

BHC Act, ‘‘banking entities’’ include 

insured depository institutions, any 

company that controls an insured 

depository institution or that is treated 

as a bank holding company for purposes 

of section 8 of the International Banking 

Act of 1978, and their affiliates and 

subsidiaries.283 Accordingly, certain 

SEC-regulated entities, such as brokerdealers, security-based swap dealers 

(‘‘SBSDs’’), and registered investment 

advisers (‘‘RIAs’’) affiliated with a 

banking entity, fall under the definition 

of ‘‘banking entity’’ and are subject to 

the prohibitions of section 13 of the 

BHC Act.284 In addition, the Economic 

Growth, Regulatory Relief, and 

Consumer Protection Act, enacted on 

May 24, 2018, amends section 13 of the 

BHC Act to exclude from the scope of 

‘‘insured depository institution’’ in the 

banking entity definition any entity that 

does not have and is not controlled by 

a company that has (1) more than $10 

billion in total consolidated assets; and 

(2) total trading assets and trading 

liabilities, as reported on the most 

recent applicable regulatory filing filed 

by the institution, that are more than 

5% of total consolidated assets.285

The Agencies issued final regulations 

implementing section 13 of the BHC Act 

in December 2013, with an initial 

effective date of April 1, 2014.286 The 

2013 final rule prohibits banking 

entities (e.g., bank-affiliated brokerdealers, SBSDs, and investment 

advisers) from engaging, as principal, in 

short-term trading of securities, 

derivatives, futures contracts, and 

options on these instruments, subject to 

certain exemptions. In addition, the 

2013 final rule generally prohibits the 

same entities from acquiring or retaining 

an ownership interest in, sponsoring, or 

having certain relationships with a 

‘‘covered fund,’’ subject to certain 

exemptions. The 2013 final rule defines 

the term ‘‘covered fund’’ to include any 

issuer that would be an investment 

company under the Investment 

Company Act of 1940 if it were not 

otherwise excluded by sections 3(c)(1) 

or 3(c)(7) of that act, as well as certain 

foreign funds and commodity pools.287

However, the definition contains a 

number of exclusions for entities that 

would otherwise meet the covered fund 

definition but that the Agencies did not 

believe are engaged in investment 

activities contemplated by section 13 of 

the BHC Act.288

In implementing section 13 of the 

BHC Act, the Agencies sought to 

increase the safety and soundness of 

banking entities, promote financial 

stability, and reduce conflicts of interest 

between banking entities and their 

customers.289 The regulatory regime 

created by the 2013 final rule may 

enhance regulatory oversight and 

compliance with the substantive 

prohibitions but could also impact 

capital formation and liquidity. The 

Agencies also recognized that clientoriented financial services, such as 

underwriting and market making, are 

critical to capital formation and can 

facilitate the provision of market 

liquidity, and that the ability to hedge 

is fundamental to prudent risk 

management as well as capital 

formation.290


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Making in Times of Stress,’’ Journal of Financial 

Economics, forthcoming. Bao et al. (2017) shows 

that dealers not subject to the Volcker rule 

increased their market-making activities, partially 

offsetting the reduction market making by dealers 

affected by the Volcker Rule. See also, Anderson 

and Stulz, 2017, ‘‘Is Post-Crisis Bond Liquidity 

Lower?’’ working paper; Goldstein and Hotchkiss, 

2017, ‘‘Providing Liquidity in an Illiquid Market: 

Dealer Behavior in U.S. Corporate Bonds,’’ working 

paper. 

291See 12 U.S.C. 1851(d). 

292See section 13(d)(1)(G) of the BHC Act. 

293See 2013 final rule §§ll.4, ll.5, ll.6, l

l.11, ll.13. 

294See 2013 final rule §ll.20. 

Section 13 of the BHC Act also 

provides a number of statutory 

exemptions to the general prohibitions 

on proprietary trading and covered 

funds activities. For example, the statute 

exempts from the proprietary trading 

restrictions certain underwriting, market 

making, and risk-mitigating hedging 

activities, as well as certain trading 

activities outside of the United 

States.291 Similarly, section 13 provides 

exemptions for certain covered funds 

activities, such as exemptions for 

organizing and offering covered 

funds.292 The 2013 final rule 

implemented these exemptions.293 In 

addition, some banking entities engaged 

in proprietary trading are required to 

furnish periodic reports that include a 

variety of quantitative measurements of 

their covered trading activities, and 

banking entities engaged in activities 

covered by section 13 of the BHC Act 

and the 2013 final rule are required to 

establish a compliance program 

reasonably designed to ensure and 

monitor compliance with the 2013 final 

rule.294

Certain aspects of the rule may have 

resulted in a complex and costly 

compliance regime that is unduly 

restrictive and burdensome on some 

affected banking entities, particularly 

smaller firms that do not qualify for the 

simplified compliance and reporting 

regime. The Agencies also recognize 

that distinguishing between permissible 

and prohibited activities may be 

complex and costly for some firms. 

Moreover, the 2013 final rule may have 

included in its scope some groups of 

market participants that do not 

necessarily engage in the activities or 

pose the risks that section 13 of the BHC 

Act intended to address. For example, 

the 2013 final rule’s definition of the 

term ‘‘covered fund’’ is broad and, as a 

result, may include funds that do not 

engage in the investment activities 

contemplated by section 13 of the BHC 

Act. As another example, foreign 

banking entities’ ability to trade 

financial instruments in the United 

States may have been significantly 

limited despite the foreign trading 

exemption in the 2013 final rule. 

The amendments to the 2013 final 

rule proposed in this release include 

those that influence the scope of 

permitted activities for all or a subset of 

banking entities and covered funds, and 

those that simplify, tailor, or eliminate 

the application of certain aspects of the 

rule to reduce compliance and reporting 

burdens. 

Some of the proposed amendments 

affect the scope of permitted activities 

(e.g., foreign trading, underwriting, 

market making, and risk-mitigating 

hedging). These changes would expand 

the scope of permitted activities, which 

may benefit the parties to those 

transactions and broader capital 

markets, for example, if reduced 

compliance costs translate into 

increased willingness of banking 

entities to underwrite securities or make 

markets. These changes also, however, 

could facilitate risk-taking or create 

conflicts of interest among certain 

groups of market participants. 

Moreover, amendments that redefine the 

scope of entities subject to certain 

provisions of the rule may impact 

competition, allocative efficiency, and 

capital formation. Broadly, to the extent 

that the proposed amendments and 

changes on which the Agencies are 

requesting comment increase or 

decrease the scope of permissible 

activities, they may magnify or attenuate 

the economic tradeoffs above. As we 

discuss below, to the extent that the 

proposed amendments or changes on 

which the Agencies are requesting 

comments reduce burdens on some 

groups of market participants (e.g., on 

entities without significant trading 

assets and liabilities, foreign banking 

entities, certain types of covered funds), 

the proposed amendments may increase 

competition and trading activity in 

various market segments. 

Other proposed amendments reduce 

compliance program, reporting, and 

documentation requirements for some 

entities. While these amendments are 

designed to reduce the compliance 

burdens of regulated entities, they may 

also reduce the efficacy of regulatory 

oversight, internal compliance, and 

supervision. Amendments and changes 

on which the Agencies are requesting 

comment that decrease (or increase) 

compliance program and reporting 

requirements tip the balance of 

economic tradeoffs toward (or away 

from) competition, trading activity, and 

capital formation on the one hand, and 

against (or in favor of) regulatory and 

internal oversight on the other. 

However, as discussed below, some of 

the changes need not reduce the efficacy 

of the Agencies’ regulatory oversight. 

Further, under the proposal, banking 

entities (other than banking entities 

with limited trading assets and 

liabilities for which the proposed 

presumption of compliance has not 

been rebutted) would still be required to 

develop and provide for the continued 

administration of a compliance program 

reasonably designed to ensure and 

monitor compliance with the 

prohibitions and restrictions set forth in 

section 13 of the BHC Act and the 2013 

final rule, as it is proposed to be 

amended. 

Where possible, we have attempted to 

quantify the costs and benefits expected 

to result from the proposed 

amendments. In many cases, however, 

the SEC is unable to quantify these 

potential economic effects. Some of the 

primary economic effects, such as the 

effect on incentives that may give rise to 

conflicts of interest in various regulated 

entities and the efficacy of regulatory 

oversight under various compliance 

regimes, are inherently difficult to 

quantify. Moreover, some of the benefits 

of the 2013 final rule’s definitions and 

prohibitions that are being amended 

here, for example potential benefits for 

resilience during a crisis, are less 

readily observable under strong 

economic conditions. Lastly, because of 

overlapping implementation periods of 

various post-crisis regulations affecting 

the same group of SEC registrants, the 

long implementation timeline of the 

2013 final rule, and the fact that many 

market participants changed their 

behavior in anticipation of future 

changes in regulation, it is difficult to 

quantify the net economic effects of the 

individual amendments to rule 

provisions proposed here. 

In some instances, we lack the 

information or data necessary to provide 

reasonable estimates for the economic 

effects of the proposed amendments. For 

example, we lack information and data 

on the volume of trading activity that 

does not occur because of uncertainty 

about how to demonstrate that 

underwriting or market-making 

activities satisfy the RENTD 

requirement; the extent to which 

internally-set risk limits capture 

expected customer demand; how 

accurately correlation analysis reflects 

underlying exposures of banking 

entities with, and without, significant 

trading assets and liabilities in normal 

times and in times of market stress; the 

feasibility and costs of reorganization 

that may enable some U.S. banking 

entities to become foreign banking 

entities for the purposes of relying on 

the foreign trading exemption; how 

market participants may choose to 


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295See, e.g., Access to Capital and Market 

Liquidity supra note 106. 

296See, e.g., Bessembinder et al. (2017), Bao et al. 

(2017), Anderson and Stulz (2017). See also, Trebbi 

and Xiao, 2018, ‘‘Regulation and Market Liquidity,’’ 

Management Science, forthcoming; Oehmke and 

Zawadowski, 2017, ‘‘The Anatomy of the CDS 

Market,’’ Review of Financial Studies 30(1), 80–119. 

297See Responses to Frequently Asked Questions 

Regarding the Commission’s Rule under Section 13 

of the Bank Holding Company Act (the ‘‘Volcker 

Rule’’), June 10, 2014; Updated March 4, 2016, 

available at https://www.sec.gov/divisions/ 

marketreg/faq-volcker-rule-section13.htm 

(providing background on the application of the 

Commission’s rule). 

298See id. 

299See Statement regarding Treatment of Certain 

Foreign Funds under the Rules Implementing 

Section 13 of the Bank Holding Company Act supra 

note 48. 

restructure their interests in various 

types of private funds in response to the 

proposed amendments or other changes 

on which the Agencies seek comment; 

the amount of capital formation in 

covered funds that does not occur 

because of current covered fund 

provisions, including those concerning 

underwriting, market making, or 

hedging with covered funds; or the 

volume of loans, guarantees, securities 

lending, and derivatives activity dealers 

may wish to engage in with the covered 

funds they advise; the extent of risk 

reduction associated with the 2013 final 

rule. Where we cannot quantify the 

relevant economic effects, we discuss 

them in qualitative terms. 

In addition, the broader economic 

effects of the proposed amendments, 

such as those related to efficiency, 

competition, and capital formation, are 

difficult to quantify with any degree of 

certainty. The proposed amendments 

tailor, remove, or alter the scope of 

requirements in the 2013 final rule. 

Thus, some of the methodological 

challenges in analyzing market effects of 

these amendments are somewhat similar 

to those that arise when analyzing the 

effects of the 2013 final rule. As we have 

noted elsewhere, analysis of the effects 

of the implementation of the 2013 final 

rule is confounded by, among others, 

macroeconomic factors, other policy 

interventions, post-crisis changes to 

market participants’ risk aversion and 

return expectations, and technological 

advancements unrelated to regulations. 

Because of the extended timeline of 

implementation of section 13 of the 

BHC Act and the overlap of the 2013 

final rule period with other post-crisis 

changes affecting the same group of SEC 

registrants, typical quantitative methods 

that might otherwise enable causal 

attribution and quantification of the 

effects of section 13 of the BHC Act and 

the 2013 final rule on measures of 

capital formation, liquidity, and 

informational or allocative efficiency are 

not available. Where existing research 

has sought to test causal effects and to 

measure them quantitatively, the 

presence, direction, and magnitude of 

the effects are sensitive to econometric 

methodology, measurement, choice of 

market, and the time period studied.295

Moreover, empirical measures of capital 

formation or liquidity do not reflect 

issuance and transaction activity that 

does not occur as a result of the 

implementing rules. Accordingly, it is 

difficult to quantify the primary 

issuance and market liquidity that 

would have been observed following the 

financial crisis absent the ensuing 

reforms. Finally, since section 13 of the 

BHC Act and the 2013 final rule 

combined a number of different 

requirements, it is difficult to attribute 

the observed effects to a specific 

provision or set of requirements. 

In addition, the existing securities 

markets—including market participants, 

their business models, market structure, 

etc.—differ in significant ways from the 

securities markets that existed prior to 

the 2013 final rule’s implementation. 

For example, the role of dealers in 

intermediating trading activity has 

changed in important ways, including: 

Bank-dealer capital commitment 

declined while non-bank dealer capital 

commitment increased; electronic 

trading in some securities markets 

became more prominent; the 

profitability of trading after the financial 

crisis may have decreased significantly; 

and the introduction of alternative 

credit markets may have contributed to 

liquidity fragmentation across 

markets.296

The SEC continues to recognize that 

post-crisis financial reforms in general, 

and the 2013 final rule in particular, 

impose costs on certain groups of 

market participants. Since the rule 

became effective, new estimates 

regarding compliance burdens and new 

information about the various effects of 

the final rule have become available. 

The passage of time has also enabled an 

assessment of the value of individual 

requirements that enable SEC oversight, 

such as the requirement to report certain 

quantitative metrics, relative to 

compliance burdens. This and other 

information and considerations inform 

the SEC’s economic analysis. 

From the outset, we note that this 

analysis is limited to areas within the 

scope of the SEC’s function as the 

primary securities markets regulator in 

the United States. In particular, the 

SEC’s economic analysis is focused on 

the potential effects of the proposed 

amendments on SEC registrants, the 

functioning and efficiency of the 

securities markets, and capital 

formation. Specifically, this economic 

analysis generally concerns entities 

subject to the 2013 final rule for which 

the SEC is the primary financial 

regulatory agency, including SECregistered broker-dealers, SBSDs, and 

RIAs.297 In addition, the analysis of the 

covered funds provisions discusses their 

economic effects on covered funds as 

well as the economic effects of the 

Agencies modifying the definition of 

covered funds. Thus, the below analysis 

does not consider broker-dealers, 

SBSDs, and investment advisers that are 

not banking entities, and banking 

entities that are not SEC registrants, 

beyond the potential spillover effects on 

these entities and effects on efficiency, 

competition, and capital formation in 

securities markets. 

2. Overview of the Baseline 

In the context of this economic 

analysis, the economic costs and 

benefits, and the impact of the proposed 

amendments on efficiency, competition, 

and capital formation, are considered 

relative to a baseline that includes the 

2013 final rule and recent legislative 

amendments as applicable and current 

practices aimed at compliance with 

these regulations. 

a. Regulation 

To assess the economic impact of the 

proposed rule, we are using as our 

baseline the legal and regulatory 

framework as it exists at the time of this 

release. Thus, the regulatory baseline for 

our economic analysis includes section 

13 of the BHC Act as amended by the 

Economic Growth, Regulatory Relief, 

and Consumer Protection Act and the 

2013 final rule. Further, our baseline 

accounts for the fact that since the 

adoption of the 2013 final rule, the staffs 

of the Agencies have provided FAQ 

responses related to the regulatory 

obligations of banking entities, 

including SEC-regulated entities that are 

also banking entities under the 2013 

final rule, which likely influenced these 

entities’ means of compliance with the 

2013 final rule.298 In addition, the 

Federal banking agencies released a 

2017 policy statement with respect to 

foreign excluded funds.299

Three major areas of the 2013 final 

rule—proprietary trading restrictions, 

covered fund restrictions, and 

compliance requirements—are relevant 

to establishing an economic baseline. 

First, with respect to proprietary trading 

restrictions, the features of the existing 

regulatory framework relevant to the 

baseline of this economic analysis 


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300 Data sources included Reporting Form FR 

Y–9C data for domestic holding companies on a 

consolidated basis and Report of Condition and 

Income data for banks regulated by the Board, FDIC, 

and OCC as of Q3 2017. Broker-dealer bank 

affiliations were obtained from the Federal 

Financial Institutions Examination Council’s 

(FFIEC) National Information Center (NIC). Brokerdealer assets and holdings were obtained from 

FOCUS Report data for Q3 2017. 

301Broker-dealer total assets are based on FOCUS 

report data for ‘‘Total Assets.’’ 

302Broker-dealer holdings are based on FOCUS 

report data for securities and spot commodities 

owned at market value, including bankers’ 

acceptances, certificates of deposit and commercial 

paper, state and municipal government obligations, 

corporate obligations, stocks and warrants, options, 

arbitrage, other securities, U.S. and Canadian 

government obligations, and spot commodities. 

303This alternative measure excludes U.S. and 

Canadian government obligations and spot 

commodities. 

304This category includes all banking entity 

broker-dealers except those affiliated with banks 

that have consolidated total assets less than or equal 

to $10 billion and trading assets and liabilities less 

than or equal to 5% of total assets, and those for 

which bank trading asset and liability data was not 

available. 

305This category includes all banking entity 

broker-dealers affiliated with firms that have 

consolidated total assets less than or equal to $10 

billion and trading assets and liabilities less than or 

equal to 5% of total assets, as well as banking entity 

broker-dealers for which bank trading asset and 

liability data was not available. 

306See, e.g., 2013 final rule §ll.20(d)(1). 

include definitions of ‘‘trading account’’ 

and ‘‘trading desk;’’ requirements for 

permissible underwriting, market 

making, and risk-mitigating hedging 

activities; the liquidity management 

exclusion; treatment of error-related 

trades; restrictions on transactions 

between foreign banking entities and 

their U.S.-dealer affiliates; and the 

compliance and metrics-reporting 

requirements for dealers affiliated with 

banking entities. The potential that a 

RIC or a BDC would be treated as a 

banking entity where the fund’s sponsor 

is a banking entity and holds 25% of 

more of the RIC or BDC’s voting 

securities after a seeding period also 

forms part of our baseline. 

Second, with respect to the 

restrictions on covered funds, the 

features of the existing regulatory 

framework under the 2013 final rule 

relevant to the baseline include the 

definition of the term ‘‘covered fund;’’ 

restrictions on a banking entity’s 

relationships with covered funds; and 

restrictions on underwriting, market 

making, and hedging with covered 

funds. 

Third, with respect to compliance, 

relevant requirements include the 2013 

final rule’s compliance program 

requirements, including those under 

§ ll.20 and Appendix B, as well as 

recordkeeping and reporting of metrics 

under Appendix A. 

The 2013 final rule differentiates 

banking entities on the basis of certain 

monetary thresholds, including the size 

of consolidated trading assets and 

liabilities of their parent company. More 

specifically, U.S. banking entities that 

have, together with affiliates and 

subsidiaries, trading assets and 

liabilities (excluding trading assets and 

liabilities involving obligations of or 

guaranteed by the United States or any 

agency of the United States) the average 

gross sum of which (on a worldwide 

consolidated basis) over the previous 

consecutive four quarters, as measured 

as of the last day of each of the four 

prior calendar quarters, equals $10 

billion or more are currently subject to 

reporting requirements of Appendix A 

of the 2013 final rule. Entities below 

this threshold do not need to comply 

with Appendix A. Additionally, 

banking entities with total consolidated 

assets of $10 billion or less as reported 

on December 31 of the previous 2 

calendar years that engage in covered 

activities qualify for the simplified 

compliance regime, and banking entities 

that have $50 billion or more in total 

consolidated assets and banking entities 

with over $10 billion in consolidated 

trading assets and liabilities are 

currently subject to the requirement to 

adopt an enhanced compliance program 

pursuant to Appendix B. 

In the sections that follow we discuss 

rule provisions currently in effect, how 

each proposed amendment changes 

regulatory requirements, and the 

anticipated costs and benefits of the 

proposed amendments. 

b. Affected Participants 

The SEC-regulated entities directly 

affected by the proposed amendments 

include broker-dealers, security-based 

swap dealers, and investment advisers. 

i. Broker-Dealers 300

Under the 2013 final rule, some of the 

largest SEC-regulated broker-dealers are 

banking entities. Table 1 reports the 

number, total assets, and holdings of 

broker-dealers by the broker-dealer’s 

bank affiliation. 

While the 3,658 domestic brokerdealers that are not affiliated with 

holding companies greatly outnumber 

the 138 banking entity broker-dealers 

subject to the 2013 final rule, these 

banking entity broker-dealers dominate 

non-banking entity broker-dealers in 

terms of total assets (74% of total 

broker-dealer assets) and aggregate 

holdings (72% of total broker-dealer 

holdings). 

TABLE 1—BROKER-DEALER COUNT, ASSETS, AND HOLDINGS BY AFFILIATION

Broker-dealer affiliation Number Total assets, 

$mln 301

Holdings, 

$mln 302

Holdings 

(alternative), 

$mln 303

Affected bank broker-dealers 304 ................................................................. 138 3,039,337 724,706 536,555 

Other bank broker-dealers 305 ..................................................................... 124 125,595 12,312 5,582 

Non-bank broker-dealers ............................................................................. 3,658 929,240 270,876 151,516 

Total ...................................................................................................... 3,920 4,094,172 1,007,894 693,653 

Some of the changes being proposed 

to the 2013 final rule differentiate 

banking entities on the basis of their 

consolidated trading assets and 

liabilities.306 Table 2 reports the 

distribution of broker-dealer banking 

entities’ counts, assets, and holdings by 

consolidated trading assets and 

liabilities of the (top-level) parent firm. 

We estimate that 89 broker-dealer 

affiliates of firms with less than $10 

billion in consolidated trading assets 

and liabilities account for 7% of bankaffiliated broker-dealer assets and 5% of 

holdings (or 3% using the alternative 

measure of holdings). These figures may 

overestimate or underestimate the 

number of affected broker-dealers as 

they may include broker-dealers that do 

not engage in various types of covered 

trading activity. 


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307This analysis excludes SEC-registered brokerdealers affiliated with firms that have consolidated 

total assets less than or equal to $10 billion and 

trading assets and liabilities less than or equal to 

5% of total assets, as well as firms for which bank 

trading asset and liability data was not available. 

308Consolidated trading assets and liabilities are 

estimated using information reported in form Y–9C 

data. These estimates exclude from the definition of 

consolidated trading assets and liabilities Treasury 

securities—we subtract from the sum of total 

trading assets and liabilities reported in items 

BHCK3545 and BHCK3547 trading assets that are 

U.S. Treasury securities as reported in item 

BHCK3531 and calculate average trading assets and 

liabilities using 2016Q4 through 2017Q3 data. 

However, our estimates do not exclude agency 

securities as such information is not otherwise 

available. Thus, these figures may overestimate or 

underestimate the number of affected bank 

affiliated broker-dealers. We also note that we do 

not have data on worldwide consolidated trading 

assets and liabilities of foreign banking entities with 

which some SEC registrants are affiliated, and 

consolidated trading assets and liabilities for such 

foreign banking entities are calculated based on 

their U.S. operations. Thus, the figures may 

overestimate or underestimate the number of 

affected bank affiliated broker-dealers. 

309See SBSD and MSP Registration Release, 

supra note 284. 

310These estimates are calculated from Form 

ADV data as of March 31, 2018. We define an 

investment adviser as a ‘‘private fund adviser’’ if it 

indicates that it is an adviser to any private fund 

on Form ADV Item 7.B. We define an investment 

adviser as a ‘‘banking entity RIA’’ if it indicates on 

Form ADV Item 6.A.(7) that it is actively engaged 

in business as a bank, or it indicates on Form ADV 

Item 7.A.(8) that it has a ‘‘related person’’ that is 

a banking or thrift institution. For purposes of Form 

ADV, a ‘‘related person’’ is any advisory affiliate 

and any person that is under common control with 

the adviser. We recognize that the definition of 

‘‘control’’ for purposes of Form ADV, which is used 

in identifying related persons on the form, differs 

from the definition of ‘‘control’’ under the BHC Act. 

In addition, this analysis does not exclude SECregistered investment advisers affiliated with banks 

that have consolidated total assets less than or equal 

to $10 billion and trading assets and liabilities less 

than or equal to 5% of total assets. Thus, these 

figures may overestimate or underestimate the 

number of banking entity RIAs. 

TABLE 2—BROKER-DEALER COUNTS, ASSETS, AND HOLDINGS BY CONSOLIDATED TRADING ASSETS AND LIABILITIES OF

THE BANKING ENTITY 307

Consolidated trading assets and liabilities 308 Number Percentage 

Total assets, 

$mln 

Percentage Holdings, 

$mln Percentage 

Holdings 

(altern.), 

$mln 

Percentage 

≥50bln .............................. 29 21 2,215,295 73 554,125 76 492,017 92 

25bln–50bln ...................... 8 6 417,099 14 76,865 11 21,083 4 

10bln–25bln ...................... 12 9 184,591 6 58,232 8 7,494 1 

5bln–10bln ........................ 24 17 145,151 5 23,321 3 10,527 2 

1bln–5bln .......................... 23 17 9,756 0 3,628 1 1,795 0 

≤1bln ................................ 42 30 67,446 2 8,534 1 3,638 1 

Total .......................... 138 100 3,039,338 100 724,705 100 536,554 100 

ii. Security-Based Swap Dealers 

The proposed amendments may also 

affect bank-affiliated SBSDs. As 

compliance with SBSD registration 

requirements is not yet required, there 

are currently no registered SBSDs. 

However, the SEC has previously 

estimated that as many as 50 entities 

may potentially register as securitybased swap dealers and that as many as 

16 of these entities may already be SECregistered broker-dealers.309 Given our 

analysis of DTCC Derivatives Repository 

Limited Trade Information Warehouse 

(‘‘TIW’’) transaction and positions data 

on single-name credit-default swaps, we 

preliminarily believe that all entities 

that may register with the SEC as SBSDs 

are bank-affiliated firms, including 

those that are SEC-registered brokerdealers. Therefore, we preliminarily 

estimate that, in addition to the bankaffiliated SBSDs that are already 

registered as broker-dealers and 

included in the discussion above, as 

many as 34 other bank-affiliated SBSDs 

may be affected by the proposed 

amendments. 

Importantly, capital and other 

substantive requirements for SBSDs 

under Title VII of the Dodd-Frank Act 

have not yet been adopted. We 

recognize that firms may choose to 

move security-based swap trading 

activity into (or out of) an affiliated bank 

or an affiliated broker-dealer instead of 

registering as a standalone SBSD, if 

bank or broker-dealer capital and other 

regulatory requirements are less (or 

more) costly than those that may be 

imposed on SBSDs under Title VII. As 

a result, the above figures may 

overestimate or underestimate the 

number of SBSDs that are not brokerdealers and that may become SECregistered entities that would be affected 

by the proposed amendments. 

Quantitative cost estimates are provided 

separately for affected broker-dealers 

and potential SBSDs. 

iii. Private Funds and Private Fund 

Advisers 310

In this section, we focus on RIAs 

advising private funds. Using Form 

ADV data, Table 3 reports the number 

of RIAs advising private funds by fund 

type, as those types are defined in Form 

ADV. Table 4 reports the number and 

gross assets of private funds advised by 

RIAs and separately reports these 

statistics for banking entity RIAs. As can 

be seen from Table 3, the two largest 

categories of private funds advised by 

RIAs are hedge funds and private equity 

funds. 

Banking entity RIAs advise a total of 

4,250 private funds with approximately 

$2 trillion in gross assets. Using Form 

ADV data, we observe that banking 

entity RIAs’ gross private fund assets 

under management is concentrated in 

hedge funds and private equity funds. 

We estimate on the basis of this data 

that banking entity RIAs advise 947 

hedge funds with approximately $616 

billion in gross assets and 1,282 private 

equity funds with approximately $350 

billion in assets. While banking entity 

RIAs are subject to all of section 13’s 

restrictions, because RIAs do not 

typically engage in proprietary trading, 

we preliminarily believe that they will 

not be impacted by the proposed 

amendments related to proprietary 

trading. 

TABLE 3—SEC-REGISTERED INVESTMENT ADVISERS ADVISING PRIVATE FUNDS BY FUND TYPE 311

Fund type All RIA Banking 

entity RIA 

Hedge Funds ........................................................................................................................................................... 2,691 173 

Private Equity Funds ............................................................................................................................................... 1,538 90 


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311This table includes only the advisers that list 

private funds on Section 7.B.(1) of Form ADV. The 

number of advisers in the ‘‘Any Private Fund’’ row 

is not the sum of the rows that follow since an 

adviser may advise multiple types of private funds. 

Each listed private fund type (e.g., real estate fund, 

liquidity fund) is defined in Form ADV, and those 

definitions are the same for purposes of the SEC’s 

Form PF. 

312 Gross assets include uncalled capital 

commitments on Form ADV. 

313For the purposes of this analysis, the term RIC 

refers to the fund or series, not the legal entity. 

314With respect to a banking entity that is a 

foreign banking organization or a subsidiary of a 

foreign banking organization, this threshold for 

having significant trading assets and liabilities 

would apply based on the trading assets and 

liabilities of the combined U.S. operations, 

including all subsidiaries, affiliates, branches and 

agencies. 

TABLE 3—SEC-REGISTERED INVESTMENT ADVISERS ADVISING PRIVATE FUNDS BY FUND TYPE 311—Continued 

Fund type All RIA Banking 

entity RIA 

Real Estate Funds ................................................................................................................................................... 486 56 

Securitized Asset Funds .......................................................................................................................................... 222 43 

Venture Capital Funds ............................................................................................................................................. 173 16 

Liquidity Funds ......................................................................................................................................................... 46 7 

Other Private Funds ................................................................................................................................................ 1,043 148 

Total Private Fund Advisers ............................................................................................................................. 4,660 308 

TABLE 4—THE NUMBER AND GROSS ASSETS OF PRIVATE FUNDS ADVISED BY SEC-REGISTERED INVESTMENT

ADVISERS 312

Fund type 

Number of private funds Gross assets, $bln 

All RIA Banking 

entity RIA All RIA Banking entity RIA 

Hedge Funds ................................................................................................... 10,329 947 7,081 616 

Private Equity Funds ....................................................................................... 13,588 1,282 2,919 350 

Real Estate Funds ........................................................................................... 3,252 323 564 84 

Securitized Asset Funds .................................................................................. 1,707 360 562 120 

Liquidity Funds ................................................................................................. 1,073 29 109 190 

Venture Capital Funds ..................................................................................... 76 42 291 2 

Other Private Funds ........................................................................................ 4,337 1,268 1,568 689 

Total Private Funds .................................................................................. 34,359 4,250 13,093 2,052 

Banking entity RIAs advise a total of 

4,250 private funds with approximately 

$2 trillion in gross assets. Using Form 

ADV data, we observe that banking 

entity RIAs’ gross private fund assets 

under management is concentrated in 

hedge funds and private equity funds. 

We estimate on the basis of this data 

that banking entity RIAs advise 947 

hedge funds with approximately $616 

billion in gross assets and 1,282 private 

equity funds with approximately $350 

billion in assets. While banking entity 

RIAs are subject to all of section 13’s 

restrictions, because RIAs do not 

typically engage in proprietary trading, 

we preliminarily believe that they will 

not be impacted by the proposed 

amendments related to proprietary 

trading. 

iv. Registered Investment Companies 

Based on SEC filings and public data, 

we estimate that, as of January 2018, 

there were approximately 15,500 

RICs 313 and 100 BDCs. Although RICs 

and BDCs are generally not banking 

entities themselves subject to the 2013 

final rule, they may be indirectly 

affected by the 2013 final rule and the 

proposed amendments to the extent that 

their advisers are banking entities. For 

instance, banking entity RIAs or their 

affiliates may reduce their level of 

investment in the funds they advise, or 

potentially close these funds, to avoid 

these funds becoming banking entities 

themselves. As discussed in more detail 

in section III.A, however, the Agencies 

have made clear that nothing in the 

proposal would modify the application 

of the staff FAQs discussed above, and 

the Agencies will not treat RICs (or 

FPFs) that meet the conditions included 

in the applicable staff FAQs as banking 

entities or attribute their activities and 

investments to the banking entity that 

sponsors the fund or otherwise may 

control the fund under the 

circumstances set forth in the FAQs. In 

addition, and also as discussed in more 

detail in section III.A, to accommodate 

the pendency of the proposal, for an 

additional period of one year until July 

21, 2019, the Agencies will not treat 

qualifying foreign excluded funds that 

meet the conditions included in the 

policy statement discussed above as 

banking entities or attribute their 

activities and investments to the 

banking entity that sponsors the fund or 

otherwise may control the fund under 

the circumstances set forth in the policy 

statement. 

3. Economic Effects 

a. Treatment of Entities Based on the 

Size of Trading Assets and Liabilities 

i. Costs and Benefits 

The proposal categorizes banking 

entities into three groups on the basis of 

the size of their trading activity: (1) 

Banking entities with significant trading 

assets and liabilities, (2) banking entities 

with moderate trading assets and 

liabilities, and (3) banking entities with 

limited trading assets and liabilities. 

Banking entities with significant trading 

assets and liabilities are defined as those 

that have, together with affiliates and 

subsidiaries, trading assets and 

liabilities (excluding trading assets and 

liabilities involving obligations of or 

guaranteed by the United States or any 

agency of the United States) the average 

gross sum of which over the previous 

consecutive four quarters, as measured 

as of the last day of each of the four 

previous calendar quarters, equaling or 

exceeding $10 billion.314 Banking 

entities with limited trading assets and 

liabilities are defined as those that have, 

together with affiliates and subsidiaries 

on a worldwide consolidated basis, 

trading assets and liabilities (excluding 


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trading assets and liabilities involving 

obligations of or guaranteed by the 

United States or any agency of the 

United States) the average gross sum of 

which over the previous consecutive 

four quarters, as measured as of the last 

day of each of the four previous 

calendar quarters, is less than $1 billion. 

Finally, banking entities with moderate 

trading assets and liabilities are defined 

as those that are neither banking entities 

with significant trading assets and 

liabilities nor banking entities with 

limited trading assets and liabilities. 

We further refer to SEC-registered 

broker-dealer, investment adviser, and 

SBSD affiliates of banking entities with 

significant trading assets and liabilities 

as ‘‘Group A’’ entities, to affiliates of 

banking entities with moderate trading 

assets and liabilities as ‘‘Group B’’ 

entities, and to affiliates of banking 

entities with limited trading assets and 

liabilities as ‘‘Group C’’ entities. 

Under the proposed amendments, 

Group A entities would be required to 

comply with a streamlined but 

comprehensive version of the 2013 final 

rule’s compliance program 

requirements, as discussed below. 

Group B entities would be subject to 

reduced requirements and an even more 

tailored approach in light of their 

smaller and less complex trading 

activities. The burdens are further 

reduced for Group C entities, for which 

the proposed rule establishes presumed 

compliance, which can be rebutted by 

the Agencies. We discuss the economic 

effects of each of the substantive 

amendments on these groups of entities 

in the sections that follow. 

This economic analysis is focused on 

the expected economic effects of the 

proposed amendments on SEC 

registrants. Table 2 in the economic 

baseline quantifies broker-dealer 

activity by gross trading assets and 

liabilities of banking entities they are 

affiliated with. We estimate that there 

are approximately 89 broker-dealers 

affiliated with firms that have less than 

$10 billion in consolidated trading 

assets and liabilities (Group B and 

Group C broker-dealers). Group B and 

Group C broker-dealers account for 

approximately 7% of assets and 5% (or 

3% on the basis on the alternative 

measure of holdings) of total bank 

broker-dealer holdings. 

The primary effects of the proposed 

amendments for SEC registrants are 

reduced compliance burdens for Group 

B and Group C entities, as discussed in 

more detail in later sections. To the 

extent that the compliance costs of 

Group B and Group C entities are 

currently passed along to customers and 

counterparties, some of the cost 

reductions for these entities associated 

with the proposed amendments may 

flow through to counterparties and 

clients in the form of reduced 

transaction costs or a greater willingness 

to engage in activity, including 

intermediation that facilitates risksharing. 

The proposed $10 billion threshold 

would leave firms with moderate 

trading assets and liabilities with 

reduced compliance program 

requirements and more tailored 

supervision. The proposed $1 billion 

threshold would leave firms with 

limited trading assets and liabilities 

presumed compliant with all 

proprietary trading and covered fund 

activity prohibitions. We note that, from 

above, Group B and Group C brokerdealers currently account for only 3% to 

5% of total bank broker-dealer holdings. 

To the extent that holdings reflect risk 

exposure resulting from trading activity, 

current trading activity by Group B and 

Group C entities may represent lower 

risks than the risks posed by covered 

trading of Group A entities. 

We recognize that some Group B and 

Group C entities that currently exhibit 

low levels of trading activity because of 

the costs of compliance may respond to 

the proposed amendments by increasing 

their trading assets and liabilities while 

still remaining under the $10 billion 

and $1 billion thresholds at the holding 

company level. Increases in aggregate 

risk-taking by Group B and Group C 

entities may be magnified if trading 

activity becomes more highly correlated 

among such entities, or dampened if 

trading activity becomes less correlated 

among such entities. Since it is difficult 

to estimate the number of Group B and 

Group C entities that may increase their 

risk-taking and the degree to which their 

trading activity would be correlated, the 

implications of this effect for aggregate 

risk-taking and capital market activity 

are unclear. 

Such shifts in risk-taking may have 

two competing effects. On the one hand, 

if Group B and Group C entities are able 

to bear risk at a lower cost than their 

customers, increased risk-taking could 

promote secondary market trading 

activity and capital formation in 

primary markets, and increase access to 

capital for issuers. On the other hand, 

depending on the risk-taking incentives 

of Group B and Group C firms, 

increased risk-taking may result in 

increased moral hazard and market 

fragility, could exacerbate conflicts of 

interest between banking entities and 

their customers, and could ultimately 

negatively impact issuers and investors. 

However, we note that the proposed 

amendments are focused on tailoring 

the compliance regime based on the 

amount of covered activity engaged in 

by each banking entity, and all banking 

entities would still be subject to the 

prohibitions related to such covered 

activities. Thus, the magnitude of 

increased moral hazard, market fragility, 

and the severity of conflicts of interest 

effects may be attenuated. 

In response to the proposed 

amendments, trading activity that was 

once consolidated within a small 

number of unaffiliated banking entities 

may become fragmented among a larger 

number of unaffiliated banking entities 

that each ‘‘manage down’’ their trading 

books under the $10 billion and $1 

billion trading asset and liability 

thresholds to enjoy reduced hedging 

compliance and documentation 

requirements and a less costly 

compliance and reporting regime 

described in sections V.D.3.c, V.D.3.d, 

and V.D.3.i. The extent to which 

banking entities may seek to manage 

down their trading books will likely 

depend on the size and complexity of 

each banking entity’s trading activities 

and organizational structure, along with 

those of its affiliated entities, as well as 

forms of potential restructuring and the 

magnitude of expected compliance 

savings from such restructuring relative 

to the cost of restructuring. We 

anticipate that the incentives to manage 

the trading book under the $10 billion 

and $1 billion thresholds may be 

strongest for those holding companies 

that are just above the thresholds. Such 

management of the trading book may 

reduce the size of trading activity of 

some banking entities and reduce the 

number of banking entities subject to 

more stringent hedging, compliance, 

and reporting requirements. At the same 

time, to the degree that the proposed 

amendments incentivize banking 

entities to have smaller trading books, 

they may mitigate moral hazard and 

reduce market impacts from the failure 

of a given banking entity. 

ii. Efficiency, Competition, and Capital 

Formation 

The 2013 final rule currently imposes 

compliance burdens that may be 

particularly significant for smaller 

market participants. Moreover, such 

compliance burdens may be passed 

along to counterparties and customers 

in the form of higher costs, reduced 

capital formation, or a reduced 

willingness to transact. For example, 

one commenter estimated that the 

funding cost for an average nonfinancial firm may have increased by as 

much as $30 million after the 2013 final 


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315See supra note 18. 

rule’s implementation.315 At the same 

time, and as discussed above in section 

V.D.1, the SEC continues to recognize 

that the 2013 final rule may have 

yielded important qualitative benefits, 

such as reducing moral hazard and 

potential incentive conflicts that could 

be posed by certain types of proprietary 

trading by dealers, and enhancing 

oversight and supervision. 

On one hand, as a result of the 

proposed amendments, Group B and 

Group C entities might enjoy a 

competitive advantage relative to 

similarly situated Group A and Group B 

entities respectively. As noted, firms 

that are close to the $10 billion 

threshold may actively manage their 

trading book to avoid triggering stricter 

requirements, and some firms above the 

threshold may seek to manage down the 

trading activity to qualify for 

streamlined treatment under the 

proposed amendments. As a result, the 

proposed amendments may result in 

greater competition between Group B 

and Group A entities around the $10 

billion threshold, and similarly, 

between Group B and Group C entities 

around the $1 billion threshold. On the 

other hand, to the extent that Group B 

and Group C entities increase risktaking as they compete with Group A 

and Group B entities, respectively, 

investors may demand additional 

compensation for bearing financial risk. 

A higher required rate of return and 

higher cost of capital could therefore 

offset potential competitive advantages 

for Group B and Group C entities. 

We recognize that cost savings to 

Group B and Group C entities related to 

the reduced hedging documentation 

requirements and compliance 

requirements described in sections 

V.D.3.d and V.D.3.i may be partially or 

fully passed along to clients and 

counterparties. To the extent that 

hedging documentation and compliance 

requirements for Group B and Group C 

entities are currently resulting in a 

reduced willingness to make markets or 

underwrite placements, the proposed 

amendments may facilitate trading 

activity and risk-sharing, as well as 

capital formation and reduced costs of 

access to capital. Crucially, the 

proposed amendments do not eliminate 

substantive prohibitions under the 2013 

final rule but create a simplified 

compliance regime for entities affiliated 

with firms without significant trading 

assets and liabilities. Thus, the 2013 

final rule’s restrictions on proprietary 

trading and covered funds activities will 

continue to apply to all affected entities, 

including Group B and Group C entities. 

iii. Alternatives 

The Agencies could have taken 

alternative approaches. For example, the 

proposed rule could have used other 

values for thresholds for total 

consolidated trading assets and 

liabilities in the definition of entities 

with significant trading assets and 

liabilities. As noted in the discussion of 

the economic baseline, using different 

thresholds would affect the scope of 

application of the hedging 

documentation, compliance program 

and metrics-reporting requirements by 

changing the number and size of 

affected dealers. For instance, using a $1 

billion or a $5 billion threshold in a 

definition of significant trading assets 

and liabilities would scope a larger 

number of entities into Group A, as 

compared to the proposed $10 billion 

threshold, thereby subjecting a larger 

share of the dealer and investment 

adviser industries to six-pillar 

compliance obligations. However, we 

continue to recognize that trading 

activity is heavily concentrated in the 

right tail of the distribution, and using 

a lower threshold would not 

significantly increase the volume of 

trading assets and liabilities scoped into 

the Group A regime. For example, Table 

2 shows that 65 broker-dealers affiliated 

with banking entities that have less than 

$5 billion in consolidated trading assets 

and liabilities and are subject to section 

13 of the BHC Act as amended by the 

Economic Growth, Regulatory Relief, 

and Consumer Protection Act account 

for only 2.5% of bank-affiliated brokerdealer assets and between 1.7% and 1% 

of holdings. Alternatively, 42 brokerdealer affiliates of firms that have less 

than $1 billion in consolidated trading 

assets and liabilities and are subject to 

section 13 of the BHC Act account for 

only 2% of bank-affiliated broker-dealer 

assets and 1% of holdings. At the same 

time, with a lower threshold, more 

banking entities would face higher 

compliance burdens and related costs. 

The Agencies also could have 

proposed a percentage-based threshold 

for determining whether a banking 

entity has significant trading assets and 

liabilities. For example, the proposed 

amendment could have relied 

exclusively on threshold where banking 

entities are considered to be entities 

with significant trading assets and 

liabilities if the firm’s total consolidated 

trading assets and liabilities are above a 

certain percentage (for example, 10% or 

25%) of the firm’s total consolidated 

assets. Under this alternative, a greater 

number of entities may benefit from 

lower compliance costs and a 

streamlined regime for Group B entities. 

However, under this approach, even 

firms in the extreme right tail of the 

trading asset distribution could be 

considered without significant trading 

assets and liabilities if they are also in 

the extreme right tail of the total assets 

distribution. Thus, without placing an 

additional limit on total assets within 

such regime, entities with the largest 

trading books may be scoped into the 

Group B regime if they also have a 

sufficiently large amount of total 

consolidated assets, while entities with 

significantly smaller trading books 

could be categorized as Group A entities 

if they have fewer assets overall. 

Alternatively, the Agencies could 

have relied on a threshold based on total 

assets. However, a threshold based on 

total assets may not be as meaningful as 

a threshold based on trading assets and 

liabilities being proposed here when 

considered in the context of section 13 

of the BHC Act. A threshold based on 

total assets would scope in entities 

based merely on their balance sheet 

size, even though they may have little 

or no trading activity, notwithstanding 

the fact that the moral hazard and 

conflicts of interest that section 13 of 

the BHC Act are intended to address are 

more likely to arise out of such trading 

activity (and not necessarily from the 

banking entity size, as measured by total 

consolidated assets). However, it is 

possible that losses on small trading 

portfolios can be amplified through 

their effect on non-trading assets held 

by a firm. To that extent, a threshold 

based on total assets may be useful in 

potentially capturing both direct and 

indirect losses that originate from 

trading activity of a holding company. 

The Agencies also could have based 

the thresholds on the level of total 

revenues from permitted trading 

activities. To the extent that revenues 

could be a proxy for the structure of a 

banking entity’s business and the focus 

of its operations, this alternative may 

apply more stringent compliance 

requirements to those entities profiting 

the most from covered activities. 

However, revenues from trading activity 

fluctuate over time, rising during 

economic booms and deteriorating 

during crises and liquidity freezes. As a 

result, under the alternative, a banking 

entity that is scoped in the regulatory 

regime during normal times may be 

scoped out during the time of market 

stress due to a decrease in the revenues 

from permitted activities. That is, under 

such alternative, the weakest 

compliance regime may be applied to 

banking entities with the largest trading 

books in times of acute market stress, 

when the performance of trading desks 

is deteriorating and the underlying 


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33528 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

316This category excludes SEC-registered brokerdealers affiliated with banks that have consolidated 

total assets less than or equal to $10 billion and 

trading assets and liabilities less than or equal to 

5% of total assets, as well as firms for which bank 

trading asset and liability data was not available. 

317See 2013 final rule §ll.3(b). 

318See 2013 final rule §ll.3(b)(1)(iii). 

319See 79 FR at 5549 (‘‘The Agencies believe the 

scope of the dealer prong is appropriate because, as 

noted in the proposal, positions held by a registered 

dealer in connection with its dealing activity are 

generally held for sale to customers upon request 

or otherwise support the firm’s trading activities 

(e.g., by hedging its dealing positions), which is 

indicative of short term intent.’’). 

requirements of the 2013 final rule may 

be the most valuable. 

Finally, the Agencies could have 

excluded from the definition of entities 

with significant trading assets and 

liabilities those entities that may be 

affiliated with a firm with over $10 

billion in consolidated trading assets 

and liabilities but that are operated 

separately and independently from its 

affiliates and that have total trading 

assets and liabilities (excluding trading 

assets and liabilities involving 

obligations of or guaranteed by the 

United States or any agency of the 

United States) under $10 billion. We do 

not have data on the number of dealers 

that are operated ‘‘separately and 

independently’’ from affiliated entities 

with significant trading assets and 

liabilities. However, as shown in Table 

5, this alternative could decrease the 

scope of application of the Group A 

regime. 

TABLE 5—BROKER-DEALER ASSETS AND HOLDINGS BY GROSS TRADING ASSET AND LIABILITY THRESHOLD OF AFFILIATED

BANKING ENTITIES

Type of broker-dealer Number Total assets 

($mln) 

Holdings 

($mln) 

Holdings 

(altern.) 

($mln) 

Holdings ≥$10bln and affiliated with firms with gross trading assets and liabilities ≥$10bln ............................................................................................ 14 2,538,656 668,283 515,443 

Holdings <$10bln and affiliated with firms with gross trading assets and liabilities ≥$10bln ............................................................................................ 35 278,329 20,940 5,152 

Affiliated with firms with gross trading assets and liabilities <$10bln 316 ........ 89 222,352 35,483 15,960 

Total .......................................................................................................... 138 3,039,337 724,706 536,555 

This alternative would increase the 

number of entities able to avail 

themselves of the reduced compliance, 

documentation and metrics-reporting 

requirements, potentially resulting in 

cost reductions flowing through to 

customers and counterparties. At the 

same time, this alternative would permit 

greater risk-taking by entities affiliated 

with firms that have gross trading assets 

and liabilities in excess of $10 billion. 

In addition, it could encourage such 

firms to fragment their trading activity, 

for instance, across multiple dealers, 

and operate them ‘‘separately and 

independently,’’ thereby relieving such 

firms of the requirement to comply with 

the hedging, compliance, and reporting 

regime of the 2013 final rule. This 

alternative may, therefore, reduce the 

regulatory oversight and compliance 

benefits of the full hedging, 

documentation, reporting, and 

compliance requirements for Group A 

banking entities. The feasibility and 

costs of such fragmentation would 

depend, in part, on organizational 

complexity of a firm’s trading activity, 

the architecture of trading systems, the 

location and skillsets of personnel 

across various dealers affiliated with 

such entities, and current inter-affiliate 

hedging and risk mitigation practices. 

b. Proprietary Trading 

i. Trading Account 

A. Costs and Benefits 

Under the 2013 final rule, proprietary 

trading is defined as engaging as 

principal for the ‘‘trading account’’ of a 

banking entity.317 Thus, the definition 

of the trading account effectively 

determines the trading activity that falls 

within the scope of the 2013 final rule 

prohibitions and the compliance regime 

associated with such activity. The 

current definition of trading account has 

three prongs, including the registered 

dealer prong. As discussed elsewhere in 

this SUPPLEMENTARY INFORMATION, the 

proposed amendments introduce certain 

changes to the trading account test. 

However, the proposal does not remove 

or modify the registered dealer prong. 

As a result, the proposed definition of 

‘‘trading account’’ would continue to 

automatically include transactions in 

financial instruments by a registered 

dealer, swap dealer, or security-based 

swap dealer, if the purchase or sale is 

made in connection with the activity 

that requires the entity to be registered 

as such.318 Thus, most (if not 

substantially all) trading activity by 

SEC-registered dealers should continue 

to be captured by the ‘‘trading account’’ 

of a banking entity, notwithstanding any 

of the changes made to the definition. 

We recognize the possibility that 

some market participants may engage in 

transaction activity that does not trigger 

a dealer registration requirement. Under 

the baseline, such activity would be 

scoped into the ‘‘trading account’’ 

definition by the short-term prong and 

the rebuttable presumption by virtue of 

the fact that most transactions by a 

dealer are likely to be indicative of 

short-term intent as noted in the 2013 

final rule.319 We preliminarily believe 

that, under the proposal, such trading 

would likely be included in the trading 

account definition under the new prong 

on the basis of accounting treatment in 

reference to whether a financial 

instrument (as defined in the 2013 final 

rule and unchanged by the proposal) is 

recorded at fair value on a recurring 

basis under applicable accounting 

standards. In addition, persons engaging 

in the type and volume of activity that 

would be scoped in under the proposed 

accounting prong are likely engaged in 

the business of buying and selling 

securities for their own account as part 

of regular business, which would trigger 

broker-dealer (depending on the volume 

of activity) or SBSD registration 

requirements. 

To the extent that the proposed 

amendments increase (or decrease) the 

scope of trading activity that falls under 

the proprietary trading prohibitions of 

the 2013 final rule, the amendments 

would increase (or decrease) the 

economic costs, benefits, and tradeoffs 

outlined in section V.D.1. However, we 

preliminarily believe that the largest 

share of dealing activity subject to SEC 

oversight is already captured by the 

registered dealer prong and that the 


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Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33529 

320For the purposes of the burden estimates in 

this release, we are assuming the cost of $409 per 

hour for an attorney, from SIFMA’s ‘‘Management 

& Professional Earnings in the Securities Industry 

2013,’’ modified to account for an 1800-hour work 

year and multiplied by 5.35 to account for bonuses, 

firm size, employee benefits, and overhead, and 

adjusted for inflation. 

321We preliminarily believe that the burden 

reduction for SEC-regulated entities will be a 

fraction of the burden reduction for the holding 

company as a whole. We estimate the ratio on the 

basis of the fraction of total assets of broker-dealer 

affiliates of banking entities relative to the total 

consolidated assets of parent holding companies at 

approximately 0.18. To the extent that compliance 

burdens represent a fixed cost that does not scale 

with assets, or if the role and compliance burdens 

of entities that may register with the SEC as SBSDs 

may differ from those of broker-dealers, these 

figures may overestimate or underestimate 

compliance cost reductions for SEC-registered 

entities. Reporting burden for broker-dealers: 2 

Hours per firm per year × 0.18 weight × (Attorney 

at $409 per hour) × 138 firms = $20,319. Reporting 

burden for entities that may register as SBSDs: 2 

hours per firm per year × 0.18 weight × (Attorney 

at $409 per hour) × 34 firms = $5,006. 322 79 FR at 5549. 

economic effects of the proposed 

amendments to the definition of the 

trading account on SEC-registered 

entities may be de minimis. Therefore, 

we do not estimate any additional 

reporting costs for SEC registrants. 

The Agencies also propose to include 

a reservation of authority allowing for 

determination, on a case-by-case basis, 

with appropriate notice and response 

procedures, that any purchase or sale of 

one or more financial instruments by a 

banking entity for which it is the 

primary financial regulatory agency 

either ‘‘is’’ or ‘‘is not’’ for the trading 

account. While the Agencies recognize 

that the use of objective factors to define 

proprietary trading is intended to 

provide bright lines that simplify 

compliance, the Agencies also recognize 

that this approach may, in some 

circumstances, produce results that are 

either underinclusive or overinclusive 

with respect to the definition of 

proprietary trading. The proposed 

reservation of authority may add 

uncertainty for banking entities about 

whether a particular transaction could 

be deemed as a proprietary trade by the 

regulating agency, which may affect the 

banking entity’s decision to engage in 

transactions that are currently not 

included in the definition of the trading 

account. As discussed in section V.B,320

notice and response procedures related 

to the reservation of authority provision 

may cost as much as $20,319 for SECregistered broker-dealers, and $5,006 for 

entities that may choose to register with 

the SEC as SBSDs.321

B. Alternatives 

Specific Activities 

The Agencies could have taken the 

approach of excluding specific trading 

activities from the scope of the 

proprietary trading prohibitions. For 

example, the Agencies could exclude 

transactions in derivatives on 

government securities, transactions in 

foreign sovereign debt and derivatives 

on foreign sovereign debt, and 

transactions executed by SEC-registered 

dealers on behalf of their asset 

management customers. 

The 2013 final rule exempts all 

trading in domestic government 

obligations and trading in foreign 

government obligations under certain 

conditions; however, derivatives 

referencing such obligations–including 

derivatives portfolios that can replicate 

the payoffs and risks of such 

government obligations–are not 

exempted. Therefore, existing 

requirements reduce the flexibility of 

banking entities to engage in assetliability management and treat two 

groups of financial instruments that 

have similar risks and payoffs 

differently. Excluding derivatives 

transactions on government obligations 

from the trading account definition 

could reduce costs to market 

participants and provide greater 

flexibility in their asset-liability 

management. This alternative could also 

result in increased volume of trading in 

markets for derivatives on government 

obligations, such as Treasury futures. 

We recognize, nonetheless, that 

derivatives portfolios that reference an 

obligation, including Treasuries, can be 

structured to magnify the economic 

exposure to fluctuations in the price of 

the reference obligation. Moreover, 

derivatives transactions involve 

counterparty credit risk not present in 

transactions in reference obligations 

themselves. Since the alternative would 

exclude all derivatives transactions on 

government obligations, and not just 

those that are intended to mitigate risk, 

this alternative could permit banking 

entities to increase their exposure to 

counterparty, interest rate, and liquidity 

risk. 

Length of the Holding Period 

In addition, the current registered 

dealer prong does not condition the 

trading account definition for registered 

dealers on the length of the holding 

period. This is because, as noted in the 

2013 final rule, positions held by a 

registered dealer in connection with its 

dealing activity are generally held for 

sale to customers upon request or 

otherwise support the firm’s trading 

activities (e.g., by hedging its dealing 

positions), which is indicative of short 

term intent.322 As an alternative, the 

Agencies could have modified the 

registered dealer prong of the trading 

account definition to include only 

‘‘near-term trading,’’ e.g., positions held 

for less than 60, 90, or 120 days. This 

alternative would likely narrow the 

scope of application of the substantive 

proprietary trading prohibitions to a 

smaller portion of a banking entity’s 

activities. 

Under this alternative, dealers 

affiliated with banking entities would be 

able to amass large trading positions at 

the ‘‘near-term definition’’ boundary 

(e.g., for 61, 91, or 121 days) to take 

advantage of a directional market view, 

to profit from mispricing in an 

instrument, or to collect a liquidity 

premium in a particular instrument. 

This may significantly increase risktaking and moral hazard in the activities 

of dealers affiliated with banking 

entities. However, as this alternative 

could stimulate an increase in 

potentially impermissible proprietary 

trading by these dealers, the volume of 

trading activity in certain instruments 

and liquidity in certain markets may 

increase. 

We also note that the temporal 

thresholds necessary to implement such 

a ‘‘short-term’’ trading alternative would 

be difficult to quantify and may have to 

vary by product, asset class, and 

aggregate market conditions, among 

other factors. For instance, the markets 

for large cap equities and investment 

grade corporate bonds have different 

structures, types of participants, latency 

of trading, and liquidity levels. 

Therefore, an appropriate horizon for 

‘‘short-term’’ positions will likely vary 

across these markets. Similarly, the 

ability to transact quickly differs under 

strong macroeconomic conditions and 

in times of stress. A meaningful 

implementation of this alternative 

would likely require calibrating and 

recalibrating complex thresholds to 

exempt non-near-term proprietary 

trading and so could introduce 

additional uncertainty and increase the 

compliance burdens on SEC-regulated 

banking entities. 

‘‘Trading Desk’’ Definition 

The definition of ‘‘trading desk’’ is an 

important component of the 

implementation of the 2013 final rule in 

that certain requirements, such as those 

applicable to the underwriting and 

market-making exemptions, and the 

metrics-reporting requirements apply at 

the level of the trading desk. Under the 

current requirements, a trading desk is 

defined as the smallest discrete unit of 

organization of a banking entity that 

purchases or sells financial instruments 

for the trading account of the banking 


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33530 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

323See supra note 18. 

324See id. 325See 2013 final rule §ll.3(d)(3). 326See 2013 final rule §ll.3(e)(7). 

entity or an affiliate thereof. The 2013 

final rule recognizes that underwriting 

and market-making activities are 

essential financial services that facilitate 

capital formation and promote liquidity, 

and that metrics reporting may facilitate 

the SEC oversight of banking entities. 

The application of these rules at the 

trading desk level may facilitate 

monitoring and review of compliance 

with the underwriting and marketmaking exemptions and allow for better 

identification of the aggregate trading 

volume that must be reviewed for 

consistency with the underwriting, 

market making, and metrics-reporting 

requirements. 

At the same time, some market 

participants have noted that the trading 

desk designation under the 2013 final 

rule may be unduly burdensome and 

costly and may have engendered 

inefficient fragmentation of trading 

activity. For example, some market 

participants report an average of 95 

trading desks engaged in permitted 

activities.323 Since under the 2013 final 

rule metrics reporting is required at the 

trading desk level, such fragmentation 

may result in operational inefficiencies 

and decentralized compliance programs, 

with some participants currently 

reporting as many as 5,000,000 data 

points per entity per filing.324

The Agencies are requesting comment 

on whether the trading desk definition 

should be amended to refer to a less 

granular ‘‘business unit’’ or a ‘‘unit 

designed to establish efficient trading 

for a market sector.’’ This approach 

would allow a trading desk to be 

defined on the basis of the same criteria 

that are used to establish trading desks 

for other operational, management, and 

compliance purposes, which typically 

depend on the type of trading activity, 

asset class, product line offered, and 

individual banking entity structure and 

internal compliance policies and 

procedures. For example, the Agencies 

could define the trading desk as a unit 

of organization of a banking entity that 

engages in purchasing or selling of 

financial instruments for the trading 

account of the banking entity or an 

affiliate thereof that is structured by a 

banking entity to establish efficient 

trading for a market sector, organized to 

ensure appropriate setting, monitoring, 

and review of trading and hedging 

limits, and characterized by a clearly 

defined unit of personnel. This would 

provide banking entities greater 

flexibility in determining their own 

optimal organizational structure and 

allow banking entities organized with 

various degrees of complexity to reflect 

their organizational structure in the 

trading desk definition. This alternative 

could reduce operational costs from 

fragmentation of trading activity and 

compliance program requirements, as 

well as enable more streamlined metrics 

reporting. 

On the other hand, under this 

alternative, a banking entity may be able 

to aggregate impermissible proprietary 

trading with permissible activity (e.g., 

underwriting, market making, or 

hedging) into the same trading desk and 

consequently take speculative positions 

under the guise of permitted activities. 

To the extent that this alternative would 

allow banking entities to use a highly 

aggregated definition of a trading desk, 

it may increase moral hazard and the 

risks that the prohibitions of section 13 

of the BHC Act aim to address. The SEC 

does not have data on operating and 

compliance costs because of the 

fragmentation incurred by SECregulated banking entities, or data on 

the organizational complexity of such 

dealers, and the extent of variation 

therein. 

ii. Liquidity Management Exclusion 

Liquidity management serves an 

important purpose in ensuring banking 

entities have sufficient resources to 

meet their short-term operational needs. 

Under the 2013 final rule, certain 

activities related to liquidity 

management are excluded from the 

scope of the proprietary trading 

prohibition under some conditions.325

The current exclusion covers any 

purchase or sale of a security by a 

banking entity for the purpose of 

liquidity management in accordance 

with a documented liquidity 

management plan that meets a number 

of requirements. Moreover, current rules 

require that the financial instruments 

purchased and sold as part of a liquidity 

management plan be highly liquid and 

not reasonably expected to give rise to 

appreciable profits or losses as a result 

of short-term price movements. 

The Agencies recognize that the 

liquidity management exclusion may be 

narrow and that the trading account 

definition may scope in routine assetliability management and commercialbanking related activities that trigger the 

rebuttable presumption or the marketrisk capital prong. Accordingly, the 

Agencies are proposing to expand the 

liquidity management exclusion. 

Specifically, the proposed amendments 

would broaden the liquidity 

management exclusion such that it 

would apply not only to securities, but 

also to foreign exchange forwards and 

foreign exchange swaps (as defined in 

the Commodity Exchange Act), and to 

physically settled cross-currency swaps. 

Under the proposed amendment, SECregulated banking entities would face 

lower burdens and enjoy greater 

flexibility in currency-risk management 

as part of their overall liquidity 

management plans. To the degree that 

the 2013 final rule may be restricting 

liquidity-risk management by banking 

entities, and to the extent that these 

effects impact their trading activity, the 

proposed amendment could facilitate 

more efficient risk management, greater 

secondary market activity, and more 

capital formation in primary markets. 

However, in the absence of other 

conditions governing reliance on the 

liquidity management exclusion, this 

flexibility may also lead to currency 

derivatives exposures, including 

potentially very large exposures, being 

scoped out of the trading account 

definition and the ensuing substantive 

prohibitions of the 2013 final rule. In 

addition, some entities may seek to rely 

on this exclusion while engaging in 

speculative currency trading, which 

may increase their risk-taking and moral 

hazard and reduce the effectiveness of 

regulatory oversight. While the 

proposed amendment broadens the set 

of instruments that banking entities may 

use to manage liquidity, the proposed 

reservation of authority would provide 

the Agencies with the ability to 

determine whether a particular 

purchase or sale of a financial 

instrument by a banking entity either is 

or is not for the trading account. 

iii. Error Trades 

The 2013 final rule excludes from the 

proprietary trading prohibition certain 

‘‘clearing activities’’ by banking entities 

that are members of clearing agencies, 

derivatives clearing organizations, or 

designated financial market utilities. 

Specifically, such clearing activities are 

defined to include, among others, any 

purchase or sale necessary to correct 

error trades made by, or on behalf of, 

customers with respect to customer 

transactions that are cleared, provided 

the purchase or sale is conducted in 

accordance with certain regulations, 

rules, or procedures. However, the 

current exclusion for error trades is 

applicable only to clearing members 

with respect to cleared customer 

transactions.326

The proposed amendments would 

exclude trading errors and subsequent 

correcting transactions from the 

definition of proprietary trading. The 


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327Broker-dealers clearing and/or carrying 

customer accounts are identified using FOCUS 

filings. Broadly, broker-dealers that are clearing or 

carrying firms directly carry customer accounts, 

maintain custody of the assets, and clear trades. 

Other broker-dealers may accept customer orders 

but do not maintain custody of assets. See, e.g., 

Clearing Firms FAQ, FINRA, https://www.finra.org/ 

arbitration-and-mediation/faq-clearing-firms-faq. 

This analysis excludes SEC-registered brokerdealers affiliated with banks that have consolidated 

total assets less than or equal to $10 billion and 

trading assets and liabilities less than or equal to 

5% of total assets, as well as firms for which bank 

trading asset and liability data was not available. 

328See 2013 final rule §ll.4 (a). 

329See 2013 final rule §ll.4 (a)(2)(i). 

330See 2013 final rule §ll.4 (a)(2)(ii). 

331See 2013 final rule §ll.4 (a)(2)(iii). 

332See 2013 final rule §ll.4 (a)(2)(iv). 

333See 2013 final rule §ll.4 (a)(2)(v). 

334See 2013 final rule §ll.4 (b). 

335See 2013 final rule §ll.4 (b)(2)(i). 

336See 2013 final rule §ll.4 (b)(2)(ii). 

337See 2013 final rule §ll.4 (b)(2)(iii). 

338See 2013 final rule §ll.4 (b)(3)(i). 

proposed amendments primarily impact 

SEC-registered dealers that are not 

clearing members with respect to all 

customer trades and dealers that are 

clearing members with respect to 

customer trades that are not cleared. 

Table 6 reports information about 

broker-dealer count, assets, and 

holdings, by affiliation and clearing 

type. 

TABLE 6—BROKER-DEALER ASSETS AND HOLDINGS BY CLEARING STATUS 327

Broker-dealers subject to section 13 of the BHC Act Number Total assets 

($mln) 

Holdings 

($mln) 

Holdings 

(altern.) 

($mln) 

Clear/carry ....................................................................................................... 56 3,002,341 720,863 533,100 

Other ................................................................................................................ 82 36,996 3,843 3,455 

Total .......................................................................................................... 138 3,039,337 724,706 536,555 

Since correcting error trades by or on 

behalf of customers is not conducted for 

the purpose of profiting from short-term 

price movements, this amendment is 

likely to facilitate valuable customerfacing activities. As discussed elsewhere 

in this Supplementary Information, the 

Agencies believe that banking entities 

should monitor and manage their error 

trade account because doing so would 

help prevent personnel from using these 

accounts for the purpose of evading the 

2013 final rule. We preliminarily 

believe that existing requirements and 

SEC oversight would be sufficient to 

deter participants from using the error 

trade exclusion to obfuscate 

impermissible proprietary trades. 

c. Permitted Underwriting and Market 

Making 

i. Regulatory Baseline 

Underwriting and market making are 

customer-oriented financial services 

that are essential to capital formation 

and market liquidity, and the risks and 

profit sources related to these activities 

are distinct from those related to 

impermissible proprietary trading. 

Therefore, the 2013 final rule contains 

exemptions for underwriting and market 

making-related activities. 

Under the 2013 final rule, all banking 

entities with covered activities must 

satisfy five requirements with respect to 

their underwriting activities to qualify 

for the underwriting exemption.328

First, the banking entity must act as an 

underwriter for a distribution of 

securities, and the trading desk’s 

underwriting position must be related to 

such distribution.329 Second, the 

amount and type of the securities in the 

trading desk’s underwriting position 

must be designed not to exceed RENTD, 

and reasonable efforts must be made to 

sell or otherwise reduce the 

underwriting position within a 

reasonable period, taking into account 

the liquidity, maturity, and depth of the 

market for the relevant type of 

security.330 Third, the banking entity 

must establish and implement, 

maintain, and enforce an internal 

compliance system that is reasonably 

designed to ensure the banking entity’s 

compliance with the requirements. The 

compliance program must include the 

list of the products, instruments, or 

exposures each trading desk may 

purchase, sell, or manage as part of its 

underwriting activities, as well as the 

limits for each trading desk, based on 

the nature and amount of the trading 

desk’s underwriting activities, including 

RENTD limits.331 Fourth, the 

compensation arrangements of persons 

engaged in underwriting must be 

designed to not reward or incentivize 

prohibited proprietary trading.332 Fifth, 

the banking entity must be 

appropriately licensed or registered to 

perform underwriting activities.333

Under the current baseline, all 

banking entities with covered activities 

must satisfy six requirements with 

respect to their market-making activities 

to qualify for the market-making 

exemption.334 First, the trading desk 

responsible for the market-making 

activities must routinely stand ready to 

purchase and sell the financial 

instruments in which it is making 

markets and must be willing and 

available to quote, purchase, and sell, or 

otherwise enter into long and short 

positions in these types of financial 

instruments for its own account in 

commercially reasonable amounts and 

throughout market cycles.335 Second, 

the trading desks’ market-maker 

inventory must be designed not to 

exceed, on an ongoing basis, RENTD.336

Third, the banking entity must establish, 

implement, and enforce an internal 

compliance program, reasonably 

designed to ensure compliance with the 

requirements. This compliance program 

must include, among other things, limits 

for each trading desk that address 

RENTD.337 Fourth, the banking entity 

must ensure that any violations of risk 

limits are promptly corrected. Fifth, the 

compensation arrangements of persons 

engaged in market making must be 

designed so as to not reward or 

incentivize prohibited proprietary 

trading. Finally, the banking entity must 

be appropriately licensed or registered. 

We also note that, under the baseline, 

an organizational unit or a trading desk 

of another banking entity that has 

consolidated trading assets and 

liabilities of $50 billion or more is 

generally not considered a client, 

customer, or counterparty for the 

purposes of the RENTD requirement.338

Thus, such demand does not contribute 

to RENTD unless such demand is 

affected through an anonymous trading 

facility or unless the trading desk 

documents how and why the 

organizational unit of said large banking 

entity should be treated as a client, 

customer, or counterparty. To the extent 

that such documentation requirements 

increase the cost of intermediating 

interdealer transactions, this current 

requirement may impact the volume 

and cost of interdealer trading. 

The Agencies understand that current 

compliance with the RENTD 


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339See supra note 18. 

340For instance, Bessembinder et al. (2017) shows 

that dealers have shrunk their intraday capital 

commitment, measured as the absolute difference 

between their daily accumulated buy volume and 

sell volume. Similarly, the FRB’s ‘‘Staff Q2 2017 

Report on Corporate Bond Market Liquidity’’ 

(available at https://www.federalreserve.gov/foia/ 

files/bond-market-liquidity-report-2017Q2.pdf) 

shows a steep decline in broker-dealer holdings of 

corporate and foreign bonds between 2007 and 2009 

and a gradual decline in 2012 onwards. 

While some research suggests the decline in 

dealer inventories is attributable to the 2013 final 

rule (e.g., Bessembinder et al. (2017)), other studies 

show that inventory declines in fixed income 

markets occurred in the immediate aftermath of the 

financial crisis and coincided with a drastic decline 

in profitability of trading desks during the crisis 

(e.g., Access to Capital and Market Liquidity, supra 

note 106, Figure 34). It is difficult to clearly 

distinguish the causal effects of the various 

provisions of section 13 of the BHC Act from the 

influence of other confounding factors, such as 

crisis-related changes in dealer risk aversion and 

declines in profitability of trading, macroeconomic 

conditions, the evolution of market structure and 

new technology, and other factors. 

341See supra note 290. 

342See, e.g., Access to Capital and Market 

Liquidity supra note 106, Part IV.C.4 (describing 

corporate bond activity on electronic venues). 

343We are not aware of any data that allows us 

to quantify the impacts of individual provisions of 

section 13 of the BHC Act on dealer inventories or 

market liquidity. The evidence on the impacts of 

section 13 on various measures of corporate bond, 

credit default swap (CDS), and bond fund liquidity 

is sensitive to the choice of market, measure, time 

period, and empirical methodology. For a literature 

review, see, e.g., Access to Capital and Market 

Liquidity supra note 106. 344See, e.g., 17 CFR 240.15c3–1. 

requirements under both the 

underwriting and market-making 

exemptions creates ambiguity for some 

market participants, is over-reliant on 

historical demand, and necessitates an 

accurate calibration of RENTD for 

different asset classes, time periods, and 

market conditions.339 Since forecasting 

future customer demand involves 

uncertainty, particularly in less liquid 

and more volatile instruments and 

products, banking entity affiliated 

dealers may face uncertainty about the 

ability to rely on the underwriting and 

market-making exemptions. This 

uncertainty can reduce a banking 

entity’s willingness to engage in 

principal transactions with 

customers,340 which, along with 

reducing profits, can adversely impact 

the volume of transactions 

intermediated by banking entities. To 

the extent that non-banking entities do 

not step in to intermediate trades that 

do not occur as a result of the RENTD 

requirement,341 and to the extent that 

technological advances do not allow 

customers to trade against other 

customers,342 thereby shortening dealer 

intermediation chains, counterparties of 

affected banking entities may have 

difficulty transacting in some market 

segments.343

ii. Costs and Benefits 

Under the proposal, Group A and 

Group B entities with covered activities 

would be presumed compliant with the 

RENTD requirements of the 

underwriting and market-making 

exemptions if the banking entity 

establishes and implements, maintains, 

and enforces internally set risk limits. 

These risk limits would be subject to 

regulatory review and oversight on an 

ongoing basis, which would include an 

assessment of whether the limits are 

designed not to exceed RENTD. For 

Group A entities, these limits are 

required to be established within the 

entity’s compliance program. Under the 

proposed amendment, Group B entities 

would not be required to establish a 

separate compliance program for 

underwriting and market-making 

requirements, including the risk limits 

for RENTD. However, in order to be 

presumed compliant with the 

underwriting and market-making 

exemptions, Group B entities must 

establish and comply with the RENTD 

limits. We note that Group B entities 

seeking to rely on the presumption of 

compliance would still be required to 

comply with the RENTD requirements, 

even though they would not be required 

to design a specific underwriting or 

market-making compliance program. 

Under the proposed amendments, 

Group C banking entities would be 

presumed compliant with requirements 

of subpart B and subpart C of the rule, 

including with respect to the reliance on 

the underwriting and market-making 

exemptions, without reference to their 

internal RENTD limits. In addition, 

under the proposal, Group A entities 

relying on internal risk limits for 

market-making RENTD requirements 

must promptly reduce the risk exposure 

when the risk limit is exceeded. 

The proposed amendments may 

provide SEC-registered banking entities 

with more flexibility and certainty in 

conducting permissible underwriting 

and market making-related activities. 

The proposed presumption allows the 

reliance on internally-set risk limits in 

accordance with a banking entity’s risk 

management function that may already 

be used to meet other regulatory 

requirements, such as obligations under 

the SEC and FINRA capital and 

liquidity rules,344 so long as these limits 

meet the requirements under the 

proposed amendment. Therefore, the 

proposed amendment may prevent 

unnecessary duplication of riskmanagement compliance procedures for 

the purposes of complying with 

multiple regulations and may reduce 

compliance costs for SEC-regulated 

banking entities. To the extent that the 

uncertainty and compliance burdens 

related to the RENTD requirements are 

currently impeding otherwise profitable 

permissible underwriting and market 

making by dealers, the proposed 

amendments may increase banking 

entities’ profits and the volume of dealer 

intermediation. 

The proposed regulatory oversight of 

the internally-set risk limits may result 

in new compliance burdens for SEC 

registrants, potentially offsetting the 

cost-reducing effects of other proposed 

amendments to the compliance with the 

underwriting and market-making 

exemptions. However, if banking 

entities are permitted to rely on internal 

risk limits to meet the RENTD 

requirement, Agency oversight of 

internal risk limits for the purposes of 

compliance with the proposed rule may 

help support the benefits and costs of 

the substantive prohibitions of section 

13 of the BHC Act. Additionally, the 

costs of the prompt notice requirement 

for exceeding the risk limits will depend 

on a given entity’s trading activity and 

on its design of internal risk limits, 

which are likely to reflect, among other 

factors, the entity’s respective business 

model, organizational structure, 

profitability and volume of trading 

activity. As a result, we cannot estimate 

these costs with any degree of certainty. 

The overall economic effect of these 

amendments will depend on the amount 

and profitability of economic activity 

that currently does not occur because of 

the uncertainty surrounding the RENTD 

requirement compared to the potential 

costs of establishing and maintaining 

internal risk limits, and uncertainty 

related to validation that these limits 

would meet the requirements under the 

proposed amendments. We do not have 

data on the volume of trading activity 

that does not occur because of 

uncertainty and costs surrounding the 

RENTD requirement, or data on the 

profitability of such trading activity for 

banking entities. To the best of our 

knowledge, no such data is publicly 

available. 

To the extent that internal risk limits 

may be designed to exceed the actual 

RENTD, introducing the proposed 

presumption may also increase risktaking by banking entity dealers. As a 

result, under the proposed amendments, 

some entities may be able to maintain 

positions that are larger than RENTD 

and, thus, increase their risk-taking. 

This type of activity could increase 

moral hazard and reduce the economic 

effects of section 13 of the BHC Act and 

the implementing rules. However, to 


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345See, e.g., Staff Q2 2017 Report on Corporate 

Bond Market Liquidity supra note 340; see also 

Bessembinder et al. (2017). 

346 Dealers can trade as agents, matching 

customer buys to customer sells, or as principals, 

absorbing customer buys and customer sells into 

inventory and committing the necessary capital. 

347 Dealers provide less liquidity to clients and 

peripheral dealers during stress times; during the 

peak of the crisis core dealers charged higher 

spreads to peripheral dealers and clients but lower 

spreads to dealers with whom they had strong ties. 

See Di Maggio, Kermani, and Song, 2017, ‘‘The 

Value of Trading Relationships in Turbulent 

Times.’’ Journal of Financial Economics 124(2), 

266–284; see also Choi and Shachar, 2013, ‘‘Did 

Liquidity Providers Become Liquidity Seekers?’’ 

New York Fed Staff Report No. 650, available at 

https://www.newyorkfed.org/medialibrary/media/ 

research/staff_reports/sr650.pdf. 

348See Bao et al. (2017); Anderson and Stulz 

(2017). 

349For a literature review and data, see Access to 

Capital and Market Liquidity supra note 106. 

350For a literature review, see, e.g., Benoit et al. 

(2017). Some examples include: 

• A large proportion of the variation in bank 

market-to-book ratios over time may be due to 

changes in the value of government guarantees. See 

Atkeson et al. (2018). 

• Moral hazard resulting from idiosyncratic and 

targeted bailouts may make the economy 

significantly more exposed to financial crises, while 

moral hazard effects may be limited if bailouts are 

systemic and broad based. See Bianchi (2016); see 

also Kelly et al. (2016). 

• Deposit insurance and financial safety nets 

increased bank risk-taking and measures of 

systemic fragility in the run-up to the global 

financial crisis. However, during the crisis itself, 

deposit insurance reduced bank risk and systemic 

stability. See Anginer et al. (2014). 

• Short-term capital market funding may increase 

bank fragility. See Beltratti and Stulz (2012). 

• Implicit bailout guarantees for the financial 

sector as a whole are priced in spreads on index put 

Continued 

mitigate this effect, the Agencies are 

proposing that the internally set risk 

limits that would be used to establish 

the presumption of compliance would 

be subject to ongoing regulatory 

assessments as to whether they are 

designed not to exceed RENTD. 

We note that the proposed 

amendments tailor regulatory relief for 

smaller banking entities for both the 

underwriting and market-making 

exemptions. More specifically, the 

threshold for the reduced requirements 

is based on trading assets and liabilities 

for both exemptions. We also recognize 

that the nature, profit sources, and risks 

of underwriting and market-making 

activities differ. For example, 

underwriting may involve pricing, book 

building, and placement of securities 

with investors, whereas market making 

centers on intermediation of trading 

activity. 

In that regard, the Agencies could 

have proposed an approach, under 

which underwriting and market-making 

requirements are tailored to banking 

entities on the basis of different 

thresholds. For example, the Agencies 

could have instead relied on the trading 

assets and liabilities threshold for 

market-making compliance (as 

proposed), but applied a different 

threshold for underwriting compliance, 

on the basis of the volume or 

profitability of past underwriting 

activity. This alternative would have 

tailored the compliance requirements 

for SEC-regulated banking entities with 

respect to underwriting activities. 

However, the volume and profitability 

of underwriting activity is highly 

cyclical and is likely to decline in weak 

macroeconomic conditions. As a result, 

under the alternative, SEC-regulated 

banking entities would face lower 

compliance obligations with respect to 

underwriting activity during times of 

economic stress when covered trading 

activity related to underwriting may 

pose the highest risk of loss. 

iii. Efficiency, Competition, and Capital 

Formation 

As discussed above, these proposed 

amendments may reduce the costs of 

relying on the underwriting and marketmaking exemptions, which may 

facilitate the activities related to these 

exemptions. The evolution in market 

structure in some asset classes (e.g., 

equities) has transformed the role of 

traditional dealers vis-a`-vis other 

participants, particularly as it relates to 

high-frequency trading and electronic 

platforms. However, dealers continue to 

play a central role in less liquid 

markets, such as corporate bond and 

over-the-counter derivatives markets. 

While it is difficult to establish 

causality, corporate bond dealers, 

particularly bank-affiliated dealers, 

have, on aggregate, significantly reduced 

their capital commitment post-crisis—a 

finding that is consistent with a 

reduction in liquidity provision in 

corporate bonds due to the 2013 final 

rule.345 In addition, corporate bond 

dealers may have shifted from trading in 

a principal capacity to agency 

trading.346 To the extent that this 

change cannot be explained by 

enhanced ability of dealers to manage 

corporate bond inventory, electronic 

trading, post-crisis changes in dealer 

risk tolerance and macro factors (effects 

which themselves need not be fully 

independent of the effect of section 13 

of the BHC Act and the 2013 final rule), 

such effects may point to a reduced 

supply of liquidity by dealers. 

Moreover, corporate bond dealers 

decrease liquidity provision in times of 

stress in general (e.g., during a financial 

crisis) 347 and after the 2013 final rule in 

particular (under a few isolated stressed 

selling conditions, some evidence 

shows greater price impact from trading 

activity).348 In dealer-centric singlename CDS markets, interdealer trade 

activity, trade sizes, quoting activity, 

and quoted spreads for illiquid 

underliers have deteriorated since 2010, 

but dealer-customer activity and various 

trading activity metrics have remained 

stable.349

Because of the methodological 

challenges described earlier in this 

analysis, we cannot quantify potential 

effects of the 2013 final rule in general, 

and the RENTD, underwriting, and 

market-making provisions of the 2013 

final rule in particular, on capital 

formation and market liquidity. We also 

recognize that these provisions may not 

be currently affecting all securities 

markets, asset classes, and products 

uniformly. If, because of uncertainty 

and the costs of relying on marketmaking and hedging exemptions, 

dealers are limiting their market-making 

and hedging activity in certain products, 

the proposed amendments may facilitate 

market making. Because secondary 

market liquidity can influence the 

willingness to invest in primary 

markets, and access to these markets can 

enable market participants to mitigate 

undesirable risk exposures, the 

amendments may increase trading 

activity and capital formation in some 

segments of the market. 

While the statute and the 2013 final 

rule, including as proposed to be 

amended, prohibit banking entities from 

engaging in proprietary trading, some 

trading desks may attempt to use certain 

elements of the proposed RENTD 

amendments to circumvent those 

restrictions. This may reduce the 

economic benefits and costs of the 2013 

final rule outlined in section V.D.1. We 

continue to recognize that proprietary 

trading by banking entities may give rise 

to moral hazard, economic inefficiency 

because of implicitly subsidized risktaking, and market fragility, and may 

increase conflicts of interest between 

banking entities and their customers. An 

analysis of the effects of the 2013 final 

rule in general, and the specific 

amendments being proposed here in 

particular, on moral hazard, risk-taking, 

systemic risk, and conflicts of interest 

described above, faces the same 

methodological challenges discussed in 

section V.D.1. and in this section. In 

addition, existing qualitative analysis 

and quantitative estimates of moral 

hazard, risk-taking incentives resulting 

from deposit insurance and implicit 

bailout guarantees, and systemic risk 

implications of proprietary trading, 

centers on banking entities that are not 

SEC registrants.350 However, we 


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options far more than those on put options of 

individual banks. See, e.g., Kelly et al. (2016). 

• Other research used CDS data to measure the 

value of government bailouts to bondholders and 

stockholders of large financial firms during the 

global financial crisis. See Veronesi and Zingales 

(2010). 

351See, e.g., Billio, Getmansky, Lo, and Pelizzon, 

2012, Econometric Measures of Connectedness and 

Systemic Risk in the Finance and Insurance Sectors, 

Journal of Financial Economics 104(3), 535–559; see 

also Alam, Fuss, and Gropp, 2014, Spillover Effects 

Among Financial Institutions: A State-Dependent 

Sensitivity Value at Risk Approach (SDSVar). 

Journal of Financial and Quantitative Analysis 

49(3), 575–598; Adrian and Brunnermeier, 2016, 

CoVar, American Economic Review 106(7), 1705– 

1741. 

352See 2013 final rule §ll.5. 

353See 79 FR at 5631. 

354See supra note 18. 

continue to recognize that the effects of 

the proposed amendments on bank 

entity risk-taking and conflicts of 

interest may flow through to SECregistered dealers and investment 

advisers affiliated with banks and bank 

holding companies and may impact 

securities markets. As suggested by 

academic evidence, the presence and 

magnitude of spillovers across different 

types of financial institutions vary over 

time and may be more significant in 

times of stress.351

Where the proposed amendments 

increase the scope of permissible 

activities or decrease the risk of 

detection of proprietary trading, their 

impact on informational efficiency 

stems from a balance of two effects. On 

the one hand, where banking entities’ 

proprietary trading strategies are based 

on superior analysis and prediction 

models, their reduced ability to trade on 

such information may make securities 

markets less informationally efficient. 

While such proprietary trading 

strategies can be executed by brokerdealers unaffiliated with banking 

entities and unaffected by the 

prohibitions on proprietary trading, 

their ability to do so may be constrained 

by their limited access to capital and a 

lack of scale needed to profit from such 

strategies. On the other hand, if superior 

information is obtained by an entity 

from its customer-facing activities and 

as a result of conflicts of interest, 

proprietary trading may make customers 

less willing to transact with banks or 

participate in securities markets. 

iv. Loan-Related Swaps 

The Agencies are requesting comment 

on the treatment of swaps entered into 

with a customer in connection with a 

loan provided to the customer. 

Specifically, loan-related swaps are 

transactions between a banking entity 

and a loan customer that are directly 

related to the terms of the customer’s 

loan. The Agencies understand that 

such swaps may be considered financial 

instruments triggering proprietary 

trading prohibitions of the 2013 final 

rule. As a result, a banking entity would 

need to rely on an applicable exclusion 

from the definition of proprietary 

trading or an exemption in the 

implementing regulations in order for 

this activity to be permissible. 

Accordingly, the Agencies are 

requesting comment on whether loanrelated swaps should be permitted 

under the market-making exemption if 

the banking entity stands ready to make 

a market in both directions whenever a 

customer makes an appropriate request, 

but in practice primarily makes a market 

in the swaps only in one direction. The 

Agencies are also requesting comment 

on whether it would be appropriate to 

exclude loan-related swaps from the 

definition of proprietary trading for 

some banking entities or to permit the 

activity pursuant to an exemption from 

the prohibition on proprietary trading 

other than market making. 

Addressing the treatment of loanrelated swaps may benefit banking 

entities that are currently unsure as to 

their ability to engage in loan-related 

swaps pursuant to the existing marketmaking exemption. Legal certainty in 

this space may increase the willingness 

of banking entities to accommodate 

customer demand for such loans and 

increase certainty that such activity 

would not trigger the proprietary trading 

prohibition. To the degree that the backto-back offsetting purchases and sales of 

derivatives are not immediate, and to 

the extent that such transactions are not 

cleared and involve counterparty risk, 

this may also increase risk-taking by 

banking entities. To the extent that the 

proposed guidance was to increase the 

scope of permissible proprietary trading 

activity, such activity would implicate 

the economic tradeoffs of the 

proprietary trading prohibitions of the 

2013 final rule discussed in section 

V.D.1. 

d. Permitted Risk-Mitigating Hedging 

i. Regulatory Baseline 

Under the baseline, certain riskmitigating hedging activities may be 

exempt from the restriction on 

proprietary trading under the riskmitigating hedging exemption. To make 

use of this exemption, the 2013 final 

rule requires all banking entities to 

comply with a comprehensive and 

multi-faceted set of requirements, 

including: (1) The establishment and 

implementation, and maintenance of an 

internal compliance program; (2) 

satisfaction of various criteria for 

hedging activities; and (3) the existence 

of compensation arrangements for 

persons performing risk-mitigating 

hedging activities that are designed not 

to reward or incentivize prohibited 

proprietary trading. In addition, certain 

activities under the hedging exemption 

are subject to documentation 

requirements.352

Specifically, 2013 final rule requires 

that a banking entity seeking to rely on 

the risk-mitigating hedging exemption 

must establish, implement, maintain, 

and enforce an internal compliance 

program that is reasonably designed to 

ensure compliance with the 

requirements of the rule. Such a 

compliance program must include 

reasonably designed written policies 

and procedures regarding the positions, 

techniques, and strategies that may be 

used for hedging, including 

documentation indicating what 

positions, contracts, or other holdings a 

particular trading desk may use in its 

risk-mitigating hedging activities, as 

well as position and aging limits with 

respect to such positions, contracts, or 

other holdings. The compliance 

program also must provide for internal 

controls and ongoing monitoring, 

management, and authorization 

procedures, including relevant 

escalation procedures. In addition, the 

2013 final rule requires that all banking 

entities, as part of their compliance 

program, must conduct analysis, 

including correlation analysis, and 

independent testing designed to ensure 

that the positions, techniques, and 

strategies that may be used for hedging 

are designed to reduce or otherwise 

significantly mitigate and demonstrably 

reduce or otherwise significantly 

mitigate the specific, identifiable risk(s) 

being hedged. 

The 2013 final rule does not require 

a banking entity to prove correlation 

mathematically—rather, the nature and 

extent of the correlation analysis should 

be dependent on the facts and 

circumstances of the hedge and the 

underlying risks targeted. Moreover, if 

correlation cannot be demonstrated, the 

analysis needs to state the reason and 

explain how the proposed hedging 

position, technique, or strategy is 

designed to reduce or significantly 

mitigate risk and how that reduction or 

mitigation can be demonstrated without 

correlation.353 Some market participants 

have argued that the inability to perform 

correlation analysis, for instance, for 

non-trading assets such as mortgage 

servicing assets, can add as much as 2% 

of the asset value to the cost of 

hedging.354


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355See 2013 final rule §ll.5(b)(2)(ii). 

356See 2013 final rule §ll.5(c)(1). 

357See 2013 final rule §ll.5(c)(3); see also 2013 

final rule §ll.20(b)(6). 

To qualify for the risk-mitigating 

hedging exemption, the hedging 

activity, both at inception and at the 

time of any adjustment to the hedging 

activity, must be designed to reduce or 

otherwise significantly mitigate and 

demonstrably reduce or significantly 

mitigate one or more specific 

identifiable risks.355 Hedging activities 

also must not give rise, at the inception 

of the hedge, to any significant new or 

additional risk that is not itself hedged 

contemporaneously. Additionally, the 

hedging activity must be subject to 

continuing review, monitoring, and 

management by the banking entity, 

including ongoing recalibration of the 

hedging activity to ensure that the 

hedging activity satisfies the 

requirements for the exemption and 

does not constitute prohibited 

proprietary trading. Lastly, the 

compensation arrangements of persons 

performing risk-mitigating hedging 

activities must be designed so as to not 

reward or incentivize prohibited 

proprietary trading. 

Finally, the 2013 final rule requires 

banking entities to document and retain 

information related to the purchase or 

sale of hedging instruments that are 

either (1) established by a trading desk 

that is different from the trading desk 

establishing or responsible for the risks 

being hedged; (2) established by the 

specific trading desk establishing or 

responsible for the risks being hedged 

but that are effected through means not 

specifically identified in the trading 

desks written policies and procedures; 

or (3) established to hedge aggregate 

positions across two or more trading 

desks. 356 The documentation must 

include the specific identifiable risks 

being hedged, the specific riskmitigating strategy that is being 

implemented, and the trading desk that 

is establishing and responsible for the 

hedge. These records must be retained 

for a period of not less than 5 years in 

a form that allows them to be promptly 

produced if requested.357

As discussed elsewhere in this 

Supplementary Information, the 

Agencies recognize that, in some 

circumstances, it may be difficult to 

know with sufficient certainty whether 

a potential hedging activity will 

continue to demonstrably reduce or 

significantly mitigate an identifiable risk 

after it is implemented. Unforeseeable 

changes in market conditions and other 

factors could reduce or eliminate the 

intended risk-mitigating impact of the 

hedging activity, making it difficult for 

a banking entity to comply with the 

continuous requirement that the 

hedging activity demonstrably reduce or 

significantly mitigate specific, 

identifiable risks. In such cases, a 

banking entity may choose not to enter 

into a hedge out of concern that it may 

not be able to effectively comply with 

the continuing requirement to 

demonstrate risk mitigation. 

We also recognize that SEC-regulated 

entities may engage in both static and 

dynamic hedging at the portfolio (and 

not at the transaction) level and monitor 

and reevaluate aggregate portfolio risk 

exposures on an ongoing basis, rather 

than the risk exposure of individual 

transactions. Dynamic hedging may be 

particularly common among dealers 

with large derivative portfolios, 

especially when the values of these 

portfolios are nonlinear functions of the 

prices of the underlying assets (e.g., 

gamma hedging of options). The rules 

currently in effect permit dynamic 

hedging, but require the banking entity 

to document and support its decisions 

regarding individual hedging 

transactions, strategies, and techniques 

for ongoing activity in the same manner 

as for its initial activities, rather than 

the hedging decisions regarding a 

portfolio as a whole. 

ii. Costs and Benefits 

As discussed elsewhere in this 

Supplementary Information, the 

Agencies recognize that hedging is an 

essential tool for risk mitigation and can 

enhance a banking entity’s provision of 

client-facing services, such as market 

making and underwriting, as well as 

facilitate financial stability. In 

recognition of the role that this activity 

plays as part of a banking entity’s 

overall operations, the Agencies have 

proposed a number of changes that are 

intended to streamline and clarify the 

current exemption for risk-mitigating 

hedging activities. 

The first proposed amendment 

concerns the ‘‘demonstrability’’ 

requirement of the risk-mitigating 

hedging exemption. Specifically, the 

Agencies propose to eliminate the 

requirement that the risk-mitigating 

hedging activity must demonstrably 

reduce or otherwise significantly 

mitigate one or more specific 

identifiable risks at the inception of the 

hedge. Additionally, the 

demonstrability requirement would also 

be removed from the requirement to 

continually review, monitor, and 

manage the banking entity’s existing 

hedging activity. We also note that 

banking entities would continue to be 

subject to the requirement that the riskmitigating hedging activity be designed 

to reduce or otherwise significantly 

mitigate one or more specific, 

identifiable risks, as well as to the 

requirement that the hedging activity be 

subject to continuing review, 

monitoring and management by the 

banking entity to confirm that such 

activity is designed to reduce or 

otherwise significantly mitigate the 

specific, identifiable risks that develop 

over time from the risk-mitigating 

hedging. 

The removal of the demonstrability 

requirement is expected to benefit 

banking entity dealers, as it would 

decrease uncertainty about the ability to 

rely on the risk-mitigating hedging 

exemption and may reduce the 

compliance costs of engaging in 

permitted hedging activities. While this 

aspect of the proposal may alleviate 

compliance burdens related to risk 

management and potentially facilitate 

greater trading activity and liquidity 

provision by bank-affiliated dealers, it 

could also enable dealers to accumulate 

large proprietary positions through 

adjustments (or lack thereof) to 

otherwise permissible hedging 

portfolios. Therefore, we recognize that 

the proposed amendment could increase 

moral hazard risks related to proprietary 

trading by allowing dealers to take 

positions that are economically 

equivalent to positions they could have 

taken in the absence of the 2013 final 

rule. 

The second proposed amendment to 

the risk-mitigating hedging exemption is 

the removal of the requirement to 

perform the correlation analysis. The 

Agencies recognize that a correlation 

analysis based on returns may be 

prohibitively complex for some asset 

classes, and that a correlation coefficient 

may not always serve as a meaningful or 

predictive risk metric. While we 

recognize that, in some instances, 

correlation analysis of past returns may 

be helpful in evaluating whether a 

hedging transaction was effective in 

offsetting the risks intended to be 

mitigated, correlation analysis may not 

be an effective tool for such evaluation 

in other instances. For example, 

correlation across assets and asset 

classes evolves over time and may 

exhibit jumps at times of idiosyncratic 

or systematic stress. Additionally, the 

hedging activity, even if properly 

designed to reduce risk, may not be 

practicable if costly delays or 

compliance complexities result from a 

requirement to undertake a correlation 

analysis. Thus, the removal of the 

correlation analysis requirement may 

provide dealers with greater flexibility 

in selecting and executing riskVerDate Sep<11>2014 19:39 Jul 16, 2018 Jkt 244001 PO 00000 Frm 00105 Fmt 4701 Sfmt 4702 E:\FR\FM\17JYP3.SGM 17JYP3

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33536 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

358 Group C banking entities (i.e., those with 

limited trading assets and liabilities) also would not 

be subject to these express requirements. 

359Recordkeeping burden reduction for brokerdealers: 20 hours per firm × 0.18 weight × (Attorney 

at $409 per hour) × 138 firms = $203,191. 

Recordkeeping burden reduction for entities that 

may register as SBSDs: 20 hours per firm × 0.18 

weight × (Attorney at $409 per hour) × 34 firms = 

$50,062. 

360Recordkeeping burden reduction for entities 

that may register as SBSDs: 20 hours per firm × 0.18 

weight × (Attorney at $409 per hour) × 34 firms = 

$50,062. 

361 Initial set-up burden reduction for brokerdealers: 10 hours per firm × 0.18 weight × (Attorney 

at $409 per hour) × 138 firms = $101,596. Initial setup burden reduction for entities that may register 

as SBSDs: 10 hours per firm × 0.18 weight × 

(Attorney at $409 per hour) × 34 firms = $25,031. 

mitigating hedging activities. However, 

we also recognize that the removal of 

the correlation analysis requirement 

may result in tradeoffs discussed above. 

To the extent that some banking entities 

may be able to engage in speculative 

proprietary trading activities while 

relying on the risk-mitigating hedging 

exemption, the proposed amendment 

may potentially increase moral hazard 

and conflicts of interest between 

banking entities and their customers, 

notwithstanding the fact that a potential 

increase in permitted risk-mitigating 

hedging may increase capital formation 

and trading activity by banking entities. 

The third proposed amendment 

simplifies the requirements of the riskmitigating hedging exemption for Group 

B banking entities (i.e., those with 

moderate trading assets and liabilities). 

The proposed amendment would 

remove the requirement to have a 

specific risk-mitigating hedging 

compliance program, as well as the 

documentation requirements and 

certain hedging activity requirements 

for Group B entities.358 As a result, 

these dealers would be subject to two 

key hedging activity requirements: (1) 

That a hedging transaction must be 

designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks; and (2) that 

a hedging transaction is subject, as 

appropriate, to ongoing review, 

monitoring, and management by the 

banking entity that requires 

recalibration of the hedging activity to 

ensure that the hedging activity satisfies 

the requirements on an ongoing basis 

and is not prohibited proprietary 

trading. Under the proposed 

amendments, Group C banking entities 

are presumed compliant with subpart B 

and subpart C of the proposed rule, 

including with respect to the reliance on 

the hedging exemption. 

As discussed elsewhere in this 

Supplementary Information, the 

Agencies recognize that banking entities 

without significant trading assets and 

liabilities are less likely to engage in 

large and/or complicated trading 

activities and hedging strategies. We 

continue to recognize that compliance 

with the 2013 final rule may impose 

disproportionate costs on banking 

entities without significant trading 

assets and liabilities. Therefore, the 

proposed amendment would benefit 

Group B and Group C entities, as it 

would reduce the costs of relying on the 

hedging exemption and, thus, engaging 

in hedging activities. To the extent that 

the removal of these requirements may 

reduce the costs of risk-mitigating 

hedging activity, Group B and Group C 

entities may increase their 

intermediation activity while also 

growing their trading assets and 

liabilities. 

The fourth proposed amendment 

reduces documentation requirements for 

Group A entities. In particular, the 

proposal removes the documentation 

requirements for some financial 

instruments used for hedging. More 

specifically, the instrument would not 

be subject to the documentation 

requirement if: (1) It is identified on a 

written list of pre-approved financial 

instruments commonly used by the 

trading desk for the specific type of 

hedging activity; and (2) at the time the 

financial instrument is purchased or 

sold the hedging activity (including the 

purchase or sale of the financial 

instrument) complies with written, preapproved hedging limits for the trading 

desk purchasing or selling the financial 

instrument for hedging activities 

undertaken for one or more other 

trading desks. The SEC lacks 

information or data that would allow us 

to quantify the magnitude of the 

expected cost reductions, as the 

prevalence of hedging activities 

depends on each registrant’s 

organizational structure, business 

model, and complexity of risk 

exposures. However, the SEC 

preliminarily believes that the flexibility 

to choose between providing 

documentation regarding risk-mitigating 

hedging transactions and establishing 

hedging limits for pre-approved 

instruments may be beneficial for Group 

A entities, as it will allow these entities 

to tailor their compliance regime to their 

specific organizational structure and 

existing policies and procedures. 

Finally, in section V.B, the Agencies 

estimate burden reductions per firm 

from the proposed amendments. The 

proposed amendments to § ll.5(c) 

will result in ongoing cost savings 

estimated at $203,191 for SEC-registered 

broker-dealers.359 Additionally, the 

proposed amendments will result in 

lower ongoing costs for potential SBSD 

registrants relative to the costs that they 

would incur under the current regime if 

they were to choose to register with the 

SEC—this cost reduction is estimated to 

reach up to $50,062.360 However, we 

recognize that compliance with SBSD 

registration requirements is not yet 

required and that there are currently no 

registered SBSDs. Similarly, the 

proposed amendments may also reduce 

initial set-up costs related to § ll.5(c) 

by $101,596 for SEC-registered brokerdealers and up to $25,031 for entities 

that may choose to register with the SEC 

as SBSDs.361

The proposed hedging amendment 

eliminates all hedging-specific 

compliance program requirements 

including correlation analysis, 

documentation requirements, and some 

hedging activity requirements for Group 

B entities. The proposed amendments 

eliminate only some of the compliance 

program requirements for Group A 

entities and provide a documentation 

requirement exemption for some 

hedging activity of these entities. Since 

the fixed costs of relying on such 

exemptions may be more significant for 

entities with smaller trading books, the 

proposed hedging amendment may 

permit Group B entities just below the 

$10 billion threshold to more effectively 

compete with Group A entities just 

above the threshold. 

The proposed hedging amendments 

may also impact the volume of hedging 

activity and capital formation. To the 

extent that some registrants currently 

experience significant compliance costs 

related to the hedging exemption, these 

costs may constrain the amount of riskmitigating hedging they currently 

engage in. The ability to hedge 

underlying risks at a low cost can 

facilitate the willingness of SECregulated entities to commit capital and 

take on underlying risk exposures. 

Because the proposed amendments 

would reduce costs of relying on the 

hedging exemption, these entities may 

become more incentivized to engage in 

risk-mitigating hedging activity, which 

may in turn contribute to greater capital 

formation. 

e. Trading Outside the United States 

i. Baseline 

Under the 2013 final rule, a foreign 

banking entity that has a branch, 

agency, or subsidiary located in the 

United States (and is not itself located 

in the United States) is subject to the 


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Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33537 

362See 2013 final rule §ll.6(e). 

363See 2013 final rule §ll.6(e)(3). 

364For instance, a commenter has stated that at 

least seven international banks have terminated or 

transferred existing transactions with U.S. 

counterparties in order to comply with the foreign 

trading exemption and to avoid compliance costs of 

relying on alternative exemptions or exclusions. See 

supra note 18. 

proprietary trading prohibitions and 

related compliance requirements unless 

it meets five criteria.362 First, a branch, 

agency, or subsidiary of a foreign 

banking organization that is located in 

the United States or organized under the 

laws of the United States or of any state 

may not engage as principal in the 

purchase or sale of financial 

instruments (including any personnel 

that arrange, negotiate, or execute a 

purchase or sale). Second, the banking 

entity (including relevant personnel) 

that makes the decision to engage in the 

transaction must not be located in the 

United States or organized under the 

laws of the United States or of any state. 

Third, the transaction, including any 

transaction arising from risk-mitigating 

hedging related to the transaction, must 

not be accounted for as principal 

directly or on a consolidated basis by 

any branch or affiliate that is located in 

the United States or organized under the 

laws of the United States or of any state. 

Fourth, no financing for the transaction 

can be provided by any branch or 

affiliate of a foreign banking entity that 

is located in the United States or 

organized under the laws of the United 

States or of any state (the ‘‘financing 

prong’’). Fifth, the transaction must 

generally not be conducted with or 

through any U.S. entity (the 

‘‘counterparty prong’’), unless: (1) No 

personnel of a U.S. entity that are 

located in the United States are 

involved in the arrangement, 

negotiation, or execution of such 

transaction; (2) the transaction is with 

an unaffiliated U.S. market intermediary 

acting as principal and is promptly 

cleared and settled through a central 

counterparty; or (3) the transaction is 

executed through an unaffiliated U.S. 

market intermediary acting as agent, 

conducted anonymously through an 

exchange or similar trading facility, and 

is promptly cleared and settled through 

a central counterparty.363

As discussed elsewhere in this 

Supplementary Information, the 

Agencies recognize that foreign banking 

entities seeking to rely on the exemption 

for trading outside the United States 

face a complex set of compliance 

requirements that may result in 

implementation inefficiencies. In 

particular, the application of the 

financing prong may be challenging 

because of the fungibility of some forms 

of financing. In addition, the Agencies 

recognize that satisfying the 

counterparty prong is burdensome for 

foreign banking entities and may have 

led some foreign banking entities to 

reduce the range of counterparties with 

which they engage in trading activity. 

ii. Costs and Benefits 

The proposed amendments remove 

the financing and counterparty prongs. 

Under the proposed rule, financing 

for the transaction relying on the foreign 

trading exemption can be provided by 

U.S. branches or affiliates of foreign 

banking entities, including SECregistered dealers. Foreign banking 

entities may benefit from the proposed 

amendments and enjoy greater 

flexibility in financing their transaction 

activity. However, some of the economic 

exposure and risks of proprietary 

trading by foreign banking entities 

would flow not just to the foreign 

banking entities, but to U.S.-located 

entities financing the transactions, e.g., 

through margin loans. While SECregistered banking entity dealers 

financing the transactions of foreign 

entities are themselves subject to the 

substantive requirements of the 2013 

final rule, SEC-registered dealers that 

are not banking entities under the BHC 

Act are not. The proposal retains the 

requirement that the transactions of a 

foreign banking entity, including any 

hedging trades, are not to be accounted 

for as principal directly or on a 

consolidated basis by any U.S. branch or 

affiliate. 

In addition, the proposed amendment 

removes the counterparty prong and its 

corresponding clearing and anonymous 

exchange requirements. Currently, a 

foreign banking entity may transact with 

or through U.S. counterparties if the 

trades are conducted anonymously on 

an exchange (for trades executed by a 

counterparty acting as an agent) and 

cleared and settled through a clearing 

agency or derivatives clearing 

organization acting as a central 

counterparty (for trades executed by a 

counterparty acting as either an agent or 

principal). As a result, the proposed 

amendments would make it easier for 

foreign banking entities to transact with 

or through U.S. counterparties. To the 

extent that foreign banking entities are 

currently passing along compliance 

burdens to their U.S. counterparties, or 

are unwilling to intermediate or engage 

in certain transactions with or through 

U.S. counterparties, the proposed 

amendments may reduce transaction 

costs for U.S. counterparties and may 

increase the volume of trading activity 

between U.S. counterparties and foreign 

banking entities. 

We note that, even when a foreign 

banking entity engages in proprietary 

trading through a U.S. dealer, the 

principal risk of the foreign banking 

entities’ position is consolidated to the 

foreign banking entity. While such 

trades expose the counterparty to risks 

related to the transaction, such risks 

born by U.S. counterparties likely 

depend on both the identity of the 

counterparty and the nature of the 

instrument and terms of trading 

position. Moreover, concerns about 

moral hazard and the volume of risktaking by U.S. banking entities may be 

less relevant for foreign banking entities. 

The current requirement that foreign 

banking entities transact with U.S. 

counterparties through unaffiliated 

dealers steers trading business to 

unaffiliated U.S. dealers but does not 

necessarily reduce moral hazard in the 

U.S. financial system. 

iii. Efficiency, Competition, and Capital 

Formation 

The proposed amendments would 

likely narrow the scope of transaction 

activity and banking entities to which 

the substantive prohibitions of the 2013 

final rule apply. As a result, the 

amendments may reduce the effects on 

efficiency, competition, and capital 

formation of the implementing rules 

currently in place. The proposed 

amendments reflect consideration of the 

potentially inefficient restructuring 

undergone by foreign banking entities 

after the 2013 final rule came into effect 

and enhanced access to securities 

markets by U.S. market participants on 

the one hand,364 and, advancing the 

objectives of the 2013 final rule as 

discussed above on the other. 

Allowing foreign banking entities to 

be financed by U.S.-dealer affiliates and 

to transact with U.S. counterparties off 

exchange and without clearing the 

trades, may reduce costs of non-U.S. 

banking entities’ activity in the United 

States and with U.S. counterparties. 

These costs may currently represent 

barriers to entry for foreign banking 

entities that contemplate engaging in 

trading and other transaction activity 

using a U.S. affiliate’s financing and 

trading with U.S. counterparties off 

exchange. To that extent, the proposed 

amendments may provide incentives for 

foreign banking entities that currently 

receive financing from non-U.S. 

affiliates to move financing to U.S. 

dealer affiliates, and incentives for 

foreign banking entities that currently 

transact through or with U.S. 

counterparties via anonymous 

exchanges and clearing agencies to 


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33538 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

365See 2013 final rule §ll.20(d) and Appendix 

A. 

366See 2013 final rule §ll.20 and Appendix A. 

367See 2013 final rule §ll.20(d)(3). 

transact through or with U.S. 

counterparties outside of anonymous 

exchanges and clearing. As a result, the 

number of banking entities engaging in 

securities trading in U.S. markets may 

increase, which may enhance the 

incorporation of new information into 

prices. However, the amendments may 

result in a shift in securities trading 

activity away from U.S. banking entities 

to foreign banking entities that are not 

comparably regulated. Thus, the 

amendments may reduce the benefits 

and costs of the 2013 final rule 

discussed in section V.D.1. 

The proposed amendments may 

increase market entry as they will 

decrease the need for foreign banking 

entities to rely only on a narrow set of 

unaffiliated market intermediaries for 

the purposes of avoiding the compliance 

costs associated with the 2013 final rule. 

Additionally, the proposed amendments 

may increase operational efficiency of 

trading activity by foreign banking 

entities in the United States, which may 

decrease costs to market participants 

and may increase the level of market 

participation by U.S-dealer affiliates of 

foreign banking entities. 

The proposed amendments would 

also affect competition among banking 

entities. These amendments may 

introduce competitive disparities 

between U.S. and foreign banking 

entities. Under the proposed 

amendments, foreign banking entities 

would enjoy a greater degree of 

flexibility in financing proprietary 

trading and transacting through or with 

U.S. counterparties. At the same time, 

U.S. banking entities would not be able 

to engage in proprietary trading and 

would be subject to the substantive 

prohibitions of section 13 of the BHC 

Act. To the extent that banking entities 

at the holding company level may be 

able to reorganize and move their 

business to a foreign jurisdiction, some 

U.S. banking entity holding companies 

may exit from the U.S. regulatory 

regime. However, under sections 4(c)(9) 

and 4(c)(13) of the Banking Act, 

domestic entities would have to conduct 

the majority of their business outside 

the United States to become eligible for 

the exemption. In addition, certain 

changes in control of banks and bank 

holding companies require supervisory 

approval. Hence, the feasibility and 

magnitude of such regulatory arbitrage 

remain unclear. 

To the extent that foreign banking 

entities currently engage in cleared and 

anonymous transactions through or with 

U.S. counterparties because of the 

existing counterparty prong but would 

have chosen not to do so otherwise, the 

proposed approach may reduce the 

amount of cleared transactions and the 

trading volume in anonymous markets. 

This may reduce opportunities for risksharing among market participants and 

increase idiosyncratic counterparty risk 

born by U.S. and foreign counterparties. 

At the same time, the proposed 

amendments may increase the 

availability of liquidity and reduce 

transaction costs for market participants 

seeking to trade in U.S. securities 

markets. To the extent that non-U.S. 

banking entities will face lower costs of 

transacting with U.S. counterparties, it 

may become easier for U.S. banking 

entities or customers to find a 

transaction counterparty that would be 

willing to engage in, for instance, 

hedging transactions. To that extent, 

U.S. market participants accessing 

securities markets to hedge financial 

and commercial risks may increase their 

hedging activity and assume a more 

efficient amount of risk. The potential 

consequences of relocation of non-U.S. 

banking entity activity to the United 

States on liquidity and risk sharing 

would be most concentrated in those 

asset classes and market segments 

where activity is most constrained by 

current requirements. 

f. Metrics Reporting 

i. Regulatory Baseline 

The regulatory baseline against which 

we are assessing proposed amendments 

includes requirements for banking 

entities with consolidated trading assets 

and liabilities above $10 billion to 

record and report certain quantitative 

measurements for each trading desk 

engaged in covered trading.365 The 

metrics-reporting requirements 

currently in place were intended to 

facilitate monitoring of patterns in 

covered trading activities and to identify 

activities that may warrant further 

review for compliance with the 

restrictions on proprietary trading of 

section 13 of the BHC Act and the 

implementing rules. 

Specifically, the quantitative 

measurements reported under the 

baseline were intended to assist banking 

entities and the SEC in achieving the 

following: A better understanding of the 

scope, type, and profile of covered 

trading activities; identification of 

covered trading activities that warrant 

further review or examination by the 

banking entity to verify compliance 

with the rule’s proprietary trading 

restrictions; evaluation of whether the 

covered trading activities of trading 

desks engaged in permitted activities are 

consistent with the provisions of the 

permitted activity exemptions; 

evaluation of whether the covered 

trading activities of trading desks that 

are engaged in permitted trading 

activities (i.e., underwriting and market 

making-related activity, risk-mitigating 

hedging, or trading in certain 

government obligations) are consistent 

with the requirement that such activity 

not result, directly or indirectly, in a 

material exposure to high-risk assets or 

high-risk trading strategies; 

identification of the profile of particular 

covered trading activities of the banking 

entity, and its individual trading desks, 

to help establish the appropriate 

frequency and scope of the SEC’s 

examinations of such activity; and the 

assessment and addressing of the risks 

associated with the banking entity’s 

covered trading activities.366

Under the regulatory baseline, dealers 

affiliated with banking entities that have 

less than $10 billion in consolidated 

trading assets and liabilities are not 

subject to the 2013 final rule’s metrics 

reporting and recordkeeping 

requirements. Group A entities (i.e., SEC 

registrants affiliated with banking 

entities that have more than $10 billion 

in consolidated trading assets and 

liabilities) are required to record and 

report the following quantitative 

measurements for each trading day and 

for each trading desk engaged in 

covered trading activities: (i) Risk and 

Position Limits and Usage; (ii) Risk 

Factor Sensitivities; (iii) Value-at-Risk 

and Stress Value-at-Risk; (iv) 

Comprehensive Profit and Loss 

Attribution; (v) Inventory Turnover; (vi) 

Inventory Aging; and (vii) CustomerFacing Trade Ratio. 

Currently, Group A entities affiliated 

with banking entities that have less than 

$50 billion in consolidated trading 

assets and liabilities are required to 

report metrics for each quarter within 30 

days of the end of that quarter. In 

contrast, Group A entities affiliated with 

banking entities with total trading assets 

and liabilities equal to or above $50 

billion are required to report metrics 

more frequently—each month within 10 

days of the end of that month.367 Table 

2 quantifies the number and trading 

book of SEC-registered broker-dealers 

affiliated with firms above and below 

the $10 billion and $50 billion 

thresholds. 

ii. Costs and Benefits 

We understand that the current 

metrics reporting and recordkeeping 

requirements may involve large 

compliance costs. For instance, the 


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368See supra note 18. 

369 Id. 

370To the extent that costs related to compliance 

consulting include both costs of metrics reporting 

and related systems, as well as costs related to other 

compliance requirements under the 2013 final rule, 

we cannot estimate the firm’s all-in metrics 

reporting costs. 

371 Initial setup cost reduction for broker-dealers: 

40 hours per firm × 0.18 weight × (Attorney at $409 

per hour) × 29 firms = $85,399. Initial setup cost 

reduction for entities that may register as SBSDs: 40 

hours per firm × 0.18 weight × (Attorney at $409 

per hour) × 34 firms= $100,123. Ongoing reporting 

cost reduction for broker-dealers: 14 hours per 

response × 12 responses per year × 0.18 weight × 

(Attorney at $409 per hour) × 29 firms= $358,677. 

Ongoing reporting cost reduction for SBSDs: 14 

hours per response × 12 responses per year × 0.18 

weight × (Attorney at $409 per hour) × 34 firms = 

$420,517. The estimate for SBSDs assumes that all 

34 SBSDs have more than $50 billion in trading 

assets and liabilities. 

372Ongoing recordkeeping cost reduction for 

broker-dealers: 3 hours per response × 12 responses 

per year × 0.18 weight × (Attorney at $409 per hour) 

× 29 firms = $76,859. Ongoing recordkeeping cost 

reduction for SBSDs: 3 hours per response × 12 

responses per year × 0.18 weight × (Attorney at 

$409 per hour) × 34 firms = $90,111. The estimate 

for SBSDs assumes that all 34 have more than $50 

billion in trading assets and liabilities. 

373 In addition, SEC-regulated banking entities 

may incur costs associated with reporting metrics 

in accordance with the XML Schema published on 

each Agency’s website. We discuss these costs 

below. 

374We believe that affiliated SEC-regulated 

banking entities will collaborate with one another 

to take advantage of efficiencies that may exist and 

have factored that assumption into our analysis. 

375This estimate also includes personnel costs 

associated with preparing the proposed narrative 

statement. These cost estimates are based, in part, 

on staff experience, as well as consideration of 

recent estimates of the one-time and ongoing 

systems costs associated with other SEC 

rulemakings. See, e.g., Regulation SBSR—Reporting 

and Dissemination of Security-Based Swap 

Information, Exchange Act Release No. 78321 (July 

14, 2016), 81 FR 53546, 53629 (Aug. 12, 2016) 

(estimating the one-time costs for trade execution 

platforms and registered clearing agencies to 

develop transaction processing systems and report 

transaction-level information to swap data 

repositories); see also Trade Acknowledgment and 

Verification of Security-Based Swap Transactions, 

Exchange Act Release No. 78011 (June 8, 2016), 81 

FR 39807, 39839 (June 17, 2016) (estimating the 

one-time costs for registered security-based swap 

dealers and major participants to develop internal 

order and trade management systems to 

electronically process transactions and send trade 

acknowledgments). 

Although the substance and content of systems 

associated with reporting transaction-level 

information to swap data repositories and 

derivatives counterparties would be different from 

the substance and content of systems associated 

with reporting quantitative measurements of 

covered trading activity, the costs associated with 

the proposed amendments, like the costs associated 

with the referenced security-based swap rules, 

would entail gathering and maintaining transactionlevel information, and planning, coding, testing, 

and installing relevant system modifications. 

average cost of collecting and filing 

metrics subject to the reporting 

requirements may be as high as $2 

million per year per participant, and 

market participants may submit an 

average of over 5 million data points in 

each filing.368 One firm reported 

incurring approximately $3 million in 

costs associated with the build out of 

new IT infrastructure and system 

enhancements, and estimated that this 

IT infrastructure will require at least 

$250,000 in maintenance and operating 

costs year-to-year. 369 In addition, the 

same firm estimated costs related to 

compliance consultants assisting with 

the construction of a 2013 final rule 

compliance regime at $3 million.370

The proposed amendments streamline 

the metrics reporting and recordkeeping 

requirements, eliminating or adding 

particular metrics on the basis of 

regulatory experience with the data and 

providing some entities with additional 

reporting time. Broadly, metrics 

reporting provides information for 

regulatory oversight and supervision but 

presents compliance burdens for 

registrants. The balance of these effects 

turns on the value of different metrics 

in evaluating covered trading activity 

for compliance with the rule, as well as 

their usefulness for risk assessment and 

general supervision. We discuss these 

effects with respect to each proposed 

amendment in the sections that follow. 

A. Reporting and Recordkeeping Burden 

for SEC-Regulated Banking Entities 

In section V.B, the Agencies estimate 

that extending the reporting period for 

banking entities with $50 billion or 

more in trading assets and liabilities 

from10 days to 20 days after the end of 

each calendar month may decrease the 

initial setup cost by $85,399 and 

ongoing annual reporting cost by 

$358,677 for broker-dealers, as well as 

initial setup cost decrease of up to 

$100,123 and ongoing reporting costs 

decrease of up to $420,517 for SBSDs 

that choose to register with the SEC.371

In addition, the change to the reporting 

period for banking entities with $50 

billion or more in trading assets and 

liabilities may result in ongoing annual 

recordkeeping cost savings of $76,859 

for broker-dealers and up to $90,111 for 

SBSDs.372 These figures reflect the 

estimated burden reductions net of any 

new systems costs imposed by the 

proposed amendments and discussed in 

greater detail in the section that follows. 

The proposed amendments generate 

both costs (from new reporting 

requirements) and savings (from 

limitations to the scope of certain 

metrics and reduced analytical burden). 

To the extent that the costs of 

compliance with the existing metrics 

requirements have a significant fixed 

cost component and may be sunk, the 

potential cost savings of the proposed 

amendments may be reduced. The SEC 

recognizes that while these amendments 

will reduce the aggregate metrics 

reporting and recordkeeping burden 

across all types of banking entities, the 

allocation of these costs and benefits 

may differ across banking entity types. 

For example, one of the proposed 

amendments replaces the Inventory 

Turnover and Customer-Facing Trade 

Ratio metrics with Positions and 

Transaction Volumes metrics, and limits 

the scope of these metrics to trading 

desks engaged in market-making and 

underwriting activities. Because SECregistered dealers are routinely engaged 

in market-making and underwriting 

activities, we preliminarily expect that a 

greater share of the costs associated with 

the Positions and Transaction Volumes 

metrics, such as the costs associated 

with tagging intra-company and interaffiliate transactions for purposes of the 

Transaction Volumes metric, may fall 

on SEC-regulated entities, while a 

greater share of the savings, such as the 

savings associated with the elimination 

of this reporting requirement for desks 

engaged solely in risk-mitigating 

hedging activities, may be allocated to 

non-SEC-regulated banking entities. 

The SEC preliminarily believes 

reporters will need to modify existing 

systems to comply with the proposed 

amendments.373 On the basis of its 

experience in similar rulemakings, the 

SEC believes that the costs necessary to 

modify existing systems used to comply 

with the proposed metrics reporting and 

recordkeeping amendments 374 would 

depend on the particular structure and 

activities of each SEC-regulated banking 

entity’s trading desks.375 In order to 

allocate the estimated aggregate costs 

across the various proposed 

amendments, we make several 

assumptions about the relative costs of 

the proposed amendments, as described 

below. These assumptions are based on 

the SEC’s experience with reporters, as 

well as the SEC’s preliminary belief that 

the most significant component of the 

estimated costs will be the initial 

implementation cost for the new 

reporting requirements. 

The primary systems-related costs of 

approximately $120,000 to $130,000, 

estimated at the level of the reporter, 

will come from: (i) Personnel costs 

associated with preparing the written 

Narrative Statement for a single reporter 

that is not already providing this 

information ($11,000); (ii) costs related 

to providing data in relation to the 

Positions and Transaction Volumes 

metrics that is more granular than is 


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33540 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

376The SEC currently receives metrics from 19 

entities, including two reporters that are below $10 

billion in trading assets and liabilities, and two 

reporters that belong to the same holding company. 

Since voluntary reporters are not constrained by the 

requirements of the proposed amendment, they are 

not reflected in our cost estimates. In addition, we 

believe that the additional systems costs estimated 

here will be incurred at the holding company level 

and scope in the trading activity of all SECregistered banking entity affiliates. 

377See supra note 321. 

currently required for the Inventory 

Turnover and Customer Facing Trade 

Ratio metrics ($8,000); (iii) systems 

costs related to reporting intra-company 

and inter-affiliate transactions under the 

Positions and Transaction Volumes 

metrics ($7,000); (iv) initial 

implementation costs for the 

Quantitative Measurements Identifying 

Information metric ($26,000); (v) 

ongoing costs related to the Quantitative 

Measurements Identifying Information 

metric ($3,000); (vi) one-time costs of 

establishing and implementing systems 

in accordance with the XML Schema 

($75,000). As discussed above, we 

preliminarily believe that the net 

burden savings estimated in section V.B 

and monetized in the previous section 

reflect these new systems costs, as well 

as gross cost savings from the proposed 

amendments. We discuss these costs, as 

well as potential benefits of the 

proposed amendments, in greater detail 

below. 

The SEC further considered how to 

assess the costs of the proposed rule for 

SEC-regulated banking entities. The 

metrics costs are generally estimated at 

the holding company level for 17 

reporters.376 We then allocate these 

costs to the affiliated SEC-regulated 

banking entity.377 We preliminarily 

believe that estimating the cost savings 

of the proposal at the individual 

registrant level would be inconsistent 

with our understanding of how these 

entities are complying with the current 

metrics reporting requirement. 

Specifically, we anticipate that SECregulated banking entities within the 

same corporate group will collaborate 

with one another to comply with the 

proposed amendments, to take 

advantage of efficiencies of scale. 

Further, we note that individual SECregulated banking entities may vary in 

the scope and type of activity they 

conduct and that not all entities within 

an organization subject to Appendix A 

engage in the types of covered trading 

activity for which metrics must be 

reported. Thus, to the extent that 

metrics compliance occurs at the 

holding company level, estimating costs 

at the registrant level may overstate the 

magnitude of the costs and cost savings 

for SEC-regulated entities from the 

proposed amendments. 

We considered an alternative 

approach to estimating costs of the 

proposed metrics amendments— 

specifically, doing so at the trading desk 

level. We anticipate that individual 

trading desks and their personnel may 

not be directly involved in complying 

with the full scope of the proposed 

amendments. For example, the 

Quantitative Measurements Identifying 

Information and the Narrative Statement 

must be prepared and reported 

collectively for all relevant trading 

desks. We also expect that trading desks 

within the same holding company could 

share systems to implement many of the 

proposed amendments to the 

quantitative measurements. Thus, a cost 

estimate at the trading desk level may 

not be an accurate proxy of the costs of 

the proposed amendments to SECregulated banking entities. Hence, such 

an analytical approach is likely to 

overestimate the total cost savings of the 

proposed amendments to SEC-regulated 

entities. 

B. Elimination, Replacement, and 

Streamlining of Certain Metrics 

The proposed amendments replace 

the Inventory Aging metric with a 

Securities Inventory Aging metric and 

eliminate the Inventory Aging metric for 

derivatives. In addition, the proposed 

amendments remove the requirement to 

establish and report limits on Stressed 

Value-at-Risk (VaR) at the trading desk 

level, replace the Customer-Facing 

Trade Ratio metric with a new 

Transaction Volumes metric, replace 

Inventory Turnover with a new 

Positions metric (reflecting both 

securities and derivatives positions), 

streamline valuation of metrics 

calculations for comparability, limit 

certain metrics to market-making and 

underwriting desks, modify instructions 

for metrics reporting, including with 

respect to profit and loss attribution, 

and remove metrics that can be 

calculated from other reported 

measurements. 

In general, the key economic tradeoff 

from metrics reporting is between 

compliance burdens, which may be 

particularly significant for smaller 

Group A entities, and the amount and 

usefulness of information provided for 

regulatory oversight of the 2013 final 

rule, as well as for general supervision 

and oversight. The proposed limitation 

of certain metrics to market-making and 

underwriting desks, elimination of the 

inventory aging metric, and removal of 

the Stressed VaR risk limit requirements 

may reduce burdens related to reporting 

and recordkeeping for Group A entities. 

As proprietary trading activity is 

inherently difficult to distinguish from 

permitted market making, riskmitigating hedging, or underwriting 

activity, certain metrics may provide 

additional information that is useful for 

regulatory oversight. However, 

eliminating inventory turnover and 

Stressed VaR metrics should not reduce 

the benefits of metrics reporting, as, 

these metrics do not enable a clear 

identification of prohibited proprietary 

trading or exempt market-making, riskmitigating hedging, or underwriting 

activities. 

The proposed amendments replace 

the Inventory Turnover metric with the 

Positions quantitative measurement and 

replace the Customer-Facing Trade 

Ratio metric with the Transaction 

Volumes quantitative measurement. The 

Inventory Turnover and CustomerFacing Trade Ratio metrics are ratios 

that measure the turnover of a trading 

desk’s inventory and compare the 

transactions involving customers and 

non-customers of the trading desk, 

respectively. The proposed Positions 

and Transaction Volumes metrics would 

provide information about risk exposure 

and trading activity at a more granular 

level. Specifically, the proposed rule 

requires that banking entities provide 

the relevant Agency with the underlying 

data used to calculate the ratios for each 

trading day, rather than providing more 

aggregated data over 30-, 60-, and 90- 

day calculation periods. By providing 

more granular data, the proposed 

Positions metric, in conjunction with 

the proposed Transaction Volumes 

metric, is expected to provide the SEC 

with the flexibility to calculate 

inventory turnover ratios and customerfacing trade ratios over any period of 

time, including a single trading day, 

allowing the use of the calculation 

method we find most effective for 

monitoring and understanding trading 

activity. 

In addition, the new Positions and 

Transaction Volumes metrics will 

distinguish between securities and 

derivatives positions, unlike the 

Inventory Turnover and CustomerFacing Trade Ratio metrics. The 

proposed Positions and Transaction 

Volumes metrics would require a 

banking entity to separately report the 

value of securities positions and the 

value of derivatives positions. While the 

current Inventory Turnover and 

Customer-Facing Trade Ratio metrics 

require banking entities to use different 

methodologies for valuing securities 

positions and derivatives positions 

because of differences between these 

asset classes, these metrics currently 

require banking entities to aggregate 


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378The SEC anticipates that costs associated with 

the more granular reporting in the Positions and 

Transaction Volumes metrics will be $8,000 per 

affiliated group of SEC-regulated banking entities. 

($8,000 × 17 reporters × 0.18 SEC-registered banking 

entity weight) = $24,480. 

379The SEC estimates that the additional costs 

associated with categorizing transactions under the 

Transaction Volumes metric will be $7,000 per 

reporter. ($7,000 × 17 reporters × 0.18 SECregistered banking entity weight) = $21,420. 380See 79 FR at 5798. 

such values for reporting purposes. By 

combining separate and distinct 

valuation types (e.g., market value and 

notional value), the Inventory Turnover 

and Customer-Facing Trade Ratio 

metrics are currently providing less 

meaningful information than was 

intended. Therefore, requiring banking 

entities to disaggregate the value of 

securities positions and the value of 

derivatives positions for reporting 

purposes may enhance the usability of 

this information. 

In addition to requiring separate 

reporting of the value of securities 

positions and the value of derivatives 

positions, the proposed rule would also 

streamline valuation method 

requirements for different product 

types. We understand that certain 

valuation methodologies currently 

required by the Inventory Turnover and 

the Customer-Facing Trade Ratio 

metrics may not be otherwise used by 

banking entities (e.g., for internal 

monitoring or external reporting 

purposes). Furthermore, current 

requirements result in information being 

aggregated and furnished to the SEC in 

non-comparable units. Therefore, the 

proposed requirement to report notional 

and market value for all derivatives 

positions may further enhance the 

usability of the information provided in 

the Positions and Transaction Volumes 

metrics. 

Moreover, the valuation methods 

required under the proposed rule are 

intended to be more consistent with our 

understanding of how banking entities 

value securities and derivatives 

positions in other contexts, such as 

internal monitoring or external 

reporting purposes, which may allow 

them to leverage existing systems and 

reduce ongoing costs relatively to the 

costs of current reporting requirements. 

While a banking entity may incur onetime costs in modifying how it values 

certain positions for purposes of metrics 

reporting, we do not expect such 

systems costs to be significant, 

particularly if the banking entity is able 

to use the systems it currently has in 

place for purposes of metrics reporting 

to value positions consistent with the 

proposed rule. 

Notably, the SEC does not anticipate 

that requiring banking entities to 

provide more granular data in the 

Positions and Transaction Volumes 

metrics will significantly alter the costs 

associated with the current Inventory 

Turnover and Customer-Facing Trade 

Ratio metrics. The Positions and 

Transaction Volumes metrics are based 

on the same underlying data regarding 

the trading activity of a trading desk as 

the Inventory Turnover and CustomerFacing Trade Ratio metrics, so we 

expect that banking entities already 

keep records of these data and have 

systems in place that collect these data. 

However, the SEC anticipates that 

reporting more granular information in 

the Positions and Transaction Volumes 

metrics may result in costs of 

$24,480.378

Similar to the Customer-Facing Trade 

Ratio, the proposed Transaction 

Volumes metric would require banking 

entities to identify the value and the 

number of transactions a trading desk 

conducts with customers and noncustomers. However, the proposed 

Transaction Volumes metric would add 

two additional categories of 

counterparties to capture the value and 

number of internal transactions a 

trading desk conducts. These include 

transactions booked within the same 

banking entity (intra-company) and 

those booked with an affiliated banking 

entity (inter-affiliate). These additional 

categories of information should 

facilitate better classification of internal 

transactions, which may assist the SEC 

in evaluating whether the trading desk’s 

activities are consistent with the 

requirements of the exemptions for 

underwriting or market making-related 

activity. The SEC estimates that 

modifying the current requirements of 

the Customer-Facing Trade Ratio to 

require SEC-regulated banking entities 

to further categorize trading desk 

transactions may impose additional 

systems costs related to tagging internal 

transactions and maintaining associated 

records valued at $21,420.379

In addition, we anticipate that the 

proposed Positions and Transaction 

Volumes metrics may reduce costs 

compared to the current reporting 

requirements by limiting the scope of 

trading desks that must provide the 

position- and trade-based data that is 

currently required by the Inventory 

Turnover and Customer-Facing Trade 

Ratio metrics. Under the 2013 final rule, 

banking entities are required to 

calculate and report the Inventory 

Turnover and the Customer-Facing 

Trade Ratio metrics for all trading desks 

engaged in covered trading activity. The 

proposal would limit the scope of 

trading desks for which a banking entity 

would be required to calculate and 

report the Positions and Transaction 

Volumes metrics to only those trading 

desks engaged in market making-related 

activity or underwriting activity. As 

noted above, we do not expect SECregulated banking entities to realize the 

same amount of cost savings as other 

banking entities would with respect to 

this aspect of the proposed rule, since 

SEC-regulated banking entities are the 

entities that typically engage in market 

making-related and underwriting 

activities. 

C. New Qualitative Information: Trading 

Desk, Narrative Statement, and 

Descriptive Information 

The proposed amendments require 

banking entities to provide additional 

information. Specifically, the proposal 

requires entities to provide: (1) Desk 

level qualitative information about the 

types of financial instruments the desk 

uses and covered trading activity the 

desk conducts, and about the legal 

entities into which the trading desk 

books trades; (2) a narrative describing 

changes in calculation methods, trading 

desk structure, or trading desk 

strategies; (3) descriptive information 

about reported metrics, including 

information uniquely identifying and 

describing risk measurements and 

identifying the relationships of these 

measurements within a trading desk and 

across trading desks. 

D. Trading Desk Information and 

Narrative Statement 

As recognized in Appendix A of the 

2013 final rule, the effectiveness of 

particular quantitative measurements 

may differ depending on the profile of 

a particular trading desk, including the 

types of instruments traded and trading 

activities and strategies.380 Thus, the 

additional qualitative information the 

Agencies propose to collect in the 

Trading Desk Information provision 

may facilitate SEC review and analysis 

of covered trading activities and 

reported metrics. For instance, the 

proposed trading desk description may 

help the SEC assess the risks associated 

with a given activity and establish the 

appropriate frequency and scope of 

examination of such activity. 

The Agencies are also proposing to 

require banking entities to provide a 

Narrative Statement that describes any 

changes in calculation methods used, a 

description of and reasons for changes 

in the trading desk structure or trading 

desk strategies, and when any such 

change occurred. The Narrative 

Statement must also include any 

information the banking entity views as 


daltland on DSKBBV9HB2PROD with PROPOSALS3
33542 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

381The SEC estimates that costs associated with 

the proposed Narrative Statement will be $11,000 

per affiliated group of SEC-regulated banking 

entities. ($11,000 × 1 reporter × 0.18 entity) = 

$1,980. 

382The SEC estimates that the costs associated 

with the initial implementation of the Quantitative 

Measurements Identifying Information will be 

$26,000 per affiliated group of SEC-regulated 

banking entities. ($26,000 × 17 reporters × 0.18 

entity weight) = $79,560. 

383The SEC estimates that the ongoing costs 

associated with the Quantitative Measurements 

Identifying Information will be $3,000 per affiliated 

group of SEC-regulated banking entities per year. 

($3,000 × 17 reporters × 0.18 entity weight) = 

$9,180. 

384 XML is an open standard, meaning that it is 

a technological standard that is widely available to 

the public at no cost. XML is also widely used 

across the industry. 385For example, FINRA members commonly use 

FINRA’s Web EFT system, which requires that all 

data be submitted in XML. See Web EFT Schema 

Documentation and Schema Files, FINRA, http://

www.finra.org/industry/web-crd/web-eft-schemadocumentation-and-schema-files; see also 

Disclosure of Order Handling Information, 

Exchange Act Release No. 78309 (July 13, 2016), 81 

FR 49431, 49499 (July 27, 2016). Information about 

FINRA’s eFOCUS system is available at http://

www.finra.org/industry/focus. 

relevant for assessing the information 

reported, such as further description of 

calculation methods used. If a banking 

entity does not have any information to 

report in the Narrative Statement, it 

must submit an electronic document 

stating that it does not have any 

information to report. The Narrative 

Statement will provide banking entities 

with an opportunity to describe and 

explain unusual aspects of the data or 

modifications that may have occurred 

since the last submission, which may 

facilitate better evaluation of the 

reported data. 

The SEC anticipates that the proposed 

Trading Desk Information and Narrative 

Statement may enhance the efficiency of 

data review by regulators. Having access 

to both quantitative data and qualitative 

information for trading desks in each 

submission may allow the SEC to 

consider the specifics of each trading 

desk’s activities during the reporting 

period, which may facilitate our ability 

to monitor patterns in the quantitative 

measurements. 

We note that all the SEC-regulated 

entities that currently report Appendix 

A metrics are also currently providing 

certain elements of the proposed 

Trading Desk Information to the SEC. 

Therefore, we preliminarily believe that 

the costs of gathering the relevant 

Trading Desk Information as well as the 

benefits of this requirement may be de 

minimis. 

The costs associated with preparing 

the Narrative Statement will depend on 

the extent to which a banking entity 

modifies its calculation methods, makes 

changes to a trading desk’s structure or 

trading strategies, or otherwise has 

additional information that it views as 

relevant for assessing the information 

reported. Preparation of a Narrative 

Statement is expected to be a more 

manual process involving a written 

description of pertinent issues. 

However, all but one SEC reporter 

already provides a narrative with every 

submission. Thus, the proposed 

Narrative Statement requirement is 

expected to result in ongoing personnel 

and monitoring costs of only $1,980.381

Since only one SEC reporter is likely to 

be affected by this amendment, we 

believe the benefits of the requirement 

will be de minimis. 

E. Quantitative Measurements 

Identifying Information 

The Agencies are proposing to require 

banking entities to report a Risk and 

Position Limits Information Schedule, a 

Risk Factor Sensitivities Information 

Schedule, a Risk Factor Attribution 

Schedule, a Limit/Sensitivity CrossReference Schedule, and a Risk Factor 

Sensitivity/Attribution Cross-Reference 

Schedule. This additional information 

may improve our understanding of how 

reported limits and risk factors relate to 

each other for one or more trading 

desks, both within the same reporting 

period and across reporting periods. The 

SEC preliminarily believes that, while 

these new reporting elements may 

increase compliance costs for banking 

entities, the information contained in 

the reports may allow for more 

meaningful interpretation of 

quantitative metrics data. 

Banking entities will incur certain 

initial implementation costs to develop 

these schedules of information, 

including costs associated with 

developing unique identifiers for all 

limits, risk factor sensitivities, and risk 

factor or other factor attributions used 

by the banking entity and brief 

descriptions of all such limits, 

sensitivities, and factors. This will 

include personnel costs to prepare the 

descriptions and systems costs to collect 

and maintain the relevant information 

for each schedule. The SEC estimates 

initial implementation costs associated 

with the proposed Quantitative 

Measurements Identifying Information 

at $79,560.382 There will also likely be 

ongoing maintenance costs associated 

with updating and storing the 

information schedules and ongoing 

monitoring costs to ensure that the 

information schedules continue to 

accurately describe the banking entity’s 

reported limits, sensitivities, and factors 

over time. However, since this 

information is not expected to change 

significantly from reporting period to 

reporting period, banking entities 

should be able to routinize the 

preparation of these information 

schedules to minimize or mitigate 

ongoing costs. We estimate the proposed 

Quantitative Measurements Identifying 

Information will result in $9,180 of 

ongoing costs.383 To limit burdens 

associated with reporting the identifying 

and descriptive information covered by 

the Quantitative Measurements 

Identifying Information, the proposed 

rule requires a banking entity to report 

this information in the relevant 

information schedule for the entire 

banking entity rather than for each 

trading desk. 

F. XML Format 

The Agencies are proposing to require 

banking entities to submit the Trading 

Desk Information, the Quantitative 

Measurements Identifying Information, 

and each applicable quantitative 

measurement in accordance with the 

XML Schema specified and published 

on the relevant Agency’s website.384

The metrics are not currently required 

to be reported in a structured format, 

and banking entities are currently 

reporting quantitative measurement data 

electronically. On the basis of 

discussions with metrics reporters, most 

of these entities indicated a familiarity 

with XML, and further, several 

indicated that they use XML internally 

for other reporting purposes. In 

addition, we note that banks currently 

submit quarterly Reports of Condition 

and Income (‘‘Call Reports’’) to the 

Federal Financial Institutions 

Examination Council (‘‘FFIEC’’) Central 

Data Repository in eXtensible Business 

Reporting Language (‘‘XBRL’’) format, 

an XML-based reporting language, so 

they are generally familiar with the 

processes and technology for submitting 

regulatory reports in a structured data 

format. We believe that familiarity with 

these practices at the bank level will 

facilitate the implementation of these 

practices for affiliated SEC registrants. 

Furthermore, FINRA requires its 

member broker-dealers to file their 

FOCUS Reports in a structured format 

through its eFOCUS system.385 The 

eFOCUS system permits broker-dealers 

to import the FOCUS Report data into 

a filing using an Excel, XML, or text file. 

Therefore, the SEC preliminarily 

believes that all SEC-registered dealers 

covered by the metrics reporting and 

recordkeeping requirements have 

experience applying the XML format to 

their data. 

Reporting metrics and other 

information in XML allows data to be 


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386These cost estimates are based in part on the 

SEC’s recent estimates of the one-time systems costs 

associated with the proposed requirement that 

security-based swap data repositories (‘‘SDRs’’) 

make transaction-level security-based swap data 

available to the SEC in Financial products Markup 

Language (‘‘FpML’’) and Financial Information 

eXchange Markup Language (‘‘FIXML’’). See 

Establishing the Form and Manner with which 

Security-Based Swap Data Repositories Must Make 

Security-Based Swap Data Available to the 

Commission, Exchange Act Release No. 76624 (Dec. 

11, 2015), 80 FR 79757 (Dec. 23, 2015) (‘‘SBS 

Taxonomy rule proposing release’’). The SBS 

Taxonomy rule proposing release estimates a onetime cost per SDR of $127,000. Although the 

substance of reporting associated with the metrics 

is different from the information collected and 

made available by SDRs, the SEC expects similar 

costs to apply to the implementation of XML for the 

reporting metrics. In particular, on the basis of its 

experience with similar structured data reporting 

requirements in other contexts (e.g., the SBS 

Taxonomy rule), the SEC expects that systems 

engineering fixed costs will represent the bulk of 

the costs related to the XML requirement. Among 

other things, the proposed SBS Taxonomy rule 

would require SDRs to make available to the SEC 

in a specific format (in this case, FpML or FIXML) 

transaction-level data that they are already required 

to provide. Similarly, the proposed metrics 

amendments would require banking entities to 

produce in XML metrics reports that they are 

already required (or will be required) to provide. 

However, our estimate is reduced to account for the 

fact that registered broker-dealers already provide 

eFOCUS reports to FINRA in XML and, therefore, 

must have the requisite systems in place. Our cost 

estimates include responsibilities for modifications 

of information technology systems to an attorney, 

a compliance Manager, a programmer analyst, and 

a senior business analyst and responsibilities for 

policies and procedures to an attorney, a 

compliance Manager, a senior systems analyst, and 

an operations specialist. 

387The SEC computes total costs as follows: 

$75,000 × 17 reporters × 0.18 entity weight = 

$229,500. 

tagged, which in turn identifies the 

content of the underlying information. 

The data then becomes instantly 

machine-readable through the use of 

standard software. Requiring banking 

entities to submit the metrics in 

accordance with the XML Schema 

would enhance the ability to process 

and analyze the data. Once the data is 

in a structured format, it can easily be 

organized for viewing, manipulation, 

and analysis through the use of 

commonly used software tools and 

applications. Structured data allows 

users to discern patterns from large 

quantities of information much more 

easily than unstructured data. 

Structured data also facilitates users’ 

abilities to dynamically search, 

aggregate, and compare information 

across submissions, whether within a 

banking entity, across multiple banking 

entities, or across multiple date ranges. 

The data supplied in a structured format 

could help the SEC identify outliers or 

trends that could warrant further 

investigation. 

The XML Schema would also 

incorporate certain validations to help 

ensure consistent formatting among all 

reports—in other words, it would help 

ensure data quality. The validations are 

restrictions placed on the formatting for 

each data element so that data is 

presented comparably. Requiring 

banking entities to report using the XML 

Schema may help ensure timely access 

to the data in a format that is already 

consistent and comparable for 

automated machine-processing and 

analysis. However, these validations are 

not designed to ensure the underlying 

accuracy of the data. Any reports 

provided by banking entities under the 

proposed requirement would have to 

comply with these validations that are 

incorporated within the XML Schema; 

otherwise the reports would not be 

considered to have been provided using 

the XML Schema specified and 

published on the SEC’s website. 

Specifying the format in which 

banking entities must report information 

may help the Agencies ensure that we 

receive consistently comparable 

information in an efficient manner 

across banking entities. The costs 

associated with providing XML data lie 

in the specialized software or services 

required to make the submission and 

the time required to map the required 

data elements to the requisite taxonomy. 

In addition to enhanced viewing, 

manipulation, and analysis, the benefits 

associated with providing XML data lie 

in the enhanced validation tools that 

minimize the likelihood that data are 

reported with errors. Therefore, 

subsequent reporting periods may 

require fewer resources, relative to both 

initial reporting periods and the current 

reporting process. 

We expect that the requirement to 

submit the Narrative Statement 

electronically will result in minimal 

information systems costs, as banking 

entities already have systems in place to 

submit information to the SEC 

electronically. However, the SEC 

recognizes that, as a result of the 

proposed amendments, banking entities 

will be required to establish and 

implement systems in accordance with 

the XML Schema that will result in onetime costs 386 of approximately $75,000 

per holding company banking entity, on 

average, for an expected aggregate onetime cost of approximately $229,500.387

Because we expect that XML reporting 

will result in a more efficient 

submission process, including 

validation of submissions, we anticipate 

that some of the implementation costs 

may be partially offset, over time, by 

these greater efficiencies. 

G. Extended Time To Report 

The proposed changes also extend the 

time to report metrics for different 

groups of filers. Because processes 

enabling reporting under tight deadlines 

may generally be costlier, we anticipate 

that the amended reporting 

requirements may marginally reduce 

compliance costs, particularly for filers 

with less sophisticated data and trading 

infrastructure. In addition, the 

amendments may result in fewer 

resubmissions by filers. To a limited 

extent, the proposed amendment may 

reduce the timeliness of data received 

from dealers, making supervision less 

agile. However, the SEC will continue to 

have access to quantitative metrics and 

related information through the 

standard examination and review 

process and existing recordkeeping 

requirements. 

iii. Competition, Efficiency, and Capital 

Formation 

Under the proposed amendments, 

Group A entities would incur lower 

costs of compliance with metricsreporting requirements. To the extent 

that these compliance burdens may be 

significant for some Group A entities, 

and since Group B entities are not 

subject to any metrics requirements, 

smaller Group A entities around the 

threshold may become more 

competitive with Group B entities. 

Since metrics are reported only to the 

Agencies and are not publicly 

disseminated, this amendment does not 

change the scope of information 

available to investors. As such, we do 

not anticipate effects on informational 

efficiency to be significant. To the 

extent that some Group A entities are 

currently experiencing significant 

metrics-reporting costs and partially or 

fully passing them along to customers in 

the form of reduced access to capital or 

higher cost of capital, the proposed 

amendments may reduce costs of and 

increase access to capital. However, as 

estimated cost savings from the 

proposed amendments are small, we do 

not anticipate a substantial increase in 

access to capital as a result of the 

proposed amendments to metrics 

reporting requirements. 

iv. Alternatives 

The Agencies could have taken 

alternative approaches. First, the 

Agencies could keep the metrics being 

reported unchanged but increase or 

decrease the trading activity thresholds 

used to determine metrics 

recordkeeping and reporting by filers 

and the frequency of such reporting. For 

instance, the $10 billion trading activity 

threshold for quarterly reporting could 

be replaced by the $25 billion threshold. 

As shown in Table 2, we estimate that 

this alternative would affect 12 bankVerDate Sep<11>2014 19:39 Jul 16, 2018 Jkt 244001 PO 00000 Frm 00113 Fmt 4701 Sfmt 4702 E:\FR\FM\17JYP3.SGM 17JYP3

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388See 12 U.S.C. 1851. 

389The exclusions from the covered fund 

definition are set forth in §ll.10(c) of the 2013 

final rule. 

390See 2013 final rule §ll.10(c)(12). 

affiliated SEC-registered broker-dealers. 

Under the alternative, these dealers 

would no longer be required to keep or 

report metrics, enjoying lower 

compliance burdens. However, the 

alternative reduces the amount and 

frequency of quantitative data available 

for regulatory oversight of banking 

entities. Similarly, lowering the 

recordkeeping and reporting thresholds 

would increase the scope of application 

of the metrics reporting requirement, 

increasing accompanying recordkeeping 

and reporting obligations as well as 

potential oversight and supervision 

benefits. However, we continue to 

recognize that while metrics being 

reported under the 2013 final rule do 

not allow a clear delineation of 

proprietary trading and market-making 

or hedging activities, they may be used 

to flag risks and enhance general 

supervision, as well as demonstrate 

prudent risk management. 

In addition, the Agencies could have 

proposed eliminating the VaR 

requirement. Both VaR and Stressed 

VaR are based on firm-wide activity, 

and VaR limits may not be routinely 

used by banking entities to manage and 

control risk-taking activities at the desk 

level. The alternative would remove 

from Appendix A the requirement for 

VaR limits because such limits may not 

be meaningful at the trading desk level. 

This alternative may reduce the burden 

of reporting and compliance costs 

without necessarily reducing the 

effectiveness of regulatory oversight by 

the SEC. 

The Agencies have also considered 

eliminating all quantitative metrics 

recordkeeping and reporting 

requirements under Appendix A of the 

2013 final rule. This alternative would 

reduce the amount of data produced and 

transmitted to the Agencies. Appendix 

A metrics enable regulators to have a 

more complete picture of risk-taking 

and profit and loss attribution for 

supervised entities. However, the metric 

reporting regime is costly, and banking 

entities currently subject to the 2013 

final rule and SEC oversight are also 

subject to other compliance and 

reporting requirements unrelated to the 

2013 final rule, as well as the standard 

examination and review process. It is 

not clear that the Appendix A metrics 

are superior to internal quantitative risk 

measurements or other data (such as 

metrics in the FOCUS reports) reported 

by SEC registered broker-dealers in 

describing risk exposures and 

profitability of various activities by SEC 

registrants. Crucially, Appendix A 

metrics, such as VaR, dealer inventory, 

transaction volume, and profit and loss 

attribution, do not delineate a 

prohibited proprietary trade and a 

permitted market making, underwriting 

or hedging trade, particularly when 

executed in highly illiquid products and 

times of stress. Moreover, reporters’ 

flexibility in defining the metrics may 

reduce their comparability. We 

recognize that while Appendix A 

metrics do not allow a clear 

identification of proprietary trading by 

SEC registrants, they may be used to flag 

risks and enhance general supervision, 

as well as demonstrate prudent risk 

management. 

g. Covered Funds 

Section 13 of the BHC Act generally 

prohibits banking entities from 

acquiring or retaining an ownership 

interest in, sponsoring, or having certain 

relationships with covered funds, 

subject to certain exemptions.388 The 

SEC’s economic analysis concerns the 

potential costs, benefits, and effects on 

efficiency, competition, and capital 

formation of the proposed covered fund 

amendments for four groups of market 

participants. First, the proposed 

amendments may impact SEC-registered 

investment advisers that are banking 

entities, including those that sponsor or 

advise covered funds and those that do 

not, as well as SEC-registered 

investment advisers that are not banking 

entities that sponsor or advise covered 

funds and compete with banking entity 

RIAs. Second, the proposed 

amendments affect the ability of bankaffiliated dealers to underwrite, make 

markets, or engage in risk-mitigating 

hedging transactions involving covered 

funds. Third, the proposed amendments 

impact private funds, including those 

funds scoped in or out of the covered 

fund provisions of the 2013 final rule, 

as well as private funds competing with 

such funds. Fourth, to the extent that 

the proposed amendments impact 

efficiency, competition, and capital 

formation in covered funds or 

underlying securities, investors in and 

sponsors of covered funds and 

underlying securities may be affected as 

well. 

As discussed in greater detail below, 

the primary economic tradeoff posed by 

the proposed amendments to the 

covered fund provisions and other 

potential changes to these provisions on 

which the Agencies seek comment is the 

tradeoff between enhanced competition 

and capital formation in covered funds 

and the potential moral hazard and 

related financial risks posed by fund 

investments. To the extent that the 

current covered fund provisions limit 

fund formation, the proposed 

amendments and other amendments on 

which the Agencies seek comment 

could reduce long-term compliance 

costs and increase revenues for banking 

entities, and, as a result, increase capital 

formation. We are currently not aware of 

any information or data about the extent 

to which the covered fund provisions of 

the 2013 final rule are inhibiting capital 

formation in funds. Therefore, the bulk 

of the analysis below is necessarily 

qualitative. 

i. Definition of ‘‘Covered Fund’’ 

Regulatory Baseline 

The definition of ‘‘covered fund’’ 

impacts the scope of the substantive 

prohibitions on banking entities’ 

acquiring or retaining an ownership 

interest in, sponsoring, and having 

certain relationships with covered 

funds. The covered fund provisions of 

the 2013 final rule may reduce the 

ability and incentives of banking 

entities to bail out affiliated funds to 

mitigate reputational risk; limit conflicts 

of interest with clients, customers, and 

counterparties; and reduce the ability of 

banking entities to engage in proprietary 

trading indirectly through funds. The 

2013 final rule defines covered funds as 

issuers that would be investment 

companies but for section 3(c)(1) or 

3(c)(7) of the Investment Company Act 

and then excludes specific types of 

entities from the definition. The 

definition also includes certain 

commodity pools as well as certain 

foreign funds, but only with respect to 

a U.S. banking entity that sponsors or 

invests in the foreign fund. Funds that 

rely on the exclusions in sections 3(c)(1) 

or 3(c)(7) of the Investment Company 

Act are covered funds unless an 

exemption from the covered fund 

definition is available; generally, funds 

that rely on other exclusions in the 

Investment Company Act, such as real 

estate and mortgage funds that rely on 

the exclusion in section 3(c)(5)(C), are 

not covered funds under the 2013 final 

rule. 

The broad definition of covered funds 

above encompasses many different 

types of vehicles, and the 2013 final rule 

excludes some of them from the 

definition of a covered fund.389 The 

excluded fund types relevant to the 

baseline are funds regulated under the 

Investment Company Act, that is, RICs 

and BDCs. Seeding vehicles for these 

funds are also excluded from the 

covered fund definition during their 

seeding period.390


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391As noted in the economic baseline, a single 

RIA may advise multiple types of funds. 

392See supra note 18. 

393We understand that, for instance, the median 

venture capital fund size in some locations is 

approximately $15 million. One fund may have lost 

as much as $50 million dollars in investment 

because of the prohibitions of section 13 of the BHC 

Act and implementing regulations. See supra note 

18. 

Scope of the Covered Fund Definition: 

Costs and Benefits 

The Agencies are requesting comment 

on potential modifications to the 

covered fund definition. For instance, 

with respect to the foreign public funds 

exclusion, the Agencies are requesting 

comment as to whether to remove the 

condition that, for a foreign public fund 

sponsored by a U.S. banking entity, the 

fund’s ownership interests are sold 

predominantly to persons other than the 

sponsoring banking entity, affiliates of 

the issuer and the sponsoring banking 

entity, and employees and directors of 

such entities. As another example, the 

Agencies are requesting comment as to 

whether to revise the exclusion to focus 

on the qualification of the fund in 

foreign jurisdictions and markets as 

eligible for retail sales, without 

including requirements related to the 

manner in which the fund’s interests are 

sold, or to tailor the exclusion’s use of 

the defined term ‘‘distribution’’ to 

address instances in which a fund’s 

ownership interests generally are sold to 

retail investors in secondary market 

transactions, as with foreign exchangetraded funds. The Agencies are also 

requesting comment on excluding other 

funds, such as family wealth vehicles, 

from the scope of the covered fund 

definition. The Agencies are requesting 

comment on modifying the loan 

securitization exclusion to permit 

limited holdings of debt securities and 

synthetic instruments in addition to 

loans. As a final example, the Agencies 

are requesting comment on revising the 

covered fund definition to provide an 

exclusion focused on the characteristics 

of an entity rather than only whether it 

would be an investment company but 

for section 3(c)(1) or 3(c)(7) of the 

Investment Company Act or would 

otherwise come within the covered fund 

base definition. 

Broadly, such modifications to the 

existing covered fund definition and 

additional exclusions would reduce the 

number and types of funds that are 

impacted by the 2013 final rule. Hence, 

these alternatives may decrease both the 

economic benefits and the economic 

costs of the 2013 final rule’s covered 

fund provisions, as discussed further 

below. 

Form ADV data is not always 

sufficiently granular to allow us to 

estimate the number of funds and fund 

advisers affected by the different 

modifications to the covered fund 

definition on which the Agencies are 

seeking comment. However, Table 3 and 

Table 4 in the economic baseline 

quantify the number and asset size of 

private funds advised by banking entity 

RIAs by the type of private fund they 

advise, as those fund types are defined 

in Form ADV. These fund types include 

hedge funds, private equity funds, real 

estate funds, securitized asset funds, 

venture capital funds, liquidity, and 

other private funds. 

The Agencies are requesting comment 

on whether to tailor the covered funds 

definition by using a characteristicsbased exclusion. For instance, the 

Agencies are requesting comment on 

whether the covered fund definition 

should exclude funds that are not hedge 

funds or private equity funds, as defined 

in Form PF. This would exclude other 

types of funds from the covered fund 

definition (such as venture capital, real 

estate, securitized asset, liquidity, and 

all other private funds, as those terms 

are defined in Form PF). 

Using Form ADV data, we 

preliminarily estimate that 

approximately 173 banking entity RIAs 

advise hedge funds and 90 banking 

entity RIAs advise private equity 

funds.391 As can be seen from Table 3 

in the economic baseline, 43 banking 

entity RIAs advise securitized asset 

funds. Table 4 shows that banking entity 

RIAs advise 360 securitized asset funds 

with $120 billion in gross assets. 

Another 56 banking entity RIAs advise 

real estate funds, and banking entity 

RIAs advise 323 real estate funds with 

$84 billion in gross assets. Venture 

capital funds are advised by only 16 

banking entity RIAs, and all 42 venture 

capital funds advised by RIAs have on 

aggregate approximately $2 billion in 

gross assets. 

As noted elsewhere in this 

Supplementary Information, the covered 

fund provisions of the 2013 final rule 

may limit the ability of banking entities 

to engage in trading through covered 

funds in circumvention of the 

proprietary trading prohibition, reduce 

bank incentives to bailout their covered 

funds, and mitigate conflicts of interest 

between banking entities and its clients, 

customers, or counterparties. However, 

the covered fund definition in the 

implementing rules is broad, and some 

have argued that the rules currently in 

place may limit the ability of banking 

entities to conduct traditional asset 

management activities and to promote 

capital formation. The Agencies 

recognize that the covered fund 

provisions of the implementing rules, as 

currently in effect, may impose 

significant costs on some entities. The 

Agencies also understand that the 

breadth of the covered fund definition 

requires market participants to review 

hundreds of thousands of issuers, and 

potentially more, to determine if the 

issuers are covered funds as defined in 

the 2013 final rule. We understand that 

this has included a review of hundreds 

of thousands of CUSIPs issued by 

common types of securitizations for 

covered fund status.392 The need to 

perform an in-depth analysis and make 

covered funds determinations across 

such a large scope of entities involves 

costs and may adversely affect the 

willingness of banking entities to own, 

sponsor, and have relationships with 

covered funds and financial instruments 

that may be covered funds. Moreover, 

the 2013 final rule’s limitations on 

banking entities’ investment in covered 

funds may be more significant for 

covered funds that are typically small in 

size, with potentially more negative 

spillover effects on capital formation in 

underlying securities.393

The potential modifications to the 

covered fund definition on which the 

Agencies are seeking comment would 

reduce further the scope of funds that 

need to be analyzed for covered fund 

status or would simplify this analysis 

and would enable banking entities to 

own, sponsor, and have relationships 

with certain groups of funds that are 

currently defined as a covered fund. 

Accordingly, these potential 

modifications may reduce costs of 

banking entity ownership, sponsorship, 

and transactions with certain private 

funds, may promote greater capital 

formation in, and competition among 

such funds, and may improve access to 

capital for issuers of underlying debt or 

equity. They may also benefit banking 

entity dealers through higher profits or 

more underwriting business. Reducing 

the covered fund restrictions by further 

tailoring the covered fund definition 

may encourage more launches of funds 

that are excluded from the definition, 

increasing capital formation and, 

possibly, competition in those types of 

funds. If competition increases the 

quality of funds available to investors or 

reduces the fees they are charged, 

investors in funds may benefit. 

We do not observe the amount of 

capital formation in different types of 

covered funds or underlying equity and 

debt securities that does not occur 

because of the 2013 final rule. Because 

of the prolonged and overlapping 

implementation timeline of various 


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33546 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

394See 2013 final rule §ll.12(a)(2)(ii); see also 

§ll.11(c)(2). 

395 2013 final rule §ll.12(a)(2)(iii); see also 

§ll.11(c)(3). 396 2013 final rule §ll.13(a). 397 79 FR at 5737. 

post-crisis reforms and because market 

participants restructured their trading 

and covered funds activities in 

anticipation of the implementing rules 

being effective, we cannot measure the 

counterfactual levels of capital 

formation and liquidity that would have 

been observed after the financial crisis, 

absent the covered fund provisions 

currently in place. Similarly, we cannot 

establish whether competition in 

covered funds is adversely affected by 

the covered fund definition currently in 

effect. We solicit any information, 

particularly quantitative data, that 

would allow us to estimate the 

magnitudes of the potential costs and 

benefits of the covered fund provisions 

on banking entity-affiliated brokerdealers and investment advisers 

advising the different types of funds 

discussed above and any effects on 

efficiency, competition, and capital 

formation in different types of funds 

and their underlying securities. 

ii. Covered Funds: Underwriting, 

Market Making, and Risk-Mitigating 

Hedging Regulatory Baseline 

Under the baseline, as described 

above, the 2013 final rule provides for 

market-making and hedging exemptions 

to the prohibition on proprietary 

trading. However, the 2013 final rule 

places tighter restrictions on the amount 

of underwriting, market making, and 

hedging a banking entity can engage in 

when those transactions involve 

covered funds. For underwriting and 

market-making transactions in covered 

funds, if the banking entity sponsors or 

advises a covered fund, or acts in any 

of the other capacities specified in 

§ ll.11(c)(2) of the 2013 final rule, 

then any ownership interests acquired 

or retained by the banking entity and its 

affiliates in connection with 

underwriting and market making-related 

activities for that particular covered 

fund must be included in the per-fund 

and aggregate covered fund investment 

limits in § ll.12 of the 2013 final rule 

and subject to the capital deduction 

provided in § ll.12(d) of the 2013 

final rule.394 Additionally, a banking 

entity’s aggregate investment in all 

covered funds is limited to 3 percent of 

a banking entity’s tier 1 capital, and all 

banking entities must include 

ownership interests acquired or retained 

in connection with underwriting and 

market making-related activities for 

purposes of this calculation.395

Moreover, hedging transactions in a 

covered fund are only permitted if the 

transaction mitigates risks associated 

with the compensation of a banking 

entity employee or an affiliate that 

provides advisory or other services to 

the covered fund.396

Costs and Benefits 

The increased requirements imposed 

on SEC-registered dealers’ transactions 

in covered funds relative to other 

securities mean that a dealer may not be 

able to make markets in a covered fund 

or may be limited in its ability to do so, 

even if the dealer may be able to make 

markets in the underlying securities 

owned by the covered fund or securities 

that are otherwise similar to the covered 

fund. The Agencies’ proposed changes 

would provide banking entities greater 

flexibility in underwriting and market 

making in covered fund interests. 

Specifically, as discussed elsewhere in 

this Supplementary Information, for a 

covered fund that the banking entity 

does not organize or offer pursuant to 

§ ll.11(a) or (b) of the 2013 final rule, 

the proposal would remove the 

requirement that the banking entity 

include, for purposes of the aggregate 

fund limits and capital deduction, the 

value of any ownership interests of the 

covered fund acquired or retained in 

connection with underwriting or market 

making-related activities. Under the 

proposed amendments, these limits, as 

well as the per fund limit, would only 

apply to a covered fund that the banking 

entity organizes or offers and in which 

the banking entity retains an ownership 

interest pursuant to §ll.11(a) or (b) of 

the 2013 final rule. 

The proposed amendment aligns the 

requirements for underwriting and 

market making with respect to 

ownership interests in covered funds 

that the banking entity does not 

organize or offer, with requirements for 

engaging in these activities with respect 

to other financial instruments. We 

understand that the 2013 final rule’s 

restrictions on underwriting and 

making-related activities involving 

covered funds impose costs on banking 

entities and may constrain their 

underwriting and market making in 

covered funds. Under the proposed 

amendments, banking entities would be 

able to engage in potentially profitable 

market making and underwriting in 

covered funds they do not organize or 

offer without the per-fund and aggregate 

limits and capital deductions. SECregistered banking entities are expected 

to benefit from this amendment to the 

extent they profit from underwriting 

and market-making activities in such 

covered funds. In addition, these 

benefits may, at least partially, flow 

through to funds and fund investors. 

Specifically, banking entities may 

become more willing and able to 

underwrite and make markets in 

covered funds, and provide investors 

with more readily available economic 

exposure to the returns and risks of 

certain covered funds. 

We recognize that ownership interests 

in covered funds expose owners to the 

risks related to covered funds. It is 

possible that covered fund ownership 

interests acquired or retained by a 

banking entity acting as an underwriter 

or engaged in market making-related 

activities may lead to losses for banking 

entities. However, we recognize that the 

risks of market making or underwriting 

of covered funds are substantively 

similar to the risks of market making or 

underwriting of otherwise comparable 

securities. Therefore, the same general 

tradeoffs discussed in section V.D.3.c of 

this Supplementary Information 

between potential benefits for capital 

formation and liquidity and potential 

costs related to moral hazard and market 

fragility apply to banking entities’ 

underwriting and market-making 

activities involving covered funds and 

other types of securities. 

Banking entities are also currently 

unable to retain ownership interests in 

covered funds as part of routine riskmitigating hedging. These restrictions 

may currently be limiting banking 

entities’ ability to hedge the risks of 

fund-linked derivatives through shares 

of covered funds referenced by fundlinked products. The Agencies 

recognized that, as a result of this 

approach, banking entities may no 

longer be able to participate in offering 

certain customer facilitating products 

relating to covered funds. The Agencies 

recognized that increased use of 

ownership interests in covered funds 

could result in exposure to greater 

risk.397 Moreover, banking entities’ 

transactions in fund-linked products 

that reference covered funds with 

customers can expose a banking entity 

to risk in cases where a customer fails 

to perform, transforming the banking 

entity’s covered fund hedge of the 

customer trade into an unhedged, and 

potentially illiquid, position in the 

covered fund (unless and until the 

banking entity takes action to hedge this 

exposure and bears the corresponding 

costs). 

The proposal expands the scope of 

permissible risk-mitigating hedging with 

covered funds. Specifically, under the 

proposal, in addition to being able to 


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Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 33547 

acquire or retain an ownership interest 

in a covered fund as a risk-mitigating 

hedge with respect to certain 

compensation agreements as permitted 

under the 2013 final rule, the banking 

entity would also be able to acquire or 

retain an ownership interest in a 

covered fund when acting as an 

intermediary on behalf of a non-banking 

entity customer to facilitate exposure by 

the customer to the profits and losses of 

the covered fund. 

The proposal is likely to benefit 

banking entities and their customers, as 

well as advisers of covered funds. The 

proposed amendments increase the 

ability of banking entities to facilitate 

customer-facing transactions while 

hedging their own risk exposure. As a 

result, this amendment may increase 

banking entity intermediation and 

provide customers with easier access to 

the risks and returns of covered funds. 

To the degree that banking entities’ 

investments in covered funds to hedge 

customer-facing transactions may 

facilitate their engagement in customerfacing trades, customers of banking 

entities may benefit from greater 

availability of financial instruments 

providing exposure to covered funds 

and related intermediation. Access to 

covered funds may be particularly 

valuable when private capital plays an 

increasingly important role in U.S. 

capital markets and firm financing. 

We also recognize that the proposed 

amendments may increase risks to 

banking entities. For instance, when a 

banking entity enters into a transaction 

with a customer that provides exposure 

to the profits and losses of a covered 

fund to a customer, even when such 

exposure is hedged, the banking entity 

may suffer losses if a customer fails to 

perform and fund investments are 

illiquid and decline in value. However, 

such counterparty default risk is present 

in any principal transaction in illiquid 

financial instruments, including when 

facilitating customer trades in the 

securities in which covered funds 

invest, as well as in market-making and 

underwriting activities. We note that, 

under the proposal, risk-mitigating 

hedging transactions involving covered 

funds would be conducted consistent 

with the requirements of the 2013 final 

rule, as modified by the proposal, 

including the requirements with respect 

to risk-mitigating hedging transactions. 

For example, such exposures would be 

subject to required risk limits and 

policies and procedures and would have 

to be appropriately monitored and risk 

managed. Therefore, it is not clear that 

hedging or customer facilitation in 

covered funds would pose a greater risk 

to banking entities than hedging or 

customer facilitation in similar 

securities that is permissible under the 

2013 final rule. 

Alternatives 

An alternative would be to provide 

greater flexibility for underwriting, 

market making, and risk-mitigating 

hedging transactions involving covered 

fund interests. Specifically, the 

Agencies could consider eliminating the 

per-fund limit, aggregate fund limit, and 

capital deduction for a banking entity 

acting as an underwriter or engaged in 

market making-related activities with 

respect to a covered fund that the 

banking entity organizes and offers. The 

Agencies also could have proposed 

amending the 2013 final rule to provide 

that, in addition to the proposed 

amendment, banking entities should be 

permitted to acquire or retain ownership 

interests in covered funds as riskmitigating hedging transactions where 

the acquisition or retention meets the 

requirements of § ll.5 of the 2013 

final rule, as modified by the proposal. 

If the Agencies made all of these 

changes, this would provide dealers the 

same level of flexibility in underwriting, 

making markets in, or hedging with, 

covered funds as applied to these 

activities with respect to all other types 

of financial instruments, including the 

underlying financial instruments owned 

by the same covered funds. 

Compliance with current rules for 

covered funds imposes costs on banking 

entities. To the extent that, under the 

baseline, such costs prevent dealer 

subsidiaries of banking entities from 

making markets in or underwriting 

certain financial instruments, the 

alternative would enable them to engage 

in potentially profitable market making 

in, underwriting, and hedging with, 

covered funds. Banking entity dealers 

could benefit from this alternative, to 

the extent they profit from underwriting 

and market-making activities in covered 

funds and to the extent that investing in 

covered funds to hedge a banking 

entity’s exposure in transactions such as 

total return swaps reduce their risk 

profile. 

The benefits of this alternative may 

also flow through to funds, investors, 

and customers. Under the alternative, 

banking entities would enjoy greater 

flexibility in transacting in covered 

funds with customers and in hedging 

banking entities’ exposure with covered 

funds. As a result, banking entities may 

become more willing and able to 

underwrite and market products linked 

to covered funds and to provide 

customers with an economic interest in 

the profits and losses of covered funds. 

This may increase investor access to the 

returns and risks of private funds, 

which may be particularly valuable 

when issuers are increasingly relying on 

private capital and delaying public 

offerings. Finally, the increased ability 

of banking entities to transact in covered 

funds under the alternative may 

increase market quality for covered 

funds that are traded. 

We continue to recognize that 

transactions in covered funds— 

including transactions with customers, 

and holdings of ownership interests in 

covered funds related to underwriting, 

market making, or hedging activities— 

necessarily involve the risk of losses. 

However, the risks of market making, 

underwriting, or hedging by banking 

entities of financial instruments 

underlying the covered fund, or 

financial instruments or securities that 

are otherwise similar to covered funds, 

are substantively similar. Therefore, the 

same tradeoffs discussed in section 

V.D.3.c in this SUPPLEMENTARY

INFORMATION between potential benefits 

to capital formation and liquidity and 

potential costs related to moral hazard 

and market fragility apply to both 

banking entity interests from 

underwriting and market making in 

financial instruments and underwriting 

and market making in covered funds. It 

is not clear that the existence of a legal 

and management structure of a covered 

fund per se changes the economic risk 

exposure of banking entities, and, thus, 

the capital formation and other tradeoffs 

discussed above. We note that the 

alternative would simply involve a 

consistent treatment of financial 

instruments and funds as it pertains to 

underwriting, market making, and 

hedging activities. However, as 

discussed above in section V.D.1 of this 

SUPPLEMENTARY INFORMATION, some of 

the effects of the 2013 final rule’s 

provisions are difficult to evaluate 

outside of economic downturns, and we 

are unable to measure the amount of 

capital formation or liquidity in covered 

funds or underlying products that does 

not occur because of the existing 

treatment of underwriting, market 

making, and hedging using covered 

funds. 

iii. Restrictions on Relationships 

Between Banking Entities and Covered 

Funds Regulatory Baseline 

Under the baseline, banking entities 

are limited in the types of transactions 

they are able to engage in with covered 

funds with which they have certain 

relationships. Banking entities that 

serve in certain capacities with respect 

to a covered fund, such as the fund’s 

investment manager, adviser, or 

sponsor, are prohibited from engaging in 


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33548 Federal Register / Vol. 83, No. 137 / Tuesday, July 17, 2018 / Proposed Rules 

398See 2013 final rule §ll.14(a). 

399See 2013 final rule §ll.14(c). 

400The Agencies also are requesting comment as 

to whether the definition of ‘‘prime brokerage 

transaction’’ under the proposal is appropriate and, 

if not, what definition would be appropriate and 

which transactions should be included in the 

definition. The costs, benefits, and other 

implications of expansions to the definition of 

‘‘prime brokerage transaction’’ would generally be 

similar to those associated with the potential 

changes to §ll.14 discussed in this section, 

except that they likely would be less significant 

because the statute permits prime brokerage 

transactions only with second-tier funds and does 

not extend to covered funds more generally. 

401We understand that market participants have 

adjusted their activity in reliance on the FAQs 

regarding the marketing restriction. Hence, we 

preliminarily believe that the economic effects of 

the proposed amendment to reflect the position 

expressed in the staffs’ FAQs are likely to be de 

minimis and we focus this discussion on the 

proposed removal of the financing prong. 

a ‘‘covered transaction,’’ as defined in 

section 23A of the FR Act, with the 

covered fund.398 This prohibits 

transactions such as loans, guarantees, 

securities lending, and derivatives 

transactions that cause the banking 

entity to have credit exposure to the 

affiliate. However, the 2013 final rule 

exempts from the prohibition any prime 

brokerage transaction with a covered 

fund in which a covered fund managed, 

sponsored, or advised by a banking 

entity has taken an ownership interest (a 

‘‘second-tier fund’’). Therefore, banking 

entities with a relationship to a covered 

fund can engage in prime brokerage 

transactions (that are covered 

transactions) only with second-tier 

funds and not with all covered funds.399

Costs and Benefits 

The Agencies request comments on 

whether the Agencies should amend 

§ ll.14 of the 2013 final rule to 

incorporate the exemptions under 

section 23A of the FR Act and the 

Board’s Regulation W, such as intraday 

extensions of credit that facilitate 

settlement.400 As a result of the 

restrictions on covered transactions in 

the 2013 final rule, some banking 

entities may be outsourcing the 

provision of routine services to 

sponsored funds, such as custody and 

clearing services, to outside providers. 

We recognize that outsourcing such 

activities may adversely affect customer 

relationships, increase costs, and 

decrease operational efficiency for 

banking entities and covered funds. The 

changes on which the Agencies seek 

comment would provide banking 

entities greater flexibility to provide 

these and other services directly to 

covered funds. If being able to provide 

custody, clearing, and other services to 

sponsored funds reduces the costs of 

these services, fund advisers and, 

indirectly, fund investors, may benefit 

from incorporating the exemptions. We 

note that most direct benefits are likely 

to accrue to banking entity advisers to 

covered funds that are currently relying 

on third-party service providers as a 

result of the requirements of the 2013 

final rule. 

These changes would increase 

banking entities’ ability to engage in 

custody, clearing, and other transactions 

with their covered funds and benefit 

banking entities that are currently 

unable to engage in otherwise profitable 

or efficient activities with covered funds 

they own or advise. Moreover, this 

could enhance operational efficiency 

and reduce costs incurred by covered 

funds, which are currently unable to 

rely on their affiliated banking entity for 

custody, clearing, and other 

transactions. Conversely, to the extent 

that this approach increases transactions 

between a banking entity and related 

covered funds, banking entities could 

incur any risks associated with these 

transactions, recognizing that the 

transactions would be subject to the 

limitations in section 23A of the FR Act 

and the Board’s Regulation W, as well 

as §ll.14(b) of the 2013 final rule and 

other applicable laws. 

iv. Covered Fund Activities and 

Investments Outside of the United 

States Regulatory Baseline 

Under the 2013 final rule, foreign 

banking entities can acquire or retain an 

ownership interest in, or act as sponsor 

to, a covered fund, so long as those 

activities and investments occur solely 

outside the United States, no ownership 

interest in such fund is offered for sale 

or sold to a resident of the United States 

(the ‘‘marketing restriction’’), and 

certain other conditions are met. An 

activity or investment occurs solely 

outside of the United States if (1) the 

banking entity is not itself, and is not 

controlled directly or indirectly by, a 

banking entity that is located in the 

United States or established under the 

laws of the United States or of any state; 

(2) the banking entity (and relevant 

personnel) that makes the decision to 

acquire or retain the ownership interest 

or act as sponsor to the covered fund is 

not located in the United States or 

organized under the laws of the United 

States or of any state; (3) the investment 

or sponsorship, including any riskmitigating hedging transaction related to 

an ownership interest, is not accounted 

for as principal by any U.S. branch or 

affiliate; and (4) no financing is 

provided, directly or indirectly, by any 

U.S. branch or affiliate. In addition, the 

staffs of the Agencies issued FAQs 

concerning the requirement that no 

ownership interest in such fund is 

offered for sale or sold to a resident of 

the United States. 

Costs and Benefits 

The proposed amendments remove 

the financing prong of the foreign funds 

exemption and codify the FAQs 

regarding marketing of foreign funds to 

U.S. residents.401 Thus, under the 

proposed amendments, foreign banking 

entities would be able to acquire or 

retain ownership interests in and 

sponsor covered funds with financing 

provided directly or indirectly by U.S. 

branches and affiliates, including SECregistered dealers. The costs, benefits, 

and effects on efficiency, competition, 

and capital formation of this 

amendment generally parallel those of 

the removal of the financing prong with 

respect to trading activity outside the 

United States in section V.D.3.e of this 

Supplementary Information. 

Foreign banking entities may benefit 

from the proposed amendments and 

enjoy greater flexibility in financing 

their covered fund activity. Allowing 

foreign banking entities to obtain 

financing of covered fund transactions 

from U.S.-dealer affiliates may reduce 

costs of foreign banking entity activity 

in covered funds. The amendment may 

decrease the need for foreign banking 

entities to rely on foreign dealer 

affiliates solely for the purposes of 

avoiding the compliance costs and 

prohibitions of the 2013 final rule. This 

may increase operational efficiency of 

covered fund activity by foreign banking 

entities. To the extent that costs of 

compliance with the foreign fund 

exemption may currently represent 

barriers to entry for foreign banking 

entities’ covered fund activities, the 

proposed amendment may increase 

foreign banking entities’ sponsorship 

and financing of covered funds. 

The economic exposure and risks of 

foreign banking entities’ covered funds 

activities may be incurred not just by 

the foreign banking entities, but by U.S. 

entities financing the covered fund 

ownership interests, e.g., through 

margin loans covering particular 

transactions. However, the proposal 

retains the requirement that the 

investment or sponsorship, including 

any related hedging, is not accounted 

for as principal by any U.S. branch or 

affiliate. We continue to note that moral 

hazard risks and concerns about the 

volume of U.S. banking entity risktaking are less relevant when the 

covered fund activity is conducted by, 


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402This section does not focus on foreign 

excluded funds. The information the SEC collects 

on Form ADV does not allow the SEC to estimate 

the number of SEC-registered investment advisers 

that advise foreign excluded funds. For example, 

Form ADV does not require advisers with a 

principal office and place of business outside the 

United States to provide information on Schedule 

D of Part 1A with respect to any private fund that, 

during the last fiscal year, was not a U.S. person, 

was not offered in the United States, and was not 

beneficially owned by any U.S. person. Because 

foreign excluded funds are organized and offered 

outside of the United States by foreign banking 

entities, however, many foreign excluded funds 

may be advised by foreign banks or other foreign 

affiliates or subsidiaries that are not SEC-registered 

investment advisers. Therefore, we preliminarily 

believe that the proposal and any further 

modifications to the 2013 final rule on which the 

Agencies seek comment would likely primarily 

impact foreign activities of foreign banking entities 

and funds outside of the SEC’s regulatory oversight. 

and the risk consolidates to, foreign 

banking entities. 

Competitive effects of this 

amendment may differ from the 

proposed amendment regarding trading 

activity outside of the United States. 

Under the proposed amendment to the 

foreign fund exemption, foreign banking 

entities will enjoy a greater degree of 

flexibility and potentially lower costs of 

financing covered fund transactions 

outside of the United States. Because 

the 2013 final rule’s exemption for 

covered funds activities solely outside 

of the United States is available only to 

foreign banking entities, the proposed 

amendments may reduce costs for some 

foreign banking entities but need not 

affect the competitive standing of U.S. 

banking entities relative to foreign 

banking entities with respect to covered 

funds activities in the United States. 

h. Definition of Banking Entity 

As discussed elsewhere in this 

Supplementary Information, staffs of the 

Agencies have responded to questions 

raised regarding the potential treatment 

of RICs as banking entities as a result of 

a sponsor’s seed investment, as well as 

issues related to FPFs and foreign 

excluded funds. The Agencies are 

continuing to consider the issues raised 

by the interaction between the 2013 

final rule’s definitions of the terms 

‘‘banking entity’’ and ‘‘covered fund,’’ 

including the issues addressed by the 

Agencies’ staffs and the Federal banking 

agencies discussed above. Accordingly, 

the Agencies have made clear that 

nothing in the proposal would modify 

the application of the staffs’ FAQs 

discussed above, and the Agencies will 

not treat RICs or FPFs that meet the 

conditions included in the applicable 

staff FAQs as banking entities or 

attribute their activities and investments 

to the banking entity that sponsors the 

fund or otherwise may control the fund 

under the circumstances set forth in the 

FAQs. In addition, to accommodate the 

pendency of the proposal, for an 

additional period of one year until July 

21, 2019, the Agencies will not treat 

qualifying foreign excluded funds that 

meet the conditions included in the 

policy statement discussed above as 

banking entities or attribute their 

activities and investments to the 

banking entity that sponsors the fund or 

otherwise may control the fund under 

the circumstances set forth in the policy 

statement. This section focuses on the 

seeding of RICs, because they are 

registered with the SEC (and applies to 

BDCs as well, which are regulated by 

the SEC). To the extent that the same 

considerations generally apply to the 

seeding of FPFs, the analysis below may 

be relevant for the seeding of these 

funds as well.402

The FAQ issued by the staffs related 

to seeding RICs and FPFs observed that 

the preamble to the 2013 final rule 

recognized that a banking entity may 

own a significant portion of the shares 

of a RIC or FPF during a brief period 

during which the banking entity is 

testing the fund’s investment strategy, 

establishing a track record of the fund’s 

performance for marketing purposes, 

and attempting to distribute the fund’s 

shares. The FAQ recognizes that the 

length of a seeding period can vary and 

therefore provides an example of 3 

years, the maximum period of time that 

could be permitted under certain 

conditions for seeding a covered fund 

under the 2013 final rule, without 

setting any maximum prescribed period 

for a RIC or FPF seeding period. The 

Agencies are seeking comment on 

whether this guidance has been 

effective, including questions as to 

whether the Agencies should specify a 

maximum period of time for a seeding 

period or, conversely, whether the 

current approach of not prescribing a 

fixed period of time for a seeding period 

is more effective in providing flexibility 

for funds that may need more time to 

develop a track record without having to 

specify a particular time period that will 

be appropriate for all funds. 

The SEC understands that RICs (and 

FPFs) commonly require some time to 

establish a performance track necessary 

to market the fund effectively to thirdparty investors. Some funds will need a 

3-year performance track record, and 

sometimes longer, to be distributed 

through certain intermediaries or to 

attract sufficient investor interest. For 

example, the SEC understands that 

some funds might need a 5-year track 

record to be distributed effectively. 

On the one hand, providing a fixed 

period of time beyond which a seeding 

period for a RIC cannot extend would 

provide banking entities with greater 

certainty, which may incentivize 

banking entities to form new funds. On 

the other hand, the current approach of 

not prescribing a fixed period of time for 

a seeding period for a RIC may provide 

flexibility for funds that need more time 

to develop a track record. This approach 

would recognize that banking entities 

may be able to quickly reduce a seed 

investment in some RICs but not in 

others. However, the lack of certainty 

about the length of permissible seeding 

period could disincentivize a banking 

entity from sponsoring a RIC. 

Another potential approach, on which 

the Agencies seek comment, would be 

to specify a fixed period of time for a 

seeding period while also permitting a 

banking entity to hold an investment 

beyond this fixed period if the banking 

entity complies with additional 

conditions, such as documentation of 

the business need for the sponsor’s 

continued investment. This may 

provide benefits by providing more 

certainty to banking entities, while 

providing for the ability to exceed a 

fixed seeding period in appropriate 

circumstances. 

In addition, longer seeding periods for 

RICs and FPFs extend the period of time 

during which a banking entity may be 

subject to the risks associated with the 

seed investment. We note, however, that 

RICs are subject to all of the 

requirements under the Investment 

Company Act, and the exclusion for 

FPFs is designed to identify foreign 

funds that are sufficiently similar to 

RICs such that it is appropriate to 

exclude these foreign funds from the 

covered fund definition. Therefore, 

although section 13 and the 2013 final 

rule under certain conditions permit a 

seeding period of up to 3 years for 

covered funds (which are not subject to 

substantive SEC regulation and are the 

target of section 13’s restrictions), longer 

seeding periods for RICs and FPFs may 

not raise the same concerns. 

i. Compliance Program 

i. Regulatory Baseline 

The 2013 final rule emphasized the 

importance of a strong compliance 

program and sought to tailor the 

compliance program to the size of 

banking entities and the size of their 

trading activity. The Agencies believed 

it was necessary to balance compliance 

burdens posed on smaller banking 

entities with specificity and rigor 

necessary for large and complex banking 

organizations facing high compliance 

risks. As a result, the current 

compliance regime is progressively 


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403See 2013 final rule §ll.20(a). 

404See 2013 final rule §ll.20(f). Note that if an 

entity does not have any covered activities, it is not 

required to establish a compliance program until it 

begins to engage in covered activity. 

405See 2013 final rule §ll.20(b). 

406See 2013 final rule §ll.20(c) and Appendix 

B. 

407See 2013 final rule §ll.20(e). 

408See supra note 18. 

409 Id. 

more stringent with the size of covered 

activities and/or balance sheet of 

banking entities. 

Under the 2013 final rule, all banking 

entities with covered activities must 

develop and maintain a compliance 

program that is reasonably designed to 

ensure and monitor compliance with 

section 13 of the BHC Act and the 

implementing regulations. The terms, 

scope, and detail of the compliance 

program depend on the types, size, 

scope, and complexity of activities and 

business structure of the banking 

entity.403 Under the 2013 final rule, 

banking entities with total consolidated 

assets of less than $10 billion as 

reported on December 31 of the 2 

previous calendar years face a 

simplified compliance program: Such 

entities are able to incorporate 

compliance with the 2013 final rule into 

their regular compliance policies and 

procedures by reference, adjusting as 

appropriate given the entities’ activities, 

size, scope, and complexity.404

All other banking entities with 

covered activities are, at a minimum, 

required to implement a six-pillar 

compliance program. The six pillars 

include: (1) Written policies and 

procedures reasonably designed to 

document, describe, monitor and limit 

proprietary trading and covered fund 

activities and investments for 

compliance; (2) a system of internal 

controls reasonably designed to monitor 

compliance; (3) a management 

framework that clearly delineates 

responsibility and accountability for 

compliance, including management 

review of trading limits, strategies, 

hedging activities, investments, and 

incentive compensation; (4) 

independent testing and audit of the 

effectiveness of the compliance 

program; (5) training for personnel to 

effectively implement and enforce the 

compliance program; and (6) 

recordkeeping sufficient to demonstrate 

compliance.405

In addition, under the 2013 final rule, 

banking entities with covered activities 

that do not qualify as those with modest 

activity (total consolidated assets in 

excess of $10 billion) and that either are 

subject to the reporting requirements of 

Appendix A or have more than $50 

billion in gross consolidated total assets 

are required to comply with the 

enhanced minimum standards for 

compliance programs that are specified 

in Appendix B of the 2013 final rule.406

That is, Appendix B scopes in (1) all 

banking entities with significant trading 

assets and liabilities; and (2) banking 

entities with covered activity that have 

more than $50 billion in gross 

consolidated total assets, regardless of 

whether or not these banking entities 

have significant trading assets and 

liabilities. 

As described in greater detail 

elsewhere in the Supplementary 

Information, Appendix B requires the 

compliance program to (1) be reasonably 

designed to supervise the permitted 

trading and covered fund activities and 

investments, identify and monitor the 

risks of those activities and potential 

areas of noncompliance, and prevent 

prohibited activities and investments; 

(2) establish and enforce appropriate 

limits on the covered activities and 

investments, including limits on the 

size, scope, complexity, and risks of the 

individual activities or investments 

consistent with the requirements of 

section 13 of the BHC Act and the 2013 

final rule; (3) subject the compliance 

program to periodic independent review 

and testing and ensure the entity’s 

internal audit, compliance, and internal 

control functions are effective and 

independent; (4) make senior 

management and others accountable for 

the effective implementation of the 

compliance program, and ensure that 

the chief executive officer and board of 

directors review the program; and (5) 

facilitate supervision and examination 

by the Agencies. 

Additionally, under the 2013 final 

rule, any banking entity that has more 

than $10 billion in total consolidated 

assets as reported in the previous 2 

calendar years shall maintain additional 

records in relation to covered funds. In 

particular, a banking entity must 

document the exclusions or exemptions 

relied on by each fund sponsored by the 

banking entity (including all 

subsidiaries and affiliates) in 

determining that such fund is not a 

covered fund, including documentation 

that supports such determination; for 

each seeding vehicle that will become a 

registered investment company or SECregulated business development 

company, a written plan documenting 

the banking entity’s determination that 

the seeding vehicle will become a 

registered investment company or SECregulated business development 

company, the period of time during 

which the vehicle will operate as a 

seeding vehicle, and the banking 

entity’s plan to market the vehicle to 

third-party investors and convert it into 

a registered investment company or 

SEC-regulated business development 

company within the time period 

specified.407

The Agencies recognize that the scope 

and breadth of the compliance 

obligations impose significant costs on 

banking entities, which may be 

particularly impactful for smaller 

entities. For example, some commenters 

estimate that banking entities may have 

added as many as 2,500 pages of 

policies, procedures, mandates, and 

controls per institution for the purposes 

of compliance with the 2013 final rule, 

which need to be monitored and 

updated on an ongoing basis.408

Moreover, some banking entities may 

spend, on average, more than 10,000 

hours on training each year.409 In terms 

of ongoing costs, some banking entities 

may have 15 regularly meeting 

committees and forums, with as many 

as 50 participants per institution 

dedicated to compliance with the 2013 

final rule. 

The current compliance regime and 

related burdens may reduce the 

profitability of covered activities by 

dealers and investment advisers 

affiliated with banking entities and may 

be passed along to customers or clients 

in the form of reduced provision of 

services or higher service costs. 

Moreover, the Agencies recognize that 

the extensive compliance program 

under the 2013 final rule may detract 

resources of banking entities and their 

compliance departments and 

supervisors from other routine 

compliance matters, risk management, 

and supervision. Finally, prescriptive 

compliance requirements may not 

optimally reflect the organizational 

structures, governance mechanisms, or 

risk management practices of complex, 

innovative, and global banking entities. 

ii. Costs and Benefits 

The proposed amendments are 

expected to lower compliance burdens 

in two ways. First, the proposed 

amendments increase flexibility in 

complying with the 2013 final rule for 

banking entities without significant 

trading assets and liabilities, which may 

reduce compliance costs for these 

entities. Second, the proposed 

amendments streamline the compliance 

program for large banking entities. To 

the extent that current requirements are 

duplicative and maintaining both an 

enhanced compliance program and 

regular compliance systems is 


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410We do not have the information necessary to 

quantify the current costs of compliance programs 

specific to banking entity RIAs. Thus, we do not 

allocate cost savings from monetized PRA burdens 

to banking entity RIAs from the proposed Appendix 

B amendments. To the degree that some banking 

entity RIAs may be complying using compliance 

resources and systems independent of the affiliated 

holding company or affiliates and subsidiaries, we 

may be underestimating the cost savings from the 

proposed amendments. 

411See supra note 18. 

412As a baseline matter, the CEO is currently 

required to annually attest that the banking entity 

has in place processes to establish, maintain, 

enforce, review, test, and modify the compliance 

program established pursuant to Appendix B in a 

manner reasonably designed to achieve compliance 

with section 13 of the BHC Act and the 2013 final 

rule. 

413See supra note 18. 

inefficient, large entities may benefit 

from the proposed amendments. 

Specifically, the proposed amendments 

introduce four main changes to the 

compliance program requirements of the 

2013 final rule. 

First, Group C entities would be 

subject to presumed compliance with 

proprietary trading and covered fund 

prohibitions. Specifically, the rebuttable 

presumption of compliance would 

apply to all holding companies with less 

than $1 billion in combined total of 

consolidated trading assets and trading 

liabilities (excluding trading assets and 

liabilities involving obligations of or 

guaranteed by the United States or any 

agency of the United States). We 

preliminarily estimate that 

approximately 42 broker-dealers would 

be able to avail themselves of the 

rebuttable presumption and would not 

have to apply the 2013 final rule’s 

compliance program requirements. The 

presumed compliance standard 

proposed for Group C entities may 

benefit entities with very low levels of 

trading activity by providing additional 

compliance flexibility. While this may 

increase the risks of non-compliance, 

the proposed amendments do not waive 

the proprietary trading and covered 

fund prohibitions of the 2013 final rule 

for such entities. 

Second, the threshold for a simplified 

compliance program would be based on 

a banking entity’s consolidated trading 

assets and liabilities instead of its total 

assets. The Agencies recognize that 

existing compliance program 

requirements may burden entities that 

engage in little covered trading activity 

but have larger total assets. The 

proposed amendment may reduce costs 

for banking entities that have more than 

$10 billion in total assets but do not 

have significant trading activity. Since 

the volume of consolidated trading 

assets and liabilities is likely less than 

the size of the firm’s balance sheet, this 

amendment would scope in more 

holding companies—and consequently 

SEC-registered dealers and investment 

advisers affiliated with them—into the 

simplified compliance program regime. 

Third, under the proposed 

amendments covered fund 

recordkeeping requirements apply to 

banking entities with significant trading 

assets and liabilities, rather than to 

banking entities with over $10 billion in 

total assets. As discussed above, the 

Agencies expect that the covered funds 

activities of banking entities without 

significant trading assets and liabilities 

may generally be smaller in scale and 

less complex than those of banking 

entities with significant trading assets 

and liabilities. Thus, the value of 

additional documentation requirements 

for banking entities without significant 

trading assets and liabilities may be 

lower. The proposal reflects these 

considerations and may reduce the costs 

associated with these covered funds 

recordkeeping requirements by reducing 

the number of banking entities subject 

to these requirements.410 We note that 

entities with moderate trading assets 

and liabilities would still be required to 

comply with all the covered fund 

provisions, and the proposal simply 

eliminates recordkeeping for the 

purposes of demonstrating compliance. 

While, in general, the removal of such 

recordkeeping requirements may reduce 

the effectiveness of regulatory oversight, 

we preliminarily believe that SEC 

oversight of registered dealers and 

investment advisers of covered funds 

may not be adversely affected. 

Fourth, with an exception for the CEO 

attestation, the requirements in 

Appendix B of the 2013 final rule would 

be removed. The Agencies understand 

that compliance with Appendix B 

required entities to develop and 

administer an enhanced compliance 

program that may not be tailored to the 

business model or risks of specific 

institutions. Further, some banking 

entities have established as many as 500 

controls related to Appendix B 

obligations, some of which may be 

duplicating existing policies and 

procedures designed as part of 

prudential safety and soundness.411 The 

removal of Appendix B requirements 

will affect all Group A banking entities 

and Group B and Group C banking 

entities that have total consolidated 

assets of $50 billion or more. We 

estimate that there are 100 brokerdealers that may experience reduced 

compliance costs as a result of this 

amendment. The removal of the 

Appendix B requirements may 

significantly reduce the number and 

complexity of the compliance 

requirements such entities are subject 

to. Given the size of affected holding 

companies, a stringent compliance 

regime may reduce compliance risks 

related to the substantive prohibition of 

the 2013 final rule. However, Group A 

and Group B entities will continue to be 

required to establish and maintain a 

compliance program under §ll.20. 

Finally, the proposed amendment 

would require all Group A and Group B 

entities to comply with the CEO 

attestation requirement. Under the 2013 

final rule, banking entities with $50 

billion or more in total consolidated 

assets, banking entities with over $10 

billion in consolidated trading assets 

and liabilities, and those banking 

entities that an Agency has notified in 

writing are subject to the CEO 

attestation requirement.412 We estimate 

that currently as many as 100 banking 

entity broker-dealers are required to 

comply with the CEO attestation 

requirement. Based on the counts in 

Table 2, we estimate that the proposed 

amendment will reduce this number to 

approximately 96 entities. However, we 

recognize that entities have flexibility to 

comply with the attestation 

requirement, including providing it at 

the SEC-registrant or at the holdingcompany level. For example, in 2017 

the SEC received a total of 57 

attestations, including those from 

registrants and holding companies. 

While the proposed amendment may 

slightly decrease the number of affected 

broker-dealers because of this flexibility 

in compliance, the effects on 

compliance burdens for SEC registrants, 

if any, are unclear. 

As an alternative, the Agencies could 

have proposed amending the 2013 final 

rule by requiring CEO attestations for all 

Group A entities only if they have over 

$50 billion in total assets; removing the 

CEO attestation requirement; or 

allowing other senior officers, such as 

the chief compliance officer (CCO), to 

provide the requisite attestation for 

some or all affected banking entities. 

The Agencies recognize that the CEO 

attestation process is costly and that 

some banking entities may spend more 

than 1,700 hours on the CEO attestation 

process and that the elimination of this 

requirement may reduce time dedicated 

towards the compliance program by as 

much as 10%.413 The Agencies also 

recognize that allowing other senior 

officers to provide the attestation would 

provide beneficial flexibility to banking 

entities with different business models, 

organizational structures, delegation of 

duties, and internal reporting and 

oversight lines. In addition, as the 


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414See, e.g., Business Conduct Standards for 

Security-Based Swap Dealers and Major SecurityBased Swap Participants, Exchange Act Release No. 

77617 (Apr. 13, 2016), 81 FR 29960, 30128 (May 24, 

2016). 

415See supra note 18. 

416Cost reduction for broker-dealers: 1,100 hours 

per firm × 0.18 dealer weight × 100 broker-dealers 

× (Attorney at $409 per hour) = $8,098,200. Cost 

reductions for entities that may register as SBSDs 

may be as high as: 1,100 hours per firm × 0.18 

dealer weight × 34 firms × (Attorney at $409 per 

hour) = $2,753,388. The estimate for SBSDs 

assumes that all 34 SBSDs would be subject to 

Appendix B requirements, and may over-estimate 

the cost savings. 

417 Initial set-up cost reduction for broker-dealers: 

3,300 hours per firm × 0.18 dealer weight × 100 

broker-dealers × (Attorney at $409 per hour) = 

$24,294,600. Cost reductions for entities that may 

register as SBSDs may be as high as: 3,300 hours 

per firm × 0.18 dealer weight × 34 firms × (Attorney 

at $409 per hour) = $8,260,164. The estimate for 

SBSDs assumes that all 34 SBSDs would be subject 

to Appendix B requirements, and may over-estimate 

the cost savings. 

Agencies have discussed in other 

contexts,414 certification and attestation 

requirements may increase CEO liability 

when the CEO executes the required 

attestation. If CEOs of banking entities 

are risk averse, they may require 

additional liability insurance, higher 

compensation or lower incentive pay as 

a fraction of overall compensation. 

However, liability related to the 

attestation may also serve as a 

disciplining mechanism by 

incentivizing compliance and may 

reduce risk-taking by banking entities. 

We also note that the covered activities 

of larger and more complex banking 

entities with higher volumes of trading 

activity may involve more significant 

moral hazard and conflicts of interest. 

The Agencies also recognize that CEO 

attestation may be costly for foreign 

banking entities. For example, one 

foreign firm reported that it organizes 

and manages a global controls subcertification process that takes 6 months 

to complete and involves over 400 staff 

(including over 260 outside the United 

States) in order for the CEO to sign and 

deliver the annual attestation.415 As an 

alternative, the Agencies could have 

proposed exempting foreign banking 

entities from the CEO attestation 

requirement. Currently, the requirement 

covers only the U.S. operations of a 

foreign banking entity and not its 

foreign operations. Similar to the 

analysis of the proposed amendment to 

trading outside the United States, this 

alternative may decrease compliance 

costs and increase trading activity by 

foreign banking entities in the United 

States, but result in losses in market 

share and profitability for U.S. banking 

entities that would remain subject to the 

attestation requirement and would be 

placed at a competitive disadvantage as 

a result. 

As can be seen from section V.B, the 

Agencies do not estimate any 

recordkeeping or reporting burden 

reductions related to compliance 

requirements in § ll.20(b) of the final 

rule. The proposed removal of 

Appendix B requirements will result in 

ongoing annual cost savings estimated 

as $8,098,200 for registered brokerdealers and as up to $2,753,388 for 

entities that may choose to register as 

SBSDs.416 In addition, the removal of 

Appendix B requirements may result in 

initial cost savings estimated as 

$24,294,600 for registered brokerdealers, and up to $8,260,164 for 

entities that may choose to register as 

SBSDs.417 As can be seen from section 

V.B, the Agencies do not estimate any 

recordkeeping or reporting burden 

reductions related to proposed 

presumed compliance amendment in 

§ ll.20(f)(2) of the final rule. 

iii. Competition, Efficiency, and Capital 

Formation 

Under the proposed amendments, 

both Group A and Group B entities will 

enjoy reduced compliance program 

requirements and Group C will be 

presumed compliant with prohibitions 

of sections B and C of the proposed rule. 

To the extent that compliance program 

requirements for Group B entities are 

less costly, Group A entities close to the 

threshold may choose to manage down 

their trading book such that they would 

qualify for the simplified compliance 

program, resulting in more competition 

among entities that are close to the 

threshold. Similarly, the proposed 

amendment may incentivize Group B 

entities close to the threshold to 

rebalance their trading book and qualify 

for the presumed compliance treatment 

of Group C entities. Such management 

of the trading book may reduce the risk 

of each individual banking entity and 

may decrease moral hazard addressed 

by the 2013 final rule. We note that 

entities are likely to weigh potential cost 

savings related to lighter compliance 

requirements for Group B and Group C 

entities against the costs of reducing 

trading activity below the $10 billion 

and $1 billion thresholds. Therefore, 

this competition effect may be 

particularly significant for Group A 

entities that are close to the $10 billion 

threshold and for Group B entities that 

are close to the $1 billion threshold. 

Since the compliance requirements do 

not impact the scope of information 

available to investors, we do not 

anticipate effects on informational 

efficiency to be significant. To the 

extent that some dealers are 

experiencing large compliance costs and 

partially or fully passing them along to 

customers in the form of reduced access 

to capital or higher cost of capital, the 

amendment may reduce costs of and 

increase access to capital. 

4. Request for Comment 

The SEC is requesting comment 

regarding the economic analysis set 

forth here. To the extent possible, the 

SEC requests that market participants 

and other commenters provide 

supporting data and analysis with 

respect to the benefits, costs, and effects 

on competition, efficiency, and capital 

formation of adopting the proposed 

amendments or any reasonable 

alternatives. In addition, the SEC asks 

commenters to consider the following 

questions: 

Question SEC–1. What additional 

qualitative or quantitative information 

should the SEC consider as part of the 

baseline for its economic analysis of the 

proposed amendments? 

Question SEC–2. What additional 

considerations can the SEC use to 

estimate the costs and benefits of 

implementing the proposed 

amendments for SEC-regulated banking 

entities? 

Question SEC–3. Is it likely that 

certain cost savings associated with the 

proposed rule will not be recognized by 

SEC-regulated banking entities because 

of the nature of their activities or 

because of new costs the proposal 

would impose on these activities? Why 

or why not? Are there other benefits or 

costs associated with the proposed rule 

that will impact SEC-regulated banking 

entities differently than other types of 

banking entities? 

Question SEC–4. Has the SEC 

considered all relevant aspects of the 

proposed amendments? Are the 

estimated costs of the proposed rule for 

SEC-regulated banking entities 

reasonable? If not, please explain in 

detail why the cost estimates should be 

higher or lower than those provided. 

Have we accurately described the 

benefits of the proposed rule? Why or 

why not? Please identify any other 

benefits associated with the proposed 

rule in detail. Please identify any costs 

associated with the proposed rule that 

we have not identified. 

List of Subjects 

12 CFR Part 44 

Banks, Banking, Compensation, 

Credit, Derivatives, Government 

securities, Insurance, Investments, 

National banks, Penalties, Reporting and 

recordkeeping requirements, Risk, Risk 

retention, Securities, Trusts and 

trustees. 


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12 CFR Part 248 

Administrative practice and 

procedure, Banks, Banking, Conflict of 

interests, Credit, Foreign banking, 

Government securities, Holding 

companies, Insurance, Insurance 

companies, Investments, Penalties, 

Reporting and recordkeeping 

requirements, Securities, State 

nonmember banks, State savings 

associations, Trusts and trustees 

12 CFR Part 351 

Banks, Banking, Capital, 

Compensation, Conflicts of interest, 

Credit, Derivatives, Government 

securities, Insurance, Insurance 

companies, Investments, Penalties, 

Reporting and recordkeeping 

requirements, Risk, Risk retention, 

Securities, Trusts and trustees 

17 CFR Part 75 

Banks, Banking, Compensation, 

Credit, Derivatives, Federal branches 

and agencies, Federal savings 

associations, Government securities, 

Hedge funds, Insurance, Investments, 

National banks, Penalties, Proprietary 

trading, Reporting and recordkeeping 

requirements, Risk, Risk retention, 

Securities, Swap dealers, Trusts and 

trustees, Volcker rule. 

17 CFR Part 255 

Banks, Brokers, Dealers, Investment 

advisers, Recordkeeping, Reporting, 

Securities. 

DEPARTMENT OF THE TREASURY 

Office of the Comptroller of the Currency 

12 CFR Chapter I 

Authority and Issuance 

For the reasons stated in the Common 

Preamble, the Office of the Comptroller 

of the Currency proposes to amend 

chapter I of Title 12, Code of Federal 

Regulations as follows: 

PART 44—PROPRIETARY TRADING 

AND CERTAIN INTERESTS IN AND 

RELATIONSHIPS WITH COVERED 

FUNDS 

■ 1. The authority citation for part 44 

continues to read as follows: 

Authority: 7 U.S.C. 27 et seq., 12 U.S.C. 1, 

24, 92a, 93a, 161, 1461, 1462a, 1463, 1464, 

1467a, 1813(q), 1818, 1851, 3101, 3102, 3108, 

5412. 

■ 2. Section 44.2 is revised to read as 

follows: 

§ 44.2 Definitions. 

Unless otherwise specified, for 

purposes of this part: 

(a) Affiliate has the same meaning as 

in section 2(k) of the Bank Holding 

Company Act of 1956 (12 U.S.C. 

1841(k)). 

(b) Applicable accounting standards 

means U.S. generally accepted 

accounting principles, or such other 

accounting standards applicable to a 

banking entity that the OCC determines 

are appropriate and that the banking 

entity uses in the ordinary course of its 

business in preparing its consolidated 

financial statements. 

(c) Bank holding company has the 

same meaning as in section 2 of the 

Bank Holding Company Act of 1956 (12 

U.S.C. 1841). 

(d) Banking entity. (1) Except as 

provided in paragraph (d)(2) of this 

section, banking entity means: 

(i) Any insured depository institution; 

(ii) Any company that controls an 

insured depository institution; 

(iii) Any company that is treated as a 

bank holding company for purposes of 

section 8 of the International Banking 

Act of 1978 (12 U.S.C. 3106); and 

(iv) Any affiliate or subsidiary of any 

entity described in paragraphs (d)(1)(i), 

(ii), or (iii) of this section. 

(2) Banking entity does not include: 

(i) A covered fund that is not itself a 

banking entity under paragraphs 

(d)(1)(i), (ii), or (iii) of this section; 

(ii) A portfolio company held under 

the authority contained in section 

4(k)(4)(H) or (I) of the BHC Act (12 

U.S.C. 1843(k)(4)(H), (I)), or any 

portfolio concern, as defined under 13 

CFR 107.50, that is controlled by a small 

business investment company, as 

defined in section 103(3) of the Small 

Business Investment Act of 1958 (15 

U.S.C. 662), so long as the portfolio 

company or portfolio concern is not 

itself a banking entity under paragraphs 

(d)(1)(i), (ii), or (iii) of this section; or 

(iii) The FDIC acting in its corporate 

capacity or as conservator or receiver 

under the Federal Deposit Insurance Act 

or Title II of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act. 

(e) Board means the Board of 

Governors of the Federal Reserve 

System. 

(f) CFTC means the Commodity 

Futures Trading Commission. 

(g) Dealer has the same meaning as in 

section 3(a)(5) of the Exchange Act (15 

U.S.C. 78c(a)(5)). 

(h) Depository institution has the 

same meaning as in section 3(c) of the 

Federal Deposit Insurance Act (12 

U.S.C. 1813(c)). 

(i) Derivative. (1) Except as provided 

in paragraph (i)(2) of this section, 

derivative means: 

(i) Any swap, as that term is defined 

in section 1a(47) of the Commodity 

Exchange Act (7 U.S.C. 1a(47)), or 

security-based swap, as that term is 

defined in section 3(a)(68) of the 

Exchange Act (15 U.S.C. 78c(a)(68)); 

(ii) Any purchase or sale of a 

commodity, that is not an excluded 

commodity, for deferred shipment or 

delivery that is intended to be 

physically settled; 

(iii) Any foreign exchange forward (as 

that term is defined in section 1a(24) of 

the Commodity Exchange Act (7 U.S.C. 

1a(24)) or foreign exchange swap (as 

that term is defined in section 1a(25) of 

the Commodity Exchange Act (7 U.S.C. 

1a(25)); 

(iv) Any agreement, contract, or 

transaction in foreign currency 

described in section 2(c)(2)(C)(i) of the 

Commodity Exchange Act (7 U.S.C. 

2(c)(2)(C)(i)); 

(v) Any agreement, contract, or 

transaction in a commodity other than 

foreign currency described in section 

2(c)(2)(D)(i) of the Commodity Exchange 

Act (7 U.S.C. 2(c)(2)(D)(i)); and 

(vi) Any transaction authorized under 

section 19 of the Commodity Exchange 

Act (7 U.S.C. 23(a) or (b)); 

(2) A derivative does not include: 

(i) Any consumer, commercial, or 

other agreement, contract, or transaction 

that the CFTC and SEC have further 

defined by joint regulation, 

interpretation, guidance, or other action 

as not within the definition of swap, as 

that term is defined in section 1a(47) of 

the Commodity Exchange Act (7 U.S.C. 

1a(47)), or security-based swap, as that 

term is defined in section 3(a)(68) of the 

Exchange Act (15 U.S.C. 78c(a)(68)); or 

(ii) Any identified banking product, as 

defined in section 402(b) of the Legal 

Certainty for Bank Products Act of 2000 

(7 U.S.C. 27(b)), that is subject to section 

403(a) of that Act (7 U.S.C. 27a(a)). 

(j) Employee includes a member of the 

immediate family of the employee. 

(k) Exchange Act means the Securities 

Exchange Act of 1934 (15 U.S.C. 78a et 

seq.). 

(l) Excluded commodity has the same 

meaning as in section 1a(19) of the 

Commodity Exchange Act (7 U.S.C. 

1a(19)). 

(m) FDIC means the Federal Deposit 

Insurance Corporation. 

(n) Federal banking agencies means 

the Board, the Office of the Comptroller 

of the Currency, and the FDIC. 

(o) Foreign banking organization has 

the same meaning as in section 

211.21(o) of the Board’s Regulation K 

(12 CFR 211.21(o)), but does not include 

a foreign bank, as defined in section 

1(b)(7) of the International Banking Act 

of 1978 (12 U.S.C. 3101(7)), that is 

organized under the laws of the 

Commonwealth of Puerto Rico, Guam, 

American Samoa, the United States 


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Virgin Islands, or the Commonwealth of 

the Northern Mariana Islands. 

(p) Foreign insurance regulator means 

the insurance commissioner, or a 

similar official or agency, of any country 

other than the United States that is 

engaged in the supervision of insurance 

companies under foreign insurance law. 

(q) General account means all of the 

assets of an insurance company except 

those allocated to one or more separate 

accounts. 

(r) Insurance company means a 

company that is organized as an 

insurance company, primarily and 

predominantly engaged in writing 

insurance or reinsuring risks 

underwritten by insurance companies, 

subject to supervision as such by a state 

insurance regulator or a foreign 

insurance regulator, and not operated 

for the purpose of evading the 

provisions of section 13 of the BHC Act 

(12 U.S.C. 1851). 

(s) Insured depository institution has 

the same meaning as in section 3(c) of 

the Federal Deposit Insurance Act (12 

U.S.C. 1813(c)), but does not include an 

insured depository institution that is 

described in section 2(c)(2)(D) of the 

BHC Act (12 U.S.C. 1841(c)(2)(D)). 

(t) Limited trading assets and 

liabilities means, with respect to a 

banking entity, that: 

(1) The banking entity has, together 

with its affiliates and subsidiaries on a 

worldwide consolidated basis, trading 

assets and liabilities (excluding trading 

assets and liabilities involving 

obligations of or guaranteed by the 

United States or any agency of the 

United States) the average gross sum of 

which over the previous consecutive 

four quarters, as measured as of the last 

day of each of the four previous 

calendar quarters, is less than 

$1,000,000,000; and 

(2) The OCC has not determined 

pursuant to § 44.20(g) or (h) of this part 

that the banking entity should not be 

treated as having limited trading assets 

and liabilities. 

(u) Loan means any loan, lease, 

extension of credit, or secured or 

unsecured receivable that is not a 

security or derivative. 

(v) Moderate trading assets and 

liabilities means, with respect to a 

banking entity, that the banking entity 

does not have significant trading assets 

and liabilities or limited trading assets 

and liabilities. 

(w) Primary financial regulatory 

agency has the same meaning as in 

section 2(12) of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (12 U.S.C. 5301(12)). 

(x) Purchase includes any contract to 

buy, purchase, or otherwise acquire. For 

security futures products, purchase 

includes any contract, agreement, or 

transaction for future delivery. With 

respect to a commodity future, purchase 

includes any contract, agreement, or 

transaction for future delivery. With 

respect to a derivative, purchase 

includes the execution, termination 

(prior to its scheduled maturity date), 

assignment, exchange, or similar 

transfer or conveyance of, or 

extinguishing of rights or obligations 

under, a derivative, as the context may 

require. 

(y) Qualifying foreign banking 

organization means a foreign banking 

organization that qualifies as such under 

section 211.23(a), (c) or (e) of the 

Board’s Regulation K (12 CFR 211.23(a), 

(c), or (e)). 

(z) SEC means the Securities and 

Exchange Commission. 

(aa) Sale and sell each include any 

contract to sell or otherwise dispose of. 

For security futures products, such 

terms include any contract, agreement, 

or transaction for future delivery. With 

respect to a commodity future, such 

terms include any contract, agreement, 

or transaction for future delivery. With 

respect to a derivative, such terms 

include the execution, termination 

(prior to its scheduled maturity date), 

assignment, exchange, or similar 

transfer or conveyance of, or 

extinguishing of rights or obligations 

under, a derivative, as the context may 

require. 

(bb) Security has the meaning 

specified in section 3(a)(10) of the 

Exchange Act (15 U.S.C. 78c(a)(10)). 

(cc) Security-based swap dealer has 

the same meaning as in section 3(a)(71) 

of the Exchange Act (15 U.S.C. 

78c(a)(71)). 

(dd) Security future has the meaning 

specified in section 3(a)(55) of the 

Exchange Act (15 U.S.C. 78c(a)(55)). 

(ee) Separate account means an 

account established and maintained by 

an insurance company in connection 

with one or more insurance contracts to 

hold assets that are legally segregated 

from the insurance company’s other 

assets, under which income, gains, and 

losses, whether or not realized, from 

assets allocated to such account, are, in 

accordance with the applicable contract, 

credited to or charged against such 

account without regard to other income, 

gains, or losses of the insurance 

company. 

(ff) Significant trading assets and 

liabilities.—(1) Significant trading assets 

and liabilities means, with respect to a 

banking entity, that: 

(i) The banking entity has, together 

with its affiliates and subsidiaries, 

trading assets and liabilities the average 

gross sum of which over the previous 

consecutive four quarters, as measured 

as of the last day of each of the four 

previous calendar quarters, equals or 

exceeds $10,000,000,000; or 

(ii) The OCC has determined pursuant 

to § 44.20(h) of this part that the banking 

entity should be treated as having 

significant trading assets and liabilities. 

(2) With respect to a banking entity 

other than a banking entity described in 

paragraph (3), trading assets and 

liabilities for purposes of this paragraph 

(ff) means trading assets and liabilities 

(excluding trading assets and liabilities 

involving obligations of or guaranteed 

by the United States or any agency of 

the United States) on a worldwide 

consolidated basis. 

(3)(i) With respect to a banking entity 

that is a foreign banking organization or 

a subsidiary of a foreign banking 

organization, trading assets and 

liabilities for purposes of this paragraph 

(ff) means the trading assets and 

liabilities (excluding trading assets and 

liabilities involving obligations of or 

guaranteed by the United States or any 

agency of the United States) of the 

combined U.S. operations of the top-tier 

foreign banking organization (including 

all subsidiaries, affiliates, branches, and 

agencies of the foreign banking 

organization operating, located, or 

organized in the United States). 

(ii) For purposes of paragraph (ff)(3)(i) 

of this section, a U.S. branch, agency, or 

subsidiary of a banking entity is located 

in the United States; however, the 

foreign bank that operates or controls 

that branch, agency, or subsidiary is not 

considered to be located in the United 

States solely by virtue of operating or 

controlling the U.S. branch, agency, or 

subsidiary. 

(gg) State means any State, the District 

of Columbia, the Commonwealth of 

Puerto Rico, Guam, American Samoa, 

the United States Virgin Islands, and the 

Commonwealth of the Northern Mariana 

Islands. 

(hh) Subsidiary has the same meaning 

as in section 2(d) of the Bank Holding 

Company Act of 1956 (12 U.S.C. 

1841(d)). 

(ii) State insurance regulator means 

the insurance commissioner, or a 

similar official or agency, of a State that 

is engaged in the supervision of 

insurance companies under State 

insurance law. 

(jj) Swap dealer has the same meaning 

as in section 1(a)(49) of the Commodity 

Exchange Act (7 U.S.C. 1a(49)). 

■ 3. Section 44.3 is amended by: 

■ a. Revising paragraph (b); 

■ b. Redesignating paragraphs (c) 

through (e) as paragraphs (d) through (f); 

■ c. Adding a new paragraph (c); 


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■ d. Revising paragraph (e)(3) and 

adding paragraph (e)(10); 

■ e. Redesignating paragraphs (f)(5) 

through (f)(13) as paragraphs (f)(6) 

through (f)(14) and adding new 

paragraph (f)(5); and 

■ f. Adding paragraph (g). 

The revisions and additions read as 

follows: 

§ 44.3 Prohibition on proprietary trading. 

* * * * * 

(b) Definition of trading account. 

Trading account means any account 

that is used by a banking entity to: 

(1)(i) Purchase or sell one or more 

financial instruments that are both 

market risk capital rule covered 

positions and trading positions (or 

hedges of other market risk capital rule 

covered positions), if the banking entity, 

or any affiliate of the banking entity, is 

an insured depository institution, bank 

holding company, or savings and loan 

holding company, and calculates riskbased capital ratios under the market 

risk capital rule; or 

(ii) With respect to a banking entity 

that is not, and is not controlled directly 

or indirectly by a banking entity that is, 

located in or organized under the laws 

of the United States or any State, 

purchase or sell one or more financial 

instruments that are subject to capital 

requirements under a market risk 

framework established by the homecountry supervisor that is consistent 

with the market risk framework 

published by the Basel Committee on 

Banking Supervision, as amended from 

time to time. 

(2) Purchase or sell one or more 

financial instruments for any purpose, if 

the banking entity: 

(i) Is licensed or registered, or is 

required to be licensed or registered, to 

engage in the business of a dealer, swap 

dealer, or security-based swap dealer, to 

the extent the instrument is purchased 

or sold in connection with the activities 

that require the banking entity to be 

licensed or registered as such; or 

(ii) Is engaged in the business of a 

dealer, swap dealer, or security-based 

swap dealer outside of the United 

States, to the extent the instrument is 

purchased or sold in connection with 

the activities of such business; or 

(3) Purchase or sell one or more 

financial instruments, with respect to a 

financial instrument that is recorded at 

fair value on a recurring basis under 

applicable accounting standards. 

(c) Presumption of compliance. (1)(i) 

Each trading desk that does not 

purchase or sell financial instruments 

for a trading account defined in 

paragraphs (b)(1) or (b)(2) of this section 

may calculate the net gain or net loss on 

the trading desk’s portfolio of financial 

instruments each business day, 

reflecting realized and unrealized gains 

and losses since the previous business 

day, based on the banking entity’s fair 

value for such financial instruments. 

(ii) If the sum of the absolute values 

of the daily net gain and loss figures 

determined in accordance with 

paragraph (c)(1)(i) of this section for the 

preceding 90-calendar-day period does 

not exceed $25 million, the activities of 

the trading desk shall be presumed to be 

in compliance with the prohibition in 

paragraph (a) of this section. 

(2) The OCC may rebut the 

presumption of compliance in 

paragraph (c)(1)(ii) of this section by 

providing written notice to the banking 

entity that the OCC has determined that 

one or more of the banking entity’s 

activities violates the prohibitions under 

subpart B. 

(3) If a trading desk operating 

pursuant to paragraph (c)(1)(ii) of this 

section exceeds the $25 million 

threshold in that paragraph at any point, 

the banking entity shall, in accordance 

with any policies and procedures 

adopted by the OCC: 

(i) Promptly notify the OCC; 

(ii) Demonstrate that the trading 

desk’s purchases and sales of financial 

instruments comply with subpart B; and 

(iii) Demonstrate, with respect to the 

trading desk, how the banking entity 

will maintain compliance with subpart 

B on an ongoing basis. 

* * * * * 

(e) * * * 

(3) Any purchase or sale of a security, 

foreign exchange forward (as that term 

is defined in section 1a(24) of the 

Commodity Exchange Act (7 U.S.C. 

1a(24)), foreign exchange swap (as that 

term is defined in section 1a(25) of the 

Commodity Exchange Act (7 U.S.C. 

1a(25)), or physically-settled crosscurrency swap, by a banking entity for 

the purpose of liquidity management in 

accordance with a documented liquidity 

management plan of the banking entity 

that, with respect to such financial 

instruments: 

(i) Specifically contemplates and 

authorizes the particular financial 

instruments to be used for liquidity 

management purposes, the amount, 

types, and risks of these financial 

instruments that are consistent with 

liquidity management, and the liquidity 

circumstances in which the particular 

financial instruments may or must be 

used; 

(ii) Requires that any purchase or sale 

of financial instruments contemplated 

and authorized by the plan be 

principally for the purpose of managing 

the liquidity of the banking entity, and 

not for the purpose of short-term resale, 

benefitting from actual or expected 

short-term price movements, realizing 

short-term arbitrage profits, or hedging a 

position taken for such short-term 

purposes; 

(iii) Requires that any financial 

instruments purchased or sold for 

liquidity management purposes be 

highly liquid and limited to financial 

instruments the market, credit, and 

other risks of which the banking entity 

does not reasonably expect to give rise 

to appreciable profits or losses as a 

result of short-term price movements; 

(iv) Limits any financial instruments 

purchased or sold for liquidity 

management purposes, together with 

any other instruments purchased or sold 

for such purposes, to an amount that is 

consistent with the banking entity’s 

near-term funding needs, including 

deviations from normal operations of 

the banking entity or any affiliate 

thereof, as estimated and documented 

pursuant to methods specified in the 

plan; 

(v) Includes written policies and 

procedures, internal controls, analysis, 

and independent testing to ensure that 

the purchase and sale of financial 

instruments that are not permitted 

under §§ 44.6(a) or (b) of this subpart are 

for the purpose of liquidity management 

and in accordance with the liquidity 

management plan described in 

paragraph (e)(3) of this section; and 

(vi) Is consistent with the OCC’s 

supervisory requirements, guidance, 

and expectations regarding liquidity 

management; 

* * * * * 

(10) Any purchase (or sale) of one or 

more financial instruments that was 

made in error by a banking entity in the 

course of conducting a permitted or 

excluded activity or is a subsequent 

transaction to correct such an error, and 

the erroneously purchased (or sold) 

financial instrument is promptly 

transferred to a separately-managed 

trade error account for disposition. 

(f) * * * 

(5) Cross-currency swap means a swap 

in which one party exchanges with 

another party principal and interest rate 

payments in one currency for principal 

and interest rate payments in another 

currency, and the exchange of principal 

occurs on the date the swap is entered 

into, with a reversal of the exchange of 

principal at a later date that is agreed 

upon when the swap is entered into. 

* * * * * 

(g) Reservation of Authority: (1) The 

OCC may determine, on a case-by-case 

basis, that a purchase or sale of one or 


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more financial instruments by a banking 

entity either is or is not for the trading 

account as defined at 12 U.S.C. 

1851(h)(6). 

(2) Notice and Response 

Procedures.—(i) Notice. When the OCC 

determines that the purchase or sale of 

one or more financial instruments is for 

the trading account under paragraph 

(g)(1) of this section, the OCC will notify 

the banking entity in writing of the 

determination and provide an 

explanation of the determination. 

(ii) Response. (A) The banking entity 

may respond to any or all items in the 

notice. The response should include any 

matters that the banking entity would 

have the OCC consider in deciding 

whether the purchase or sale is for the 

trading account. The response must be 

in writing and delivered to the 

designated OCC official within 30 days 

after the date on which the banking 

entity received the notice. The OCC may 

shorten the time period when, in the 

opinion of the OCC, the activities or 

condition of the banking entity so 

requires, provided that the banking 

entity is informed promptly of the new 

time period, or with the consent of the 

banking entity. In its discretion, the 

OCC may extend the time period for 

good cause. 

(B) Failure to respond within 30 days 

or such other time period as may be 

specified by the OCC shall constitute a 

waiver of any objections to the OCC’s 

determination. 

(iii) After the close of banking entity’s 

response period, the OCC will decide, 

based on a review of the banking 

entity’s response and other information 

concerning the banking entity, whether 

to maintain the OCC’s determination 

that the purchase or sale of one or more 

financial instruments is for the trading 

account. The banking entity will be 

notified of the decision in writing. The 

notice will include an explanation of 

the decision. 

■ 4. Section 44.4 is amended by: 

■ a. Revising paragraph (a)(2); 

■ b. Adding paragraph (a)(8); 

■ c. Revising paragraph (b)(2); 

■ d. Revising the introductory text of 

paragraph (b)(3)(i); 

■ e. In paragraph (b)(5) removing 

‘‘inventory’’ wherever it appears and 

adding ‘‘positions’’ in its place; and 

■ f. Adding a new paragraph (b)(6). 

The revisions and additions read as 

follows: 

§ 44.4 Permitted underwriting and market 

making-related activities. 

(a) * * * 

(2) Requirements. The underwriting 

activities of a banking entity are 

permitted under paragraph (a)(1) of this 

section only if: 

(i) The banking entity is acting as an 

underwriter for a distribution of 

securities and the trading desk’s 

underwriting position is related to such 

distribution; 

(ii) (A) The amount and type of the 

securities in the trading desk’s 

underwriting position are designed not 

to exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties, taking into account the 

liquidity, maturity, and depth of the 

market for the relevant type of security, 

and 

(B) Reasonable efforts are made to sell 

or otherwise reduce the underwriting 

position within a reasonable period, 

taking into account the liquidity, 

maturity, and depth of the market for 

the relevant type of security; 

(iii) In the case of a banking entity 

with significant trading assets and 

liabilities, the banking entity has 

established and implements, maintains, 

and enforces an internal compliance 

program required by subpart D of this 

part that is reasonably designed to 

ensure the banking entity’s compliance 

with the requirements of paragraph (a) 

of this section, including reasonably 

designed written policies and 

procedures, internal controls, analysis, 

and independent testing identifying and 

addressing: 

(A) The products, instruments or 

exposures each trading desk may 

purchase, sell, or manage as part of its 

underwriting activities; 

(B) Limits for each trading desk, in 

accordance with paragraph (a)(8)(i) of 

this section; 

(C) Internal controls and ongoing 

monitoring and analysis of each trading 

desk’s compliance with its limits; and 

(D) Authorization procedures, 

including escalation procedures that 

require review and approval of any 

trade that would exceed a trading desk’s 

limit(s), demonstrable analysis of the 

basis for any temporary or permanent 

increase to a trading desk’s limit(s), and 

independent review of such 

demonstrable analysis and approval; 

(iv) The compensation arrangements 

of persons performing the activities 

described in this paragraph (a) are 

designed not to reward or incentivize 

prohibited proprietary trading; and 

(v) The banking entity is licensed or 

registered to engage in the activity 

described in this paragraph (a) in 

accordance with applicable law. 

* * * * * 

(8) Rebuttable presumption of 

compliance.—(i) Risk limits. (A) A 

banking entity shall be presumed to 

meet the requirements of paragraph 

(a)(2)(ii)(A) of this section with respect 

to the purchase or sale of a financial 

instrument if the banking entity has 

established and implements, maintains, 

and enforces the limits described in 

paragraph (a)(8)(i)(B) and does not 

exceed such limits. 

(B) The presumption described in 

paragraph (8)(i)(A) of this section shall 

be available with respect to limits for 

each trading desk that are designed not 

to exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties, based on the nature and 

amount of the trading desk’s 

underwriting activities, on the: 

(1) Amount, types, and risk of its 

underwriting position; 

(2) Level of exposures to relevant risk 

factors arising from its underwriting 

position; and 

(3) Period of time a security may be 

held. 

(ii) Supervisory review and oversight. 

The limits described in paragraph 

(a)(8)(i) of this section shall be subject 

to supervisory review and oversight by 

the OCC on an ongoing basis. Any 

review of such limits will include 

assessment of whether the limits are 

designed not to exceed the reasonably 

expected near term demands of clients, 

customers, or counterparties. 

(iii) Reporting. With respect to any 

limit identified pursuant to paragraph 

(a)(8)(i) of this section, a banking entity 

shall promptly report to the OCC (A) to 

the extent that any limit is exceeded and 

(B) any temporary or permanent 

increase to any limit(s), in each case in 

the form and manner as directed by the 

OCC. 

(iv) Rebutting the presumption. The 

presumption in paragraph (a)(8)(i) of 

this section may be rebutted by the OCC 

if the OCC determines, based on all 

relevant facts and circumstances, that a 

trading desk is engaging in activity that 

is not based on the reasonably expected 

near term demands of clients, 

customers, or counterparties. The OCC 

will provide notice of any such 

determination to the banking entity in 

writing. 

(b) * * * 

(2) Requirements. The market makingrelated activities of a banking entity are 

permitted under paragraph (b)(1) of this 

section only if: 

(i) The trading desk that establishes 

and manages the financial exposure 

routinely stands ready to purchase and 

sell one or more types of financial 

instruments related to its financial 

exposure and is willing and available to 

quote, purchase and sell, or otherwise 

enter into long and short positions in 

those types of financial instruments for 

its own account, in commercially 

reasonable amounts and throughout 


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market cycles on a basis appropriate for 

the liquidity, maturity, and depth of the 

market for the relevant types of financial 

instruments; 

(ii) The trading desk’s market-making 

related activities are designed not to 

exceed, on an ongoing basis, the 

reasonably expected near term demands 

of clients, customers, or counterparties, 

based on the liquidity, maturity, and 

depth of the market for the relevant 

types of financial instrument(s). 

(iii) In the case of a banking entity 

with significant trading assets and 

liabilities, the banking entity has 

established and implements, maintains, 

and enforces an internal compliance 

program required by subpart D of this 

part that is reasonably designed to 

ensure the banking entity’s compliance 

with the requirements of paragraph (b) 

of this section, including reasonably 

designed written policies and 

procedures, internal controls, analysis 

and independent testing identifying and 

addressing: 

(A) The financial instruments each 

trading desk stands ready to purchase 

and sell in accordance with paragraph 

(b)(2)(i) of this section; 

(B) The actions the trading desk will 

take to demonstrably reduce or 

otherwise significantly mitigate 

promptly the risks of its financial 

exposure consistent with the limits 

required under paragraph (b)(2)(iii)(C) of 

this section; the products, instruments, 

and exposures each trading desk may 

use for risk management purposes; the 

techniques and strategies each trading 

desk may use to manage the risks of its 

market making-related activities and 

positions; and the process, strategies, 

and personnel responsible for ensuring 

that the actions taken by the trading 

desk to mitigate these risks are and 

continue to be effective; 

(C) Limits for each trading desk, in 

accordance with paragraph (b)(6)(i) of 

this section; 

(D) Internal controls and ongoing 

monitoring and analysis of each trading 

desk’s compliance with its limits; and 

(E) Authorization procedures, 

including escalation procedures that 

require review and approval of any 

trade that would exceed a trading desk’s 

limit(s), demonstrable analysis that the 

basis for any temporary or permanent 

increase to a trading desk’s limit(s) is 

consistent with the requirements of this 

paragraph (b), and independent review 

of such demonstrable analysis and 

approval; 

(iv) In the case of a banking entity 

with significant trading assets and 

liabilities, to the extent that any limit 

identified pursuant to paragraph 

(b)(2)(iii)(C) of this section is exceeded, 

the trading desk takes action to bring the 

trading desk into compliance with the 

limits as promptly as possible after the 

limit is exceeded; 

(v) The compensation arrangements of 

persons performing the activities 

described in this paragraph (b) are 

designed not to reward or incentivize 

prohibited proprietary trading; and 

(vi) The banking entity is licensed or 

registered to engage in activity 

described in this paragraph (b) in 

accordance with applicable law. 

(3) * * * 

(i) A trading desk or other 

organizational unit of another banking 

entity is not a client, customer, or 

counterparty of the trading desk if that 

other entity has trading assets and 

liabilities of $50 billion or more as 

measured in accordance with the 

methodology described in definition of 

‘‘significant trading assets and 

liabilities’’ contained in § 44.2 of this 

part, unless: 

* * * * * 

(6) Rebuttable presumption of 

compliance. 

(i) Risk limits. 

(A) A banking entity shall be 

presumed to meet the requirements of 

paragraph (b)(2)(ii) of this section with 

respect to the purchase or sale of a 

financial instrument if the banking 

entity has established and implements, 

maintains, and enforces the limits 

described in paragraph (b)(6)(i)(B) and 

does not exceed such limits. 

(B) The presumption described in 

paragraph (6)(i)(A) of this section shall 

be available with respect to limits for 

each trading desk that are designed not 

to exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties, based on the nature and 

amount of the trading desk’s market 

making-related activities, on the: 

(1) Amount, types, and risks of its 

market-maker positions; 

(2) Amount, types, and risks of the 

products, instruments, and exposures 

the trading desk may use for risk 

management purposes; 

(3) Level of exposures to relevant risk 

factors arising from its financial 

exposure; and 

(4) Period of time a financial 

instrument may be held. 

(ii) Supervisory review and oversight. 

The limits described in paragraph 

(b)(6)(i) of this section shall be subject 

to supervisory review and oversight by 

the OCC on an ongoing basis. Any 

review of such limits will include 

assessment of whether the limits are 

designed not to exceed the reasonably 

expected near term demands of clients, 

customers, or counterparties. 

(iii) Reporting. With respect to any 

limit identified pursuant to paragraph 

(b)(6)(i) of this section, a banking entity 

shall promptly report to the OCC (A) to 

the extent that any limit is exceeded and 

(B) any temporary or permanent 

increase to any limit(s), in each case in 

the form and manner as directed by the 

OCC. 

(iv) Rebutting the presumption. The 

presumption in paragraph (b)(6)(i) of 

this section may be rebutted by the OCC 

if the OCC determines, based on all 

relevant facts and circumstances, that a 

trading desk is engaging in activity that 

is not based on the reasonably expected 

near term demands of clients, 

customers, or counterparties. The OCC 

will provide notice of any such 

determination to the banking entity in 

writing. 

■ 5. Section 44.5 is amended by revising 

paragraphs (b) and (c)(1) introductory 

text and adding paragraph (c)(4) to read 

as follows: 

§ 44.5 Permitted risk-mitigating hedging 

activities. 

* * * * * 

(b) Requirements. 

(1) The risk-mitigating hedging 

activities of a banking entity that has 

significant trading assets and liabilities 

are permitted under paragraph (a) of this 

section only if: 

(i) The banking entity has established 

and implements, maintains and enforces 

an internal compliance program 

required by subpart D of this part that 

is reasonably designed to ensure the 

banking entity’s compliance with the 

requirements of this section, including: 

(A) Reasonably designed written 

policies and procedures regarding the 

positions, techniques and strategies that 

may be used for hedging, including 

documentation indicating what 

positions, contracts or other holdings a 

particular trading desk may use in its 

risk-mitigating hedging activities, as 

well as position and aging limits with 

respect to such positions, contracts or 

other holdings; 

(B) Internal controls and ongoing 

monitoring, management, and 

authorization procedures, including 

relevant escalation procedures; and 

(C) The conduct of analysis and 

independent testing designed to ensure 

that the positions, techniques and 

strategies that may be used for hedging 

may reasonably be expected to reduce or 

otherwise significantly mitigate the 

specific, identifiable risk(s) being 

hedged; 

(ii) The risk-mitigating hedging 

activity: 

(A) Is conducted in accordance with 

the written policies, procedures, and 


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internal controls required under this 

section; 

(B) At the inception of the hedging 

activity, including, without limitation, 

any adjustments to the hedging activity, 

is designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks, including 

market risk, counterparty or other credit 

risk, currency or foreign exchange risk, 

interest rate risk, commodity price risk, 

basis risk, or similar risks, arising in 

connection with and related to 

identified positions, contracts, or other 

holdings of the banking entity, based 

upon the facts and circumstances of the 

identified underlying and hedging 

positions, contracts or other holdings 

and the risks and liquidity thereof; 

(C) Does not give rise, at the inception 

of the hedge, to any significant new or 

additional risk that is not itself hedged 

contemporaneously in accordance with 

this section; 

(D) Is subject to continuing review, 

monitoring and management by the 

banking entity that: 

(1) Is consistent with the written 

hedging policies and procedures 

required under paragraph (b)(1)(i) of this 

section; 

(2) Is designed to reduce or otherwise 

significantly mitigate the specific, 

identifiable risks that develop over time 

from the risk-mitigating hedging 

activities undertaken under this section 

and the underlying positions, contracts, 

and other holdings of the banking 

entity, based upon the facts and 

circumstances of the underlying and 

hedging positions, contracts and other 

holdings of the banking entity and the 

risks and liquidity thereof; and 

(3) Requires ongoing recalibration of 

the hedging activity by the banking 

entity to ensure that the hedging activity 

satisfies the requirements set out in 

paragraph (b)(1)(ii) of this section and is 

not prohibited proprietary trading; and 

(iii) The compensation arrangements 

of persons performing risk-mitigating 

hedging activities are designed not to 

reward or incentivize prohibited 

proprietary trading. 

(2) The risk-mitigating hedging 

activities of a banking entity that does 

not have significant trading assets and 

liabilities are permitted under paragraph 

(a) of this section only if the riskmitigating hedging activity: 

(i) At the inception of the hedging 

activity, including, without limitation, 

any adjustments to the hedging activity, 

is designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks, including 

market risk, counterparty or other credit 

risk, currency or foreign exchange risk, 

interest rate risk, commodity price risk, 

basis risk, or similar risks, arising in 

connection with and related to 

identified positions, contracts, or other 

holdings of the banking entity, based 

upon the facts and circumstances of the 

identified underlying and hedging 

positions, contracts or other holdings 

and the risks and liquidity thereof; and 

(ii) Is subject, as appropriate, to 

ongoing recalibration by the banking 

entity to ensure that the hedging activity 

satisfies the requirements set out in 

paragraph (b)(2) of this section and is 

not prohibited proprietary trading. 

(c) * * * (1) A banking entity that has 

significant trading assets and liabilities 

must comply with the requirements of 

paragraphs (c)(2) and (3) of this section, 

unless the requirements of paragraph 

(c)(4) of this section are met, with 

respect to any purchase or sale of 

financial instruments made in reliance 

on this section for risk-mitigating 

hedging purposes that is: 

* * * * * 

(4) The requirements of paragraphs 

(c)(2) and (3) of this section do not 

apply to the purchase or sale of a 

financial instrument described in 

paragraph (c)(1) of this section if: 

(i) The financial instrument 

purchased or sold is identified on a 

written list of pre-approved financial 

instruments that are commonly used by 

the trading desk for the specific type of 

hedging activity for which the financial 

instrument is being purchased or sold; 

and 

(ii) At the time the financial 

instrument is purchased or sold, the 

hedging activity (including the purchase 

or sale of the financial instrument) 

complies with written, pre-approved 

hedging limits for the trading desk 

purchasing or selling the financial 

instrument for hedging activities 

undertaken for one or more other 

trading desks. The hedging limits shall 

be appropriate for the: 

(A) Size, types, and risks of the 

hedging activities commonly 

undertaken by the trading desk; 

(B) Financial instruments purchased 

and sold for hedging activities by the 

trading desk; and 

(C) Levels and duration of the risk 

exposures being hedged. 

■ 6. Section 44.6 is amended by revising 

paragraph (e)(3) and removing 

paragraph (e)(6) to read as follows: 

§ 44.6 Other permitted proprietary trading 

activities. 

* * * * * 

(e) * * * 

(3) A purchase or sale by a banking 

entity is permitted for purposes of this 

paragraph (e) if: 

(i) The banking entity engaging as 

principal in the purchase or sale 

(including relevant personnel) is not 

located in the United States or 

organized under the laws of the United 

States or of any State; 

(ii) The banking entity (including 

relevant personnel) that makes the 

decision to purchase or sell as principal 

is not located in the United States or 

organized under the laws of the United 

States or of any State; and 

(iii) The purchase or sale, including 

any transaction arising from riskmitigating hedging related to the 

instruments purchased or sold, is not 

accounted for as principal directly or on 

a consolidated basis by any branch or 

affiliate that is located in the United 

States or organized under the laws of 

the United States or of any State. 

* * * * * 

§ 44.10 [Amended] 

■ 7. Section 44.10 is amended by: 

■ a. In paragraph (c)(8)(i)(A) removing 

‘‘§ 44.2(s)’’ and adding ‘‘§ 44.2(u)’’ in its 

place; 

■ b. Removing paragraph (d)(1); 

■ c. Redesignating paragraphs (d)(2) 

through (d)(10) as paragraphs (d)(1) 

through (d)(9); 

■ d. In paragraph (d)(5)(i)(G) revising 

the reference to ‘‘(d)(6)(i)(A)’’ to read 

‘‘(d)(5)(i)(A)’’; and 

■ e. In paragraph (d)(9) revising the 

reference to ‘‘(d)(9)’’ to read ‘‘(d)(8)’’ and 

the reference to ‘‘(d)(10)(i)(A)’’ to read 

‘‘(d)(9)(i)(A)’’ and the reference to 

‘‘(d)(10)(i)’’ to read ‘‘(d)(9)(i)’’. 

■ 8. Section 44.11 is amended by 

revising paragraph (c) as follows: 

§ 44.11 Permitted organizing and offering, 

underwriting, and market making with 

respect to a covered fund. 

* * * * * 

(c) Underwriting and market making 

in ownership interests of a covered 

fund. The prohibition contained in 

§ 44.10(a) of this subpart does not apply 

to a banking entity’s underwriting 

activities or market making-related 

activities involving a covered fund so 

long as: 

(1) Those activities are conducted in 

accordance with the requirements of 

§ 44.4(a) or § 44.4(b) of subpart B, 

respectively; and 

(2) With respect to any banking entity 

(or any affiliate thereof) that: Acts as a 

sponsor, investment adviser or 

commodity trading advisor to a 

particular covered fund or otherwise 

acquires and retains an ownership 

interest in such covered fund in reliance 

on paragraph (a) of this section; or 

acquires and retains an ownership 

interest in such covered fund and is 


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either a securitizer, as that term is used 

in section 15G(a)(3) of the Exchange Act 

(15 U.S.C. 78o–11(a)(3)), or is acquiring 

and retaining an ownership interest in 

such covered fund in compliance with 

section 15G of that Act (15 U.S.C.78o– 

11) and the implementing regulations 

issued thereunder each as permitted by 

paragraph (b) of this section, then in 

each such case any ownership interests 

acquired or retained by the banking 

entity and its affiliates in connection 

with underwriting and market making 

related activities for that particular 

covered fund are included in the 

calculation of ownership interests 

permitted to be held by the banking 

entity and its affiliates under the 

limitations of § 44.12(a)(2)(ii); 

§ 44.12(a)(2)(iii), and § 44.12(d) of this 

subpart. 

§ 44.12 [Amended] 

■ 9. Section 44.12 is amended by: 

■ a. In paragraphs (c)(1) and (d) 

removing ‘‘§ 44.10(d)(6)(ii)’’ and adding 

‘‘§ 44.10(d)(5)(ii)’’ in its place; 

■ b. Removing paragraph (e)(2)(vii); and 

■ c. Redesignating the second instance 

of paragraph (e)(2)(vi) as paragraph 

(e)(2)(vii). 

■ 10. Section 44.13 is amended by 

revising paragraphs (a) and (b)(3) and 

removing paragraph (b)(4)(iv) to read as 

follows: 

§ 44.13 Other permitted covered fund 

activities and investments. 

(a) Permitted risk-mitigating hedging 

activities. (1) The prohibition contained 

in § 44.10(a) of this subpart does not 

apply with respect to an ownership 

interest in a covered fund acquired or 

retained by a banking entity that is 

designed to reduce or otherwise 

significantly mitigate the specific, 

identifiable risks to the banking entity 

in connection with: 

(i) A compensation arrangement with 

an employee of the banking entity or an 

affiliate thereof that directly provides 

investment advisory, commodity trading 

advisory or other services to the covered 

fund; or 

(ii) A position taken by the banking 

entity when acting as intermediary on 

behalf of a customer that is not itself a 

banking entity to facilitate the exposure 

by the customer to the profits and losses 

of the covered fund. 

(2) Requirements. The risk-mitigating 

hedging activities of a banking entity are 

permitted under this paragraph (a) only 

if: 

(i) The banking entity has established 

and implements, maintains and enforces 

an internal compliance program in 

accordance with subpart D of this part 

that is reasonably designed to ensure the 

banking entity’s compliance with the 

requirements of this section, including: 

(A) Reasonably designed written 

policies and procedures; and 

(B) Internal controls and ongoing 

monitoring, management, and 

authorization procedures, including 

relevant escalation procedures; and 

(ii) The acquisition or retention of the 

ownership interest: 

(A) Is made in accordance with the 

written policies, procedures, and 

internal controls required under this 

section; 

(B) At the inception of the hedge, is 

designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks arising: 

(1) Out of a transaction conducted 

solely to accommodate a specific 

customer request with respect to the 

covered fund; or 

(2) In connection with the 

compensation arrangement with the 

employee that directly provides 

investment advisory, commodity trading 

advisory, or other services to the 

covered fund; 

(C) Does not give rise, at the inception 

of the hedge, to any significant new or 

additional risk that is not itself hedged 

contemporaneously in accordance with 

this section; and 

(D) Is subject to continuing review, 

monitoring and management by the 

banking entity. 

(iii) With respect to risk-mitigating 

hedging activity conducted pursuant to 

paragraph (a)(1)(i), the compensation 

arrangement relates solely to the 

covered fund in which the banking 

entity or any affiliate has acquired an 

ownership interest pursuant to 

paragraph (a)(1)(i) and such 

compensation arrangement provides 

that any losses incurred by the banking 

entity on such ownership interest will 

be offset by corresponding decreases in 

amounts payable under such 

compensation arrangement. 

(b) * * * 

(3) An ownership interest in a covered 

fund is not offered for sale or sold to a 

resident of the United States for 

purposes of paragraph (b)(1)(iii) of this 

section only if it is not sold and has not 

been sold pursuant to an offering that 

targets residents of the United States in 

which the banking entity or any affiliate 

of the banking entity participates. If the 

banking entity or an affiliate sponsors or 

serves, directly or indirectly, as the 

investment manager, investment 

adviser, commodity pool operator or 

commodity trading advisor to a covered 

fund, then the banking entity or affiliate 

will be deemed for purposes of this 

paragraph (b)(3) to participate in any 

offer or sale by the covered fund of 

ownership interests in the covered fund. 

* * * * * 

■ 11. Section 44.14 is amended by 

revising paragraph (a)(2)(ii)(B) as 

follows: 

§ 44.14 Limitations on relationships with a 

covered fund. 

(a) * * * 

(2) * * * 

(ii) * * * 

(B) The chief executive officer (or 

equivalent officer) of the banking entity 

certifies in writing annually no later 

than March 31 to the OCC (with a duty 

to update the certification if the 

information in the certification 

materially changes) that the banking 

entity does not, directly or indirectly, 

guarantee, assume, or otherwise insure 

the obligations or performance of the 

covered fund or of any covered fund in 

which such covered fund invests; and 

* * * * * 

■ 12. Section 44.20 is amended by: 

■ a. Revising paragraph (a); 

■ b. Revising the introductory text of 

paragraph (b); 

■ c. Revising paragraph (c); 

■ d. Revising paragraph (d); 

■ e. Revising the introductory text of 

paragraph (e); 

■ f. Revising paragraph (f)(2); and 

■ g. Adding new paragraphs (g) and (h). 

The revisions read as follows: 

§ 44.20 Program for compliance; reporting. 

(a) Program requirement. Each 

banking entity (other than a banking 

entity with limited trading assets and 

liabilities) shall develop and provide for 

the continued administration of a 

compliance program reasonably 

designed to ensure and monitor 

compliance with the prohibitions and 

restrictions on proprietary trading and 

covered fund activities and investments 

set forth in section 13 of the BHC Act 

and this part. The terms, scope, and 

detail of the compliance program shall 

be appropriate for the types, size, scope, 

and complexity of activities and 

business structure of the banking entity. 

(b) Banking entities with significant 

trading assets and liabilities. With 

respect to a banking entity with 

significant trading assets and liabilities, 

the compliance program required by 

paragraph (a) of this section, at a 

minimum, shall include: 

* * * * * 

(c) CEO attestation. 

(1) The CEO of a banking entity 

described in paragraph (2) must, based 

on a review by the CEO of the banking 

entity, attest in writing to the OCC, each 

year no later than March 31, that the 

banking entity has in place processes 


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reasonably designed to achieve 

compliance with section 13 of the BHC 

Act and this part. In the case of a U.S. 

branch or agency of a foreign banking 

entity, the attestation may be provided 

for the entire U.S. operations of the 

foreign banking entity by the senior 

management officer of the U.S. 

operations of the foreign banking entity 

who is located in the United States. 

(2) The requirements of paragraph 

(c)(1) apply to a banking entity if: 

(i) The banking entity does not have 

limited trading assets and liabilities; or 

(ii) The OCC notifies the banking 

entity in writing that it must satisfy the 

requirements contained in paragraph 

(c)(1). 

(d) Reporting requirements under the 

Appendix to this part. (1) A banking 

entity engaged in proprietary trading 

activity permitted under subpart B shall 

comply with the reporting requirements 

described in the Appendix, if: 

(i) The banking entity has significant 

trading assets and liabilities; or 

(ii) The OCC notifies the banking 

entity in writing that it must satisfy the 

reporting requirements contained in the 

Appendix. 

(2) Frequency of reporting: Unless the 

OCC notifies the banking entity in 

writing that it must report on a different 

basis, a banking entity with $50 billion 

or more in trading assets and liabilities 

(as calculated in accordance with the 

methodology described in the definition 

of ‘‘significant trading assets and 

liabilities’’ contained in § 44.2 of this 

part of this part) shall report the 

information required by the Appendix 

for each calendar month within 20 days 

of the end of each calendar month. Any 

other banking entity subject to the 

Appendix shall report the information 

required by the Appendix for each 

calendar quarter within 30 days of the 

end of that calendar quarter unless the 

OCC notifies the banking entity in 

writing that it must report on a different 

basis. 

(e) Additional documentation for 

covered funds. A banking entity with 

significant trading assets and liabilities 

shall maintain records that include: 

* * * * * 

(f) * * * 

(2) Banking entities with moderate 

trading assets and liabilities. A banking 

entity with moderate trading assets and 

liabilities may satisfy the requirements 

of this section by including in its 

existing compliance policies and 

procedures appropriate references to the 

requirements of section 13 of the BHC 

Act and this part and adjustments as 

appropriate given the activities, size, 

scope, and complexity of the banking 

entity. 

(g) Rebuttable presumption of 

compliance for banking entities with 

limited trading assets and liabilities. 

(1) Rebuttable presumption. Except as 

otherwise provided in this paragraph, a 

banking entity with limited trading 

assets and liabilities shall be presumed 

to be compliant with subpart B and 

subpart C and shall have no obligation 

to demonstrate compliance with this 

part on an ongoing basis. 

(2) Rebuttal of presumption. (i) If 

upon examination or audit, the OCC 

determines that the banking entity has 

engaged in proprietary trading or 

covered fund activities that are 

otherwise prohibited under subpart B or 

subpart C, the OCC may require the 

banking entity to be treated under this 

part as if it did not have limited trading 

assets and liabilities. 

(ii) Notice and Response Procedures. 

(A) Notice. The OCC will notify the 

banking entity in writing of any 

determination pursuant to paragraph 

(g)(2)(i) of this section to rebut the 

presumption described in this 

paragraph (g) and will provide an 

explanation of the determination. 

(B) Response. (1) The banking entity 

may respond to any or all items in the 

notice described in paragraph 

(g)(2)(ii)(A) of this section. The response 

should include any matters that the 

banking entity would have the OCC 

consider in deciding whether the 

banking entity has engaged in 

proprietary trading or covered fund 

activities prohibited under subpart B or 

subpart C. The response must be in 

writing and delivered to the designated 

OCC official within 30 days after the 

date on which the banking entity 

received the notice. The OCC may 

shorten the time period when, in the 

opinion of the OCC, the activities or 

condition of the banking entity so 

requires, provided that the banking 

entity is informed promptly of the new 

time period, or with the consent of the 

banking entity. In its discretion, the 

OCC may extend the time period for 

good cause. 

(2) Failure to respond within 30 days 

or such other time period as may be 

specified by the OCC shall constitute a 

waiver of any objections to the OCC’s 

determination. 

(C) After the close of banking entity’s 

response period, the OCC will decide, 

based on a review of the banking 

entity’s response and other information 

concerning the banking entity, whether 

to maintain the OCC’s determination 

that banking entity has engaged in 

proprietary trading or covered fund 

activities prohibited under subpart B or 

subpart C. The banking entity will be 

notified of the decision in writing. The 

notice will include an explanation of 

the decision. 

(h) Reservation of authority. 

Notwithstanding any other provision of 

this part, the OCC retains its authority 

to require a banking entity without 

significant trading assets and liabilities 

to apply any requirements of this part 

that would otherwise apply if the 

banking entity had significant or 

moderate trading assets and liabilities if 

the OCC determines that the size or 

complexity of the banking entity’s 

trading or investment activities, or the 

risk of evasion of subpart B or subpart 

C, does not warrant a presumption of 

compliance under paragraph (g) of this 

section or treatment as a banking entity 

with moderate trading assets and 

liabilities, as applicable. 

■ 13. Remove Appendix A and 

Appendix B to Part 44 and add 

Appendix to Part 44—Reporting and 

Recordkeeping Requirements for 

Covered Trading Activities 

Appendix to Part 44—Reporting and 

Recordkeeping Requirements for 

Covered Trading Activities 

I. Purpose 

a. This appendix sets forth reporting and 

recordkeeping requirements that certain 

banking entities must satisfy in connection 

with the restrictions on proprietary trading 

set forth in subpart B (‘‘proprietary trading 

restrictions’’). Pursuant to § 44.20(d), this 

appendix applies to a banking entity that, 

together with its affiliates and subsidiaries, 

has significant trading assets and liabilities. 

These entities are required to (i) furnish 

periodic reports to the OCC regarding a 

variety of quantitative measurements of their 

covered trading activities, which vary 

depending on the scope and size of covered 

trading activities, and (ii) create and maintain 

records documenting the preparation and 

content of these reports. The requirements of 

this appendix must be incorporated into the 

banking entity’s internal compliance program 

under § 44.20. 

b. The purpose of this appendix is to assist 

banking entities and the OCC in: 

(i) Better understanding and evaluating the 

scope, type, and profile of the banking 

entity’s covered trading activities; 

(ii) Monitoring the banking entity’s covered 

trading activities; 

(iii) Identifying covered trading activities 

that warrant further review or examination 

by the banking entity to verify compliance 

with the proprietary trading restrictions; 

(iv) Evaluating whether the covered trading 

activities of trading desks engaged in market 

making-related activities subject to § 44.4(b) 

are consistent with the requirements 

governing permitted market making-related 

activities; 

(v) Evaluating whether the covered trading 

activities of trading desks that are engaged in 

permitted trading activity subject to §§ 44.4, 

44.5, or 44.6(a)–(b) (i.e., underwriting and 

market making-related related activity, riskmitigating hedging, or trading in certain 


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government obligations) are consistent with 

the requirement that such activity not result, 

directly or indirectly, in a material exposure 

to high-risk assets or high-risk trading 

strategies; 

(vi) Identifying the profile of particular 

covered trading activities of the banking 

entity, and the individual trading desks of 

the banking entity, to help establish the 

appropriate frequency and scope of 

examination by the OCC of such activities; 

and 

(vii) Assessing and addressing the risks 

associated with the banking entity’s covered 

trading activities. 

c. Information that must be furnished 

pursuant to this appendix is not intended to 

serve as a dispositive tool for the 

identification of permissible or 

impermissible activities. 

d. In addition to the quantitative 

measurements required in this appendix, a 

banking entity may need to develop and 

implement other quantitative measurements 

in order to effectively monitor its covered 

trading activities for compliance with section 

13 of the BHC Act and this part and to have 

an effective compliance program, as required 

by § 44.20. The effectiveness of particular 

quantitative measurements may differ based 

on the profile of the banking entity’s 

businesses in general and, more specifically, 

of the particular trading desk, including 

types of instruments traded, trading activities 

and strategies, and history and experience 

(e.g., whether the trading desk is an 

established, successful market maker or a 

new entrant to a competitive market). In all 

cases, banking entities must ensure that they 

have robust measures in place to identify and 

monitor the risks taken in their trading 

activities, to ensure that the activities are 

within risk tolerances established by the 

banking entity, and to monitor and examine 

for compliance with the proprietary trading 

restrictions in this part. 

e. On an ongoing basis, banking entities 

must carefully monitor, review, and evaluate 

all furnished quantitative measurements, as 

well as any others that they choose to utilize 

in order to maintain compliance with section 

13 of the BHC Act and this part. All 

measurement results that indicate a 

heightened risk of impermissible proprietary 

trading, including with respect to otherwisepermitted activities under §§ 44.4 through 

44.6(a)–(b), or that result in a material 

exposure to high-risk assets or high-risk 

trading strategies, must be escalated within 

the banking entity for review, further 

analysis, explanation to the OCC, and 

remediation, where appropriate. The 

quantitative measurements discussed in this 

appendix should be helpful to banking 

entities in identifying and managing the risks 

related to their covered trading activities. 

II. Definitions 

The terms used in this appendix have the 

same meanings as set forth in §§ 44.2 and 

44.3. In addition, for purposes of this 

appendix, the following definitions apply: 

Applicability identifies the trading desks 

for which a banking entity is required to 

calculate and report a particular quantitative 

measurement based on the type of covered 

trading activity conducted by the trading 

desk. 

Calculation period means the period of 

time for which a particular quantitative 

measurement must be calculated. 

Comprehensive profit and loss means the 

net profit or loss of a trading desk’s material 

sources of trading revenue over a specific 

period of time, including, for example, any 

increase or decrease in the market value of 

a trading desk’s holdings, dividend income, 

and interest income and expense. 

Covered trading activity means trading 

conducted by a trading desk under §§ 44.4, 

44.5, 44.6(a), or 44.6(b). A banking entity may 

include in its covered trading activity trading 

conducted under §§ 44.3(e), 44.6(c), 44.6(d), 

or 44.6(e). 

Measurement frequency means the 

frequency with which a particular 

quantitative metric must be calculated and 

recorded. 

Trading day means a calendar day on 

which a trading desk is open for trading. 

III. Reporting and Recordkeeping 

a. Scope of Required Reporting 

1. Quantitative measurements. Each 

banking entity made subject to this appendix 

by § 44.20 must furnish the following 

quantitative measurements, as applicable, for 

each trading desk of the banking entity 

engaged in covered trading activities and 

calculate these quantitative measurements in 

accordance with this appendix: 

i. Risk and Position Limits and Usage; 

ii. Risk Factor Sensitivities; 

iii. Value-at-Risk and Stressed Value-atRisk; 

iv Comprehensive Profit and Loss 

Attribution; 

v. Positions; 

vi. Transaction Volumes; and 

vii. Securities Inventory Aging. 

2. Trading desk information. Each banking 

entity made subject to this appendix by 

§ 44.20 must provide certain descriptive 

information, as further described in this 

appendix, regarding each trading desk 

engaged in covered trading activities. 

3. Quantitative measurements identifying 

information. Each banking entity made 

subject to this appendix by § 44.20 must 

provide certain identifying and descriptive 

information, as further described in this 

appendix, regarding its quantitative 

measurements. 

4. Narrative statement. Each banking entity 

made subject to this appendix by § 44.20 

must provide a separate narrative statement, 

as further described in this appendix. 

5. File identifying information. Each 

banking entity made subject to this appendix 

by § 44.20 must provide file identifying 

information in each submission to the OCC 

pursuant to this appendix, including the 

name of the banking entity, the RSSD ID 

assigned to the top-tier banking entity by the 

Board, and identification of the reporting 

period and creation date and time. 

b. Trading Desk Information 

1. Each banking entity must provide 

descriptive information regarding each 

trading desk engaged in covered trading 

activities, including: 

i. Name of the trading desk used internally 

by the banking entity and a unique 

identification label for the trading desk; 

ii. Identification of each type of covered 

trading activity in which the trading desk is 

engaged; 

iii. Brief description of the general strategy 

of the trading desk; 

iv. A list of the types of financial 

instruments and other products purchased 

and sold by the trading desk; an indication 

of which of these are the main financial 

instruments or products purchased and sold 

by the trading desk; and, for trading desks 

engaged in market making-related activities 

under § 44.4(b), specification of whether each 

type of financial instrument is included in 

market-maker positions or not included in 

market-maker positions. In addition, indicate 

whether the trading desk is including in its 

quantitative measurements products 

excluded from the definition of ‘‘financial 

instrument’’ under § 44.3(d)(2) and, if so, 

identify such products; 

v. Identification by complete name of each 

legal entity that serves as a booking entity for 

covered trading activities conducted by the 

trading desk; and indication of which of the 

identified legal entities are the main booking 

entities for covered trading activities of the 

trading desk; 

vi. For each legal entity that serves as a 

booking entity for covered trading activities, 

specification of any of the following 

applicable entity types for that legal entity: 

A. National bank, Federal branch or 

Federal agency of a foreign bank, Federal 

savings association, Federal savings bank; 

B. State nonmember bank, foreign bank 

having an insured branch, State savings 

association; 

C. U.S.-registered broker-dealer, U.S.- 

registered security-based swap dealer, U.S.- 

registered major security-based swap 

participant; 

D. Swap dealer, major swap participant, 

derivatives clearing organization, futures 

commission merchant, commodity pool 

operator, commodity trading advisor, 

introducing broker, floor trader, retail foreign 

exchange dealer; 

E. State member bank; 

F. Bank holding company, savings and 

loan holding company; 

G. Foreign banking organization as defined 

in 12 CFR 211.21(o); 

H. Uninsured State-licensed branch or 

agency of a foreign bank; or 

I. Other entity type not listed above, 

including a subsidiary of a legal entity 

described above where the subsidiary itself is 

not an entity type listed above; 

vii. Indication of whether each calendar 

date is a trading day or not a trading day for 

the trading desk; and 

viii. Currency reported and daily currency 

conversion rate. 

c. Quantitative Measurements Identifying 

Information 

1. Each banking entity must provide the 

following information regarding the 

quantitative measurements: 

i. A Risk and Position Limits Information 

Schedule that provides identifying and 

descriptive information for each limit 


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reported pursuant to the Risk and Position 

Limits and Usage quantitative measurement, 

including the name of the limit, a unique 

identification label for the limit, a 

description of the limit, whether the limit is 

intraday or end-of-day, the unit of 

measurement for the limit, whether the limit 

measures risk on a net or gross basis, and the 

type of limit; 

ii. A Risk Factor Sensitivities Information 

Schedule that provides identifying and 

descriptive information for each risk factor 

sensitivity reported pursuant to the Risk 

Factor Sensitivities quantitative 

measurement, including the name of the 

sensitivity, a unique identification label for 

the sensitivity, a description of the 

sensitivity, and the sensitivity’s risk factor 

change unit; 

iii. A Risk Factor Attribution Information 

Schedule that provides identifying and 

descriptive information for each risk factor 

attribution reported pursuant to the 

Comprehensive Profit and Loss Attribution 

quantitative measurement, including the 

name of the risk factor or other factor, a 

unique identification label for the risk factor 

or other factor, a description of the risk factor 

or other factor, and the risk factor or other 

factor’s change unit; 

iv. A Limit/Sensitivity Cross-Reference 

Schedule that cross-references, by unique 

identification label, limits identified in the 

Risk and Position Limits Information 

Schedule to associated risk factor 

sensitivities identified in the Risk Factor 

Sensitivities Information Schedule; and 

v. A Risk Factor Sensitivity/Attribution 

Cross-Reference Schedule that crossreferences, by unique identification label, 

risk factor sensitivities identified in the Risk 

Factor Sensitivities Information Schedule to 

associated risk factor attributions identified 

in the Risk Factor Attribution Information 

Schedule. 

d. Narrative Statement 

1. Each banking entity made subject to this 

appendix by § 44.20 must submit in a 

separate electronic document a Narrative 

Statement to the OCC describing any changes 

in calculation methods used, a description of 

and reasons for changes in the banking 

entity’s trading desk structure or trading desk 

strategies, and when any such change 

occurred. The Narrative Statement must 

include any information the banking entity 

views as relevant for assessing the 

information reported, such as further 

description of calculation methods used. 

2. If a banking entity does not have any 

information to report in a Narrative 

Statement, the banking entity must submit an 

electronic document stating that it does not 

have any information to report in a Narrative 

Statement. 

e. Frequency and Method of Required 

Calculation and Reporting 

A banking entity must calculate any 

applicable quantitative measurement for each 

trading day. A banking entity must report the 

Narrative Statement, the Trading Desk 

Information, the Quantitative Measurements 

Identifying Information, and each applicable 

quantitative measurement electronically to 

the OCC on the reporting schedule 

established in § 44.20 unless otherwise 

requested by the OCC. A banking entity must 

report the Trading Desk Information, the 

Quantitative Measurements Identifying 

Information, and each applicable quantitative 

measurement to the OCC in accordance with 

the XML Schema specified and published on 

the OCC’s website. 

f. Recordkeeping 

A banking entity must, for any quantitative 

measurement furnished to the OCC pursuant 

to this appendix and § 44.20(d), create and 

maintain records documenting the 

preparation and content of these reports, as 

well as such information as is necessary to 

permit the OCC to verify the accuracy of such 

reports, for a period of five years from the 

end of the calendar year for which the 

measurement was taken. A banking entity 

must retain the Narrative Statement, the 

Trading Desk Information, and the 

Quantitative Measurements Identifying 

Information for a period of five years from 

the end of the calendar year for which the 

information was reported to the OCC. 

IV. Quantitative Measurements 

a. Risk-Management Measurements 

1. Risk and Position Limits and Usage 

i. Description: For purposes of this 

appendix, Risk and Position Limits are the 

constraints that define the amount of risk that 

a trading desk is permitted to take at a point 

in time, as defined by the banking entity for 

a specific trading desk. Usage represents the 

value of the trading desk’s risk or positions 

that are accounted for by the current activity 

of the desk. Risk and position limits and their 

usage are key risk management tools used to 

control and monitor risk taking and include, 

but are not limited to, the limits set out in 

§ 44.4 and § 44.5. A number of the metrics 

that are described below, including ‘‘Risk 

Factor Sensitivities’’ and ‘‘Value-at-Risk,’’ 

relate to a trading desk’s risk and position 

limits and are useful in evaluating and 

setting these limits in the broader context of 

the trading desk’s overall activities, 

particularly for the market making activities 

under § 44.4(b) and hedging activity under 

§ 44.5. Accordingly, the limits required under 

§ 44.4(b)(2)(iii) and § 44.5(b)(1)(i)(A) must 

meet the applicable requirements under 

§ 44.4(b)(2)(iii) and § 44.5(b)(1)(i)(A) and also 

must include appropriate metrics for the 

trading desk limits including, at a minimum, 

the ‘‘Risk Factor Sensitivities’’ and ‘‘Value-atRisk’’ metrics except to the extent any of the 

‘‘Risk Factor Sensitivities’’ or ‘‘Value-at-Risk’’ 

metrics are demonstrably ineffective for 

measuring and monitoring the risks of a 

trading desk based on the types of positions 

traded by, and risk exposures of, that desk. 

A. A banking entity must provide the 

following information for each limit reported 

pursuant to this quantitative measurement: 

The unique identification label for the limit 

reported in the Risk and Position Limits 

Information Schedule, the limit size 

(distinguishing between an upper and a 

lower limit), and the value of usage of the 

limit. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks engaged 

in covered trading activities. 

2. Risk Factor Sensitivities 

i. Description: For purposes of this 

appendix, Risk Factor Sensitivities are 

changes in a trading desk’s Comprehensive 

Profit and Loss that are expected to occur in 

the event of a change in one or more 

underlying variables that are significant 

sources of the trading desk’s profitability and 

risk. A banking entity must report the risk 

factor sensitivities that are monitored and 

managed as part of the trading desk’s overall 

risk management policy. Reported risk factor 

sensitivities must be sufficiently granular to 

account for a preponderance of the expected 

price variation in the trading desk’s holdings. 

A banking entity must provide the following 

information for each sensitivity that is 

reported pursuant to this quantitative 

measurement: The unique identification label 

for the risk factor sensitivity listed in the Risk 

Factor Sensitivities Information Schedule, 

the change in risk factor used to determine 

the risk factor sensitivity, and the aggregate 

change in value across all positions of the 

desk given the change in risk factor. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks engaged 

in covered trading activities. 

3. Value-at-Risk and Stressed Value-at-Risk 

i. Description: For purposes of this 

appendix, Value-at-Risk (‘‘VaR’’) is the 

measurement of the risk of future financial 

loss in the value of a trading desk’s 

aggregated positions at the ninety-nine 

percent confidence level over a one-day 

period, based on current market conditions. 

For purposes of this appendix, Stressed 

Value-at-Risk (‘‘Stressed VaR’’) is the 

measurement of the risk of future financial 

loss in the value of a trading desk’s 

aggregated positions at the ninety-nine 

percent confidence level over a one-day 

period, based on market conditions during a 

period of significant financial stress. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: For VaR, all trading desks 

engaged in covered trading activities. For 

Stressed VaR, all trading desks engaged in 

covered trading activities, except trading 

desks whose covered trading activity is 

conducted exclusively to hedge products 

excluded from the definition of ‘‘financial 

instrument’’ under § 44.3(d)(2). 

b. Source-of-Revenue Measurements 

1. Comprehensive Profit and Loss Attribution 

i. Description: For purposes of this 

appendix, Comprehensive Profit and Loss 

Attribution is an analysis that attributes the 

daily fluctuation in the value of a trading 

desk’s positions to various sources. First, the 

daily profit and loss of the aggregated 

positions is divided into three categories: (i) 

Profit and loss attributable to a trading desk’s 

existing positions that were also positions 

held by the trading desk as of the end of the 

prior day (‘‘existing positions’’); (ii) profit 

and loss attributable to new positions 

resulting from the current day’s trading 

activity (‘‘new positions’’); and (iii) residual 

profit and loss that cannot be specifically 


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418See §§ 44.2(i), (bb). For example, under this 

part, a security-based swap is both a ‘‘security’’ and 

a ‘‘derivative.’’ For purposes of the Positions 

quantitative measurement, security-based swaps are 

reported as derivatives rather than securities. 

419See §§ 44.2(i), (bb). 420See §§ 44.2(i), (bb). 

attributed to existing positions or new 

positions. The sum of (i), (ii), and (iii) must 

equal the trading desk’s comprehensive profit 

and loss at each point in time. 

A. The comprehensive profit and loss 

associated with existing positions must 

reflect changes in the value of these positions 

on the applicable day. 

The comprehensive profit and loss from 

existing positions must be further attributed, 

as applicable, to changes in (i) the specific 

risk factors and other factors that are 

monitored and managed as part of the trading 

desk’s overall risk management policies and 

procedures; and (ii) any other applicable 

elements, such as cash flows, carry, changes 

in reserves, and the correction, cancellation, 

or exercise of a trade. 

B. For the attribution of comprehensive 

profit and loss from existing positions to 

specific risk factors and other factors, a 

banking entity must provide the following 

information for the factors that explain the 

preponderance of the profit or loss changes 

due to risk factor changes: The unique 

identification label for the risk factor or other 

factor listed in the Risk Factor Attribution 

Information Schedule, and the profit or loss 

due to the risk factor or other factor change. 

C. The comprehensive profit and loss 

attributed to new positions must reflect 

commissions and fee income or expense and 

market gains or losses associated with 

transactions executed on the applicable day. 

New positions include purchases and sales of 

financial instruments and other assets/ 

liabilities and negotiated amendments to 

existing positions. The comprehensive profit 

and loss from new positions may be reported 

in the aggregate and does not need to be 

further attributed to specific sources. 

D. The portion of comprehensive profit and 

loss that cannot be specifically attributed to 

known sources must be allocated to a 

residual category identified as an 

unexplained portion of the comprehensive 

profit and loss. Significant unexplained 

profit and loss must be escalated for further 

investigation and analysis. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks engaged 

in covered trading activities. 

c. Positions, Transaction Volumes, and 

Securities Inventory Aging Measurements 

1. Positions 

i. Description: For purposes of this 

appendix, Positions is the value of securities 

and derivatives positions managed by the 

trading desk. For purposes of the Positions 

quantitative measurement, do not include in 

the Positions calculation for ‘‘securities’’ 

those securities that are also ‘‘derivatives,’’ as 

those terms are defined under subpart A; 

instead, report those securities that are also 

derivatives as ‘‘derivatives.’’ 418 A banking 

entity must separately report the trading 

desk’s market value of long securities 

positions, market value of short securities 

positions, market value of derivatives 

receivables, market value of derivatives 

payables, notional value of derivatives 

receivables, and notional value of derivatives 

payables. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks that rely 

on § 44.4(a) or § 44.4(b) to conduct 

underwriting activity or market-makingrelated activity, respectively. 

2. Transaction Volumes 

i. Description: For purposes of this 

appendix, Transaction Volumes measures 

four exclusive categories of covered trading 

activity conducted by a trading desk. A 

banking entity is required to report the value 

and number of security and derivative 

transactions conducted by the trading desk 

with: (i) Customers, excluding internal 

transactions; (ii) non-customers, excluding 

internal transactions; (iii) trading desks and 

other organizational units where the 

transaction is booked in the same banking 

entity; and (iv) trading desks and other 

organizational units where the transaction is 

booked into an affiliated banking entity. For 

securities, value means gross market value. 

For derivatives, value means gross notional 

value. For purposes of calculating the 

Transaction Volumes quantitative 

measurement, do not include in the 

Transaction Volumes calculation for 

‘‘securities’’ those securities that are also 

‘‘derivatives,’’ as those terms are defined 

under subpart A; instead, report those 

securities that are also derivatives as 

‘‘derivatives.’’ 419 Further, for purposes of the 

Transaction Volumes quantitative 

measurement, a customer of a trading desk 

that relies on § 44.4(a) to conduct 

underwriting activity is a market participant 

identified in § 44.4(a)(7), and a customer of 

a trading desk that relies on § 44.4(b) to 

conduct market making-related activity is a 

market participant identified in § 44.4(b)(3). 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks that rely 

on § 44.4(a) or § 44.4(b) to conduct 

underwriting activity or market-makingrelated activity, respectively. 

3. Securities Inventory Aging 

i. Description: For purposes of this 

appendix, Securities Inventory Aging 

generally describes a schedule of the market 

value of the trading desk’s securities 

positions and the amount of time that those 

securities positions have been held. 

Securities Inventory Aging must measure the 

age profile of a trading desk’s securities 

positions for the following periods: 0–30 

calendar days; 31–60 calendar days; 61–90 

calendar days; 91–180 calendar days; 181– 

360 calendar days; and greater than 360 

calendar days. Securities Inventory Aging 

includes two schedules, a security assetaging schedule, and a security liability-aging 

schedule. For purposes of the Securities 

Inventory Aging quantitative measurement, 

do not include securities that are also 

‘‘derivatives,’’ as those terms are defined 

under subpart A.420

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks that rely 

on § 44.4(a) or § 44.4(b) to conduct 

underwriting activity or market-making 

related activity, respectively. 

BOARD OF GOVERNORS OF THE 

FEDERAL RESERVE 

12 CFR Chapter II 

Authority and Issuance 

For the reasons set forth in the 

Common Preamble the Board proposes 

to amend chapter II of title 12 of the 

Code of Federal Regulations as follows: 

PART 248—PROPRIETARY TRADING 

AND CERTAIN INTERESTS IN AND 

RELATIONSHIPS WITH COVERED 

FUNDS (REGULATION VV) 

■ 14. The authority citation for part 248 

continues to read as follows: 

Authority: 12 U.S.C. 1851, 12 U.S.C. 221 

et seq., 12 U.S.C. 1818, 12 U.S.C. 1841 et seq., 

and 12 U.S.C. 3103 et seq. 

Subpart A—Authority and Definitions 

■ 15. Section 248.2 is revised as follows: 

§ 248.2 Definitions. 

Unless otherwise specified, for 

purposes of this part: 

(a) Affiliate has the same meaning as 

in section 2(k) of the Bank Holding 

Company Act of 1956 (12 U.S.C. 

1841(k)). 

(b) Applicable accounting standards 

means U.S. generally accepted 

accounting principles, or such other 

accounting standards applicable to a 

banking entity that the [Agency] 

determines are appropriate and that the 

banking entity uses in the ordinary 

course of its business in preparing its 

consolidated financial statements. 

(c) Bank holding company has the 

same meaning as in section 2 of the 

Bank Holding Company Act of 1956 (12 

U.S.C. 1841). 

(d) Banking entity. (1) Except as 

provided in paragraph (d)(2) of this 

section, banking entity means: 

(i) Any insured depository institution; 

(ii) Any company that controls an 

insured depository institution; 

(iii) Any company that is treated as a 

bank holding company for purposes of 

section 8 of the International Banking 

Act of 1978 (12 U.S.C. 3106); and 

(iv) Any affiliate or subsidiary of any 

entity described in paragraphs (d)(1)(i), 

(ii), or (iii) of this section. 

(2) Banking entity does not include: 

(i) A covered fund that is not itself a 

banking entity under paragraphs 

(d)(1)(i), (ii), or (iii) of this section; 

(ii) A portfolio company held under 

the authority contained in section 


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4(k)(4)(H) or (I) of the BHC Act (12 

U.S.C. 1843(k)(4)(H), (I)), or any 

portfolio concern, as defined under 13 

CFR 107.50, that is controlled by a small 

business investment company, as 

defined in section 103(3) of the Small 

Business Investment Act of 1958 (15 

U.S.C. 662), so long as the portfolio 

company or portfolio concern is not 

itself a banking entity under paragraphs 

(d)(1)(i), (ii), or (iii) of this section; or 

(iii) The FDIC acting in its corporate 

capacity or as conservator or receiver 

under the Federal Deposit Insurance Act 

or Title II of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act. 

(e) Board means the Board of 

Governors of the Federal Reserve 

System. 

(f) CFTC means the Commodity 

Futures Trading Commission. 

(g) Dealer has the same meaning as in 

section 3(a)(5) of the Exchange Act (15 

U.S.C. 78c(a)(5)). 

(h) Depository institution has the 

same meaning as in section 3(c) of the 

Federal Deposit Insurance Act (12 

U.S.C. 1813(c)). 

(i) Derivative. (1) Except as provided 

in paragraph (i)(2) of this section, 

derivative means: 

(i) Any swap, as that term is defined 

in section 1a(47) of the Commodity 

Exchange Act (7 U.S.C. 1a(47)), or 

security-based swap, as that term is 

defined in section 3(a)(68) of the 

Exchange Act (15 U.S.C. 78c(a)(68)); 

(ii) Any purchase or sale of a 

commodity, that is not an excluded 

commodity, for deferred shipment or 

delivery that is intended to be 

physically settled; 

(iii) Any foreign exchange forward (as 

that term is defined in section 1a(24) of 

the Commodity Exchange Act (7 U.S.C. 

1a(24)) or foreign exchange swap (as 

that term is defined in section 1a(25) of 

the Commodity Exchange Act (7 U.S.C. 

1a(25)); 

(iv) Any agreement, contract, or 

transaction in foreign currency 

described in section 2(c)(2)(C)(i) of the 

Commodity Exchange Act (7 U.S.C. 

2(c)(2)(C)(i)); 

(v) Any agreement, contract, or 

transaction in a commodity other than 

foreign currency described in section 

2(c)(2)(D)(i) of the Commodity Exchange 

Act (7 U.S.C. 2(c)(2)(D)(i)); and 

(vi) Any transaction authorized under 

section 19 of the Commodity Exchange 

Act (7 U.S.C. 23(a) or (b)); 

(2) A derivative does not include: 

(i) Any consumer, commercial, or 

other agreement, contract, or transaction 

that the CFTC and SEC have further 

defined by joint regulation, 

interpretation, guidance, or other action 

as not within the definition of swap, as 

that term is defined in section 1a(47) of 

the Commodity Exchange Act (7 U.S.C. 

1a(47)), or security-based swap, as that 

term is defined in section 3(a)(68) of the 

Exchange Act (15 U.S.C. 78c(a)(68)); or 

(ii) Any identified banking product, as 

defined in section 402(b) of the Legal 

Certainty for Bank Products Act of 2000 

(7 U.S.C. 27(b)), that is subject to section 

403(a) of that Act (7 U.S.C. 27a(a)). 

(j) Employee includes a member of the 

immediate family of the employee. 

(k) Exchange Act means the Securities 

Exchange Act of 1934 (15 U.S.C. 78a et 

seq.). 

(l) Excluded commodity has the same 

meaning as in section 1a(19) of the 

Commodity Exchange Act (7 U.S.C. 

1a(19)). 

(m) FDIC means the Federal Deposit 

Insurance Corporation. 

(n) Federal banking agencies means 

the Board, the Office of the Comptroller 

of the Currency, and the FDIC. 

(o) Foreign banking organization has 

the same meaning as in section 

211.21(o) of the Board’s Regulation K 

(12 CFR 211.21(o)), but does not include 

a foreign bank, as defined in section 

1(b)(7) of the International Banking Act 

of 1978 (12 U.S.C. 3101(7)), that is 

organized under the laws of the 

Commonwealth of Puerto Rico, Guam, 

American Samoa, the United States 

Virgin Islands, or the Commonwealth of 

the Northern Mariana Islands. 

(p) Foreign insurance regulator means 

the insurance commissioner, or a 

similar official or agency, of any country 

other than the United States that is 

engaged in the supervision of insurance 

companies under foreign insurance law. 

(q) General account means all of the 

assets of an insurance company except 

those allocated to one or more separate 

accounts. 

(r) Insurance company means a 

company that is organized as an 

insurance company, primarily and 

predominantly engaged in writing 

insurance or reinsuring risks 

underwritten by insurance companies, 

subject to supervision as such by a state 

insurance regulator or a foreign 

insurance regulator, and not operated 

for the purpose of evading the 

provisions of section 13 of the BHC Act 

(12 U.S.C. 1851). 

(s) Insured depository institution has 

the same meaning as in section 3(c) of 

the Federal Deposit Insurance Act (12 

U.S.C. 1813(c)), but does not include an 

insured depository institution that is 

described in section 2(c)(2)(D) of the 

BHC Act (12 U.S.C. 1841(c)(2)(D)). 

(t) Limited trading assets and 

liabilities means, with respect to a 

banking entity, that: 

(1) The banking entity has, together 

with its affiliates and subsidiaries on a 

worldwide consolidated basis, trading 

assets and liabilities (excluding trading 

assets and liabilities involving 

obligations of or guaranteed by the 

United States or any agency of the 

United States) the average gross sum of 

which over the previous consecutive 

four quarters, as measured as of the last 

day of each of the four previous 

calendar quarters, is less than 

$1,000,000,000; and 

(2) The Board has not determined 

pursuant to § 248.20(g) or (h) of this part 

that the banking entity should not be 

treated as having limited trading assets 

and liabilities. 

(u) Loan means any loan, lease, 

extension of credit, or secured or 

unsecured receivable that is not a 

security or derivative. 

(v) Moderate trading assets and 

liabilities means, with respect to a 

banking entity, that the banking entity 

does not have significant trading assets 

and liabilities or limited trading assets 

and liabilities. 

(w) Primary financial regulatory 

agency has the same meaning as in 

section 2(12) of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (12 U.S.C. 5301(12)). 

(x) Purchase includes any contract to 

buy, purchase, or otherwise acquire. For 

security futures products, purchase 

includes any contract, agreement, or 

transaction for future delivery. With 

respect to a commodity future, purchase 

includes any contract, agreement, or 

transaction for future delivery. With 

respect to a derivative, purchase 

includes the execution, termination 

(prior to its scheduled maturity date), 

assignment, exchange, or similar 

transfer or conveyance of, or 

extinguishing of rights or obligations 

under, a derivative, as the context may 

require. 

(y) Qualifying foreign banking 

organization means a foreign banking 

organization that qualifies as such under 

section 211.23(a), (c) or (e) of the 

Board’s Regulation K (12 CFR 211.23(a), 

(c), or (e)). 

(z) SEC means the Securities and 

Exchange Commission. 

(aa) Sale and sell each include any 

contract to sell or otherwise dispose of. 

For security futures products, such 

terms include any contract, agreement, 

or transaction for future delivery. With 

respect to a commodity future, such 

terms include any contract, agreement, 

or transaction for future delivery. With 

respect to a derivative, such terms 

include the execution, termination 

(prior to its scheduled maturity date), 

assignment, exchange, or similar 


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transfer or conveyance of, or 

extinguishing of rights or obligations 

under, a derivative, as the context may 

require. 

(bb) Security has the meaning 

specified in section 3(a)(10) of the 

Exchange Act (15 U.S.C. 78c(a)(10)). 

(cc) Security-based swap dealer has 

the same meaning as in section 3(a)(71) 

of the Exchange Act (15 U.S.C. 

78c(a)(71)). 

(dd) Security future has the meaning 

specified in section 3(a)(55) of the 

Exchange Act (15 U.S.C. 78c(a)(55)). 

(ee) Separate account means an 

account established and maintained by 

an insurance company in connection 

with one or more insurance contracts to 

hold assets that are legally segregated 

from the insurance company’s other 

assets, under which income, gains, and 

losses, whether or not realized, from 

assets allocated to such account, are, in 

accordance with the applicable contract, 

credited to or charged against such 

account without regard to other income, 

gains, or losses of the insurance 

company. 

(ff) Significant trading assets and 

liabilities. 

(1) Significant trading assets and 

liabilities means, with respect to a 

banking entity, that: 

(i) The banking entity has, together 

with its affiliates and subsidiaries, 

trading assets and liabilities the average 

gross sum of which over the previous 

consecutive four quarters, as measured 

as of the last day of each of the four 

previous calendar quarters, equals or 

exceeds $10,000,000,000; or 

(ii) The Board has determined 

pursuant to § 248.20(h) of this part that 

the banking entity should be treated as 

having significant trading assets and 

liabilities. 

(2) With respect to a banking entity 

other than a banking entity described in 

paragraph (3), trading assets and 

liabilities for purposes of this paragraph 

(ff) means trading assets and liabilities 

(excluding trading assets and liabilities 

involving obligations of or guaranteed 

by the United States or any agency of 

the United States) on a worldwide 

consolidated basis. 

(3)(i) With respect to a banking entity 

that is a foreign banking organization or 

a subsidiary of a foreign banking 

organization, trading assets and 

liabilities for purposes of this paragraph 

(ff) means the trading assets and 

liabilities (excluding trading assets and 

liabilities involving obligations of or 

guaranteed by the United States or any 

agency of the United States) of the 

combined U.S. operations of the top-tier 

foreign banking organization (including 

all subsidiaries, affiliates, branches, and 

agencies of the foreign banking 

organization operating, located, or 

organized in the United States). 

(ii) For purposes of paragraph (ff)(3)(i) 

of this section, a U.S. branch, agency, or 

subsidiary of a banking entity is located 

in the United States; however, the 

foreign bank that operates or controls 

that branch, agency, or subsidiary is not 

considered to be located in the United 

States solely by virtue of operating or 

controlling the U.S. branch, agency, or 

subsidiary. 

(gg) State means any State, the District 

of Columbia, the Commonwealth of 

Puerto Rico, Guam, American Samoa, 

the United States Virgin Islands, and the 

Commonwealth of the Northern Mariana 

Islands. 

(hh) Subsidiary has the same meaning 

as in section 2(d) of the Bank Holding 

Company Act of 1956 (12 U.S.C. 

1841(d)). 

(ii) State insurance regulator means 

the insurance commissioner, or a 

similar official or agency, of a State that 

is engaged in the supervision of 

insurance companies under State 

insurance law. 

(jj) Swap dealer has the same meaning 

as in section 1(a)(49) of the Commodity 

Exchange Act (7 U.S.C. 1a(49)). 

Subpart B—Proprietary Trading 

■ 16. Amend § 248.3 by: 

■ a. Revising paragraph (b); 

■ b. Redesignating paragraphs (c) 

through (e) as paragraphs (d) through (f); 

■ c. Adding a new paragraph (c); 

■ d. Revising paragraph (e)(3); 

■ e. Adding paragraph (e)(10); 

■ f. Redesignating paragraphs (f)(5) 

through (f)(13) as paragraphs (f)(6) 

through (f)(14); 

■ g. Adding a new paragraph (f)(5); and 

■ h. Adding a new paragraph (g). 

The revisions and additions read as 

follows: 

§ 248.3 Prohibition on proprietary trading. 

* * * * * 

(b) Definition of trading account. 

Trading account means any account 

that is used by a banking entity to: 

(1)(i) Purchase or sell one or more 

financial instruments that are both 

market risk capital rule covered 

positions and trading positions (or 

hedges of other market risk capital rule 

covered positions), if the banking entity, 

or any affiliate of the banking entity, is 

an insured depository institution, bank 

holding company, or savings and loan 

holding company, and calculates riskbased capital ratios under the market 

risk capital rule; or 

(ii) With respect to a banking entity 

that is not, and is not controlled directly 

or indirectly by a banking entity that is, 

located in or organized under the laws 

of the United States or any State, 

purchase or sell one or more financial 

instruments that are subject to capital 

requirements under a market risk 

framework established by the homecountry supervisor that is consistent 

with the market risk framework 

published by the Basel Committee on 

Banking Supervision, as amended from 

time to time. 

(2) Purchase or sell one or more 

financial instruments for any purpose, if 

the banking entity: 

(i) Is licensed or registered, or is 

required to be licensed or registered, to 

engage in the business of a dealer, swap 

dealer, or security-based swap dealer, to 

the extent the instrument is purchased 

or sold in connection with the activities 

that require the banking entity to be 

licensed or registered as such; or 

(ii) Is engaged in the business of a 

dealer, swap dealer, or security-based 

swap dealer outside of the United 

States, to the extent the instrument is 

purchased or sold in connection with 

the activities of such business; or 

(3) Purchase or sell one or more 

financial instruments, with respect to a 

financial instrument that is recorded at 

fair value on a recurring basis under 

applicable accounting standards. 

(c) Presumption of compliance. (1)(i) 

Each trading desk that does not 

purchase or sell financial instruments 

for a trading account defined in 

paragraphs (b)(1) or (b)(2) of this section 

may calculate the net gain or net loss on 

the trading desk’s portfolio of financial 

instruments each business day, 

reflecting realized and unrealized gains 

and losses since the previous business 

day, based on the banking entity’s fair 

value for such financial instruments. 

(ii) If the sum of the absolute values 

of the daily net gain and loss figures 

determined in accordance with 

paragraph (c)(1)(i) of this section for the 

preceding 90-calendar-day period does 

not exceed $25 million, the activities of 

the trading desk shall be presumed to be 

in compliance with the prohibition in 

paragraph (a) of this section. 

(2) The Board may rebut the 

presumption of compliance in 

paragraph (c)(1)(ii) of this section by 

providing written notice to the banking 

entity that the Board has determined 

that one or more of the banking entity’s 

activities violates the prohibitions under 

subpart B. 

(3) If a trading desk operating 

pursuant to paragraph (c)(1)(ii) of this 

section exceeds the $25 million 

threshold in that paragraph at any point, 

the banking entity shall, in accordance 


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with any policies and procedures 

adopted by the Board: 

(i) Promptly notify the Board; 

(ii) Demonstrate that the trading 

desk’s purchases and sales of financial 

instruments comply with subpart B; and 

(iii) Demonstrate, with respect to the 

trading desk, how the banking entity 

will maintain compliance with subpart 

B on an ongoing basis. 

* * * * * 

(e) * * * 

(3) Any purchase or sale of a security, 

foreign exchange forward (as that term 

is defined in section 1a(24) of the 

Commodity Exchange Act (7 U.S.C. 

1a(24)), foreign exchange swap (as that 

term is defined in section 1a(25) of the 

Commodity Exchange Act (7 U.S.C. 

1a(25)), or physically-settled crosscurrency swap, by a banking entity for 

the purpose of liquidity management in 

accordance with a documented liquidity 

management plan of the banking entity 

that, with respect to such financial 

instruments: 

(i) Specifically contemplates and 

authorizes the particular financial 

instruments to be used for liquidity 

management purposes, the amount, 

types, and risks of these financial 

instruments that are consistent with 

liquidity management, and the liquidity 

circumstances in which the particular 

financial instruments may or must be 

used; 

(ii) Requires that any purchase or sale 

of financial instruments contemplated 

and authorized by the plan be 

principally for the purpose of managing 

the liquidity of the banking entity, and 

not for the purpose of short-term resale, 

benefitting from actual or expected 

short-term price movements, realizing 

short-term arbitrage profits, or hedging a 

position taken for such short-term 

purposes; 

(iii) Requires that any financial 

instruments purchased or sold for 

liquidity management purposes be 

highly liquid and limited to financial 

instruments the market, credit, and 

other risks of which the banking entity 

does not reasonably expect to give rise 

to appreciable profits or losses as a 

result of short-term price movements; 

(iv) Limits any financial instruments 

purchased or sold for liquidity 

management purposes, together with 

any other instruments purchased or sold 

for such purposes, to an amount that is 

consistent with the banking entity’s 

near-term funding needs, including 

deviations from normal operations of 

the banking entity or any affiliate 

thereof, as estimated and documented 

pursuant to methods specified in the 

plan; 

(v) Includes written policies and 

procedures, internal controls, analysis, 

and independent testing to ensure that 

the purchase and sale of financial 

instruments that are not permitted 

under §§ 248.6(a) or (b) of this subpart 

are for the purpose of liquidity 

management and in accordance with the 

liquidity management plan described in 

paragraph (e)(3) of this section; and 

(vi) Is consistent with the Board’s 

supervisory requirements, guidance, 

and expectations regarding liquidity 

management; 

* * * * * 

(10) Any purchase (or sale) of one or 

more financial instruments that was 

made in error by a banking entity in the 

course of conducting a permitted or 

excluded activity or is a subsequent 

transaction to correct such an error, and 

the erroneously purchased (or sold) 

financial instrument is promptly 

transferred to a separately-managed 

trade error account for disposition. 

(f) * * * 

(5) Cross-currency swap means a swap 

in which one party exchanges with 

another party principal and interest rate 

payments in one currency for principal 

and interest rate payments in another 

currency, and the exchange of principal 

occurs on the date the swap is entered 

into, with a reversal of the exchange of 

principal at a later date that is agreed 

upon when the swap is entered into. 

* * * * * 

(g) Reservation of Authority: (1) The 

Board may determine, on a case-by-case 

basis, that a purchase or sale of one or 

more financial instruments by a banking 

entity either is or is not for the trading 

account as defined at 12 U.S.C. 

1851(h)(6). 

(2) Notice and Response Procedures. 

(i) Notice. When the Board determines 

that the purchase or sale of one or more 

financial instruments is for the trading 

account under paragraph (g)(1) of this 

section, the Board will notify the 

banking entity in writing of the 

determination and provide an 

explanation of the determination. 

(ii) Response. 

(A) The banking entity may respond 

to any or all items in the notice. The 

response should include any matters 

that the banking entity would have the 

Boardconsider in deciding whether the 

purchase or sale is for the trading 

account. The response must be in 

writing and delivered to the designated 

Board official within 30 days after the 

date on which the banking entity 

received the notice. The Board may 

shorten the time period when, in the 

opinion of the Board, the activities or 

condition of the banking entity so 

requires, provided that the banking 

entity is informed promptly of the new 

time period, or with the consent of the 

banking entity. In its discretion, the 

Board may extend the time period for 

good cause. 

(B) Failure to respond within 30 days 

or such other time period as may be 

specified by the Board shall constitute 

a waiver of any objections to the Board’s 

determination. 

(iii) After the close of banking entity’s 

response period, the Board will decide, 

based on a review of the banking 

entity’s response and other information 

concerning the banking entity, whether 

to maintain the Board’s determination 

that the purchase or sale of one or more 

financial instruments is for the trading 

account. The banking entity will be 

notified of the decision in writing. The 

notice will include an explanation of 

the decision. 

■ 17. Section 248.4 is amended by: 

■ a. Revising paragraph (a)(2); 

■ b. Adding paragraph (a)(8); 

■ c. Revising paragraph (b)(2); 

■ d. Revising the introductory language 

of paragraph (b)(3)(i); 

■ e. In paragraph (b)(5) revising the 

references to ‘‘inventory’’ to read 

‘‘positions’’; and 

■ f. Adding a new paragraph (b)(6). 

The revisions and additions read as 

follows: 

§ 248.4 Permitted underwriting and market 

making-related activities. 

(a) * * * 

(2) Requirements. The underwriting 

activities of a banking entity are 

permitted under paragraph (a)(1) of this 

section only if: 

(i) The banking entity is acting as an 

underwriter for a distribution of 

securities and the trading desk’s 

underwriting position is related to such 

distribution; 

(ii)(A) The amount and type of the 

securities in the trading desk’s 

underwriting position are designed not 

to exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties, taking into account the 

liquidity, maturity, and depth of the 

market for the relevant type of security, 

and (B) reasonable efforts are made to 

sell or otherwise reduce the 

underwriting position within a 

reasonable period, taking into account 

the liquidity, maturity, and depth of the 

market for the relevant type of security; 

(iii) In the case of a banking entity 

with significant trading assets and 

liabilities, the banking entity has 

established and implements, maintains, 

and enforces an internal compliance 

program required by subpart D of this 

part that is reasonably designed to 


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ensure the banking entity’s compliance 

with the requirements of paragraph (a) 

of this section, including reasonably 

designed written policies and 

procedures, internal controls, analysis, 

and independent testing identifying and 

addressing: 

(A) The products, instruments or 

exposures each trading desk may 

purchase, sell, or manage as part of its 

underwriting activities; 

(B) Limits for each trading desk, in 

accordance with paragraph (a)(8)(i) of 

this section; 

(C) Internal controls and ongoing 

monitoring and analysis of each trading 

desk’s compliance with its limits; and 

(D) Authorization procedures, 

including escalation procedures that 

require review and approval of any 

trade that would exceed a trading desk’s 

limit(s), demonstrable analysis of the 

basis for any temporary or permanent 

increase to a trading desk’s limit(s), and 

independent review of such 

demonstrable analysis and approval; 

(iv) The compensation arrangements 

of persons performing the activities 

described in this paragraph (a) are 

designed not to reward or incentivize 

prohibited proprietary trading; and 

(v) The banking entity is licensed or 

registered to engage in the activity 

described in this paragraph (a) in 

accordance with applicable law. 

* * * * * 

(8) Rebuttable presumption of 

compliance.—(i) Risk limits. (A) A 

banking entity shall be presumed to 

meet the requirements of paragraph 

(a)(2)(ii)(A) of this section with respect 

to the purchase or sale of a financial 

instrument if the banking entity has 

established and implements, maintains, 

and enforces the limits described in 

paragraph (a)(8)(i)(B) and does not 

exceed such limits. 

(B) The presumption described in 

paragraph (8)(i)(A) of this section shall 

be available with respect to limits for 

each trading desk that are designed not 

to exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties, based on the nature and 

amount of the trading desk’s 

underwriting activities, on the: 

(1) Amount, types, and risk of its 

underwriting position; 

(2) Level of exposures to relevant risk 

factors arising from its underwriting 

position; and 

(3) Period of time a security may be 

held. 

(ii) Supervisory review and oversight. 

The limits described in paragraph 

(a)(8)(i) of this section shall be subject 

to supervisory review and oversight by 

the Board on an ongoing basis. Any 

review of such limits will include 

assessment of whether the limits are 

designed not to exceed the reasonably 

expected near term demands of clients, 

customers, or counterparties. 

(iii) Reporting. With respect to any 

limit identified pursuant to paragraph 

(a)(8)(i) of this section, a banking entity 

shall promptly report to the Board (A) 

to the extent that any limit is exceeded 

and (B) any temporary or permanent 

increase to any limit(s), in each case in 

the form and manner as directed by the 

Board. 

(iv) Rebutting the presumption. The 

presumption in paragraph (a)(8)(i) of 

this section may be rebutted by the 

Board if the Board determines, based on 

all relevant facts and circumstances, 

that a trading desk is engaging in 

activity that is not based on the 

reasonably expected near term demands 

of clients, customers, or counterparties. 

The Board will provide notice of any 

such determination to the banking 

entity in writing. 

(b) * * * 

(2) Requirements. The market makingrelated activities of a banking entity are 

permitted under paragraph (b)(1) of this 

section only if: 

(i) The trading desk that establishes 

and manages the financial exposure 

routinely stands ready to purchase and 

sell one or more types of financial 

instruments related to its financial 

exposure and is willing and available to 

quote, purchase and sell, or otherwise 

enter into long and short positions in 

those types of financial instruments for 

its own account, in commercially 

reasonable amounts and throughout 

market cycles on a basis appropriate for 

the liquidity, maturity, and depth of the 

market for the relevant types of financial 

instruments; 

(ii) The trading desk’s market-making 

related activities are designed not to 

exceed, on an ongoing basis, the 

reasonably expected near term demands 

of clients, customers, or counterparties, 

based on the liquidity, maturity, and 

depth of the market for the relevant 

types of financial instrument(s). 

(iii) In the case of a banking entity 

with significant trading assets and 

liabilities, the banking entity has 

established and implements, maintains, 

and enforces an internal compliance 

program required by subpart D of this 

part that is reasonably designed to 

ensure the banking entity’s compliance 

with the requirements of paragraph (b) 

of this section, including reasonably 

designed written policies and 

procedures, internal controls, analysis 

and independent testing identifying and 

addressing: 

(A) The financial instruments each 

trading desk stands ready to purchase 

and sell in accordance with paragraph 

(b)(2)(i) of this section; 

(B) The actions the trading desk will 

take to demonstrably reduce or 

otherwise significantly mitigate 

promptly the risks of its financial 

exposure consistent with the limits 

required under paragraph (b)(2)(iii)(C) of 

this section; the products, instruments, 

and exposures each trading desk may 

use for risk management purposes; the 

techniques and strategies each trading 

desk may use to manage the risks of its 

market making-related activities and 

positions; and the process, strategies, 

and personnel responsible for ensuring 

that the actions taken by the trading 

desk to mitigate these risks are and 

continue to be effective; 

(C) Limits for each trading desk, in 

accordance with paragraph (b)(6)(i) of 

this section; 

(D) Internal controls and ongoing 

monitoring and analysis of each trading 

desk’s compliance with its limits; and 

(E) Authorization procedures, 

including escalation procedures that 

require review and approval of any 

trade that would exceed a trading desk’s 

limit(s), demonstrable analysis that the 

basis for any temporary or permanent 

increase to a trading desk’s limit(s) is 

consistent with the requirements of this 

paragraph (b), and independent review 

of such demonstrable analysis and 

approval; 

(iv) In the case of a banking entity 

with significant trading assets and 

liabilities, to the extent that any limit 

identified pursuant to paragraph 

(b)(2)(iii)(C) of this section is exceeded, 

the trading desk takes action to bring the 

trading desk into compliance with the 

limits as promptly as possible after the 

limit is exceeded; 

(v) The compensation arrangements of 

persons performing the activities 

described in this paragraph (b) are 

designed not to reward or incentivize 

prohibited proprietary trading; and 

(vi) The banking entity is licensed or 

registered to engage in activity 

described in this paragraph (b) in 

accordance with applicable law. 

(3) * * * 

(i) A trading desk or other 

organizational unit of another banking 

entity is not a client, customer, or 

counterparty of the trading desk if that 

other entity has trading assets and 

liabilities of $50 billion or more as 

measured in accordance with the 

methodology described in definition of 

‘‘significant trading assets and 

liabilities’’ contained in § 248.2 of this 

part, unless: 

* * * * * 


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(6) Rebuttable presumption of 

compliance. 

(i) Risk limits. 

(A) A banking entity shall be 

presumed to meet the requirements of 

paragraph (b)(2)(ii) of this section with 

respect to the purchase or sale of a 

financial instrument if the banking 

entity has established and implements, 

maintains, and enforces the limits 

described in paragraph (b)(6)(i)(B) and 

does not exceed such limits. 

(B) The presumption described in 

paragraph (6)(i)(A) of this section shall 

be available with respect to limits for 

each trading desk that are designed not 

to exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties, based on the nature and 

amount of the trading desk’s market 

making-related activities, on the: 

(1) Amount, types, and risks of its 

market-maker positions; 

(2) Amount, types, and risks of the 

products, instruments, and exposures 

the trading desk may use for risk 

management purposes; 

(3) Level of exposures to relevant risk 

factors arising from its financial 

exposure; and 

(4) Period of time a financial 

instrument may be held. 

(ii) Supervisory review and oversight. 

The limits described in paragraph 

(b)(6)(i) of this section shall be subject 

to supervisory review and oversight by 

the Board on an ongoing basis. Any 

review of such limits will include 

assessment of whether the limits are 

designed not to exceed the reasonably 

expected near term demands of clients, 

customers, or counterparties. 

(iii) Reporting. With respect to any 

limit identified pursuant to paragraph 

(b)(6)(i) of this section, a banking entity 

shall promptly report to the Board (A) 

to the extent that any limit is exceeded 

and (B) any temporary or permanent 

increase to any limit(s), in each case in 

the form and manner as directed by the 

Board. 

(iv) Rebutting the presumption. The 

presumption in paragraph (b)(6)(i) of 

this section may be rebutted by the 

Board if the Board determines, based on 

all relevant facts and circumstances, 

that a trading desk is engaging in 

activity that is not based on the 

reasonably expected near term demands 

of clients, customers, or counterparties. 

The Board will provide notice of any 

such determination to the banking 

entity in writing. 

■ 18. Amend § 248.5 by revising 

paragraph (b), the introductory text of 

paragraph (c)(1); and adding paragraph 

(c)(4) to read as follows: 

§ 248.5 Permitted risk-mitigating hedging 

activities. 

* * * * * 

(b) Requirements. 

(1) The risk-mitigating hedging 

activities of a banking entity that has 

significant trading assets and liabilities 

are permitted under paragraph (a) of this 

section only if: 

(i) The banking entity has established 

and implements, maintains and enforces 

an internal compliance program 

required by subpart D of this part that 

is reasonably designed to ensure the 

banking entity’s compliance with the 

requirements of this section, including: 

(A) Reasonably designed written 

policies and procedures regarding the 

positions, techniques and strategies that 

may be used for hedging, including 

documentation indicating what 

positions, contracts or other holdings a 

particular trading desk may use in its 

risk-mitigating hedging activities, as 

well as position and aging limits with 

respect to such positions, contracts or 

other holdings; 

(B) Internal controls and ongoing 

monitoring, management, and 

authorization procedures, including 

relevant escalation procedures; and 

(C) The conduct of analysis and 

independent testing designed to ensure 

that the positions, techniques and 

strategies that may be used for hedging 

may reasonably be expected to reduce or 

otherwise significantly mitigate the 

specific, identifiable risk(s) being 

hedged; 

(ii) The risk-mitigating hedging 

activity: 

(A) Is conducted in accordance with 

the written policies, procedures, and 

internal controls required under this 

section; 

(B) At the inception of the hedging 

activity, including, without limitation, 

any adjustments to the hedging activity, 

is designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks, including 

market risk, counterparty or other credit 

risk, currency or foreign exchange risk, 

interest rate risk, commodity price risk, 

basis risk, or similar risks, arising in 

connection with and related to 

identified positions, contracts, or other 

holdings of the banking entity, based 

upon the facts and circumstances of the 

identified underlying and hedging 

positions, contracts or other holdings 

and the risks and liquidity thereof; 

(C) Does not give rise, at the inception 

of the hedge, to any significant new or 

additional risk that is not itself hedged 

contemporaneously in accordance with 

this section; 

(D) Is subject to continuing review, 

monitoring and management by the 

banking entity that: 

(1) Is consistent with the written 

hedging policies and procedures 

required under paragraph (b)(1)(i) of this 

section; 

(2) Is designed to reduce or otherwise 

significantly mitigate the specific, 

identifiable risks that develop over time 

from the risk-mitigating hedging 

activities undertaken under this section 

and the underlying positions, contracts, 

and other holdings of the banking 

entity, based upon the facts and 

circumstances of the underlying and 

hedging positions, contracts and other 

holdings of the banking entity and the 

risks and liquidity thereof; and 

(3) Requires ongoing recalibration of 

the hedging activity by the banking 

entity to ensure that the hedging activity 

satisfies the requirements set out in 

paragraph (b)(1)(ii) of this section and is 

not prohibited proprietary trading; and 

(iii) The compensation arrangements 

of persons performing risk-mitigating 

hedging activities are designed not to 

reward or incentivize prohibited 

proprietary trading. 

(2) The risk-mitigating hedging 

activities of a banking entity that does 

not have significant trading assets and 

liabilities are permitted under paragraph 

(a) of this section only if the riskmitigating hedging activity: 

(i) At the inception of the hedging 

activity, including, without limitation, 

any adjustments to the hedging activity, 

is designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks, including 

market risk, counterparty or other credit 

risk, currency or foreign exchange risk, 

interest rate risk, commodity price risk, 

basis risk, or similar risks, arising in 

connection with and related to 

identified positions, contracts, or other 

holdings of the banking entity, based 

upon the facts and circumstances of the 

identified underlying and hedging 

positions, contracts or other holdings 

and the risks and liquidity thereof; and 

(ii) Is subject, as appropriate, to 

ongoing recalibration by the banking 

entity to ensure that the hedging activity 

satisfies the requirements set out in 

paragraph (b)(2) of this section and is 

not prohibited proprietary trading. 

(c) * * * (1) A banking entity that has 

significant trading assets and liabilities 

must comply with the requirements of 

paragraphs (c)(2) and (3) of this section, 

unless the requirements of paragraph 

(c)(4) of this section are met, with 

respect to any purchase or sale of 

financial instruments made in reliance 


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on this section for risk-mitigating 

hedging purposes that is: 

* * * * * 

(4) The requirements of paragraphs 

(c)(2) and (3) of this section do not 

apply to the purchase or sale of a 

financial instrument described in 

paragraph (c)(1) of this section if: 

(i) The financial instrument 

purchased or sold is identified on a 

written list of pre-approved financial 

instruments that are commonly used by 

the trading desk for the specific type of 

hedging activity for which the financial 

instrument is being purchased or sold; 

and 

(ii) At the time the financial 

instrument is purchased or sold, the 

hedging activity (including the purchase 

or sale of the financial instrument) 

complies with written, pre-approved 

hedging limits for the trading desk 

purchasing or selling the financial 

instrument for hedging activities 

undertaken for one or more other 

trading desks. The hedging limits shall 

be appropriate for the: 

(A) Size, types, and risks of the 

hedging activities commonly 

undertaken by the trading desk; 

(B) Financial instruments purchased 

and sold for hedging activities by the 

trading desk; and 

(C) Levels and duration of the risk 

exposures being hedged. 

■ 19. Amend § 248.6 by revising 

paragraph (e)(3) and removing 

paragraph (e)(6) to read as follows: 

§ 248.6 Other permitted proprietary trading 

activities. 

* * * * * 

(e) * * * 

(3) A purchase or sale by a banking 

entity is permitted for purposes of this 

paragraph (e) if: 

(i) The banking entity engaging as 

principal in the purchase or sale 

(including relevant personnel) is not 

located in the United States or 

organized under the laws of the United 

States or of any State; 

(ii) The banking entity (including 

relevant personnel) that makes the 

decision to purchase or sell as principal 

is not located in the United States or 

organized under the laws of the United 

States or of any State; and 

(iii) The purchase or sale, including 

any transaction arising from riskmitigating hedging related to the 

instruments purchased or sold, is not 

accounted for as principal directly or on 

a consolidated basis by any branch or 

affiliate that is located in the United 

States or organized under the laws of 

the United States or of any State. 

* * * * * 

Subpart C—Covered Funds Activities 

and Investments 

§ 248.10 [Amended] 

■ 20. Section 248.10 is amended by: 

■ a. In paragraph (c)(8)(i)(A) revising the 

reference to ‘‘§ 248.2(s)’’ to read 

‘‘§ 248.2(u)’’; 

■ b. Removing paragraph (d)(1); 

■ c. Redesignating paragraphs (d)(2) 

through (d)(10) as paragraphs (d)(1) 

through (d)(9); 

■ d. In paragraph (d)(5)(i)(G) revising 

the reference to ‘‘(d)(6)(i)(A)’’ to read 

‘‘(d)(5)(i)(A)’’; and 

■ e. In paragraph (d)(9) revising the 

reference to ‘‘(d)(9)’’ to read ‘‘(d)(8)’’ and 

the reference to ‘‘(d)(10)(i)(A)’’ to read 

‘‘(d)(9)(i)(A)’’ and the reference to 

‘‘(d)(10)(i)’’ to read ‘‘(d)(9)(i)’’ 

■ 21. Section 248.11 is amended by 

revising paragraph (c) as follows: 

§ 248.11 Permitted organizing and 

offering, underwriting, and market making 

with respect to a covered fund. 

* * * * * 

(c) Underwriting and market making 

in ownership interests of a covered 

fund. The prohibition contained in 

§ 248.10(a) of this subpart does not 

apply to a banking entity’s underwriting 

activities or market making-related 

activities involving a covered fund so 

long as: 

(1) Those activities are conducted in 

accordance with the requirements of 

§ 248.4(a) or § 248.4(b) of subpart B, 

respectively; and 

(2) With respect to any banking entity 

(or any affiliate thereof) that: Acts as a 

sponsor, investment adviser or 

commodity trading advisor to a 

particular covered fund or otherwise 

acquires and retains an ownership 

interest in such covered fund in reliance 

on paragraph (a) of this section; or 

acquires and retains an ownership 

interest in such covered fund and is 

either a securitizer, as that term is used 

in section 15G(a)(3) of the Exchange Act 

(15 U.S.C. 78o–11(a)(3)), or is acquiring 

and retaining an ownership interest in 

such covered fund in compliance with 

section 15G of that Act (15 U.S.C. 78o– 

11) and the implementing regulations 

issued thereunder each as permitted by 

paragraph (b) of this section, then in 

each such case any ownership interests 

acquired or retained by the banking 

entity and its affiliates in connection 

with underwriting and market making 

related activities for that particular 

covered fund are included in the 

calculation of ownership interests 

permitted to be held by the banking 

entity and its affiliates under the 

limitations of § 248.12(a)(2)(ii); 

§ 248.12(a)(2)(iii), and § 248.12(d) of this 

subpart. 

§ 248.12 (Amended) 

■ 22. Section 248.12 is amended by 

■ a. In paragraphs (c)(1) and (d) 

removing the references to 

‘‘§ 248.10(d)(6)(ii)’’ and replacing with 

‘‘§ 248.10(d)(5)(ii)’’; 

■ b. Removing paragraph (e)(2)(vii); and 

■ c. Redesignating the second instance 

of paragraph (e)(2)(vi) as paragraph 

(e)(2)(vii). 

■ 23. Section 248.13 is amended by 

revising paragraphs (a) and (b)(3) and 

removing paragraph (b)(4)(iv) to read as 

follows: 

§ 248.13 Other permitted covered fund 

activities and investments. 

(a) Permitted risk-mitigating hedging 

activities. (1) The prohibition contained 

in § 248.10(a) of this subpart does not 

apply with respect to an ownership 

interest in a covered fund acquired or 

retained by a banking entity that is 

designed to reduce or otherwise 

significantly mitigate the specific, 

identifiable risks to the banking entity 

in connection with: 

(i) A compensation arrangement with 

an employee of the banking entity or an 

affiliate thereof that directly provides 

investment advisory, commodity trading 

advisory or other services to the covered 

fund; or 

(ii) A position taken by the banking 

entity when acting as intermediary on 

behalf of a customer that is not itself a 

banking entity to facilitate the exposure 

by the customer to the profits and losses 

of the covered fund. 

(2) Requirements. The risk-mitigating 

hedging activities of a banking entity are 

permitted under this paragraph (a) only 

if: 

(i) The banking entity has established 

and implements, maintains and enforces 

an internal compliance program in 

accordance with subpart D of this part 

that is reasonably designed to ensure the 

banking entity’s compliance with the 

requirements of this section, including: 

(A) Reasonably designed written 

policies and procedures; and 

(B) Internal controls and ongoing 

monitoring, management, and 

authorization procedures, including 

relevant escalation procedures; and 

(ii) The acquisition or retention of the 

ownership interest: 

(A) Is made in accordance with the 

written policies, procedures, and 

internal controls required under this 

section; 

(B) At the inception of the hedge, is 

designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks arising (1) out 

of a transaction conducted solely to 

accommodate a specific customer 

request with respect to the covered fund 


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or (2) in connection with the 

compensation arrangement with the 

employee that directly provides 

investment advisory, commodity trading 

advisory, or other services to the 

covered fund; 

(C) Does not give rise, at the inception 

of the hedge, to any significant new or 

additional risk that is not itself hedged 

contemporaneously in accordance with 

this section; and 

(D) Is subject to continuing review, 

monitoring and management by the 

banking entity. 

(iii) With respect to risk-mitigating 

hedging activity conducted pursuant to 

paragraph (a)(1)(i), the compensation 

arrangement relates solely to the 

covered fund in which the banking 

entity or any affiliate has acquired an 

ownership interest pursuant to 

paragraph (a)(1)(i) and such 

compensation arrangement provides 

that any losses incurred by the banking 

entity on such ownership interest will 

be offset by corresponding decreases in 

amounts payable under such 

compensation arrangement. 

* * * * * 

(b) * * * 

(3) An ownership interest in a covered 

fund is not offered for sale or sold to a 

resident of the United States for 

purposes of paragraph (b)(1)(iii) of this 

section only if it is not sold and has not 

been sold pursuant to an offering that 

targets residents of the United States in 

which the banking entity or any affiliate 

of the banking entity participates. If the 

banking entity or an affiliate sponsors or 

serves, directly or indirectly, as the 

investment manager, investment 

adviser, commodity pool operator or 

commodity trading advisor to a covered 

fund, then the banking entity or affiliate 

will be deemed for purposes of this 

paragraph (b)(3) to participate in any 

offer or sale by the covered fund of 

ownership interests in the covered fund. 

* * * * * 

■ 24. Section 248.14 is amended by 

revising paragraph (a)(2)(ii)(B) as 

follows: 

§ 248.14 Limitations on relationships with 

a covered fund. 

* * * * * 

(a) * * * 

(2) * * * 

(ii) * * * 

(B) The chief executive officer (or 

equivalent officer) of the banking entity 

certifies in writing annually no later 

than March 31 to the Board (with a duty 

to update the certification if the 

information in the certification 

materially changes) that the banking 

entity does not, directly or indirectly, 

guarantee, assume, or otherwise insure 

the obligations or performance of the 

covered fund or of any covered fund in 

which such covered fund invests; and 

* * * * * 

Subpart D—Compliance Program 

Requirement; Violations 

■ 25. Section 248.20 is amended by: 

■ a. Revising paragraph (a); 

■ b. Revising the introductory language 

of paragraph (b); 

■ c. Revising paragraph (c); 

■ d. Revising paragraph (d); 

■ e. Revising the introductory language 

of paragraph (e); 

■ f. Revising paragraph (f)(2); and 

■ g. Adding new paragraphs (g) and (h). 

The revisions are as follows: 

§ 248.20 Program for compliance; 

reporting. 

(a) Program requirement. Each 

banking entity (other than a banking 

entity with limited trading assets and 

liabilities) shall develop and provide for 

the continued administration of a 

compliance program reasonably 

designed to ensure and monitor 

compliance with the prohibitions and 

restrictions on proprietary trading and 

covered fund activities and investments 

set forth in section 13 of the BHC Act 

and this part. The terms, scope, and 

detail of the compliance program shall 

be appropriate for the types, size, scope, 

and complexity of activities and 

business structure of the banking entity. 

(b) Banking entities with significant 

trading assets and liabilities. With 

respect to a banking entity with 

significant trading assets and liabilities, 

the compliance program required by 

paragraph (a) of this section, at a 

minimum, shall include: 

* * * * * 

(c) CEO attestation. (1) The CEO of a 

banking entity described in paragraph 

(2) must, based on a review by the CEO 

of the banking entity, attest in writing to 

the Board, each year no later than March 

31, that the banking entity has in place 

processes reasonably designed to 

achieve compliance with section 13 of 

the BHC Act and this part. In the case 

of a U.S. branch or agency of a foreign 

banking entity, the attestation may be 

provided for the entire U.S. operations 

of the foreign banking entity by the 

senior management officer of the U.S. 

operations of the foreign banking entity 

who is located in the United States. 

(2) The requirements of paragraph 

(c)(1) of this section apply to a banking 

entity if: 

(i) The banking entity does not have 

limited trading assets and liabilities; or 

(ii) The Board notifies the banking 

entity in writing that it must satisfy the 

requirements contained in paragraph 

(c)(1) of this section. 

(d) Reporting requirements under the 

Appendix to this part. (1) A banking 

entity engaged in proprietary trading 

activity permitted under subpart B shall 

comply with the reporting requirements 

described in the Appendix, if: 

(i) The banking entity has significant 

trading assets and liabilities; or 

(ii) The Board notifies the banking 

entity in writing that it must satisfy the 

reporting requirements contained in the 

Appendix. 

(2) Frequency of reporting. Unless the 

Board notifies the banking entity in 

writing that it must report on a different 

basis, a banking entity with $50 billion 

or more in trading assets and liabilities 

(as calculated in accordance with the 

methodology described in the definition 

of ‘‘significant trading assets and 

liabilities’’ contained in § 248.2 of this 

part of this part) shall report the 

information required by the Appendix 

for each calendar month within 20 days 

of the end of each calendar month. Any 

other banking entity subject to the 

Appendix shall report the information 

required by the Appendix for each 

calendar quarter within 30 days of the 

end of that calendar quarter unless the 

Board notifies the banking entity in 

writing that it must report on a different 

basis. 

(e) Additional documentation for 

covered funds. A banking entity with 

significant trading assets and liabilities 

shall maintain records that include: 

* * * * * 

(f) * * * 

(2) Banking entities with moderate 

trading assets and liabilities. A banking 

entity with moderate trading assets and 

liabilities may satisfy the requirements 

of this section by including in its 

existing compliance policies and 

procedures appropriate references to the 

requirements of section 13 of the BHC 

Act and this part and adjustments as 

appropriate given the activities, size, 

scope, and complexity of the banking 

entity. 

(g) Rebuttable presumption of 

compliance for banking entities with 

limited trading assets and liabilities. 

(1) Rebuttable presumption. Except as 

otherwise provided in this paragraph, a 

banking entity with limited trading 

assets and liabilities shall be presumed 

to be compliant with subpart B and 

subpart C and shall have no obligation 

to demonstrate compliance with this 

part on an ongoing basis. 

(2) Rebuttal of presumption. (i) If 

upon examination or audit, the Board 

determines that the banking entity has 

engaged in proprietary trading or 


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covered fund activities that are 

otherwise prohibited under subpart B or 

subpart C, the Board may require the 

banking entity to be treated under this 

part as if it did not have limited trading 

assets and liabilities. 

(ii) Notice and Response Procedures. 

(A) Notice. The Board will notify the 

banking entity in writing of any 

determination pursuant to paragraph 

(g)(2)(i) of this section to rebut the 

presumption described in this 

paragraph (g) and will provide an 

explanation of the determination. 

(B) Response. (1) The banking entity 

may respond to any or all items in the 

notice described in paragraph 

(g)(2)(ii)(A) of this section. The response 

should include any matters that the 

banking entity would have the Board 

consider in deciding whether the 

banking entity has engaged in 

proprietary trading or covered fund 

activities prohibited under subpart B or 

subpart C. The response must be in 

writing and delivered to the designated 

Board official within 30 days after the 

date on which the banking entity 

received the notice. The Board may 

shorten the time period when, in the 

opinion of the Board, the activities or 

condition of the banking entity so 

requires, provided that the banking 

entity is informed promptly of the new 

time period, or with the consent of the 

banking entity. In its discretion, the 

Board may extend the time period for 

good cause. 

(2) Failure to respond within 30 days 

or such other time period as may be 

specified by the Board shall constitute 

a waiver of any objections to the Board’s 

determination. 

(C) After the close of banking entity’s 

response period, the Board will decide, 

based on a review of the banking 

entity’s response and other information 

concerning the banking entity, whether 

to maintain the Board’s determination 

that banking entity has engaged in 

proprietary trading or covered fund 

activities prohibited under subpart B or 

subpart C. The banking entity will be 

notified of the decision in writing. The 

notice will include an explanation of 

the decision. 

(h) Reservation of authority. 

Notwithstanding any other provision of 

this part, the Board retains its authority 

to require a banking entity without 

significant trading assets and liabilities 

to apply any requirements of this part 

that would otherwise apply if the 

banking entity had significant or 

moderate trading assets and liabilities if 

the Board determines that the size or 

complexity of the banking entity’s 

trading or investment activities, or the 

risk of evasion of subpart B or subpart 

C, does not warrant a presumption of 

compliance under paragraph (g) of this 

section or treatment as a banking entity 

with moderate trading assets and 

liabilities, as applicable. 

■ 26. Remove Appendix A and 

Appendix B to Part 248 and add 

Appendix to Part 248—Reporting and 

Recordkeeping Requirements for 

Covered Trading Activities to read as 

follows: 

Appendix to Part 248—Reporting and 

Recordkeeping Requirements for 

Covered Trading Activities 

I. Purpose 

a. This appendix sets forth reporting and 

recordkeeping requirements that certain 

banking entities must satisfy in connection 

with the restrictions on proprietary trading 

set forth in subpart B (‘‘proprietary trading 

restrictions’’). Pursuant to § 248.20(d), this 

appendix applies to a banking entity that, 

together with its affiliates and subsidiaries, 

has significant trading assets and liabilities. 

These entities are required to (i) furnish 

periodic reports to the Board regarding a 

variety of quantitative measurements of their 

covered trading activities, which vary 

depending on the scope and size of covered 

trading activities, and (ii) create and maintain 

records documenting the preparation and 

content of these reports. The requirements of 

this appendix must be incorporated into the 

banking entity’s internal compliance program 

under § 248.20. 

b. The purpose of this appendix is to assist 

banking entities and the Board in: 

(i) Better understanding and evaluating the 

scope, type, and profile of the banking 

entity’s covered trading activities; 

(ii) Monitoring the banking entity’s covered 

trading activities; 

(iii) Identifying covered trading activities 

that warrant further review or examination 

by the banking entity to verify compliance 

with the proprietary trading restrictions; 

(iv) Evaluating whether the covered trading 

activities of trading desks engaged in market 

making-related activities subject to § 248.4(b) 

are consistent with the requirements 

governing permitted market making-related 

activities; 

(v) Evaluating whether the covered trading 

activities of trading desks that are engaged in 

permitted trading activity subject to §§ 248.4; 

248.5, or 248.6(a)–(b) (i.e., underwriting and 

market making-related related activity, riskmitigating hedging, or trading in certain 

government obligations) are consistent with 

the requirement that such activity not result, 

directly or indirectly, in a material exposure 

to high-risk assets or high-risk trading 

strategies; 

(vi) Identifying the profile of particular 

covered trading activities of the banking 

entity, and the individual trading desks of 

the banking entity, to help establish the 

appropriate frequency and scope of 

examination by the Board of such activities; 

and 

(vii) Assessing and addressing the risks 

associated with the banking entity’s covered 

trading activities. 

c. Information that must be furnished 

pursuant to this appendix is not intended to 

serve as a dispositive tool for the 

identification of permissible or 

impermissible activities. 

d. In addition to the quantitative 

measurements required in this appendix, a 

banking entity may need to develop and 

implement other quantitative measurements 

in order to effectively monitor its covered 

trading activities for compliance with section 

13 of the BHC Act and this part and to have 

an effective compliance program, as required 

by § 248.20. The effectiveness of particular 

quantitative measurements may differ based 

on the profile of the banking entity’s 

businesses in general and, more specifically, 

of the particular trading desk, including 

types of instruments traded, trading activities 

and strategies, and history and experience 

(e.g., whether the trading desk is an 

established, successful market maker or a 

new entrant to a competitive market). In all 

cases, banking entities must ensure that they 

have robust measures in place to identify and 

monitor the risks taken in their trading 

activities, to ensure that the activities are 

within risk tolerances established by the 

banking entity, and to monitor and examine 

for compliance with the proprietary trading 

restrictions in this part. 

e. On an ongoing basis, banking entities 

must carefully monitor, review, and evaluate 

all furnished quantitative measurements, as 

well as any others that they choose to utilize 

in order to maintain compliance with section 

13 of the BHC Act and this part. All 

measurement results that indicate a 

heightened risk of impermissible proprietary 

trading, including with respect to otherwisepermitted activities under §§ 248.4 through 

248.6(a)–(b), or that result in a material 

exposure to high-risk assets or high-risk 

trading strategies, must be escalated within 

the banking entity for review, further 

analysis, explanation to the Board, and 

remediation, where appropriate. The 

quantitative measurements discussed in this 

appendix should be helpful to banking 

entities in identifying and managing the risks 

related to their covered trading activities. 

II. Definitions 

The terms used in this appendix have the 

same meanings as set forth in §§ 248.2 and 

248.3. In addition, for purposes of this 

appendix, the following definitions apply: 

Applicability identifies the trading desks 

for which a banking entity is required to 

calculate and report a particular quantitative 

measurement based on the type of covered 

trading activity conducted by the trading 

desk. 

Calculation period means the period of 

time for which a particular quantitative 

measurement must be calculated. 

Comprehensive profit and loss means the 

net profit or loss of a trading desk’s material 

sources of trading revenue over a specific 

period of time, including, for example, any 

increase or decrease in the market value of 

a trading desk’s holdings, dividend income, 

and interest income and expense. 

Covered trading activity means trading 

conducted by a trading desk under §§ 248.4, 

248.5, 248.6(a), or 248.6(b). A banking entity 


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may include in its covered trading activity 

trading conducted under §§ 248.3(e), 

248.6(c), 248.6(d), or 248.6(e). 

Measurement frequency means the 

frequency with which a particular 

quantitative metric must be calculated and 

recorded. 

Trading day means a calendar day on 

which a trading desk is open for trading. 

III. Reporting and Recordkeeping 

a. Scope of Required Reporting 

1. Quantitative measurements. Each 

banking entity made subject to this appendix 

by § 248.20 must furnish the following 

quantitative measurements, as applicable, for 

each trading desk of the banking entity 

engaged in covered trading activities and 

calculate these quantitative measurements in 

accordance with this appendix: 

i. Risk and Position Limits and Usage; 

ii. Risk Factor Sensitivities; 

iii. Value-at-Risk and Stressed Value-atRisk; 

iv. Comprehensive Profit and Loss 

Attribution; 

v. Positions; 

vi. Transaction Volumes; and 

vii. Securities Inventory Aging. 

2. Trading desk information. Each banking 

entity made subject to this appendix by 

§ll.20 must provide certain descriptive 

information, as further described in this 

appendix, regarding each trading desk 

engaged in covered trading activities. 

Quantitative measurements identifying 

information. Each banking entity made 

subject to this appendix by § 248.20 must 

provide certain identifying and descriptive 

information, as further described in this 

appendix, regarding its quantitative 

measurements. 

4. Narrative statement. Each banking entity 

made subject to this appendix by § 248.20 

must provide a separate narrative statement, 

as further described in this appendix. 

5. File identifying information. Each 

banking entity made subject to this appendix 

by § 248.20 must provide file identifying 

information in each submission to the Board 

pursuant to this appendix, including the 

name of the banking entity, the RSSD ID 

assigned to the top-tier banking entity by the 

Board, and identification of the reporting 

period and creation date and time. 

b. Trading Desk Information 

1. Each banking entity must provide 

descriptive information regarding each 

trading desk engaged in covered trading 

activities, including: 

i. Name of the trading desk used internally 

by the banking entity and a unique 

identification label for the trading desk; 

ii. Identification of each type of covered 

trading activity in which the trading desk is 

engaged; 

iii. Brief description of the general strategy 

of the trading desk; 

iv. A list of the types of financial 

instruments and other products purchased 

and sold by the trading desk; an indication 

of which of these are the main financial 

instruments or products purchased and sold 

by the trading desk; and, for trading desks 

engaged in market making-related activities 

under § 248.4(b), specification of whether 

each type of financial instrument is included 

in market-maker positions or not included in 

market-maker positions. In addition, indicate 

whether the trading desk is including in its 

quantitative measurements products 

excluded from the definition of ‘‘financial 

instrument’’ under § 248.3(d)(2) and, if so, 

identify such products; 

v. Identification by complete name of each 

legal entity that serves as a booking entity for 

covered trading activities conducted by the 

trading desk; and indication of which of the 

identified legal entities are the main booking 

entities for covered trading activities of the 

trading desk; 

vi. For each legal entity that serves as a 

booking entity for covered trading activities, 

specification of any of the following 

applicable entity types for that legal entity: 

A. National bank, Federal branch or 

Federal agency of a foreign bank, Federal 

savings association, Federal savings bank; 

B. State nonmember bank, foreign bank 

having an insured branch, State savings 

association; 

C. U.S.-registered broker-dealer, U.S.- 

registered security-based swap dealer, U.S.- 

registered major security-based swap 

participant; 

D. Swap dealer, major swap participant, 

derivatives clearing organization, futures 

commission merchant, commodity pool 

operator, commodity trading advisor, 

introducing broker, floor trader, retail foreign 

exchange dealer; 

E. State member bank; 

F. Bank holding company, savings and 

loan holding company; 

G. Foreign banking organization as defined 

in 12 CFR 211.21(o); 

H. Uninsured State-licensed branch or 

agency of a foreign bank; or 

I. Other entity type not listed above, 

including a subsidiary of a legal entity 

described above where the subsidiary itself is 

not an entity type listed above; 

2. Indication of whether each calendar date 

is a trading day or not a trading day for the 

trading desk; and 

3. Currency reported and daily currency 

conversion rate. 

c. Quantitative Measurements Identifying 

Information 

1. Each banking entity must provide the 

following information regarding the 

quantitative measurements: 

i. A Risk and Position Limits Information 

Schedule that provides identifying and 

descriptive information for each limit 

reported pursuant to the Risk and Position 

Limits and Usage quantitative measurement, 

including the name of the limit, a unique 

identification label for the limit, a 

description of the limit, whether the limit is 

intraday or end-of-day, the unit of 

measurement for the limit, whether the limit 

measures risk on a net or gross basis, and the 

type of limit; 

ii. A Risk Factor Sensitivities Information 

Schedule that provides identifying and 

descriptive information for each risk factor 

sensitivity reported pursuant to the Risk 

Factor Sensitivities quantitative 

measurement, including the name of the 

sensitivity, a unique identification label for 

the sensitivity, a description of the 

sensitivity, and the sensitivity’s risk factor 

change unit; 

iii. A Risk Factor Attribution Information 

Schedule that provides identifying and 

descriptive information for each risk factor 

attribution reported pursuant to the 

Comprehensive Profit and Loss Attribution 

quantitative measurement, including the 

name of the risk factor or other factor, a 

unique identification label for the risk factor 

or other factor, a description of the risk factor 

or other factor, and the risk factor or other 

factor’s change unit; 

iv. A Limit/Sensitivity Cross-Reference 

Schedule that cross-references, by unique 

identification label, limits identified in the 

Risk and Position Limits Information 

Schedule to associated risk factor 

sensitivities identified in the Risk Factor 

Sensitivities Information Schedule; and 

v. A Risk Factor Sensitivity/Attribution 

Cross-Reference Schedule that crossreferences, by unique identification label, 

risk factor sensitivities identified in the Risk 

Factor Sensitivities Information Schedule to 

associated risk factor attributions identified 

in the Risk Factor Attribution Information 

Schedule. 

d. Narrative Statement 

Each banking entity made subject to this 

appendix by § 248.20 must submit in a 

separate electronic document a Narrative 

Statement to the Board describing any 

changes in calculation methods used, a 

description of and reasons for changes in the 

banking entity’s trading desk structure or 

trading desk strategies, and when any such 

change occurred. The Narrative Statement 

must include any information the banking 

entity views as relevant for assessing the 

information reported, such as further 

description of calculation methods used. 

If a banking entity does not have any 

information to report in a Narrative 

Statement, the banking entity must submit an 

electronic document stating that it does not 

have any information to report in a Narrative 

Statement. 

e. Frequency and Method of Required 

Calculation and Reporting 

A banking entity must calculate any 

applicable quantitative measurement for each 

trading day. A banking entity must report the 

Narrative Statement, the Trading Desk 

Information, the Quantitative Measurements 

Identifying Information, and each applicable 

quantitative measurement electronically to 

the Board on the reporting schedule 

established in §ll.20 unless otherwise 

requested by the Board. A banking entity 

must report the Trading Desk Information, 

the Quantitative Measurements Identifying 

Information, and each applicable quantitative 

measurement to the Board in accordance 

with the XML Schema specified and 

published on the Board’s website. 

f. Recordkeeping 

A banking entity must, for any quantitative 

measurement furnished to the Board 

pursuant to this appendix and § 248.20(d), 

create and maintain records documenting the 

preparation and content of these reports, as 


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421See §§ 248.2(i), (bb). For example, under this 

part, a security-based swap is both a ‘‘security’’ and 

a ‘‘derivative.’’ For purposes of the Positions 

quantitative measurement, security-based swaps are 

reported as derivatives rather than securities. 

well as such information as is necessary to 

permit the Board to verify the accuracy of 

such reports, for a period of five years from 

the end of the calendar year for which the 

measurement was taken. A banking entity 

must retain the Narrative Statement, the 

Trading Desk Information, and the 

Quantitative Measurements Identifying 

Information for a period of five years from 

the end of the calendar year for which the 

information was reported to the Board. 

IV. Quantitative Measurements 

a. Risk-Management Measurements 

1. Risk and Position Limits and Usage 

i. Description: For purposes of this 

appendix, Risk and Position Limits are the 

constraints that define the amount of risk that 

a trading desk is permitted to take at a point 

in time, as defined by the banking entity for 

a specific trading desk. Usage represents the 

value of the trading desk’s risk or positions 

that are accounted for by the current activity 

of the desk. Risk and position limits and their 

usage are key risk management tools used to 

control and monitor risk taking and include, 

but are not limited to, the limits set out in 

§ 248.4 and § 248.5. A number of the metrics 

that are described below, including ‘‘Risk 

Factor Sensitivities’’ and ‘‘Value-at-Risk,’’ 

relate to a trading desk’s risk and position 

limits and are useful in evaluating and 

setting these limits in the broader context of 

the trading desk’s overall activities, 

particularly for the market making activities 

under § 248.4(b) and hedging activity under 

§ 248.5. Accordingly, the limits required 

under § 248.4(b)(2)(iii) and § 248.5(b)(1)(i)(A) 

must meet the applicable requirements under 

§ 248.4(b)(2)(iii) and § 248.5(b)(1)(i)(A) and 

also must include appropriate metrics for the 

trading desk limits including, at a minimum, 

the ‘‘Risk Factor Sensitivities’’ and ‘‘Value-atRisk’’ metrics except to the extent any of the 

‘‘Risk Factor Sensitivities’’ or ‘‘Value-at-Risk’’ 

metrics are demonstrably ineffective for 

measuring and monitoring the risks of a 

trading desk based on the types of positions 

traded by, and risk exposures of, that desk. 

A. A banking entity must provide the 

following information for each limit reported 

pursuant to this quantitative measurement: 

The unique identification label for the limit 

reported in the Risk and Position Limits 

Information Schedule, the limit size 

(distinguishing between an upper and a 

lower limit), and the value of usage of the 

limit. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks engaged 

in covered trading activities. 

2. Risk Factor Sensitivities 

i. Description: For purposes of this 

appendix, Risk Factor Sensitivities are 

changes in a trading desk’s Comprehensive 

Profit and Loss that are expected to occur in 

the event of a change in one or more 

underlying variables that are significant 

sources of the trading desk’s profitability and 

risk. A banking entity must report the risk 

factor sensitivities that are monitored and 

managed as part of the trading desk’s overall 

risk management policy. Reported risk factor 

sensitivities must be sufficiently granular to 

account for a preponderance of the expected 

price variation in the trading desk’s holdings. 

A banking entity must provide the following 

information for each sensitivity that is 

reported pursuant to this quantitative 

measurement: The unique identification label 

for the risk factor sensitivity listed in the Risk 

Factor Sensitivities Information Schedule, 

the change in risk factor used to determine 

the risk factor sensitivity, and the aggregate 

change in value across all positions of the 

desk given the change in risk factor. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks engaged 

in covered trading activities. 

3. Value-at-Risk and Stressed Value-at-Risk 

i. Description: For purposes of this 

appendix, Value-at-Risk (‘‘VaR’’) is the 

measurement of the risk of future financial 

loss in the value of a trading desk’s 

aggregated positions at the ninety-nine 

percent confidence level over a one-day 

period, based on current market conditions. 

For purposes of this appendix, Stressed 

Value-at-Risk (‘‘Stressed VaR’’) is the 

measurement of the risk of future financial 

loss in the value of a trading desk’s 

aggregated positions at the ninety-nine 

percent confidence level over a one-day 

period, based on market conditions during a 

period of significant financial stress. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: For VaR, all trading desks 

engaged in covered trading activities. For 

Stressed VaR, all trading desks engaged in 

covered trading activities, except trading 

desks whose covered trading activity is 

conducted exclusively to hedge products 

excluded from the definition of ‘‘financial 

instrument’’ under § 248.3(d)(2). 

b. Source-of-Revenue Measurements 

1. Comprehensive Profit and Loss Attribution 

i. Description: For purposes of this 

appendix, Comprehensive Profit and Loss 

Attribution is an analysis that attributes the 

daily fluctuation in the value of a trading 

desk’s positions to various sources. First, the 

daily profit and loss of the aggregated 

positions is divided into three categories: (i) 

Profit and loss attributable to a trading desk’s 

existing positions that were also positions 

held by the trading desk as of the end of the 

prior day (‘‘existing positions’’); (ii) profit 

and loss attributable to new positions 

resulting from the current day’s trading 

activity (‘‘new positions’’); and (iii) residual 

profit and loss that cannot be specifically 

attributed to existing positions or new 

positions. The sum of (i), (ii), and (iii) must 

equal the trading desk’s comprehensive profit 

and loss at each point in time. 

A. The comprehensive profit and loss 

associated with existing positions must 

reflect changes in the value of these positions 

on the applicable day. 

The comprehensive profit and loss from 

existing positions must be further attributed, 

as applicable, to changes in (i) the specific 

risk factors and other factors that are 

monitored and managed as part of the trading 

desk’s overall risk management policies and 

procedures; and (ii) any other applicable 

elements, such as cash flows, carry, changes 

in reserves, and the correction, cancellation, 

or exercise of a trade. 

B. For the attribution of comprehensive 

profit and loss from existing positions to 

specific risk factors and other factors, a 

banking entity must provide the following 

information for the factors that explain the 

preponderance of the profit or loss changes 

due to risk factor changes: The unique 

identification label for the risk factor or other 

factor listed in the Risk Factor Attribution 

Information Schedule, and the profit or loss 

due to the risk factor or other factor change. 

C. The comprehensive profit and loss 

attributed to new positions must reflect 

commissions and fee income or expense and 

market gains or losses associated with 

transactions executed on the applicable day. 

New positions include purchases and sales of 

financial instruments and other assets/ 

liabilities and negotiated amendments to 

existing positions. The comprehensive profit 

and loss from new positions may be reported 

in the aggregate and does not need to be 

further attributed to specific sources. 

D. The portion of comprehensive profit and 

loss that cannot be specifically attributed to 

known sources must be allocated to a 

residual category identified as an 

unexplained portion of the comprehensive 

profit and loss. Significant unexplained 

profit and loss must be escalated for further 

investigation and analysis. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks engaged 

in covered trading activities. 

c. Positions, Transaction Volumes, and 

Securities Inventory Aging Measurements 

1. Positions 

i. Description: For purposes of this 

appendix, Positions is the value of securities 

and derivatives positions managed by the 

trading desk. For purposes of the Positions 

quantitative measurement, do not include in 

the Positions calculation for ‘‘securities’’ 

those securities that are also ‘‘derivatives,’’ as 

those terms are defined under subpart A; 

instead, report those securities that are also 

derivatives as ‘‘derivatives.’’ 421 A banking 

entity must separately report the trading 

desk’s market value of long securities 

positions, market value of short securities 

positions, market value of derivatives 

receivables, market value of derivatives 

payables, notional value of derivatives 

receivables, and notional value of derivatives 

payables. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks that rely 

on § 248.4(a) or § 248.4(b) to conduct 

underwriting activity or market-makingrelated activity, respectively. 

2. Transaction Volumes 

i. Description: For purposes of this 

appendix, Transaction Volumes measures 

four exclusive categories of covered trading 


daltland on DSKBBV9HB2PROD with PROPOSALS3
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422See §§ 248.2(i), (bb). 

423See §§ 248.2(i), (bb). 

activity conducted by a trading desk. A 

banking entity is required to report the value 

and number of security and derivative 

transactions conducted by the trading desk 

with: (i) Customers, excluding internal 

transactions; (ii) non-customers, excluding 

internal transactions; (iii) trading desks and 

other organizational units where the 

transaction is booked in the same banking 

entity; and (iv) trading desks and other 

organizational units where the transaction is 

booked into an affiliated banking entity. For 

securities, value means gross market value. 

For derivatives, value means gross notional 

value. For purposes of calculating the 

Transaction Volumes quantitative 

measurement, do not include in the 

Transaction Volumes calculation for 

‘‘securities’’ those securities that are also 

‘‘derivatives,’’ as those terms are defined 

under subpart A; instead, report those 

securities that are also derivatives as 

‘‘derivatives.’’ 422 Further, for purposes of the 

Transaction Volumes quantitative 

measurement, a customer of a trading desk 

that relies on § 248.4(a) to conduct 

underwriting activity is a market participant 

identified in § 248.4(a)(7), and a customer of 

a trading desk that relies on § 248.4(b) to 

conduct market making-related activity is a 

market participant identified in § 248.4(b)(3). 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks that rely 

on § 248.4(a) or § 248.4(b) to conduct 

underwriting activity or market-makingrelated activity, respectively. 

3. Securities Inventory Aging 

i. Description: For purposes of this 

appendix, Securities Inventory Aging 

generally describes a schedule of the market 

value of the trading desk’s securities 

positions and the amount of time that those 

securities positions have been held. 

Securities Inventory Aging must measure the 

age profile of a trading desk’s securities 

positions for the following periods: 0–30 

Calendar days; 31–60 calendar days; 61–90 

calendar days; 91–180 calendar days; 181– 

360 calendar days; and greater than 360 

calendar days. Securities Inventory Aging 

includes two schedules, a security assetaging schedule, and a security liability-aging 

schedule. For purposes of the Securities 

Inventory Aging quantitative measurement, 

do not include securities that are also 

‘‘derivatives,’’ as those terms are defined 

under subpart A.423

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks that rely 

on § 248.4(a) or § 248.4(b) to conduct 

underwriting activity or market-making 

related activity, respectively. 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Chapter III 

Authority and Issuance 

For the reasons set forth in the 

Common Preamble, the Federal Deposit 

Insurance Corporation proposes to 

amend chapter III of Title 12, Code of 

Federal Regulations as follows: 

PART 351—PROPRIETARY TRADING 

AND CERTAIN INTERESTS IN AND 

RELATIONSHIPS WITH COVERED 

FUNDS 

■ 27. The authority citation for Part 351 

continues to read as follows: 

Authority: 12 U.S.C. 1851; 1811 et seq.; 

3101 et seq.; and 5412. 

■ 28. Revise § 351.2 to read as follows: 

§ 351.2 Definitions. 

Unless otherwise specified, for 

purposes of this part: 

(a) Affiliate has the same meaning as 

in section 2(k) of the Bank Holding 

Company Act of 1956 (12 U.S.C. 

1841(k)). 

(b) Applicable accounting standards 

means U.S. generally accepted 

accounting principles, or such other 

accounting standards applicable to a 

banking entity that the [Agency] 

determines are appropriate and that the 

banking entity uses in the ordinary 

course of its business in preparing its 

consolidated financial statements. 

(c) Bank holding company has the 

same meaning as in section 2 of the 

Bank Holding Company Act of 1956 (12 

U.S.C. 1841). 

(d) Banking entity. (1) Except as 

provided in paragraph (d)(2) of this 

section, banking entity means: 

(i) Any insured depository institution; 

(ii) Any company that controls an 

insured depository institution; 

(iii) Any company that is treated as a 

bank holding company for purposes of 

section 8 of the International Banking 

Act of 1978 (12 U.S.C. 3106); and 

(iv) Any affiliate or subsidiary of any 

entity described in paragraphs (d)(1)(i), 

(ii), or (iii) of this section. 

(2) Banking entity does not include: 

(i) A covered fund that is not itself a 

banking entity under paragraphs 

(d)(1)(i), (ii), or (iii) of this section; 

(ii) A portfolio company held under 

the authority contained in section 

4(k)(4)(H) or (I) of the BHC Act (12 

U.S.C. 1843(k)(4)(H), (I)), or any 

portfolio concern, as defined under 13 

CFR 107.50, that is controlled by a small 

business investment company, as 

defined in section 103(3) of the Small 

Business Investment Act of 1958 (15 

U.S.C. 662), so long as the portfolio 

company or portfolio concern is not 

itself a banking entity under paragraphs 

(d)(1)(i), (ii), or (iii) of this section; or 

(iii) The FDIC acting in its corporate 

capacity or as conservator or receiver 

under the Federal Deposit Insurance Act 

or Title II of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act. 

(e) Board means the Board of 

Governors of the Federal Reserve 

System. 

(f) CFTC means the Commodity 

Futures Trading Commission. 

(g) Dealer has the same meaning as in 

section 3(a)(5) of the Exchange Act (15 

U.S.C. 78c(a)(5)). 

(h) Depository institution has the 

same meaning as in section 3(c) of the 

Federal Deposit Insurance Act (12 

U.S.C. 1813(c)). 

(i) Derivative. (1) Except as provided 

in paragraph (i)(2) of this section, 

derivative means: 

(i) Any swap, as that term is defined 

in section 1a(47) of the Commodity 

Exchange Act (7 U.S.C. 1a(47)), or 

security-based swap, as that term is 

defined in section 3(a)(68) of the 

Exchange Act (15 U.S.C. 78c(a)(68)); 

(ii) Any purchase or sale of a 

commodity, that is not an excluded 

commodity, for deferred shipment or 

delivery that is intended to be 

physically settled; 

(iii) Any foreign exchange forward (as 

that term is defined in section 1a(24) of 

the Commodity Exchange Act (7 U.S.C. 

1a(24)) or foreign exchange swap (as 

that term is defined in section 1a(25) of 

the Commodity Exchange Act (7 U.S.C. 

1a(25)); 

(iv) Any agreement, contract, or 

transaction in foreign currency 

described in section 2(c)(2)(C)(i) of the 

Commodity Exchange Act (7 U.S.C. 

2(c)(2)(C)(i)); 

(v) Any agreement, contract, or 

transaction in a commodity other than 

foreign currency described in section 

2(c)(2)(D)(i) of the Commodity Exchange 

Act (7 U.S.C. 2(c)(2)(D)(i)); and 

(vi) Any transaction authorized under 

section 19 of the Commodity Exchange 

Act (7 U.S.C. 23(a) or (b)); 

(2) A derivative does not include: 

(i) Any consumer, commercial, or 

other agreement, contract, or transaction 

that the CFTC and SEC have further 

defined by joint regulation, 

interpretation, guidance, or other action 

as not within the definition of swap, as 

that term is defined in section 1a(47) of 

the Commodity Exchange Act (7 U.S.C. 

1a(47)), or security-based swap, as that 

term is defined in section 3(a)(68) of the 

Exchange Act (15 U.S.C. 78c(a)(68)); or 

(ii) Any identified banking product, as 

defined in section 402(b) of the Legal 

Certainty for Bank Products Act of 2000 

(7 U.S.C. 27(b)), that is subject to section 

403(a) of that Act (7 U.S.C. 27a(a)). 

(j) Employee includes a member of the 

immediate family of the employee. 

(k) Exchange Act means the Securities 

Exchange Act of 1934 (15 U.S.C. 78a et 

seq.). 

(l) Excluded commodity has the same 

meaning as in section 1a(19) of the 


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Commodity Exchange Act (7 U.S.C. 

1a(19)). 

(m) FDIC means the Federal Deposit 

Insurance Corporation. 

(n) Federal banking agencies means 

the Board, the Office of the Comptroller 

of the Currency, and the FDIC. 

(o) Foreign banking organization has 

the same meaning as in section 

211.21(o) of the Board’s Regulation K 

(12 CFR 211.21(o)), but does not include 

a foreign bank, as defined in section 

1(b)(7) of the International Banking Act 

of 1978 (12 U.S.C. 3101(7)), that is 

organized under the laws of the 

Commonwealth of Puerto Rico, Guam, 

American Samoa, the United States 

Virgin Islands, or the Commonwealth of 

the Northern Mariana Islands. 

(p) Foreign insurance regulator means 

the insurance commissioner, or a 

similar official or agency, of any country 

other than the United States that is 

engaged in the supervision of insurance 

companies under foreign insurance law. 

(q) General account means all of the 

assets of an insurance company except 

those allocated to one or more separate 

accounts. 

(r) Insurance company means a 

company that is organized as an 

insurance company, primarily and 

predominantly engaged in writing 

insurance or reinsuring risks 

underwritten by insurance companies, 

subject to supervision as such by a state 

insurance regulator or a foreign 

insurance regulator, and not operated 

for the purpose of evading the 

provisions of section 13 of the BHC Act 

(12 U.S.C. 1851). 

(s) Insured depository institution has 

the same meaning as in section 3(c) of 

the Federal Deposit Insurance Act (12 

U.S.C. 1813(c)), but does not include an 

insured depository institution that is 

described in section 2(c)(2)(D) of the 

BHC Act (12 U.S.C. 1841(c)(2)(D)). 

(t) Limited trading assets and 

liabilities means, with respect to a 

banking entity, that: 

(1) The banking entity has, together 

with its affiliates and subsidiaries on a 

worldwide consolidated basis, trading 

assets and liabilities (excluding trading 

assets and liabilities involving 

obligations of or guaranteed by the 

United States or any agency of the 

United States) the average gross sum of 

which over the previous consecutive 

four quarters, as measured as of the last 

day of each of the four previous 

calendar quarters, is less than 

$1,000,000,000; and 

(2) The FDIC has not determined 

pursuant to § 351.20(g) or (h) of this part 

that the banking entity should not be 

treated as having limited trading assets 

and liabilities. 

(u) Loan means any loan, lease, 

extension of credit, or secured or 

unsecured receivable that is not a 

security or derivative. 

(v) Moderate trading assets and 

liabilities means, with respect to a 

banking entity, that the banking entity 

does not have significant trading assets 

and liabilities or limited trading assets 

and liabilities. 

(w) Primary financial regulatory 

agency has the same meaning as in 

section 2(12) of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (12 U.S.C. 5301(12)). 

(x) Purchase includes any contract to 

buy, purchase, or otherwise acquire. For 

security futures products, purchase 

includes any contract, agreement, or 

transaction for future delivery. With 

respect to a commodity future, purchase 

includes any contract, agreement, or 

transaction for future delivery. With 

respect to a derivative, purchase 

includes the execution, termination 

(prior to its scheduled maturity date), 

assignment, exchange, or similar 

transfer or conveyance of, or 

extinguishing of rights or obligations 

under, a derivative, as the context may 

require. 

(y) Qualifying foreign banking 

organization means a foreign banking 

organization that qualifies as such under 

section 211.23(a), (c) or (e) of the 

Board’s Regulation K (12 CFR 211.23(a), 

(c), or (e)). 

(z) SEC means the Securities and 

Exchange Commission. 

(aa) Sale and sell each include any 

contract to sell or otherwise dispose of. 

For security futures products, such 

terms include any contract, agreement, 

or transaction for future delivery. With 

respect to a commodity future, such 

terms include any contract, agreement, 

or transaction for future delivery. With 

respect to a derivative, such terms 

include the execution, termination 

(prior to its scheduled maturity date), 

assignment, exchange, or similar 

transfer or conveyance of, or 

extinguishing of rights or obligations 

under, a derivative, as the context may 

require. 

(bb) Security has the meaning 

specified in section 3(a)(10) of the 

Exchange Act (15 U.S.C. 78c(a)(10)). 

(cc) Security-based swap dealer has 

the same meaning as in section 3(a)(71) 

of the Exchange Act (15 U.S.C. 

78c(a)(71)). 

(dd) Security future has the meaning 

specified in section 3(a)(55) of the 

Exchange Act (15 U.S.C. 78c(a)(55)). 

(ee) Separate account means an 

account established and maintained by 

an insurance company in connection 

with one or more insurance contracts to 

hold assets that are legally segregated 

from the insurance company’s other 

assets, under which income, gains, and 

losses, whether or not realized, from 

assets allocated to such account, are, in 

accordance with the applicable contract, 

credited to or charged against such 

account without regard to other income, 

gains, or losses of the insurance 

company. 

(ff) Significant trading assets and 

liabilities. 

(1) Significant trading assets and 

liabilities means, with respect to a 

banking entity, that: 

(i) The banking entity has, together 

with its affiliates and subsidiaries, 

trading assets and liabilities the average 

gross sum of which over the previous 

consecutive four quarters, as measured 

as of the last day of each of the four 

previous calendar quarters, equals or 

exceeds $10,000,000,000; or 

(ii) The FDIC has determined 

pursuant to § 351.20(h) of this part that 

the banking entity should be treated as 

having significant trading assets and 

liabilities. 

(2) With respect to a banking entity 

other than a banking entity described in 

paragraph (3), trading assets and 

liabilities for purposes of this paragraph 

(ff) means trading assets and liabilities 

(excluding trading assets and liabilities 

involving obligations of or guaranteed 

by the United States or any agency of 

the United States) on a worldwide 

consolidated basis. 

(3)(i) With respect to a banking entity 

that is a foreign banking organization or 

a subsidiary of a foreign banking 

organization, trading assets and 

liabilities for purposes of this paragraph 

(ff) means the trading assets and 

liabilities (excluding trading assets and 

liabilities involving obligations of or 

guaranteed by the United States or any 

agency of the United States) of the 

combined U.S. operations of the top-tier 

foreign banking organization (including 

all subsidiaries, affiliates, branches, and 

agencies of the foreign banking 

organization operating, located, or 

organized in the United States). 

(ii) For purposes of paragraph (ff)(3)(i) 

of this section, a U.S. branch, agency, or 

subsidiary of a banking entity is located 

in the United States; however, the 

foreign bank that operates or controls 

that branch, agency, or subsidiary is not 

considered to be located in the United 

States solely by virtue of operating or 

controlling the U.S. branch, agency, or 

subsidiary. 

(gg) State means any State, the District 

of Columbia, the Commonwealth of 

Puerto Rico, Guam, American Samoa, 

the United States Virgin Islands, and the 


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Commonwealth of the Northern Mariana 

Islands. 

(hh) Subsidiary has the same meaning 

as in section 2(d) of the Bank Holding 

Company Act of 1956 (12 U.S.C. 

1841(d)). 

(ii) State insurance regulator means 

the insurance commissioner, or a 

similar official or agency, of a State that 

is engaged in the supervision of 

insurance companies under State 

insurance law. 

(jj) Swap dealer has the same meaning 

as in section 1(a)(49) of the Commodity 

Exchange Act (7 U.S.C. 1a(49)). 

■ 29. Amend § 351.3 by: 

■ a. Revising paragraph (b); 

■ b. Redesignating paragraphs (c) 

through (e) as paragraphs (d) through (f); 

■ c. Adding a new paragraph (c); 

■ d. Revising paragraph (e)(3); 

■ e. Adding paragraph (e)(10); 

■ f. Redesignating paragraphs (f)(5) 

through (f)(13) as paragraphs (f)(6) 

through (f)(14); 

■ g. Adding a new paragraph (f)(5); and 

■ h. Adding paragraph (g). 

The revisions and additions read as 

follows: 

§ 351.3 Prohibition on proprietary trading. 

* * * * * 

(b) Definition of trading account. 

Trading account means any account 

that is used by a banking entity to: 

(1)(i) Purchase or sell one or more 

financial instruments that are both 

market risk capital rule covered 

positions and trading positions (or 

hedges of other market risk capital rule 

covered positions), if the banking entity, 

or any affiliate of the banking entity, is 

an insured depository institution, bank 

holding company, or savings and loan 

holding company, and calculates riskbased capital ratios under the market 

risk capital rule; or 

(ii) With respect to a banking entity 

that is not, and is not controlled directly 

or indirectly by a banking entity that is, 

located in or organized under the laws 

of the United States or any State, 

purchase or sell one or more financial 

instruments that are subject to capital 

requirements under a market risk 

framework established by the homecountry supervisor that is consistent 

with the market risk framework 

published by the Basel Committee on 

Banking Supervision, as amended from 

time to time. 

(2) Purchase or sell one or more 

financial instruments for any purpose, if 

the banking entity: 

(i) Is licensed or registered, or is 

required to be licensed or registered, to 

engage in the business of a dealer, swap 

dealer, or security-based swap dealer, to 

the extent the instrument is purchased 

or sold in connection with the activities 

that require the banking entity to be 

licensed or registered as such; or 

(ii) Is engaged in the business of a 

dealer, swap dealer, or security-based 

swap dealer outside of the United 

States, to the extent the instrument is 

purchased or sold in connection with 

the activities of such business; or 

(3) Purchase or sell one or more 

financial instruments, with respect to a 

financial instrument that is recorded at 

fair value on a recurring basis under 

applicable accounting standards. 

(c) Presumption of compliance. (1)(i) 

Each trading desk that does not 

purchase or sell financial instruments 

for a trading account defined in 

paragraphs (b)(1) or (b)(2) of this section 

may calculate the net gain or net loss on 

the trading desk’s portfolio of financial 

instruments each business day, 

reflecting realized and unrealized gains 

and losses since the previous business 

day, based on the banking entity’s fair 

value for such financial instruments. 

(ii) If the sum of the absolute values 

of the daily net gain and loss figures 

determined in accordance with 

paragraph (c)(1)(i) of this section for the 

preceding 90-calendar-day period does 

not exceed $25 million, the activities of 

the trading desk shall be presumed to be 

in compliance with the prohibition in 

paragraph (a) of this section. 

(2) The FDIC may rebut the 

presumption of compliance in 

paragraph (c)(1)(ii) of this section by 

providing written notice to the banking 

entity that the FDIC has determined that 

one or more of the banking entity’s 

activities violates the prohibitions under 

subpart B. 

(3) If a trading desk operating 

pursuant to paragraph (c)(1)(ii) of this 

section exceeds the $25 million 

threshold in that paragraph at any point, 

the banking entity shall, in accordance 

with any policies and procedures 

adopted by the FDIC: 

(i) Promptly notify the FDIC; 

(ii) Demonstrate that the trading 

desk’s purchases and sales of financial 

instruments comply with subpart B; and 

(iii) Demonstrate, with respect to the 

trading desk, how the banking entity 

will maintain compliance with subpart 

B on an ongoing basis. 

* * * * * 

(e) * * * 

(3) Any purchase or sale of a security, 

foreign exchange forward (as that term 

is defined in section 1a(24) of the 

Commodity Exchange Act (7 U.S.C. 

1a(24)), foreign exchange swap (as that 

term is defined in section 1a(25) of the 

Commodity Exchange Act (7 U.S.C. 

1a(25)), or physically-settled crosscurrency swap, by a banking entity for 

the purpose of liquidity management in 

accordance with a documented liquidity 

management plan of the banking entity 

that, with respect to such financial 

instruments: 

(i) Specifically contemplates and 

authorizes the particular financial 

instruments to be used for liquidity 

management purposes, the amount, 

types, and risks of these financial 

instruments that are consistent with 

liquidity management, and the liquidity 

circumstances in which the particular 

financial instruments may or must be 

used; 

(ii) Requires that any purchase or sale 

of financial instruments contemplated 

and authorized by the plan be 

principally for the purpose of managing 

the liquidity of the banking entity, and 

not for the purpose of short-term resale, 

benefitting from actual or expected 

short-term price movements, realizing 

short-term arbitrage profits, or hedging a 

position taken for such short-term 

purposes; 

(iii) Requires that any financial 

instruments purchased or sold for 

liquidity management purposes be 

highly liquid and limited to financial 

instruments the market, credit, and 

other risks of which the banking entity 

does not reasonably expect to give rise 

to appreciable profits or losses as a 

result of short-term price movements; 

(iv) Limits any financial instruments 

purchased or sold for liquidity 

management purposes, together with 

any other instruments purchased or sold 

for such purposes, to an amount that is 

consistent with the banking entity’s 

near-term funding needs, including 

deviations from normal operations of 

the banking entity or any affiliate 

thereof, as estimated and documented 

pursuant to methods specified in the 

plan; 

(v) Includes written policies and 

procedures, internal controls, analysis, 

and independent testing to ensure that 

the purchase and sale of financial 

instruments that are not permitted 

under §§ 351.6(a) or (b) of this subpart 

are for the purpose of liquidity 

management and in accordance with the 

liquidity management plan described in 

paragraph (e)(3) of this section; and 

(vi) Is consistent with the FDIC’s 

supervisory requirements, guidance, 

and expectations regarding liquidity 

management; 

* * * * * 

(10) Any purchase (or sale) of one or 

more financial instruments that was 

made in error by a banking entity in the 

course of conducting a permitted or 

excluded activity or is a subsequent 


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transaction to correct such an error, and 

the erroneously purchased (or sold) 

financial instrument is promptly 

transferred to a separately-managed 

trade error account for disposition. 

(f) * * * 

(5) Cross-currency swap means a 

swap in which one party exchanges 

with another party principal and 

interest rate payments in one currency 

for principal and interest rate payments 

in another currency, and the exchange 

of principal occurs on the date the swap 

is entered into, with a reversal of the 

exchange of principal at a later date that 

is agreed upon when the swap is 

entered into. 

* * * * * 

(g) Reservation of Authority: (1) The 

FDIC may determine, on a case-by-case 

basis, that a purchase or sale of one or 

more financial instruments by a banking 

entity either is or is not for the trading 

account as defined at 12 U.S.C. 

1851(h)(6). 

(2) Notice and Response Procedures. 

(i) Notice. When the FDIC determines 

that the purchase or sale of one or more 

financial instruments is for the trading 

account under paragraph (g)(1) of this 

section, the [Agency] will notify the 

banking entity in writing of the 

determination and provide an 

explanation of the determination. 

(ii) Response. 

(A) The banking entity may respond 

to any or all items in the notice. The 

response should include any matters 

that the banking entity would have the 

FDIC consider in deciding whether the 

purchase or sale is for the trading 

account. The response must be in 

writing and delivered to the designated 

FDIC official within 30 days after the 

date on which the banking entity 

received the notice. The FDIC may 

shorten the time period when, in the 

opinion of the FDIC, the activities or 

condition of the banking entity so 

requires, provided that the banking 

entity is informed promptly of the new 

time period, or with the consent of the 

banking entity. In its discretion, the 

FDIC may extend the time period for 

good cause. 

(B) Failure to respond within 30 days 

or such other time period as may be 

specified by the FDIC shall constitute a 

waiver of any objections to the FDIC’s 

determination. 

(iii) After the close of banking entity’s 

response period, the FDIC will decide, 

based on a review of the banking 

entity’s response and other information 

concerning the banking entity, whether 

to maintain the FDIC’s determination 

that the purchase or sale of one or more 

financial instruments is for the trading 

account. The banking entity will be 

notified of the decision in writing. The 

notice will include an explanation of 

the decision. 

■ 30. Amend § 351.4 is amended by: 

■ a. Revising paragraph (a)(2); 

■ b. Adding paragraph (a)(8); 

■ c. Revising paragraph (b)(2); 

■ d. Revising the introductory text of 

paragraph (b)(3)(i); 

■ e. In paragraph (b)(5) removing 

‘‘inventory’’ wherever it appears and 

adding ‘‘positions’’ in its place; and 

■ f. Adding paragraph (b)(6). 

The revisions and additions read as 

follows: 

§ 351.4 Permitted underwriting and market 

making-related activities. 

(a) * * * 

(2) Requirements. The underwriting 

activities of a banking entity are 

permitted under paragraph (a)(1) of this 

section only if: 

(i) The banking entity is acting as an 

underwriter for a distribution of 

securities and the trading desk’s 

underwriting position is related to such 

distribution; 

(ii)(A) The amount and type of the 

securities in the trading desk’s 

underwriting position are designed not 

to exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties, taking into account the 

liquidity, maturity, and depth of the 

market for the relevant type of security, 

and 

(B) reasonable efforts are made to sell 

or otherwise reduce the underwriting 

position within a reasonable period, 

taking into account the liquidity, 

maturity, and depth of the market for 

the relevant type of security; 

(iii) In the case of a banking entity 

with significant trading assets and 

liabilities, the banking entity has 

established and implements, maintains, 

and enforces an internal compliance 

program required by subpart D of this 

part that is reasonably designed to 

ensure the banking entity’s compliance 

with the requirements of paragraph (a) 

of this section, including reasonably 

designed written policies and 

procedures, internal controls, analysis, 

and independent testing identifying and 

addressing: 

(A) The products, instruments or 

exposures each trading desk may 

purchase, sell, or manage as part of its 

underwriting activities; 

(B) Limits for each trading desk, in 

accordance with paragraph (a)(8)(i) of 

this section; 

(C) Internal controls and ongoing 

monitoring and analysis of each trading 

desk’s compliance with its limits; and 

(D) Authorization procedures, 

including escalation procedures that 

require review and approval of any 

trade that would exceed a trading desk’s 

limit(s), demonstrable analysis of the 

basis for any temporary or permanent 

increase to a trading desk’s limit(s), and 

independent review of such 

demonstrable analysis and approval; 

(iv) The compensation arrangements 

of persons performing the activities 

described in this paragraph (a) are 

designed not to reward or incentivize 

prohibited proprietary trading; and 

(v) The banking entity is licensed or 

registered to engage in the activity 

described in this paragraph (a) in 

accordance with applicable law. 

* * * * * 

(8) Rebuttable presumption of 

compliance. 

(i) Risk limits. 

(A) A banking entity shall be 

presumed to meet the requirements of 

paragraph (a)(2)(ii)(A) of this section 

with respect to the purchase or sale of 

a financial instrument if the banking 

entity has established and implements, 

maintains, and enforces the limits 

described in paragraph (a)(8)(i)(B) and 

does not exceed such limits. 

(B) The presumption described in 

paragraph (8)(i)(A) of this section shall 

be available with respect to limits for 

each trading desk that are designed not 

to exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties, based on the nature and 

amount of the trading desk’s 

underwriting activities, on the: 

(1) Amount, types, and risk of its 

underwriting position; 

(2) Level of exposures to relevant risk 

factors arising from its underwriting 

position; and 

(3) Period of time a security may be 

held. 

(ii) Supervisory review and oversight. 

The limits described in paragraph 

(a)(8)(i) of this section shall be subject 

to supervisory review and oversight by 

the FDIC on an ongoing basis. Any 

review of such limits will include 

assessment of whether the limits are 

designed not to exceed the reasonably 

expected near term demands of clients, 

customers, or counterparties. 

(iii) Reporting. With respect to any 

limit identified pursuant to paragraph 

(a)(8)(i) of this section, a banking entity 

shall promptly report to the FDIC (A) to 

the extent that any limit is exceeded and 

(B) any temporary or permanent 

increase to any limit(s), in each case in 

the form and manner as directed by the 

FDIC. 

(iv) Rebutting the presumption. The 

presumption in paragraph (a)(8)(i) of 

this section may be rebutted by the FDIC 

if the FDIC determines, based on all 


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relevant facts and circumstances, that a 

trading desk is engaging in activity that 

is not based on the reasonably expected 

near term demands of clients, 

customers, or counterparties. The FDIC 

will provide notice of any such 

determination to the banking entity in 

writing. 

(b) * * * 

(2) Requirements. The market makingrelated activities of a banking entity are 

permitted under paragraph (b)(1) of this 

section only if: 

(i) The trading desk that establishes 

and manages the financial exposure 

routinely stands ready to purchase and 

sell one or more types of financial 

instruments related to its financial 

exposure and is willing and available to 

quote, purchase and sell, or otherwise 

enter into long and short positions in 

those types of financial instruments for 

its own account, in commercially 

reasonable amounts and throughout 

market cycles on a basis appropriate for 

the liquidity, maturity, and depth of the 

market for the relevant types of financial 

instruments; 

(ii) The trading desk’s market-making 

related activities are designed not to 

exceed, on an ongoing basis, the 

reasonably expected near term demands 

of clients, customers, or counterparties, 

based on the liquidity, maturity, and 

depth of the market for the relevant 

types of financial instrument(s). 

(iii) In the case of a banking entity 

with significant trading assets and 

liabilities, the banking entity has 

established and implements, maintains, 

and enforces an internal compliance 

program required by subpart D of this 

part that is reasonably designed to 

ensure the banking entity’s compliance 

with the requirements of paragraph (b) 

of this section, including reasonably 

designed written policies and 

procedures, internal controls, analysis 

and independent testing identifying and 

addressing: 

(A) The financial instruments each 

trading desk stands ready to purchase 

and sell in accordance with paragraph 

(b)(2)(i) of this section; 

(B) The actions the trading desk will 

take to demonstrably reduce or 

otherwise significantly mitigate 

promptly the risks of its financial 

exposure consistent with the limits 

required under paragraph (b)(2)(iii)(C) of 

this section; the products, instruments, 

and exposures each trading desk may 

use for risk management purposes; the 

techniques and strategies each trading 

desk may use to manage the risks of its 

market making-related activities and 

positions; and the process, strategies, 

and personnel responsible for ensuring 

that the actions taken by the trading 

desk to mitigate these risks are and 

continue to be effective; 

(C) Limits for each trading desk, in 

accordance with paragraph (b)(6)(i) of 

this section; 

(D) Internal controls and ongoing 

monitoring and analysis of each trading 

desk’s compliance with its limits; and 

(E) Authorization procedures, 

including escalation procedures that 

require review and approval of any 

trade that would exceed a trading desk’s 

limit(s), demonstrable analysis that the 

basis for any temporary or permanent 

increase to a trading desk’s limit(s) is 

consistent with the requirements of this 

paragraph (b), and independent review 

of such demonstrable analysis and 

approval; 

(iv) In the case of a banking entity 

with significant trading assets and 

liabilities, to the extent that any limit 

identified pursuant to paragraph 

(b)(2)(iii)(C) of this section is exceeded, 

the trading desk takes action to bring the 

trading desk into compliance with the 

limits as promptly as possible after the 

limit is exceeded; 

(v) The compensation arrangements of 

persons performing the activities 

described in this paragraph (b) are 

designed not to reward or incentivize 

prohibited proprietary trading; and 

(vi) The banking entity is licensed or 

registered to engage in activity 

described in paragraph (b) of this 

section in accordance with applicable 

law. 

(3) * * * 

(i) A trading desk or other 

organizational unit of another banking 

entity is not a client, customer, or 

counterparty of the trading desk if that 

other entity has trading assets and 

liabilities of $50 billion or more as 

measured in accordance with the 

methodology described in definition of 

‘‘significant trading assets and 

liabilities’’ contained in § 351.2 of this 

part, unless: 

* * * * * 

(6) Rebuttable presumption of 

compliance.—(i) Risk limits. (A) A 

banking entity shall be presumed to 

meet the requirements of paragraph 

(b)(2)(ii) of this section with respect to 

the purchase or sale of a financial 

instrument if the banking entity has 

established and implements, maintains, 

and enforces the limits described in 

paragraph (b)(6)(i)(B) and does not 

exceed such limits. 

(B) The presumption described in 

paragraph (6)(i)(A) of this section shall 

be available with respect to limits for 

each trading desk that are designed not 

to exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties, based on the nature and 

amount of the trading desk’s market 

making-related activities, on the: 

(1) Amount, types, and risks of its 

market-maker positions; 

(2) Amount, types, and risks of the 

products, instruments, and exposures 

the trading desk may use for risk 

management purposes; 

(3) Level of exposures to relevant risk 

factors arising from its financial 

exposure; and 

(4) Period of time a financial 

instrument may be held. 

(ii) Supervisory review and oversight. 

The limits described in paragraph 

(b)(6)(i) of this section shall be subject 

to supervisory review and oversight by 

the FDIC on an ongoing basis. Any 

review of such limits will include 

assessment of whether the limits are 

designed not to exceed the reasonably 

expected near term demands of clients, 

customers, or counterparties. 

(iii) Reporting. With respect to any 

limit identified pursuant to paragraph 

(b)(6)(i) of this section, a banking entity 

shall promptly report to the FDIC (A) to 

the extent that any limit is exceeded and 

(B) any temporary or permanent 

increase to any limit(s), in each case in 

the form and manner as directed by the 

FDIC. 

(iv) Rebutting the presumption. The 

presumption in paragraph (b)(6)(i) of 

this section may be rebutted by the FDIC 

if the FDIC determines, based on all 

relevant facts and circumstances, that a 

trading desk is engaging in activity that 

is not based on the reasonably expected 

near term demands of clients, 

customers, or counterparties. The FDIC 

will provide notice of any such 

determination to the banking entity in 

writing. 

■ 31. Amend § 351.5 by revising 

paragraph (b), the introductory text of 

paragraph (c)(1), and adding paragraph 

(c)(4) to read as follows: 

§ 351.5 Permitted risk-mitigating hedging 

activities. 

* * * * * 

(b) Requirements. (1) The riskmitigating hedging activities of a 

banking entity that has significant 

trading assets and liabilities are 

permitted under paragraph (a) of this 

section only if: 

(i) The banking entity has established 

and implements, maintains and enforces 

an internal compliance program 

required by subpart D of this part that 

is reasonably designed to ensure the 

banking entity’s compliance with the 

requirements of this section, including: 

(A) Reasonably designed written 

policies and procedures regarding the 

positions, techniques and strategies that 


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may be used for hedging, including 

documentation indicating what 

positions, contracts or other holdings a 

particular trading desk may use in its 

risk-mitigating hedging activities, as 

well as position and aging limits with 

respect to such positions, contracts or 

other holdings; 

(B) Internal controls and ongoing 

monitoring, management, and 

authorization procedures, including 

relevant escalation procedures; and 

(C) The conduct of analysis and 

independent testing designed to ensure 

that the positions, techniques and 

strategies that may be used for hedging 

may reasonably be expected to reduce or 

otherwise significantly mitigate the 

specific, identifiable risk(s) being 

hedged; 

(ii) The risk-mitigating hedging 

activity: 

(A) Is conducted in accordance with 

the written policies, procedures, and 

internal controls required under this 

section; 

(B) At the inception of the hedging 

activity, including, without limitation, 

any adjustments to the hedging activity, 

is designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks, including 

market risk, counterparty or other credit 

risk, currency or foreign exchange risk, 

interest rate risk, commodity price risk, 

basis risk, or similar risks, arising in 

connection with and related to 

identified positions, contracts, or other 

holdings of the banking entity, based 

upon the facts and circumstances of the 

identified underlying and hedging 

positions, contracts or other holdings 

and the risks and liquidity thereof; 

(C) Does not give rise, at the inception 

of the hedge, to any significant new or 

additional risk that is not itself hedged 

contemporaneously in accordance with 

this section; 

(D) Is subject to continuing review, 

monitoring and management by the 

banking entity that: 

(1) Is consistent with the written 

hedging policies and procedures 

required under paragraph (b)(1)(i) of this 

section; 

(2) Is designed to reduce or otherwise 

significantly mitigate the specific, 

identifiable risks that develop over time 

from the risk-mitigating hedging 

activities undertaken under this section 

and the underlying positions, contracts, 

and other holdings of the banking 

entity, based upon the facts and 

circumstances of the underlying and 

hedging positions, contracts and other 

holdings of the banking entity and the 

risks and liquidity thereof; and 

(3) Requires ongoing recalibration of 

the hedging activity by the banking 

entity to ensure that the hedging activity 

satisfies the requirements set out in 

paragraph (b)(1)(ii) of this section and is 

not prohibited proprietary trading; and 

(iii) The compensation arrangements 

of persons performing risk-mitigating 

hedging activities are designed not to 

reward or incentivize prohibited 

proprietary trading. 

(2) The risk-mitigating hedging 

activities of a banking entity that does 

not have significant trading assets and 

liabilities are permitted under paragraph 

(a) of this section only if the riskmitigating hedging activity: 

(i) At the inception of the hedging 

activity, including, without limitation, 

any adjustments to the hedging activity, 

is designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks, including 

market risk, counterparty or other credit 

risk, currency or foreign exchange risk, 

interest rate risk, commodity price risk, 

basis risk, or similar risks, arising in 

connection with and related to 

identified positions, contracts, or other 

holdings of the banking entity, based 

upon the facts and circumstances of the 

identified underlying and hedging 

positions, contracts or other holdings 

and the risks and liquidity thereof; and 

(ii) Is subject, as appropriate, to 

ongoing recalibration by the banking 

entity to ensure that the hedging activity 

satisfies the requirements set out in 

paragraph (b)(2) of this section and is 

not prohibited proprietary trading. 

(c) * * * (1) A banking entity that has 

significant trading assets and liabilities 

must comply with the requirements of 

paragraphs (c)(2) and (3) of this section, 

unless the requirements of paragraph 

(c)(4) of this section are met, with 

respect to any purchase or sale of 

financial instruments made in reliance 

on this section for risk-mitigating 

hedging purposes that is: 

* * * * * 

(4) The requirements of paragraphs 

(c)(2) and (3) of this section do not 

apply to the purchase or sale of a 

financial instrument described in 

paragraph (c)(1) of this section if: 

(i) The financial instrument 

purchased or sold is identified on a 

written list of pre-approved financial 

instruments that are commonly used by 

the trading desk for the specific type of 

hedging activity for which the financial 

instrument is being purchased or sold; 

and 

(ii) At the time the financial 

instrument is purchased or sold, the 

hedging activity (including the purchase 

or sale of the financial instrument) 

complies with written, pre-approved 

hedging limits for the trading desk 

purchasing or selling the financial 

instrument for hedging activities 

undertaken for one or more other 

trading desks. The hedging limits shall 

be appropriate for the: 

(A) Size, types, and risks of the 

hedging activities commonly 

undertaken by the trading desk; 

(B) Financial instruments purchased 

and sold for hedging activities by the 

trading desk; and 

(C) Levels and duration of the risk 

exposures being hedged. 

■ 32. Amend § 351.6 by revising 

paragraph (e)(3), and removing 

paragraph (e)(6) to read as follows: 

§ 351.6 Other permitted proprietary trading 

activities. 

* * * * * 

(e) * * * 

(3) A purchase or sale by a banking 

entity is permitted for purposes of this 

paragraph (e) if: 

(i) The banking entity engaging as 

principal in the purchase or sale 

(including relevant personnel) is not 

located in the United States or 

organized under the laws of the United 

States or of any State; 

(ii) The banking entity (including 

relevant personnel) that makes the 

decision to purchase or sell as principal 

is not located in the United States or 

organized under the laws of the United 

States or of any State; and 

(iii) The purchase or sale, including 

any transaction arising from riskmitigating hedging related to the 

instruments purchased or sold, is not 

accounted for as principal directly or on 

a consolidated basis by any branch or 

affiliate that is located in the United 

States or organized under the laws of 

the United States or of any State. 

* * * * * 

§ 351.10 [Amended] 

■ 33. Amend § 351.10 by: 

■ a. In paragraph (c)(8)(i)(A) removing 

§ 351.2(s)’’ and adding § 351.2(u)’’ in its 

place; 

■ b. Removing paragraph (d)(1); 

■ c. Redesignating paragraphs (d)(2) 

through (d)(10) as paragraphs (d)(1) 

through (d)(9); 

■ d. In paragraph (d)(5)(i)(G) revising 

the reference to ‘‘(d)(6)(i)(A)’’ to read 

‘‘(d)(5)(i)(A)’’; and 

■ e. In paragraph (d)(9) revising the 

reference to ‘‘(d)(9)’’ to read ‘‘(d)(8)’’ and 

the reference to ‘‘(d)(10)(i)(A)’’ to read 

‘‘(d)(9)(i)(A)’’ and the reference to 

‘‘(d)(10)(i)’’ to read ‘‘(d)(9)(i)’’. 

■ 34. Amend § 351. by revising 

paragraph (c) to read as follows: 


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§ 351.11 Permitted organizing and 

offering, underwriting, and market making 

with respect to a covered fund. 

* * * * * 

(c) Underwriting and market making 

in ownership interests of a covered 

fund. The prohibition contained in 

§ 351.10(a) of this subpart does not 

apply to a banking entity’s underwriting 

activities or market making-related 

activities involving a covered fund so 

long as: 

(1) Those activities are conducted in 

accordance with the requirements of 

§ 351.4(a) or § 351.4(b) of subpart B, 

respectively; and 

(2) With respect to any banking entity 

(or any affiliate thereof) that: Acts as a 

sponsor, investment adviser or 

commodity trading advisor to a 

particular covered fund or otherwise 

acquires and retains an ownership 

interest in such covered fund in reliance 

on paragraph (a) of this section; or 

acquires and retains an ownership 

interest in such covered fund and is 

either a securitizer, as that term is used 

in section 15G(a)(3) of the Exchange Act 

(15 U.S.C. 78o–11(a)(3)), or is acquiring 

and retaining an ownership interest in 

such covered fund in compliance with 

section 15G of that Act (15 U.S.C. 78o– 

11) and the implementing regulations 

issued thereunder each as permitted by 

paragraph (b) of this section, then in 

each such case any ownership interests 

acquired or retained by the banking 

entity and its affiliates in connection 

with underwriting and market making 

related activities for that particular 

covered fund are included in the 

calculation of ownership interests 

permitted to be held by the banking 

entity and its affiliates under the 

limitations of § 351.12(a)(2)(ii); 

§ 351.12(a)(2)(iii), and § 351.12(d) of this 

subpart. 

§ 351.12 [Amended] 

■ 35. Amend § 351.12 by: 

■ a. In paragraphs (c)(1) and (d) 

removing ‘‘§ 351.10(d)(6)(ii)’’ to adding 

‘‘§ 351.10(d)(5)(ii)’’ in its place; 

■ b. Removing paragraph (e)(2)(vii); and 

■ c. Redesignating the second instance 

of paragraph (e)(2)(vi) as paragraph 

(e)(2)(vii). 

§ 351.13 [Amended] 

■ 36. Amend § 351.13 by revising 

paragraphs (a) and (b)(3) and removing 

paragraph (b)(4)(iv) to read as follows: 

§ 351.13 Other permitted covered fund 

activities and investments. 

(a) Permitted risk-mitigating hedging 

activities. (1) The prohibition contained 

in § 351.10(a) of this subpart does not 

apply with respect to an ownership 

interest in a covered fund acquired or 

retained by a banking entity that is 

designed to reduce or otherwise 

significantly mitigate the specific, 

identifiable risks to the banking entity 

in connection with: 

(i) A compensation arrangement with 

an employee of the banking entity or an 

affiliate thereof that directly provides 

investment advisory, commodity trading 

advisory or other services to the covered 

fund; or 

(ii) A position taken by the banking 

entity when acting as intermediary on 

behalf of a customer that is not itself a 

banking entity to facilitate the exposure 

by the customer to the profits and losses 

of the covered fund. 

(2) Requirements. The risk-mitigating 

hedging activities of a banking entity are 

permitted under this paragraph (a) only 

if: 

(i) The banking entity has established 

and implements, maintains and enforces 

an internal compliance program in 

accordance with subpart D of this part 

that is reasonably designed to ensure the 

banking entity’s compliance with the 

requirements of this section, including: 

(A) Reasonably designed written 

policies and procedures; and 

(B) Internal controls and ongoing 

monitoring, management, and 

authorization procedures, including 

relevant escalation procedures; and 

(ii) The acquisition or retention of the 

ownership interest: 

(A) Is made in accordance with the 

written policies, procedures, and 

internal controls required under this 

section; 

(B) At the inception of the hedge, is 

designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks arising: 

(1) out of a transaction conducted 

solely to accommodate a specific 

customer request with respect to the 

covered fund; or 

(2) in connection with the 

compensation arrangement with the 

employee that directly provides 

investment advisory, commodity trading 

advisory, or other services to the 

covered fund; 

(C) Does not give rise, at the inception 

of the hedge, to any significant new or 

additional risk that is not itself hedged 

contemporaneously in accordance with 

this section; and 

(D) Is subject to continuing review, 

monitoring and management by the 

banking entity. 

(iii) With respect to risk-mitigating 

hedging activity conducted pursuant to 

paragraph (a)(1)(i), the compensation 

arrangement relates solely to the 

covered fund in which the banking 

entity or any affiliate has acquired an 

ownership interest pursuant to 

paragraph (a)(1)(i) and such 

compensation arrangement provides 

that any losses incurred by the banking 

entity on such ownership interest will 

be offset by corresponding decreases in 

amounts payable under such 

compensation arrangement. 

* * * * * 

(b) * * * 

(3) An ownership interest in a covered 

fund is not offered for sale or sold to a 

resident of the United States for 

purposes of paragraph (b)(1)(iii) of this 

section only if it is not sold and has not 

been sold pursuant to an offering that 

targets residents of the United States in 

which the banking entity or any affiliate 

of the banking entity participates. If the 

banking entity or an affiliate sponsors or 

serves, directly or indirectly, as the 

investment manager, investment 

adviser, commodity pool operator or 

commodity trading advisor to a covered 

fund, then the banking entity or affiliate 

will be deemed for purposes of this 

paragraph (b)(3) to participate in any 

offer or sale by the covered fund of 

ownership interests in the covered fund. 

* * * * * 

■ 37. Section 351.14 is amended by 

revising paragraph (a)(2)(ii)(B) as 

follows: 

§ 351.14 Limitations on relationships with 

a covered fund. 

(a) * * * 

(2) * * * 

(ii) * * * 

(B) The chief executive officer (or 

equivalent officer) of the banking entity 

certifies in writing annually no later 

than March 31 to the FDIC (with a duty 

to update the certification if the 

information in the certification 

materially changes) that the banking 

entity does not, directly or indirectly, 

guarantee, assume, or otherwise insure 

the obligations or performance of the 

covered fund or of any covered fund in 

which such covered fund invests; and 

* * * * * 

■ 38. Section 351.20 is amended by: 

■ a. Revising paragraph (a); 

■ b. Revising the introductory language 

of paragraph (b); 

■ c. Revising paragraph (c); 

■ d. Revising paragraph (d); 

■ e. Revising the introductory language 

of paragraph (e); 

■ f. Revising paragraph (f)(2); and 

■ g. Adding new paragraphs (g) and (h). 

The revisions read as follows: 

§ 351.20 Program for compliance; 

reporting. 

(a) Program requirement. Each 

banking entity (other than a banking 

entity with limited trading assets and 


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liabilities) shall develop and provide for 

the continued administration of a 

compliance program reasonably 

designed to ensure and monitor 

compliance with the prohibitions and 

restrictions on proprietary trading and 

covered fund activities and investments 

set forth in section 13 of the BHC Act 

and this part. The terms, scope, and 

detail of the compliance program shall 

be appropriate for the types, size, scope, 

and complexity of activities and 

business structure of the banking entity. 

(b) Banking entities with significant 

trading assets and liabilities. With 

respect to a banking entity with 

significant trading assets and liabilities, 

the compliance program required by 

paragraph (a) of this section, at a 

minimum, shall include: 

* * * * * 

(c) CEO attestation. 

(1) The CEO of a banking entity 

described in paragraph (2) must, based 

on a review by the CEO of the banking 

entity, attest in writing to the FDIC, each 

year no later than March 31, that the 

banking entity has in place processes 

reasonably designed to achieve 

compliance with section 13 of the BHC 

Act and this part. In the case of a U.S. 

branch or agency of a foreign banking 

entity, the attestation may be provided 

for the entire U.S. operations of the 

foreign banking entity by the senior 

management officer of the U.S. 

operations of the foreign banking entity 

who is located in the United States. 

(2) The requirements of paragraph 

(c)(1) apply to a banking entity if: 

(i) The banking entity does not have 

limited trading assets and liabilities; or 

(ii) The FDIC notifies the banking 

entity in writing that it must satisfy the 

requirements contained in paragraph 

(c)(1). 

(d) Reporting requirements under the 

Appendix to this part. (1) A banking 

entity engaged in proprietary trading 

activity permitted under subpart B shall 

comply with the reporting requirements 

described in the Appendix, if: 

(i) The banking entity has significant 

trading assets and liabilities; or 

(ii) The FDIC notifies the banking 

entity in writing that it must satisfy the 

reporting requirements contained in the 

Appendix. 

(2) Frequency of reporting: Unless the 

FDIC notifies the banking entity in 

writing that it must report on a different 

basis, a banking entity with $50 billion 

or more in trading assets and liabilities 

(as calculated in accordance with the 

methodology described in the definition 

of ‘‘significant trading assets and 

liabilities’’ contained in § 351.2 of this 

part of this part) shall report the 

information required by the Appendix 

for each calendar month within 20 days 

of the end of each calendar month. Any 

other banking entity subject to the 

Appendix shall report the information 

required by the Appendix for each 

calendar quarter within 30 days of the 

end of that calendar quarter unless the 

FDIC notifies the banking entity in 

writing that it must report on a different 

basis. 

(e) Additional documentation for 

covered funds. A banking entity with 

significant trading assets and liabilities 

shall maintain records that include: 

* * * * * 

(f) * * * 

(2) Banking entities with moderate 

trading assets and liabilities. A banking 

entity with moderate trading assets and 

liabilities may satisfy the requirements 

of this section by including in its 

existing compliance policies and 

procedures appropriate references to the 

requirements of section 13 of the BHC 

Act and this part and adjustments as 

appropriate given the activities, size, 

scope, and complexity of the banking 

entity. 

(g) Rebuttable presumption of 

compliance for banking entities with 

limited trading assets and liabilities. 

(1) Rebuttable presumption. Except as 

otherwise provided in this paragraph, a 

banking entity with limited trading 

assets and liabilities shall be presumed 

to be compliant with subpart B and 

subpart C and shall have no obligation 

to demonstrate compliance with this 

part on an ongoing basis. 

(2) Rebuttal of presumption. 

(i) If upon examination or audit, the 

FDIC determines that the banking entity 

has engaged in proprietary trading or 

covered fund activities that are 

otherwise prohibited under subpart B or 

subpart C, the FDIC may require the 

banking entity to be treated under this 

part as if it did not have limited trading 

assets and liabilities. 

(ii) Notice and Response Procedures. 

(A) Notice. The FDIC will notify the 

banking entity in writing of any 

determination pursuant to paragraph 

(g)(2)(i) of this section to rebut the 

presumption described in this 

paragraph (g) and will provide an 

explanation of the determination. 

(B) Response. 

(1) The banking entity may respond to 

any or all items in the notice described 

in paragraph (g)(2)(ii)(A) of this section. 

The response should include any 

matters that the banking entity would 

have the FDIC consider in deciding 

whether the banking entity has engaged 

in proprietary trading or covered fund 

activities prohibited under subpart B or 

subpart C. The response must be in 

writing and delivered to the designated 

FDIC official within 30 days after the 

date on which the banking entity 

received the notice. The FDIC may 

shorten the time period when, in the 

opinion of the FDIC, the activities or 

condition of the banking entity so 

requires, provided that the banking 

entity is informed promptly of the new 

time period, or with the consent of the 

banking entity. In its discretion, the 

FDIC may extend the time period for 

good cause. 

(2) Failure to respond within 30 days 

or such other time period as may be 

specified by the FDIC shall constitute a 

waiver of any objections to the FDIC’s 

determination. 

(C) After the close of banking entity’s 

response period, the FDIC will decide, 

based on a review of the banking 

entity’s response and other information 

concerning the banking entity, whether 

to maintain the FDIC’s determination 

that banking entity has engaged in 

proprietary trading or covered fund 

activities prohibited under subpart B or 

subpart C. The banking entity will be 

notified of the decision in writing. The 

notice will include an explanation of 

the decision. 

(h) Reservation of authority. 

Notwithstanding any other provision of 

this part, the FDIC retains its authority 

to require a banking entity without 

significant trading assets and liabilities 

to apply any requirements of this part 

that would otherwise apply if the 

banking entity had significant or 

moderate trading assets and liabilities if 

the FDIC determines that the size or 

complexity of the banking entity’s 

trading or investment activities, or the 

risk of evasion of subpart B or subpart 

C, does not warrant a presumption of 

compliance under paragraph (g) of this 

section or treatment as a banking entity 

with moderate trading assets and 

liabilities, as applicable. 

■ 39. Remove Appendix A and 

Appendix B to Part 351 and add 

Appendix to Part 351—Reporting and 

Recordkeeping Requirements for 

Covered Trading Activities to read as 

follows: 

Appendix to Part 351—Reporting and 

Recordkeeping Requirements for 

Covered Trading Activities 

I. Purpose 

a. This appendix sets forth reporting and 

recordkeeping requirements that certain 

banking entities must satisfy in connection 

with the restrictions on proprietary trading 

set forth in subpart B (‘‘proprietary trading 

restrictions’’). Pursuant to § 351.20(d), this 

appendix applies to a banking entity that, 

together with its affiliates and subsidiaries, 


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has significant trading assets and liabilities. 

These entities are required to (i) furnish 

periodic reports to the FDIC regarding a 

variety of quantitative measurements of their 

covered trading activities, which vary 

depending on the scope and size of covered 

trading activities, and (ii) create and maintain 

records documenting the preparation and 

content of these reports. The requirements of 

this appendix must be incorporated into the 

banking entity’s internal compliance program 

under § 351.20. 

b. The purpose of this appendix is to assist 

banking entities and the FDIC in: 

(i) Better understanding and evaluating the 

scope, type, and profile of the banking 

entity’s covered trading activities; 

(ii) Monitoring the banking entity’s covered 

trading activities; 

(iii) Identifying covered trading activities 

that warrant further review or examination 

by the banking entity to verify compliance 

with the proprietary trading restrictions; 

(iv) Evaluating whether the covered trading 

activities of trading desks engaged in market 

making-related activities subject to § 351.4(b) 

are consistent with the requirements 

governing permitted market making-related 

activities; 

(v) Evaluating whether the covered trading 

activities of trading desks that are engaged in 

permitted trading activity subject to §§ 351.4, 

351.5, or 351.6(a)–(b) (i.e., underwriting and 

market making-related related activity, riskmitigating hedging, or trading in certain 

government obligations) are consistent with 

the requirement that such activity not result, 

directly or indirectly, in a material exposure 

to high-risk assets or high-risk trading 

strategies; 

(vi) Identifying the profile of particular 

covered trading activities of the banking 

entity, and the individual trading desks of 

the banking entity, to help establish the 

appropriate frequency and scope of 

examination by the FDIC of such activities; 

and 

(vii) Assessing and addressing the risks 

associated with the banking entity’s covered 

trading activities. 

c. Information that must be furnished 

pursuant to this appendix is not intended to 

serve as a dispositive tool for the 

identification of permissible or 

impermissible activities. 

d. In addition to the quantitative 

measurements required in this appendix, a 

banking entity may need to develop and 

implement other quantitative measurements 

in order to effectively monitor its covered 

trading activities for compliance with section 

13 of the BHC Act and this part and to have 

an effective compliance program, as required 

by § 351.20. The effectiveness of particular 

quantitative measurements may differ based 

on the profile of the banking entity’s 

businesses in general and, more specifically, 

of the particular trading desk, including 

types of instruments traded, trading activities 

and strategies, and history and experience 

(e.g., whether the trading desk is an 

established, successful market maker or a 

new entrant to a competitive market). In all 

cases, banking entities must ensure that they 

have robust measures in place to identify and 

monitor the risks taken in their trading 

activities, to ensure that the activities are 

within risk tolerances established by the 

banking entity, and to monitor and examine 

for compliance with the proprietary trading 

restrictions in this part. 

e. On an ongoing basis, banking entities 

must carefully monitor, review, and evaluate 

all furnished quantitative measurements, as 

well as any others that they choose to utilize 

in order to maintain compliance with section 

13 of the BHC Act and this part. All 

measurement results that indicate a 

heightened risk of impermissible proprietary 

trading, including with respect to otherwisepermitted activities under §§ 351.4 through 

351.6(a)–(b), or that result in a material 

exposure to high-risk assets or high-risk 

trading strategies, must be escalated within 

the banking entity for review, further 

analysis, explanation to the FDIC, and 

remediation, where appropriate. The 

quantitative measurements discussed in this 

appendix should be helpful to banking 

entities in identifying and managing the risks 

related to their covered trading activities. 

II. Definitions 

The terms used in this appendix have the 

same meanings as set forth in §§ 351.2 and 

351.3. In addition, for purposes of this 

appendix, the following definitions apply: 

Applicability identifies the trading desks 

for which a banking entity is required to 

calculate and report a particular quantitative 

measurement based on the type of covered 

trading activity conducted by the trading 

desk. 

Calculation period means the period of 

time for which a particular quantitative 

measurement must be calculated. 

Comprehensive profit and loss means the 

net profit or loss of a trading desk’s material 

sources of trading revenue over a specific 

period of time, including, for example, any 

increase or decrease in the market value of 

a trading desk’s holdings, dividend income, 

and interest income and expense. 

Covered trading activity means trading 

conducted by a trading desk under §§ 351.4, 

351.5, 351.6(a), or 351.6(b). A banking entity 

may include in its covered trading activity 

trading conducted under §§ 351.3(e), 

351.6(c), 351.6(d), or 351.6(e). 

Measurement frequency means the 

frequency with which a particular 

quantitative metric must be calculated and 

recorded. 

Trading day means a calendar day on 

which a trading desk is open for trading. 

III. Reporting and Recordkeeping 

a. Scope of Required Reporting 

1. Quantitative measurements. Each 

banking entity made subject to this appendix 

by § 351.20 must furnish the following 

quantitative measurements, as applicable, for 

each trading desk of the banking entity 

engaged in covered trading activities and 

calculate these quantitative measurements in 

accordance with this appendix: 

i. Risk and Position Limits and Usage; 

ii. Risk Factor Sensitivities; 

iii. Value-at-Risk and Stressed Value-atRisk; 

iv. Comprehensive Profit and Loss 

Attribution; 

v. Positions; 

vi. Transaction Volumes; and 

vii. Securities Inventory Aging. 

2. Trading desk information. Each banking 

entity made subject to this appendix by 

§ 351.20 must provide certain descriptive 

information, as further described in this 

appendix, regarding each trading desk 

engaged in covered trading activities. 

3. Quantitative measurements identifying 

information. Each banking entity made 

subject to this appendix by § 351.20 must 

provide certain identifying and descriptive 

information, as further described in this 

appendix, regarding its quantitative 

measurements. 

4. Narrative statement. Each banking entity 

made subject to this appendix by § 351.20 

must provide a separate narrative statement, 

as further described in this appendix. 

5. File identifying information. Each 

banking entity made subject to this appendix 

by § 351.20 must provide file identifying 

information in each submission to the FDIC 

pursuant to this appendix, including the 

name of the banking entity, the RSSD ID 

assigned to the top-tier banking entity by the 

Board, and identification of the reporting 

period and creation date and time. 

b. Trading Desk Information 

Each banking entity must provide 

descriptive information regarding each 

trading desk engaged in covered trading 

activities, including: 

1. Name of the trading desk used internally 

by the banking entity and a unique 

identification label for the trading desk; 

2. Identification of each type of covered 

trading activity in which the trading desk is 

engaged; 

3. Brief description of the general strategy 

of the trading desk; 

4. A list of the types of financial 

instruments and other products purchased 

and sold by the trading desk; an indication 

of which of these are the main financial 

instruments or products purchased and sold 

by the trading desk; and, for trading desks 

engaged in market making-related activities 

under § 351.4(b), specification of whether 

each type of financial instrument is included 

in market-maker positions or not included in 

market-maker positions. In addition, indicate 

whether the trading desk is including in its 

quantitative measurements products 

excluded from the definition of ‘‘financial 

instrument’’ under § 351.3(d)(2) and, if so, 

identify such products; 

5. Identification by complete name of each 

legal entity that serves as a booking entity for 

covered trading activities conducted by the 

trading desk; and indication of which of the 

identified legal entities are the main booking 

entities for covered trading activities of the 

trading desk; 

6. For each legal entity that serves as a 

booking entity for covered trading activities, 

specification of any of the following 

applicable entity types for that legal entity: 

i. National bank, Federal branch or Federal 

agency of a foreign bank, Federal savings 

association, Federal savings bank; 

ii. State nonmember bank, foreign bank 

having an insured branch, State savings 

association; 


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iii. U.S.-registered broker-dealer, U.S.- 

registered security-based swap dealer, U.S.- 

registered major security-based swap 

participant; 

iv. Swap dealer, major swap participant, 

derivatives clearing organization, futures 

commission merchant, commodity pool 

operator, commodity trading advisor, 

introducing broker, floor trader, retail foreign 

exchange dealer; 

v. State member bank; 

vi. Bank holding company, savings and 

loan holding company; 

vii. Foreign banking organization as 

defined in 12 CFR 211.21(o); 

viii. Uninsured State-licensed branch or 

agency of a foreign bank; or 

ix. Other entity type not listed above, 

including a subsidiary of a legal entity 

described above where the subsidiary itself is 

not an entity type listed above; 

7. Indication of whether each calendar date 

is a trading day or not a trading day for the 

trading desk; and 

8. Currency reported and daily currency 

conversion rate. 

c. Quantitative Measurements Identifying 

Information 

Each banking entity must provide the 

following information regarding the 

quantitative measurements: 

1. A Risk and Position Limits Information 

Schedule that provides identifying and 

descriptive information for each limit 

reported pursuant to the Risk and Position 

Limits and Usage quantitative measurement, 

including the name of the limit, a unique 

identification label for the limit, a 

description of the limit, whether the limit is 

intraday or end-of-day, the unit of 

measurement for the limit, whether the limit 

measures risk on a net or gross basis, and the 

type of limit; 

2. A Risk Factor Sensitivities Information 

Schedule that provides identifying and 

descriptive information for each risk factor 

sensitivity reported pursuant to the Risk 

Factor Sensitivities quantitative 

measurement, including the name of the 

sensitivity, a unique identification label for 

the sensitivity, a description of the 

sensitivity, and the sensitivity’s risk factor 

change unit; 

3. A Risk Factor Attribution Information 

Schedule that provides identifying and 

descriptive information for each risk factor 

attribution reported pursuant to the 

Comprehensive Profit and Loss Attribution 

quantitative measurement, including the 

name of the risk factor or other factor, a 

unique identification label for the risk factor 

or other factor, a description of the risk factor 

or other factor, and the risk factor or other 

factor’s change unit; 

4. A Limit/Sensitivity Cross-Reference 

Schedule that cross-references, by unique 

identification label, limits identified in the 

Risk and Position Limits Information 

Schedule to associated risk factor 

sensitivities identified in the Risk Factor 

Sensitivities Information Schedule; and 

5. A Risk Factor Sensitivity/Attribution 

Cross-Reference Schedule that crossreferences, by unique identification label, 

risk factor sensitivities identified in the Risk 

Factor Sensitivities Information Schedule to 

associated risk factor attributions identified 

in the Risk Factor Attribution Information 

Schedule. 

d. Narrative Statement 

Each banking entity made subject to this 

appendix by § 351.20 must submit in a 

separate electronic document a Narrative 

Statement to the FDIC describing any 

changes in calculation methods used, a 

description of and reasons for changes in the 

banking entity’s trading desk structure or 

trading desk strategies, and when any such 

change occurred. The Narrative Statement 

must include any information the banking 

entity views as relevant for assessing the 

information reported, such as further 

description of calculation methods used. 

If a banking entity does not have any 

information to report in a Narrative 

Statement, the banking entity must submit an 

electronic document stating that it does not 

have any information to report in a Narrative 

Statement. 

e. Frequency and Method of Required 

Calculation and Reporting 

A banking entity must calculate any 

applicable quantitative measurement for each 

trading day. A banking entity must report the 

Narrative Statement, the Trading Desk 

Information, the Quantitative Measurements 

Identifying Information, and each applicable 

quantitative measurement electronically to 

the FDIC on the reporting schedule 

established in § 351.20 unless otherwise 

requested by the FDIC. A banking entity must 

report the Trading Desk Information, the 

Quantitative Measurements Identifying 

Information, and each applicable quantitative 

measurement to the FDIC in accordance with 

the XML Schema specified and published on 

the FDIC’s website. 

f. Recordkeeping 

A banking entity must, for any quantitative 

measurement furnished to the FDIC pursuant 

to this appendix and § 351.20(d), create and 

maintain records documenting the 

preparation and content of these reports, as 

well as such information as is necessary to 

permit the FDIC to verify the accuracy of 

such reports, for a period of five years from 

the end of the calendar year for which the 

measurement was taken. A banking entity 

must retain the Narrative Statement, the 

Trading Desk Information, and the 

Quantitative Measurements Identifying 

Information for a period of five years from 

the end of the calendar year for which the 

information was reported to the FDIC. 

IV. Quantitative Measurements 

a. Risk-Management Measurements 

1. Risk and Position Limits and Usage 

i. Description: For purposes of this 

appendix, Risk and Position Limits are the 

constraints that define the amount of risk that 

a trading desk is permitted to take at a point 

in time, as defined by the banking entity for 

a specific trading desk. Usage represents the 

value of the trading desk’s risk or positions 

that are accounted for by the current activity 

of the desk. Risk and position limits and their 

usage are key risk management tools used to 

control and monitor risk taking and include, 

but are not limited to, the limits set out in 

§ 351.4 and § 351.5. A number of the metrics 

that are described below, including ‘‘Risk 

Factor Sensitivities’’ and ‘‘Value-at-Risk,’’ 

relate to a trading desk’s risk and position 

limits and are useful in evaluating and 

setting these limits in the broader context of 

the trading desk’s overall activities, 

particularly for the market making activities 

under § 351.4(b) and hedging activity under 

§ 351.5. Accordingly, the limits required 

under § 351.4(b)(2)(iii) and § 351.5(b)(1)(i)(A) 

must meet the applicable requirements under 

§ 351.4(b)(2)(iii) and § 351.5(b)(1)(i)(A) and 

also must include appropriate metrics for the 

trading desk limits including, at a minimum, 

the ‘‘Risk Factor Sensitivities’’ and ‘‘Value-atRisk’’ metrics except to the extent any of the 

‘‘Risk Factor Sensitivities’’ or ‘‘Value-at-Risk’’ 

metrics are demonstrably ineffective for 

measuring and monitoring the risks of a 

trading desk based on the types of positions 

traded by, and risk exposures of, that desk. 

A. A banking entity must provide the 

following information for each limit reported 

pursuant to this quantitative measurement: 

The unique identification label for the limit 

reported in the Risk and Position Limits 

Information Schedule, the limit size 

(distinguishing between an upper and a 

lower limit), and the value of usage of the 

limit. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks engaged 

in covered trading activities. 

2. Risk Factor Sensitivities 

i. Description: For purposes of this 

appendix, Risk Factor Sensitivities are 

changes in a trading desk’s Comprehensive 

Profit and Loss that are expected to occur in 

the event of a change in one or more 

underlying variables that are significant 

sources of the trading desk’s profitability and 

risk. A banking entity must report the risk 

factor sensitivities that are monitored and 

managed as part of the trading desk’s overall 

risk management policy. Reported risk factor 

sensitivities must be sufficiently granular to 

account for a preponderance of the expected 

price variation in the trading desk’s holdings. 

A banking entity must provide the following 

information for each sensitivity that is 

reported pursuant to this quantitative 

measurement: The unique identification label 

for the risk factor sensitivity listed in the Risk 

Factor Sensitivities Information Schedule, 

the change in risk factor used to determine 

the risk factor sensitivity, and the aggregate 

change in value across all positions of the 

desk given the change in risk factor. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks engaged 

in covered trading activities. 

3. Value-at-Risk and Stressed Value-at-Risk 

i. Description: For purposes of this 

appendix, Value-at-Risk (‘‘VaR’’) is the 

measurement of the risk of future financial 

loss in the value of a trading desk’s 

aggregated positions at the ninety-nine 

percent confidence level over a one-day 

period, based on current market conditions. 

For purposes of this appendix, Stressed 


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1See §§ 351.2(i), (bb). For example, under this 

part, a security-based swap is both a ‘‘security’’ and 

a ‘‘derivative.’’ For purposes of the Positions 

quantitative measurement, security-based swaps are 

reported as derivatives rather than securities. 

2See §§ 351.2(i), (bb). 3See §§ 351.2(i), (bb). 

Value-at-Risk (‘‘Stressed VaR’’) is the 

measurement of the risk of future financial 

loss in the value of a trading desk’s 

aggregated positions at the ninety-nine 

percent confidence level over a one-day 

period, based on market conditions during a 

period of significant financial stress. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: For VaR, all trading desks 

engaged in covered trading activities. For 

Stressed VaR, all trading desks engaged in 

covered trading activities, except trading 

desks whose covered trading activity is 

conducted exclusively to hedge products 

excluded from the definition of ‘‘financial 

instrument’’ under §ll.3(d)(2). 

b. Source-of-Revenue Measurements 

1. Comprehensive Profit and Loss Attribution 

i. Description: For purposes of this 

appendix, Comprehensive Profit and Loss 

Attribution is an analysis that attributes the 

daily fluctuation in the value of a trading 

desk’s positions to various sources. First, the 

daily profit and loss of the aggregated 

positions is divided into three categories: (i) 

Profit and loss attributable to a trading desk’s 

existing positions that were also positions 

held by the trading desk as of the end of the 

prior day (‘‘existing positions’’); (ii) profit 

and loss attributable to new positions 

resulting from the current day’s trading 

activity (‘‘new positions’’); and (iii) residual 

profit and loss that cannot be specifically 

attributed to existing positions or new 

positions. The sum of (i), (ii), and (iii) must 

equal the trading desk’s comprehensive profit 

and loss at each point in time. 

A. The comprehensive profit and loss 

associated with existing positions must 

reflect changes in the value of these positions 

on the applicable day. 

The comprehensive profit and loss from 

existing positions must be further attributed, 

as applicable, to changes in (i) the specific 

risk factors and other factors that are 

monitored and managed as part of the trading 

desk’s overall risk management policies and 

procedures; and (ii) any other applicable 

elements, such as cash flows, carry, changes 

in reserves, and the correction, cancellation, 

or exercise of a trade. 

B. For the attribution of comprehensive 

profit and loss from existing positions to 

specific risk factors and other factors, a 

banking entity must provide the following 

information for the factors that explain the 

preponderance of the profit or loss changes 

due to risk factor changes: The unique 

identification label for the risk factor or other 

factor listed in the Risk Factor Attribution 

Information Schedule, and the profit or loss 

due to the risk factor or other factor change. 

C. The comprehensive profit and loss 

attributed to new positions must reflect 

commissions and fee income or expense and 

market gains or losses associated with 

transactions executed on the applicable day. 

New positions include purchases and sales of 

financial instruments and other assets/ 

liabilities and negotiated amendments to 

existing positions. The comprehensive profit 

and loss from new positions may be reported 

in the aggregate and does not need to be 

further attributed to specific sources. 

D. The portion of comprehensive profit and 

loss that cannot be specifically attributed to 

known sources must be allocated to a 

residual category identified as an 

unexplained portion of the comprehensive 

profit and loss. Significant unexplained 

profit and loss must be escalated for further 

investigation and analysis. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks engaged 

in covered trading activities. 

c. Positions, Transaction Volumes, and 

Securities Inventory Aging Measurements 

1. Positions 

i. Description: For purposes of this 

appendix, Positions is the value of securities 

and derivatives positions managed by the 

trading desk. For purposes of the Positions 

quantitative measurement, do not include in 

the Positions calculation for ‘‘securities’’ 

those securities that are also ‘‘derivatives,’’ as 

those terms are defined under subpart A; 

instead, report those securities that are also 

derivatives as ‘‘derivatives.’’ 1 A banking 

entity must separately report the trading 

desk’s market value of long securities 

positions, market value of short securities 

positions, market value of derivatives 

receivables, market value of derivatives 

payables, notional value of derivatives 

receivables, and notional value of derivatives 

payables. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks that rely 

on § 351.4(a) or § 351.4(b) to conduct 

underwriting activity or market-makingrelated activity, respectively. 

2. Transaction Volumes 

i. Description: For purposes of this 

appendix, Transaction Volumes measures 

four exclusive categories of covered trading 

activity conducted by a trading desk. A 

banking entity is required to report the value 

and number of security and derivative 

transactions conducted by the trading desk 

with: (i) Customers, excluding internal 

transactions; (ii) non-customers, excluding 

internal transactions; (iii) trading desks and 

other organizational units where the 

transaction is booked in the same banking 

entity; and (iv) trading desks and other 

organizational units where the transaction is 

booked into an affiliated banking entity. For 

securities, value means gross market value. 

For derivatives, value means gross notional 

value. For purposes of calculating the 

Transaction Volumes quantitative 

measurement, do not include in the 

Transaction Volumes calculation for 

‘‘securities’’ those securities that are also 

‘‘derivatives,’’ as those terms are defined 

under subpart A; instead, report those 

securities that are also derivatives as 

‘‘derivatives.’’ 2 Further, for purposes of the 

Transaction Volumes quantitative 

measurement, a customer of a trading desk 

that relies on § 351.4(a) to conduct 

underwriting activity is a market participant 

identified in § 351.4(a)(7), and a customer of 

a trading desk that relies on § 351.4(b) to 

conduct market making-related activity is a 

market participant identified in § 351.4(b)(3). 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks that rely 

on § 351.4(a) or § 351.4(b) to conduct 

underwriting activity or market-makingrelated activity, respectively. 

3. Securities Inventory Aging 

i. Description: For purposes of this 

appendix, Securities Inventory Aging 

generally describes a schedule of the market 

value of the trading desk’s securities 

positions and the amount of time that those 

securities positions have been held. 

Securities Inventory Aging must measure the 

age profile of a trading desk’s securities 

positions for the following periods: 0–30 

calendar days; 31–60 calendar days; 61–90 

calendar days; 91–180 calendar days; 181– 

360 calendar days; and greater than 360 

calendar days. Securities Inventory Aging 

includes two schedules, a security assetaging schedule, and a security liability-aging 

schedule. For purposes of the Securities 

Inventory Aging quantitative measurement, 

do not include securities that are also 

‘‘derivatives,’’ as those terms are defined 

under subpart A.3

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks that rely 

on § 351.4(a) or § 351.4(b) to conduct 

underwriting activity or market-making 

related activity, respectively. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Chapter II 

Authority and Issuance 

For the reasons set forth in the 

Common Preamble, the Securities and 

Exchange Commission proposes to 

amend Part 255 to chapter II of Title 17 

of the Code of Federal Regulations as 

follows: 

PART 255—PROPRIETARY TRADING 

AND CERTAIN INTERESTS IN AND 

RELATIONSHIPS WITH COVERED 

FUNDS 

■ 40. The authority for part 255 

continues to read as follows: 

Authority: 12 U.S.C. 1851 

■ 41. Revise § 255.2 to read as follows: 

§ 255.2 Definitions. 

Unless otherwise specified, for 

purposes of this part: 

(a) Affiliate has the same meaning as 

in section 2(k) of the Bank Holding 

Company Act of 1956 (12 U.S.C. 

1841(k)). 

(b) Applicable accounting standards 

means U.S. generally accepted 


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accounting principles, or such other 

accounting standards applicable to a 

banking entity that the SEC determines 

are appropriate and that the banking 

entity uses in the ordinary course of its 

business in preparing its consolidated 

financial statements. 

(c) Bank holding company has the 

same meaning as in section 2 of the 

Bank Holding Company Act of 1956 (12 

U.S.C. 1841). 

(d) Banking entity. (1) Except as 

provided in paragraph (d)(2) of this 

section, banking entity means: 

(i) Any insured depository institution; 

(ii) Any company that controls an 

insured depository institution; 

(iii) Any company that is treated as a 

bank holding company for purposes of 

section 8 of the International Banking 

Act of 1978 (12 U.S.C. 3106); and 

(iv) Any affiliate or subsidiary of any 

entity described in paragraphs (d)(1)(i), 

(ii), or (iii) of this section. 

(2) Banking entity does not include: 

(i) A covered fund that is not itself a 

banking entity under paragraphs 

(d)(1)(i), (ii), or (iii) of this section; 

(ii) A portfolio company held under 

the authority contained in section 

4(k)(4)(H) or (I) of the BHC Act (12 

U.S.C. 1843(k)(4)(H), (I)), or any 

portfolio concern, as defined under 13 

CFR 107.50, that is controlled by a small 

business investment company, as 

defined in section 103(3) of the Small 

Business Investment Act of 1958 (15 

U.S.C. 662), so long as the portfolio 

company or portfolio concern is not 

itself a banking entity under paragraphs 

(d)(1)(i), (ii), or (iii) of this section; or 

(iii) The FDIC acting in its corporate 

capacity or as conservator or receiver 

under the Federal Deposit Insurance Act 

or Title II of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act. 

(e) Board means the Board of 

Governors of the Federal Reserve 

System. 

(f) CFTC means the Commodity 

Futures Trading Commission. 

(g) Dealer has the same meaning as in 

section 3(a)(5) of the Exchange Act (15 

U.S.C. 78c(a)(5)). 

(h) Depository institution has the 

same meaning as in section 3(c) of the 

Federal Deposit Insurance Act (12 

U.S.C. 1813(c)). 

(i) Derivative. (1) Except as provided 

in paragraph (i)(2) of this section, 

derivative means: 

(i) Any swap, as that term is defined 

in section 1a(47) of the Commodity 

Exchange Act (7 U.S.C. 1a(47)), or 

security-based swap, as that term is 

defined in section 3(a)(68) of the 

Exchange Act (15 U.S.C. 78c(a)(68)); 

(ii) Any purchase or sale of a 

commodity, that is not an excluded 

commodity, for deferred shipment or 

delivery that is intended to be 

physically settled; 

(iii) Any foreign exchange forward (as 

that term is defined in section 1a(24) of 

the Commodity Exchange Act (7 U.S.C. 

1a(24)) or foreign exchange swap (as 

that term is defined in section 1a(25) of 

the Commodity Exchange Act (7 U.S.C. 

1a(25)); 

(iv) Any agreement, contract, or 

transaction in foreign currency 

described in section 2(c)(2)(C)(i) of the 

Commodity Exchange Act (7 U.S.C. 

2(c)(2)(C)(i)); 

(v) Any agreement, contract, or 

transaction in a commodity other than 

foreign currency described in section 

2(c)(2)(D)(i) of the Commodity Exchange 

Act (7 U.S.C. 2(c)(2)(D)(i)); and 

(vi) Any transaction authorized under 

section 19 of the Commodity Exchange 

Act (7 U.S.C. 23(a) or (b)); 

(2) A derivative does not include: 

(i) Any consumer, commercial, or 

other agreement, contract, or transaction 

that the CFTC and SEC have further 

defined by joint regulation, 

interpretation, guidance, or other action 

as not within the definition of swap, as 

that term is defined in section 1a(47) of 

the Commodity Exchange Act (7 U.S.C. 

1a(47)), or security-based swap, as that 

term is defined in section 3(a)(68) of the 

Exchange Act (15 U.S.C. 78c(a)(68)); or 

(ii) Any identified banking product, as 

defined in section 402(b) of the Legal 

Certainty for Bank Products Act of 2000 

(7 U.S.C. 27(b)), that is subject to section 

403(a) of that Act (7 U.S.C. 27a(a)). 

(j) Employee includes a member of the 

immediate family of the employee. 

(k) Exchange Act means the Securities 

Exchange Act of 1934 (15 U.S.C. 78a et 

seq.). 

(l) Excluded commodity has the same 

meaning as in section 1a(19) of the 

Commodity Exchange Act (7 U.S.C. 

1a(19)). 

(m) FDIC means the Federal Deposit 

Insurance Corporation. 

(n) Federal banking agencies means 

the Board, the Office of the Comptroller 

of the Currency, and the FDIC. 

(o) Foreign banking organization has 

the same meaning as in section 

211.21(o) of the Board’s Regulation K 

(12 CFR 211.21(o)), but does not include 

a foreign bank, as defined in section 

1(b)(7) of the International Banking Act 

of 1978 (12 U.S.C. 3101(7)), that is 

organized under the laws of the 

Commonwealth of Puerto Rico, Guam, 

American Samoa, the United States 

Virgin Islands, or the Commonwealth of 

the Northern Mariana Islands. 

(p) Foreign insurance regulator means 

the insurance commissioner, or a 

similar official or agency, of any country 

other than the United States that is 

engaged in the supervision of insurance 

companies under foreign insurance law. 

(q) General account means all of the 

assets of an insurance company except 

those allocated to one or more separate 

accounts. 

(r) Insurance company means a 

company that is organized as an 

insurance company, primarily and 

predominantly engaged in writing 

insurance or reinsuring risks 

underwritten by insurance companies, 

subject to supervision as such by a state 

insurance regulator or a foreign 

insurance regulator, and not operated 

for the purpose of evading the 

provisions of section 13 of the BHC Act 

(12 U.S.C. 1851). 

(s) Insured depository institution has 

the same meaning as in section 3(c) of 

the Federal Deposit Insurance Act (12 

U.S.C. 1813(c)), but does not include an 

insured depository institution that is 

described in section 2(c)(2)(D) of the 

BHC Act (12 U.S.C. 1841(c)(2)(D)). 

(t) Limited trading assets and 

liabilities means, with respect to a 

banking entity, that: 

(1) The banking entity has, together 

with its affiliates and subsidiaries on a 

worldwide consolidated basis, trading 

assets and liabilities (excluding trading 

assets and liabilities involving 

obligations of or guaranteed by the 

United States or any agency of the 

United States) the average gross sum of 

which over the previous consecutive 

four quarters, as measured as of the last 

day of each of the four previous 

calendar quarters, is less than 

$1,000,000,000; and 

(2) The SEC has not determined 

pursuant to § 255.20(g) or (h) of this part 

that the banking entity should not be 

treated as having limited trading assets 

and liabilities. 

(u) Loan means any loan, lease, 

extension of credit, or secured or 

unsecured receivable that is not a 

security or derivative. 

(v) Moderate trading assets and 

liabilities means, with respect to a 

banking entity, that the banking entity 

does not have significant trading assets 

and liabilities or limited trading assets 

and liabilities. 

(w) Primary financial regulatory 

agency has the same meaning as in 

section 2(12) of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (12 U.S.C. 5301(12)). 

(x) Purchase includes any contract to 

buy, purchase, or otherwise acquire. For 

security futures products, purchase 

includes any contract, agreement, or 

transaction for future delivery. With 

respect to a commodity future, purchase 

includes any contract, agreement, or 


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transaction for future delivery. With 

respect to a derivative, purchase 

includes the execution, termination 

(prior to its scheduled maturity date), 

assignment, exchange, or similar 

transfer or conveyance of, or 

extinguishing of rights or obligations 

under, a derivative, as the context may 

require. 

(y) Qualifying foreign banking 

organization means a foreign banking 

organization that qualifies as such under 

section 211.23(a), (c) or (e) of the 

Board’s Regulation K (12 CFR 211.23(a), 

(c), or (e)). 

(z) SEC means the Securities and 

Exchange Commission. 

(aa) Sale and sell each include any 

contract to sell or otherwise dispose of. 

For security futures products, such 

terms include any contract, agreement, 

or transaction for future delivery. With 

respect to a commodity future, such 

terms include any contract, agreement, 

or transaction for future delivery. With 

respect to a derivative, such terms 

include the execution, termination 

(prior to its scheduled maturity date), 

assignment, exchange, or similar 

transfer or conveyance of, or 

extinguishing of rights or obligations 

under, a derivative, as the context may 

require. 

(bb) Security has the meaning 

specified in section 3(a)(10) of the 

Exchange Act (15 U.S.C. 78c(a)(10)). 

(cc) Security-based swap dealer has 

the same meaning as in section 3(a)(71) 

of the Exchange Act (15 U.S.C. 

78c(a)(71)). 

(dd) Security future has the meaning 

specified in section 3(a)(55) of the 

Exchange Act (15 U.S.C. 78c(a)(55)). 

(ee) Separate account means an 

account established and maintained by 

an insurance company in connection 

with one or more insurance contracts to 

hold assets that are legally segregated 

from the insurance company’s other 

assets, under which income, gains, and 

losses, whether or not realized, from 

assets allocated to such account, are, in 

accordance with the applicable contract, 

credited to or charged against such 

account without regard to other income, 

gains, or losses of the insurance 

company. 

(ff) Significant trading assets and 

liabilities. 

(1) Significant trading assets and 

liabilities means, with respect to a 

banking entity, that: 

(i) The banking entity has, together 

with its affiliates and subsidiaries, 

trading assets and liabilities the average 

gross sum of which over the previous 

consecutive four quarters, as measured 

as of the last day of each of the four 

previous calendar quarters, equals or 

exceeds $10,000,000,000; or 

(ii) The SEC has determined pursuant 

to § 255.20(h) of this part that the 

banking entity should be treated as 

having significant trading assets and 

liabilities. 

(2) With respect to a banking entity 

other than a banking entity described in 

paragraph (3), trading assets and 

liabilities for purposes of this paragraph 

(ff) means trading assets and liabilities 

(excluding trading assets and liabilities 

involving obligations of or guaranteed 

by the United States or any agency of 

the United States) on a worldwide 

consolidated basis. 

(3)(i) With respect to a banking entity 

that is a foreign banking organization or 

a subsidiary of a foreign banking 

organization, trading assets and 

liabilities for purposes of this paragraph 

(ff) means the trading assets and 

liabilities (excluding trading assets and 

liabilities involving obligations of or 

guaranteed by the United States or any 

agency of the United States) of the 

combined U.S. operations of the top-tier 

foreign banking organization (including 

all subsidiaries, affiliates, branches, and 

agencies of the foreign banking 

organization operating, located, or 

organized in the United States). 

(ii) For purposes of paragraph (ff)(3)(i) 

of this section, a U.S. branch, agency, or 

subsidiary of a banking entity is located 

in the United States; however, the 

foreign bank that operates or controls 

that branch, agency, or subsidiary is not 

considered to be located in the United 

States solely by virtue of operating or 

controlling the U.S. branch, agency, or 

subsidiary. 

(gg) State means any State, the District 

of Columbia, the Commonwealth of 

Puerto Rico, Guam, American Samoa, 

the United States Virgin Islands, and the 

Commonwealth of the Northern Mariana 

Islands. 

(hh) Subsidiary has the same meaning 

as in section 2(d) of the Bank Holding 

Company Act of 1956 (12 U.S.C. 

1841(d)). 

(ii) State insurance regulator means 

the insurance commissioner, or a 

similar official or agency, of a State that 

is engaged in the supervision of 

insurance companies under State 

insurance law. 

(jj) Swap dealer has the same meaning 

as in section 1(a)(49) of the Commodity 

Exchange Act (7 U.S.C. 1a(49)). 

■ 42. Amend § 255.3 is amended by: 

■ a. Revising paragraph (b); 

■ b. Redesignating paragraphs (c) 

through (e) as paragraphs (d) through (f); 

■ c. Adding a new paragraph (c); 

■ d. Revising paragraph (e)(3); 

■ e. Adding paragraph (e)(10); 

■ f. Redesignating paragraphs (f)(5) 

through (f)(13) as paragraphs (f)(6) 

through (f)(14); 

■ g. Adding a new paragraph (f)(5); and 

■ h. Adding paragraph (g). 

The revisions and additions read as 

follows: 

§ 255.3 Prohibition on proprietary trading. 

* * * * * 

(b) Definition of trading account. 

Trading account means any account 

that is used by a banking entity to: 

(1)(i) Purchase or sell one or more 

financial instruments that are both 

market risk capital rule covered 

positions and trading positions (or 

hedges of other market risk capital rule 

covered positions), if the banking entity, 

or any affiliate of the banking entity, is 

an insured depository institution, bank 

holding company, or savings and loan 

holding company, and calculates riskbased capital ratios under the market 

risk capital rule; or 

(ii) With respect to a banking entity 

that is not, and is not controlled directly 

or indirectly by a banking entity that is, 

located in or organized under the laws 

of the United States or any State, 

purchase or sell one or more financial 

instruments that are subject to capital 

requirements under a market risk 

framework established by the homecountry supervisor that is consistent 

with the market risk framework 

published by the Basel Committee on 

Banking Supervision, as amended from 

time to time. 

(2) Purchase or sell one or more 

financial instruments for any purpose, if 

the banking entity: 

(i) Is licensed or registered, or is 

required to be licensed or registered, to 

engage in the business of a dealer, swap 

dealer, or security-based swap dealer, to 

the extent the instrument is purchased 

or sold in connection with the activities 

that require the banking entity to be 

licensed or registered as such; or 

(ii) Is engaged in the business of a 

dealer, swap dealer, or security-based 

swap dealer outside of the United 

States, to the extent the instrument is 

purchased or sold in connection with 

the activities of such business; or 

(3) Purchase or sell one or more 

financial instruments, with respect to a 

financial instrument that is recorded at 

fair value on a recurring basis under 

applicable accounting standards. 

(c) Presumption of compliance. (1)(i) 

Each trading desk that does not 

purchase or sell financial instruments 

for a trading account defined in 

paragraphs (b)(1) or (b)(2) of this section 

may calculate the net gain or net loss on 

the trading desk’s portfolio of financial 

instruments each business day, 


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reflecting realized and unrealized gains 

and losses since the previous business 

day, based on the banking entity’s fair 

value for such financial instruments. 

(ii) If the sum of the absolute values 

of the daily net gain and loss figures 

determined in accordance with 

paragraph (c)(1)(i) of this section for the 

preceding 90-calendar-day period does 

not exceed $25 million, the activities of 

the trading desk shall be presumed to be 

in compliance with the prohibition in 

paragraph (a) of this section. 

(2) The SEC may rebut the 

presumption of compliance in 

paragraph (c)(1)(ii) of this section by 

providing written notice to the banking 

entity that the SEC has determined that 

one or more of the banking entity’s 

activities violates the prohibitions under 

subpart B. 

(3) If a trading desk operating 

pursuant to paragraph (c)(1)(ii) of this 

section exceeds the $25 million 

threshold in that paragraph at any point, 

the banking entity shall, in accordance 

with any policies and procedures 

adopted by the SEC: 

(i) Promptly notify the SEC; 

(ii) Demonstrate that the trading 

desk’s purchases and sales of financial 

instruments comply with subpart B; and 

(iii) Demonstrate, with respect to the 

trading desk, how the banking entity 

will maintain compliance with subpart 

B on an ongoing basis. 

* * * * * 

(e) * * * 

(3) Any purchase or sale of a security, 

foreign exchange forward (as that term 

is defined in section 1a(24) of the 

Commodity Exchange Act (7 U.S.C. 

1a(24)), foreign exchange swap (as that 

term is defined in section 1a(25) of the 

Commodity Exchange Act (7 U.S.C. 

1a(25)), or physically-settled crosscurrency swap, by a banking entity for 

the purpose of liquidity management in 

accordance with a documented liquidity 

management plan of the banking entity 

that, with respect to such financial 

instruments: 

(i) Specifically contemplates and 

authorizes the particular financial 

instruments to be used for liquidity 

management purposes, the amount, 

types, and risks of these financial 

instruments that are consistent with 

liquidity management, and the liquidity 

circumstances in which the particular 

financial instruments may or must be 

used; 

(ii) Requires that any purchase or sale 

of financial instruments contemplated 

and authorized by the plan be 

principally for the purpose of managing 

the liquidity of the banking entity, and 

not for the purpose of short-term resale, 

benefitting from actual or expected 

short-term price movements, realizing 

short-term arbitrage profits, or hedging a 

position taken for such short-term 

purposes; 

(iii) Requires that any financial 

instruments purchased or sold for 

liquidity management purposes be 

highly liquid and limited to financial 

instruments the market, credit, and 

other risks of which the banking entity 

does not reasonably expect to give rise 

to appreciable profits or losses as a 

result of short-term price movements; 

(iv) Limits any financial instruments 

purchased or sold for liquidity 

management purposes, together with 

any other instruments purchased or sold 

for such purposes, to an amount that is 

consistent with the banking entity’s 

near-term funding needs, including 

deviations from normal operations of 

the banking entity or any affiliate 

thereof, as estimated and documented 

pursuant to methods specified in the 

plan; 

(v) Includes written policies and 

procedures, internal controls, analysis, 

and independent testing to ensure that 

the purchase and sale of financial 

instruments that are not permitted 

under §§ 255.6(a) or (b) of this subpart 

are for the purpose of liquidity 

management and in accordance with the 

liquidity management plan described in 

paragraph (e)(3) of this section; and 

(vi) Is consistent with the SEC’s 

supervisory requirements, guidance, 

and expectations regarding liquidity 

management; 

* * * * * 

(10) Any purchase (or sale) of one or 

more financial instruments that was 

made in error by a banking entity in the 

course of conducting a permitted or 

excluded activity or is a subsequent 

transaction to correct such an error, and 

the erroneously purchased (or sold) 

financial instrument is promptly 

transferred to a separately-managed 

trade error account for disposition. 

(f) * * * 

(5) Cross-currency swap means a swap 

in which one party exchanges with 

another party principal and interest rate 

payments in one currency for principal 

and interest rate payments in another 

currency, and the exchange of principal 

occurs on the date the swap is entered 

into, with a reversal of the exchange of 

principal at a later date that is agreed 

upon when the swap is entered into. 

* * * * * 

(g) Reservation of Authority: (1) The 

SEC may determine, on a case-by-case 

basis, that a purchase or sale of one or 

more financial instruments by a banking 

entity either is or is not for the trading 

account as defined at 12 U.S.C. 

1851(h)(6). 

(2) Notice and Response Procedures. 

(i) Notice. When the SEC determines 

that the purchase or sale of one or more 

financial instruments is for the trading 

account under paragraph (g)(1) of this 

section, the SEC will notify the banking 

entity in writing of the determination 

and provide an explanation of the 

determination. 

(ii) Response. (A) The banking entity 

may respond to any or all items in the 

notice. The response should include any 

matters that the banking entity would 

have the SEC consider in deciding 

whether the purchase or sale is for the 

trading account. The response must be 

in writing and delivered to the 

designated SEC official within 30 days 

after the date on which the banking 

entity received the notice. The SEC may 

shorten the time period when, in the 

opinion of the SEC, the activities or 

condition of the banking entity so 

requires, provided that the banking 

entity is informed promptly of the new 

time period, or with the consent of the 

banking entity. In its discretion, the SEC 

may extend the time period for good 

cause. 

(B) Failure to respond within 30 days 

or such other time period as may be 

specified by the SEC shall constitute a 

waiver of any objections to the SEC’s 

determination. 

(iii) After the close of banking entity’s 

response period, the SEC will decide, 

based on a review of the banking 

entity’s response and other information 

concerning the banking entity, whether 

to maintain the SEC’s determination 

that the purchase or sale of one or more 

financial instruments is for the trading 

account. The banking entity will be 

notified of the decision in writing. The 

notice will include an explanation of 

the decision. 

■ 43. Amend § 255.4 by: 

■ a. Revising paragraph (a)(2); 

■ b. Adding paragraph (a)(8); 

■ c. Revising paragraph (b)(2); 

■ d. Revising the introductory text of 

paragraph (b)(3)(i); 

■ e. In paragraph (b)(5) removing the 

references to ‘‘inventory’’ and replacing 

them with ‘‘positions’’; and 

■ f. Adding paragraph (b)(6). 

The revisions and additions read as 

follows: 

§ 255.4 Permitted underwriting and market 

making-related activities. 

(a) * * * 

(2) Requirements. The underwriting 

activities of a banking entity are 

permitted under paragraph (a)(1) of this 

section only if: 

(i) The banking entity is acting as an 

underwriter for a distribution of 


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securities and the trading desk’s 

underwriting position is related to such 

distribution; 

(ii) (A) The amount and type of the 

securities in the trading desk’s 

underwriting position are designed not 

to exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties, taking into account the 

liquidity, maturity, and depth of the 

market for the relevant type of security, 

and (B) reasonable efforts are made to 

sell or otherwise reduce the 

underwriting position within a 

reasonable period, taking into account 

the liquidity, maturity, and depth of the 

market for the relevant type of security; 

(iii) In the case of a banking entity 

with significant trading assets and 

liabilities, the banking entity has 

established and implements, maintains, 

and enforces an internal compliance 

program required by subpart D of this 

part that is reasonably designed to 

ensure the banking entity’s compliance 

with the requirements of paragraph (a) 

of this section, including reasonably 

designed written policies and 

procedures, internal controls, analysis, 

and independent testing identifying and 

addressing: 

(A) The products, instruments or 

exposures each trading desk may 

purchase, sell, or manage as part of its 

underwriting activities; 

(B) Limits for each trading desk, in 

accordance with paragraph (a)(8)(i) of 

this section; 

(C) Internal controls and ongoing 

monitoring and analysis of each trading 

desk’s compliance with its limits; and 

(D) Authorization procedures, 

including escalation procedures that 

require review and approval of any 

trade that would exceed a trading desk’s 

limit(s), demonstrable analysis of the 

basis for any temporary or permanent 

increase to a trading desk’s limit(s), and 

independent review of such 

demonstrable analysis and approval; 

(iv) The compensation arrangements 

of persons performing the activities 

described in this paragraph (a) are 

designed not to reward or incentivize 

prohibited proprietary trading; and 

(v) The banking entity is licensed or 

registered to engage in the activity 

described in this paragraph (a) in 

accordance with applicable law. 

* * * * * 

(8) Rebuttable presumption of 

compliance. 

(i) Risk limits. 

(A) A banking entity shall be 

presumed to meet the requirements of 

paragraph (a)(2)(ii)(A) of this section 

with respect to the purchase or sale of 

a financial instrument if the banking 

entity has established and implements, 

maintains, and enforces the limits 

described in paragraph (a)(8)(i)(B) and 

does not exceed such limits. 

(B) The presumption described in 

paragraph (8)(i)(A) of this section shall 

be available with respect to limits for 

each trading desk that are designed not 

to exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties, based on the nature and 

amount of the trading desk’s 

underwriting activities, on the: 

(1) Amount, types, and risk of its 

underwriting position; 

(2) Level of exposures to relevant risk 

factors arising from its underwriting 

position; and 

(3) Period of time a security may be 

held. 

(ii) Supervisory review and oversight. 

The limits described in paragraph 

(a)(8)(i) of this section shall be subject 

to supervisory review and oversight by 

the SEC on an ongoing basis. Any 

review of such limits will include 

assessment of whether the limits are 

designed not to exceed the reasonably 

expected near term demands of clients, 

customers, or counterparties. 

(iii) Reporting. With respect to any 

limit identified pursuant to paragraph 

(a)(8)(i) of this section, a banking entity 

shall promptly report to the SEC (A) to 

the extent that any limit is exceeded and 

(B) any temporary or permanent 

increase to any limit(s), in each case in 

the form and manner as directed by the 

SEC. 

(iv) Rebutting the presumption. The 

presumption in paragraph (a)(8)(i) of 

this section may be rebutted by the SEC 

if the SEC determines, based on all 

relevant facts and circumstances, that a 

trading desk is engaging in activity that 

is not based on the reasonably expected 

near term demands of clients, 

customers, or counterparties. The SEC 

will provide notice of any such 

determination to the banking entity in 

writing. 

(b) * * * 

(2) Requirements. The market makingrelated activities of a banking entity are 

permitted under paragraph (b)(1) of this 

section only if: 

(i) The trading desk that establishes 

and manages the financial exposure 

routinely stands ready to purchase and 

sell one or more types of financial 

instruments related to its financial 

exposure and is willing and available to 

quote, purchase and sell, or otherwise 

enter into long and short positions in 

those types of financial instruments for 

its own account, in commercially 

reasonable amounts and throughout 

market cycles on a basis appropriate for 

the liquidity, maturity, and depth of the 

market for the relevant types of financial 

instruments; 

(ii) The trading desk’s market-making 

related activities are designed not to 

exceed, on an ongoing basis, the 

reasonably expected near term demands 

of clients, customers, or counterparties, 

based on the liquidity, maturity, and 

depth of the market for the relevant 

types of financial instrument(s). 

(iii) In the case of a banking entity 

with significant trading assets and 

liabilities, the banking entity has 

established and implements, maintains, 

and enforces an internal compliance 

program required by subpart D of this 

part that is reasonably designed to 

ensure the banking entity’s compliance 

with the requirements of paragraph (b) 

of this section, including reasonably 

designed written policies and 

procedures, internal controls, analysis 

and independent testing identifying and 

addressing: 

(A) The financial instruments each 

trading desk stands ready to purchase 

and sell in accordance with paragraph 

(b)(2)(i) of this section; 

(B) The actions the trading desk will 

take to demonstrably reduce or 

otherwise significantly mitigate 

promptly the risks of its financial 

exposure consistent with the limits 

required under paragraph (b)(2)(iii)(C) of 

this section; the products, instruments, 

and exposures each trading desk may 

use for risk management purposes; the 

techniques and strategies each trading 

desk may use to manage the risks of its 

market making-related activities and 

positions; and the process, strategies, 

and personnel responsible for ensuring 

that the actions taken by the trading 

desk to mitigate these risks are and 

continue to be effective; 

(C) Limits for each trading desk, in 

accordance with paragraph (b)(6)(i) of 

this section; 

(D) Internal controls and ongoing 

monitoring and analysis of each trading 

desk’s compliance with its limits; and 

(E) Authorization procedures, 

including escalation procedures that 

require review and approval of any 

trade that would exceed a trading desk’s 

limit(s), demonstrable analysis that the 

basis for any temporary or permanent 

increase to a trading desk’s limit(s) is 

consistent with the requirements of this 

paragraph (b), and independent review 

of such demonstrable analysis and 

approval; 

(iv) In the case of a banking entity 

with significant trading assets and 

liabilities, to the extent that any limit 

identified pursuant to paragraph 

(b)(2)(iii)(C) of this section is exceeded, 

the trading desk takes action to bring the 

trading desk into compliance with the 


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limits as promptly as possible after the 

limit is exceeded; 

(v) The compensation arrangements of 

persons performing the activities 

described in this paragraph (b) are 

designed not to reward or incentivize 

prohibited proprietary trading; and 

(vi) The banking entity is licensed or 

registered to engage in activity 

described in this paragraph (b) in 

accordance with applicable law. 

(3) * * * 

(i) A trading desk or other 

organizational unit of another banking 

entity is not a client, customer, or 

counterparty of the trading desk if that 

other entity has trading assets and 

liabilities of $50 billion or more as 

measured in accordance with the 

methodology described in definition of 

‘‘significant trading assets and 

liabilities’’ contained in § 255.2 of this 

part, unless: 

* * * * * 

(6) Rebuttable presumption of 

compliance. 

(i) Risk limits. 

(A) A banking entity shall be 

presumed to meet the requirements of 

paragraph (b)(2)(ii) of this section with 

respect to the purchase or sale of a 

financial instrument if the banking 

entity has established and implements, 

maintains, and enforces the limits 

described in paragraph (b)(6)(i)(B) and 

does not exceed such limits. 

(B) The presumption described in 

paragraph (6)(i)(A) of this section shall 

be available with respect to limits for 

each trading desk that are designed not 

to exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties, based on the nature and 

amount of the trading desk’s market 

making-related activities, on the: 

(1) Amount, types, and risks of its 

market-maker positions; 

(2) Amount, types, and risks of the 

products, instruments, and exposures 

the trading desk may use for risk 

management purposes; 

(3) Level of exposures to relevant risk 

factors arising from its financial 

exposure; and 

(4) Period of time a financial 

instrument may be held. 

(ii) Supervisory review and oversight. 

The limits described in paragraph 

(b)(6)(i) of this section shall be subject 

to supervisory review and oversight by 

the SEC on an ongoing basis. Any 

review of such limits will include 

assessment of whether the limits are 

designed not to exceed the reasonably 

expected near term demands of clients, 

customers, or counterparties. 

(iii) Reporting. With respect to any 

limit identified pursuant to paragraph 

(b)(6)(i) of this section, a banking entity 

shall promptly report to the SEC (A) to 

the extent that any limit is exceeded and 

(B) any temporary or permanent 

increase to any limit(s), in each case in 

the form and manner as directed by the 

SEC. 

(iv) Rebutting the presumption. The 

presumption in paragraph (b)(6)(i) of 

this section may be rebutted by the SEC 

if the SEC determines, based on all 

relevant facts and circumstances, that a 

trading desk is engaging in activity that 

is not based on the reasonably expected 

near term demands of clients, 

customers, or counterparties. The SEC 

will provide notice of any such 

determination to the banking entity in 

writing. 

■ 45. Amend § 255.5 by revising 

paragraph (b), the introductory text of 

paragraph (c)(1), and adding paragraph 

(c)(4) to read as follows: 

§ 255.5 Permitted risk-mitigating hedging 

activities. 

* * * * * 

(b) Requirements. 

(1) The risk-mitigating hedging 

activities of a banking entity that has 

significant trading assets and liabilities 

are permitted under paragraph (a) of this 

section only if: 

(i) The banking entity has established 

and implements, maintains and enforces 

an internal compliance program 

required by subpart D of this part that 

is reasonably designed to ensure the 

banking entity’s compliance with the 

requirements of this section, including: 

(A) Reasonably designed written 

policies and procedures regarding the 

positions, techniques and strategies that 

may be used for hedging, including 

documentation indicating what 

positions, contracts or other holdings a 

particular trading desk may use in its 

risk-mitigating hedging activities, as 

well as position and aging limits with 

respect to such positions, contracts or 

other holdings; 

(B) Internal controls and ongoing 

monitoring, management, and 

authorization procedures, including 

relevant escalation procedures; and 

(C) The conduct of analysis and 

independent testing designed to ensure 

that the positions, techniques and 

strategies that may be used for hedging 

may reasonably be expected to reduce or 

otherwise significantly mitigate the 

specific, identifiable risk(s) being 

hedged; 

(ii) The risk-mitigating hedging 

activity: 

(A) Is conducted in accordance with 

the written policies, procedures, and 

internal controls required under this 

section; 

(B) At the inception of the hedging 

activity, including, without limitation, 

any adjustments to the hedging activity, 

is designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks, including 

market risk, counterparty or other credit 

risk, currency or foreign exchange risk, 

interest rate risk, commodity price risk, 

basis risk, or similar risks, arising in 

connection with and related to 

identified positions, contracts, or other 

holdings of the banking entity, based 

upon the facts and circumstances of the 

identified underlying and hedging 

positions, contracts or other holdings 

and the risks and liquidity thereof; 

(C) Does not give rise, at the inception 

of the hedge, to any significant new or 

additional risk that is not itself hedged 

contemporaneously in accordance with 

this section; 

(D) Is subject to continuing review, 

monitoring and management by the 

banking entity that: 

(1) Is consistent with the written 

hedging policies and procedures 

required under paragraph (b)(1)(i) of this 

section; 

(2) Is designed to reduce or otherwise 

significantly mitigate the specific, 

identifiable risks that develop over time 

from the risk-mitigating hedging 

activities undertaken under this section 

and the underlying positions, contracts, 

and other holdings of the banking 

entity, based upon the facts and 

circumstances of the underlying and 

hedging positions, contracts and other 

holdings of the banking entity and the 

risks and liquidity thereof; and 

(3) Requires ongoing recalibration of 

the hedging activity by the banking 

entity to ensure that the hedging activity 

satisfies the requirements set out in 

paragraph (b)(1)(ii) of this section and is 

not prohibited proprietary trading; and 

(iii) The compensation arrangements 

of persons performing risk-mitigating 

hedging activities are designed not to 

reward or incentivize prohibited 

proprietary trading. 

(2) The risk-mitigating hedging 

activities of a banking entity that does 

not have significant trading assets and 

liabilities are permitted under paragraph 

(a) of this section only if the riskmitigating hedging activity: 

(i) At the inception of the hedging 

activity, including, without limitation, 

any adjustments to the hedging activity, 

is designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks, including 

market risk, counterparty or other credit 

risk, currency or foreign exchange risk, 

interest rate risk, commodity price risk, 

basis risk, or similar risks, arising in 

connection with and related to 


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identified positions, contracts, or other 

holdings of the banking entity, based 

upon the facts and circumstances of the 

identified underlying and hedging 

positions, contracts or other holdings 

and the risks and liquidity thereof; and 

(ii) Is subject, as appropriate, to 

ongoing recalibration by the banking 

entity to ensure that the hedging activity 

satisfies the requirements set out in 

paragraph (b)(2) of this section and is 

not prohibited proprietary trading. 

(c) * * * (1) A banking entity that has 

significant trading assets and liabilities 

must comply with the requirements of 

paragraphs (c)(2) and (3) of this section, 

unless the requirements of paragraph 

(c)(4) of this section are met, with 

respect to any purchase or sale of 

financial instruments made in reliance 

on this section for risk-mitigating 

hedging purposes that is: 

* * * * * 

(4) The requirements of paragraphs 

(c)(2) and (3) of this section do not 

apply to the purchase or sale of a 

financial instrument described in 

paragraph (c)(1) of this section if: 

(i) The financial instrument 

purchased or sold is identified on a 

written list of pre-approved financial 

instruments that are commonly used by 

the trading desk for the specific type of 

hedging activity for which the financial 

instrument is being purchased or sold; 

and 

(ii) At the time the financial 

instrument is purchased or sold, the 

hedging activity (including the purchase 

or sale of the financial instrument) 

complies with written, pre-approved 

hedging limits for the trading desk 

purchasing or selling the financial 

instrument for hedging activities 

undertaken for one or more other 

trading desks. The hedging limits shall 

be appropriate for the: 

(A) Size, types, and risks of the 

hedging activities commonly 

undertaken by the trading desk; 

(B) Financial instruments purchased 

and sold for hedging activities by the 

trading desk; and 

(C) Levels and duration of the risk 

exposures being hedged. 

■ 46. Amend § 255.6 by revising 

paragraph (e)(3), and removing 

paragraph (e)(6) to read as follows: 

§ 255.6 Other permitted proprietary trading 

activities. 

* * * * * 

(e) * * * 

(3) A purchase or sale by a banking 

entity is permitted for purposes of this 

paragraph (e) if: 

(i) The banking entity engaging as 

principal in the purchase or sale 

(including relevant personnel) is not 

located in the United States or 

organized under the laws of the United 

States or of any State; 

(ii) The banking entity (including 

relevant personnel) that makes the 

decision to purchase or sell as principal 

is not located in the United States or 

organized under the laws of the United 

States or of any State; and 

(iii) The purchase or sale, including 

any transaction arising from riskmitigating hedging related to the 

instruments purchased or sold, is not 

accounted for as principal directly or on 

a consolidated basis by any branch or 

affiliate that is located in the United 

States or organized under the laws of 

the United States or of any State. 

* * * * * 

§ 255.10 [Amended] 

■ 47. Amend § 255.10 by: 

■ a. In paragraph (c)(8)(i)(A) revising the 

reference to ‘‘§ 255.2(s)’’ to read 

‘‘§ 255.2(u)’’; 

■ b. Removing paragraph (d)(1); 

■ c. Redesignating paragraphs (d)(2) 

through (d)(10) as paragraphs (d)(1) 

through (d)(9); 

■ d. In paragraph (d)(5)(i)(G) revising 

the reference to ‘‘(d)(6)(i)(A)’’ to read 

‘‘(d)(5)(i)(A)’’; and 

■ e. In paragraph (d)(9) revising the 

reference to ‘‘(d)(9)’’ to read ‘‘(d)(8)’’ and 

the reference to ‘‘(d)(10)(i)(A)’’ to read 

‘‘(d)(9)(i)(A)’’ and the reference to 

‘‘(d)(10)(i)’’ to read ‘‘(d)(9)(i)’’. 

■ 48. Amend § 255.11 by revising 

paragraph (c) to read as follows: 

§ 255.11 Permitted organizing and 

offering, underwriting, and market making 

with respect to a covered fund. 

* * * * * 

(c) Underwriting and market making 

in ownership interests of a covered 

fund. The prohibition contained in 

§ 255.10(a) of this subpart does not 

apply to a banking entity’s underwriting 

activities or market making-related 

activities involving a covered fund so 

long as: 

(1) Those activities are conducted in 

accordance with the requirements of 

§ 255.4(a) or § 255.4(b) of subpart B, 

respectively; and 

(2) With respect to any banking entity 

(or any affiliate thereof) that: Acts as a 

sponsor, investment adviser or 

commodity trading advisor to a 

particular covered fund or otherwise 

acquires and retains an ownership 

interest in such covered fund in reliance 

on paragraph (a) of this section; or 

acquires and retains an ownership 

interest in such covered fund and is 

either a securitizer, as that term is used 

in section 15G(a)(3) of the Exchange Act 

(15 U.S.C. 78o–11(a)(3)), or is acquiring 

and retaining an ownership interest in 

such covered fund in compliance with 

section 15G of that Act (15 U.S.C.78o– 

11) and the implementing regulations 

issued thereunder each as permitted by 

paragraph (b) of this section, then in 

each such case any ownership interests 

acquired or retained by the banking 

entity and its affiliates in connection 

with underwriting and market making 

related activities for that particular 

covered fund are included in the 

calculation of ownership interests 

permitted to be held by the banking 

entity and its affiliates under the 

limitations of § 255.12(a)(2)(ii); 

§ 255.12(a)(2)(iii), and § 255.12(d) of this 

subpart.4 

§ 255.12 [Amended] 

■ 49. Amend § 255.12 by: 

■ a. In paragraphs (c)(1) and (d) revising 

the references to ‘‘§ 255.10(d)(6)(ii)’’ to 

read ‘‘§ 255.10(d)(5)(ii)’’; 

■ b. Removing paragraph (e)(2)(vii); and 

■ c. Redesignating the second instance 

of paragraph (e)(2)(vi) as paragraph 

(e)(2)(vii). 

■ 50. Amend § 255.13 by revising 

paragraphs (a) and (b)(3), and removing 

paragraph (b)(4)(iv) to read as follows: 

§ 255.13 Other permitted covered fund 

activities and investments. 

(a) Permitted risk-mitigating hedging 

activities. (1) The prohibition contained 

in § 255.10(a) of this subpart does not 

apply with respect to an ownership 

interest in a covered fund acquired or 

retained by a banking entity that is 

designed to reduce or otherwise 

significantly mitigate the specific, 

identifiable risks to the banking entity 

in connection with: 

(i) A compensation arrangement with 

an employee of the banking entity or an 

affiliate thereof that directly provides 

investment advisory, commodity trading 

advisory or other services to the covered 

fund; or 

(ii) A position taken by the banking 

entity when acting as intermediary on 

behalf of a customer that is not itself a 

banking entity to facilitate the exposure 

by the customer to the profits and losses 

of the covered fund. 

(2) Requirements. The risk-mitigating 

hedging activities of a banking entity are 

permitted under this paragraph (a) only 

if: 

(i) The banking entity has established 

and implements, maintains and enforces 

an internal compliance program in 

accordance with subpart D of this part 

that is reasonably designed to ensure the 

banking entity’s compliance with the 

requirements of this section, including: 

(A) Reasonably designed written 

policies and procedures; and 


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(B) Internal controls and ongoing 

monitoring, management, and 

authorization procedures, including 

relevant escalation procedures; and 

(ii) The acquisition or retention of the 

ownership interest: 

(A) Is made in accordance with the 

written policies, procedures, and 

internal controls required under this 

section; 

(B) At the inception of the hedge, is 

designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks arising (1) out 

of a transaction conducted solely to 

accommodate a specific customer 

request with respect to the covered fund 

or (2) in connection with the 

compensation arrangement with the 

employee that directly provides 

investment advisory, commodity trading 

advisory, or other services to the 

covered fund; 

(C) Does not give rise, at the inception 

of the hedge, to any significant new or 

additional risk that is not itself hedged 

contemporaneously in accordance with 

this section; and 

(D) Is subject to continuing review, 

monitoring and management by the 

banking entity. 

(iii) With respect to risk-mitigating 

hedging activity conducted pursuant to 

paragraph (a)(1)(i), the compensation 

arrangement relates solely to the 

covered fund in which the banking 

entity or any affiliate has acquired an 

ownership interest pursuant to 

paragraph (a)(1)(i) and such 

compensation arrangement provides 

that any losses incurred by the banking 

entity on such ownership interest will 

be offset by corresponding decreases in 

amounts payable under such 

compensation arrangement. 

* * * * * 

(b) * * * 

(3) An ownership interest in a covered 

fund is not offered for sale or sold to a 

resident of the United States for 

purposes of paragraph (b)(1)(iii) of this 

section only if it is not sold and has not 

been sold pursuant to an offering that 

targets residents of the United States in 

which the banking entity or any affiliate 

of the banking entity participates. If the 

banking entity or an affiliate sponsors or 

serves, directly or indirectly, as the 

investment manager, investment 

adviser, commodity pool operator or 

commodity trading advisor to a covered 

fund, then the banking entity or affiliate 

will be deemed for purposes of this 

paragraph (b)(3) to participate in any 

offer or sale by the covered fund of 

ownership interests in the covered fund. 

* * * * * 

■ 51. Amend § 255.14 by revising 

paragraph (a)(2)(ii)(B) as follows: 

§ 255.14 Limitations on relationships with 

a covered fund. 

(a) * * * 

(2) * * * 

(ii) * * * 

(B) The chief executive officer (or 

equivalent officer) of the banking entity 

certifies in writing annually no later 

than March 31 to the SEC (with a duty 

to update the certification if the 

information in the certification 

materially changes) that the banking 

entity does not, directly or indirectly, 

guarantee, assume, or otherwise insure 

the obligations or performance of the 

covered fund or of any covered fund in 

which such covered fund invests; and 

* * * * * 

■ 52. Amend § 255.20 by: 

■ a. Revising paragraphs (a), (c), (d), and 

(f)(2); 

■ b. Revising the introductory text of 

paragraphs (b) and (e); 

■ c. Adding new paragraphs (g) and (h). 

The revisions read as follows: 

§ 255.20 Program for compliance; 

reporting. 

* * * * * 

(a) Program requirement. Each 

banking entity (other than a banking 

entity with limited trading assets and 

liabilities) shall develop and provide for 

the continued administration of a 

compliance program reasonably 

designed to ensure and monitor 

compliance with the prohibitions and 

restrictions on proprietary trading and 

covered fund activities and investments 

set forth in section 13 of the BHC Act 

and this part. The terms, scope, and 

detail of the compliance program shall 

be appropriate for the types, size, scope, 

and complexity of activities and 

business structure of the banking entity. 

(b) Banking entities with significant 

trading assets and liabilities. With 

respect to a banking entity with 

significant trading assets and liabilities, 

the compliance program required by 

paragraph (a) of this section, at a 

minimum, shall include: 

* * * * * 

(c) CEO attestation. 

(1) The CEO of a banking entity 

described in paragraph (2) must, based 

on a review by the CEO of the banking 

entity, attest in writing to the SEC, each 

year no later than March 31, that the 

banking entity has in place processes 

reasonably designed to achieve 

compliance with section 13 of the BHC 

Act and this part. In the case of a U.S. 

branch or agency of a foreign banking 

entity, the attestation may be provided 

for the entire U.S. operations of the 

foreign banking entity by the senior 

management officer of the U.S. 

operations of the foreign banking entity 

who is located in the United States. 

(2) The requirements of paragraph 

(c)(1) apply to a banking entity if: 

(i) The banking entity does not have 

limited trading assets and liabilities; or 

(ii) The SEC notifies the banking 

entity in writing that it must satisfy the 

requirements contained in paragraph 

(c)(1). 

(d) Reporting requirements under the 

Appendix to this part. (1) A banking 

entity engaged in proprietary trading 

activity permitted under subpart B shall 

comply with the reporting requirements 

described in the Appendix, if: 

(i) The banking entity has significant 

trading assets and liabilities; or 

(ii) The SEC notifies the banking 

entity in writing that it must satisfy the 

reporting requirements contained in the 

Appendix. 

(2) Frequency of reporting: Unless the 

SEC notifies the banking entity in 

writing that it must report on a different 

basis, a banking entity with $50 billion 

or more in trading assets and liabilities 

(as calculated in accordance with the 

methodology described in the definition 

of ‘‘significant trading assets and 

liabilities’’ contained in § 255.2 of this 

part) shall report the information 

required by the Appendix for each 

calendar month within 20 days of the 

end of each calendar month. Any other 

banking entity subject to the Appendix 

shall report the information required by 

the Appendix for each calendar quarter 

within 30 days of the end of that 

calendar quarter unless the SEC notifies 

the banking entity in writing that it 

must report on a different basis. 

(e) Additional documentation for 

covered funds. A banking entity with 

significant trading assets and liabilities 

shall maintain records that include: 

* * * * * 

(f) * * * 

(2) Banking entities with moderate 

trading assets and liabilities. A banking 

entity with moderate trading assets and 

liabilities may satisfy the requirements 

of this section by including in its 

existing compliance policies and 

procedures appropriate references to the 

requirements of section 13 of the BHC 

Act and this part and adjustments as 

appropriate given the activities, size, 

scope, and complexity of the banking 

entity. 

(g) Rebuttable presumption of 

compliance for banking entities with 

limited trading assets and liabilities. 

(1) Rebuttable presumption. Except as 

otherwise provided in this paragraph, a 

banking entity with limited trading 

assets and liabilities shall be presumed 

to be compliant with subpart B and 


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subpart C and shall have no obligation 

to demonstrate compliance with this 

part on an ongoing basis. 

(2) Rebuttal of presumption. 

(i) If upon examination or audit, the 

SEC determines that the banking entity 

has engaged in proprietary trading or 

covered fund activities that are 

otherwise prohibited under subpart B or 

subpart C, the SEC may require the 

banking entity to be treated under this 

part as if it did not have limited trading 

assets and liabilities. 

(ii) Notice and Response Procedures. 

(A) Notice. The SEC will notify the 

banking entity in writing of any 

determination pursuant to paragraph 

(g)(2)(i) of this section to rebut the 

presumption described in this 

paragraph (g) and will provide an 

explanation of the determination. 

(B) Response. 

(I) The banking entity may respond to 

any or all items in the notice described 

in paragraph (g)(2)(ii)(A) of this section. 

The response should include any 

matters that the banking entity would 

have the SEC consider in deciding 

whether the banking entity has engaged 

in proprietary trading or covered fund 

activities prohibited under subpart B or 

subpart C. The response must be in 

writing and delivered to the designated 

SEC official within 30 days after the 

date on which the banking entity 

received the notice. The SEC may 

shorten the time period when, in the 

opinion of the SEC, the activities or 

condition of the banking entity so 

requires, provided that the banking 

entity is informed promptly of the new 

time period, or with the consent of the 

banking entity. In its discretion, the SEC 

may extend the time period for good 

cause. 

(II) Failure to respond within 30 days 

or such other time period as may be 

specified by the SEC shall constitute a 

waiver of any objections to the SEC’s 

determination. 

(C) After the close of banking entity’s 

response period, the SEC will decide, 

based on a review of the banking 

entity’s response and other information 

concerning the banking entity, whether 

to maintain the SEC’s determination 

that banking entity has engaged in 

proprietary trading or covered fund 

activities prohibited under subpart B or 

subpart C. The banking entity will be 

notified of the decision in writing. The 

notice will include an explanation of 

the decision. 

(h) Reservation of authority. 

Notwithstanding any other provision of 

this part, the SEC retains its authority to 

require a banking entity without 

significant trading assets and liabilities 

to apply any requirements of this part 

that would otherwise apply if the 

banking entity had significant or 

moderate trading assets and liabilities if 

the SEC determines that the size or 

complexity of the banking entity’s 

trading or investment activities, or the 

risk of evasion of subpart B or subpart 

C, does not warrant a presumption of 

compliance under paragraph (g) of this 

section or treatment as a banking entity 

with moderate trading assets and 

liabilities, as applicable. 

■ 53. Remove Appendix A and 

Appendix B to part 255 and add 

Appendix to Part 255—Reporting and 

Recordkeeping Requirements for 

Covered Trading Activities to read as 

follows: 

Appendix to Part 255—Reporting and 

Recordkeeping Requirements for 

Covered Trading Activities 

I. Purpose 

a. This appendix sets forth reporting and 

recordkeeping requirements that certain 

banking entities must satisfy in connection 

with the restrictions on proprietary trading 

set forth in subpart B (‘‘proprietary trading 

restrictions’’). Pursuant to § 255.20(d), this 

appendix applies to a banking entity that, 

together with its affiliates and subsidiaries, 

has significant trading assets and liabilities. 

These entities are required to (i) furnish 

periodic reports to the SEC regarding a 

variety of quantitative measurements of their 

covered trading activities, which vary 

depending on the scope and size of covered 

trading activities, and (ii) create and maintain 

records documenting the preparation and 

content of these reports. The requirements of 

this appendix must be incorporated into the 

banking entity’s internal compliance program 

under § 255.20. 

b. The purpose of this appendix is to assist 

banking entities and the SEC in: 

(i) Better understanding and evaluating the 

scope, type, and profile of the banking 

entity’s covered trading activities; 

(ii) Monitoring the banking entity’s covered 

trading activities; 

(iii) Identifying covered trading activities 

that warrant further review or examination 

by the banking entity to verify compliance 

with the proprietary trading restrictions; 

(iv) Evaluating whether the covered trading 

activities of trading desks engaged in market 

making-related activities subject to § 255.4(b) 

are consistent with the requirements 

governing permitted market making-related 

activities; 

(v) Evaluating whether the covered trading 

activities of trading desks that are engaged in 

permitted trading activity subject to §§ 255.4, 

255.5, or 255.6(a)–(b) (i.e., underwriting and 

market making-related related activity, riskmitigating hedging, or trading in certain 

government obligations) are consistent with 

the requirement that such activity not result, 

directly or indirectly, in a material exposure 

to high-risk assets or high-risk trading 

strategies; 

(vi) Identifying the profile of particular 

covered trading activities of the banking 

entity, and the individual trading desks of 

the banking entity, to help establish the 

appropriate frequency and scope of 

examination by the SEC of such activities; 

and 

(vii) Assessing and addressing the risks 

associated with the banking entity’s covered 

trading activities. 

c. Information that must be furnished 

pursuant to this appendix is not intended to 

serve as a dispositive tool for the 

identification of permissible or 

impermissible activities. 

d. In addition to the quantitative 

measurements required in this appendix, a 

banking entity may need to develop and 

implement other quantitative measurements 

in order to effectively monitor its covered 

trading activities for compliance with section 

13 of the BHC Act and this part and to have 

an effective compliance program, as required 

by § 255.20. The effectiveness of particular 

quantitative measurements may differ based 

on the profile of the banking entity’s 

businesses in general and, more specifically, 

of the particular trading desk, including 

types of instruments traded, trading activities 

and strategies, and history and experience 

(e.g., whether the trading desk is an 

established, successful market maker or a 

new entrant to a competitive market). In all 

cases, banking entities must ensure that they 

have robust measures in place to identify and 

monitor the risks taken in their trading 

activities, to ensure that the activities are 

within risk tolerances established by the 

banking entity, and to monitor and examine 

for compliance with the proprietary trading 

restrictions in this part. 

e. On an ongoing basis, banking entities 

must carefully monitor, review, and evaluate 

all furnished quantitative measurements, as 

well as any others that they choose to utilize 

in order to maintain compliance with section 

13 of the BHC Act and this part. All 

measurement results that indicate a 

heightened risk of impermissible proprietary 

trading, including with respect to otherwisepermitted activities under §§ 255.4 through 

255.6(a)–(b), or that result in a material 

exposure to high-risk assets or high-risk 

trading strategies, must be escalated within 

the banking entity for review, further 

analysis, explanation to the SEC, and 

remediation, where appropriate. The 

quantitative measurements discussed in this 

appendix should be helpful to banking 

entities in identifying and managing the risks 

related to their covered trading activities. 

II. Definitions 

The terms used in this appendix have the 

same meanings as set forth in §§ 255.2 and 

255.3. In addition, for purposes of this 

appendix, the following definitions apply: 

Applicability identifies the trading desks 

for which a banking entity is required to 

calculate and report a particular quantitative 

measurement based on the type of covered 

trading activity conducted by the trading 

desk. 

Calculation period means the period of 

time for which a particular quantitative 

measurement must be calculated. 

Comprehensive profit and loss means the 

net profit or loss of a trading desk’s material 


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sources of trading revenue over a specific 

period of time, including, for example, any 

increase or decrease in the market value of 

a trading desk’s holdings, dividend income, 

and interest income and expense. 

Covered trading activity means trading 

conducted by a trading desk under §§ 255.4, 

255.5, 255.6(a), or 255.6(b). A banking entity 

may include in its covered trading activity 

trading conducted under §§ 255.3(e), 

255.6(c), 255.6(d), or 255.6(e). 

Measurement frequency means the 

frequency with which a particular 

quantitative metric must be calculated and 

recorded. 

Trading day means a calendar day on 

which a trading desk is open for trading. 

III. Reporting and Recordkeeping 

a. Scope of Required Reporting 

1. Quantitative measurements. Each 

banking entity made subject to this appendix 

by § 255.20 must furnish the following 

quantitative measurements, as applicable, for 

each trading desk of the banking entity 

engaged in covered trading activities and 

calculate these quantitative measurements in 

accordance with this appendix: 

i. Risk and Position Limits and Usage; 

ii. Risk Factor Sensitivities; 

iii. Value-at-Risk and Stressed Value-atRisk; 

iv. Comprehensive Profit and Loss 

Attribution; 

v. Positions; 

vi. Transaction Volumes; and 

vii. Securities Inventory Aging. 

2. Trading desk information. Each banking 

entity made subject to this appendix by 

§ 255.20 must provide certain descriptive 

information, as further described in this 

appendix, regarding each trading desk 

engaged in covered trading activities. 

3. Quantitative measurements identifying 

information. Each banking entity made 

subject to this appendix by § 255.20 must 

provide certain identifying and descriptive 

information, as further described in this 

appendix, regarding its quantitative 

measurements. 

4. Narrative statement. Each banking entity 

made subject to this appendix by § 255.20 

must provide a separate narrative statement, 

as further described in this appendix. 

5. File identifying information. Each 

banking entity made subject to this appendix 

by § 255.20 must provide file identifying 

information in each submission to the SEC 

pursuant to this appendix, including the 

name of the banking entity, the RSSD ID 

assigned to the top-tier banking entity by the 

Board, and identification of the reporting 

period and creation date and time. 

b. Trading Desk Information 

Each banking entity must provide 

descriptive information regarding each 

trading desk engaged in covered trading 

activities, including: 

1. Name of the trading desk used internally 

by the banking entity and a unique 

identification label for the trading desk; 

2. Identification of each type of covered 

trading activity in which the trading desk is 

engaged; 

3. Brief description of the general strategy 

of the trading desk; 

4. A list of the types of financial 

instruments and other products purchased 

and sold by the trading desk; an indication 

of which of these are the main financial 

instruments or products purchased and sold 

by the trading desk; and, for trading desks 

engaged in market making-related activities 

under § 255.4(b), specification of whether 

each type of financial instrument is included 

in market-maker positions or not included in 

market-maker positions. In addition, indicate 

whether the trading desk is including in its 

quantitative measurements products 

excluded from the definition of ‘‘financial 

instrument’’ under § 255.3(d)(2) and, if so, 

identify such products; 

5. Identification by complete name of each 

legal entity that serves as a booking entity for 

covered trading activities conducted by the 

trading desk; and indication of which of the 

identified legal entities are the main booking 

entities for covered trading activities of the 

trading desk; 

6. For each legal entity that serves as a 

booking entity for covered trading activities, 

specification of any of the following 

applicable entity types for that legal entity: 

i. National bank, Federal branch or Federal 

agency of a foreign bank, Federal savings 

association, Federal savings bank; 

ii. State nonmember bank, foreign bank 

having an insured branch, State savings 

association; 

iii. U.S.-registered broker-dealer, U.S.- 

registered security-based swap dealer, U.S.- 

registered major security-based swap 

participant; 

iv. Swap dealer, major swap participant, 

derivatives clearing organization, futures 

commission merchant, commodity pool 

operator, commodity trading advisor, 

introducing broker, floor trader, retail foreign 

exchange dealer; 

v. State member bank; 

vi. Bank holding company, savings and 

loan holding company; 

vii. Foreign banking organization as 

defined in 12 CFR 211.21(o); 

viii. Uninsured State-licensed branch or 

agency of a foreign bank; or 

ix. Other entity type not listed above, 

including a subsidiary of a legal entity 

described above where the subsidiary itself is 

not an entity type listed above; 

7. Indication of whether each calendar date 

is a trading day or not a trading day for the 

trading desk; and 

8. Currency reported and daily currency 

conversion rate. 

c. Quantitative Measurements Identifying 

Information 

Each banking entity must provide the 

following information regarding the 

quantitative measurements: 

1. A Risk and Position Limits Information 

Schedule that provides identifying and 

descriptive information for each limit 

reported pursuant to the Risk and Position 

Limits and Usage quantitative measurement, 

including the name of the limit, a unique 

identification label for the limit, a 

description of the limit, whether the limit is 

intraday or end-of-day, the unit of 

measurement for the limit, whether the limit 

measures risk on a net or gross basis, and the 

type of limit; 

2. A Risk Factor Sensitivities Information 

Schedule that provides identifying and 

descriptive information for each risk factor 

sensitivity reported pursuant to the Risk 

Factor Sensitivities quantitative 

measurement, including the name of the 

sensitivity, a unique identification label for 

the sensitivity, a description of the 

sensitivity, and the sensitivity’s risk factor 

change unit; 

3. A Risk Factor Attribution Information 

Schedule that provides identifying and 

descriptive information for each risk factor 

attribution reported pursuant to the 

Comprehensive Profit and Loss Attribution 

quantitative measurement, including the 

name of the risk factor or other factor, a 

unique identification label for the risk factor 

or other factor, a description of the risk factor 

or other factor, and the risk factor or other 

factor’s change unit; 

4. A Limit/Sensitivity Cross-Reference 

Schedule that cross-references, by unique 

identification label, limits identified in the 

Risk and Position Limits Information 

Schedule to associated risk factor 

sensitivities identified in the Risk Factor 

Sensitivities Information Schedule; and 

5. A Risk Factor Sensitivity/Attribution 

Cross-Reference Schedule that crossreferences, by unique identification label, 

risk factor sensitivities identified in the Risk 

Factor Sensitivities Information Schedule to 

associated risk factor attributions identified 

in the Risk Factor Attribution Information 

Schedule. 

d. Narrative Statement 

Each banking entity made subject to this 

appendix by § 255.20 must submit in a 

separate electronic document a Narrative 

Statement to the SEC describing any changes 

in calculation methods used, a description of 

and reasons for changes in the banking 

entity’s trading desk structure or trading desk 

strategies, and when any such change 

occurred. The Narrative Statement must 

include any information the banking entity 

views as relevant for assessing the 

information reported, such as further 

description of calculation methods used. 

If a banking entity does not have any 

information to report in a Narrative 

Statement, the banking entity must submit an 

electronic document stating that it does not 

have any information to report in a Narrative 

Statement. 

e. Frequency and Method of Required 

Calculation and Reporting 

A banking entity must calculate any 

applicable quantitative measurement for each 

trading day. A banking entity must report the 

Narrative Statement, the Trading Desk 

Information, the Quantitative Measurements 

Identifying Information, and each applicable 

quantitative measurement electronically to 

the SEC on the reporting schedule 

established in § 255.20 unless otherwise 

requested by the SEC. A banking entity must 

report the Trading Desk Information, the 

Quantitative Measurements Identifying 

Information, and each applicable quantitative 

measurement to the SEC in accordance with 

the XML Schema specified and published on 

the SEC’s website. 


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1See §§ 255.2(i), (bb). For example, under this 

part, a security-based swap is both a ‘‘security’’ and 

a ‘‘derivative.’’ For purposes of the Positions 

quantitative measurement, security-based swaps are 

reported as derivatives rather than securities. 

f. Recordkeeping 

A banking entity must, for any quantitative 

measurement furnished to the SEC pursuant 

to this appendix and § 255.20(d), create and 

maintain records documenting the 

preparation and content of these reports, as 

well as such information as is necessary to 

permit the SEC to verify the accuracy of such 

reports, for a period of five years from the 

end of the calendar year for which the 

measurement was taken. A banking entity 

must retain the Narrative Statement, the 

Trading Desk Information, and the 

Quantitative Measurements Identifying 

Information for a period of five years from 

the end of the calendar year for which the 

information was reported to the SEC. 

IV. Quantitative Measurements 

a. Risk-Management Measurements 

1. Risk and Position Limits and Usage 

i. Description: For purposes of this 

appendix, Risk and Position Limits are the 

constraints that define the amount of risk that 

a trading desk is permitted to take at a point 

in time, as defined by the banking entity for 

a specific trading desk. Usage represents the 

value of the trading desk’s risk or positions 

that are accounted for by the current activity 

of the desk. Risk and position limits and their 

usage are key risk management tools used to 

control and monitor risk taking and include, 

but are not limited to, the limits set out in 

§ 255.4 and § 255.5. A number of the metrics 

that are described below, including ‘‘Risk 

Factor Sensitivities’’ and ‘‘Value-at-Risk,’’ 

relate to a trading desk’s risk and position 

limits and are useful in evaluating and 

setting these limits in the broader context of 

the trading desk’s overall activities, 

particularly for the market making activities 

under § 255.4(b) and hedging activity under 

§ 255.5. Accordingly, the limits required 

under § 255.4(b)(2)(iii) and § 255.5(b)(1)(i)(A) 

must meet the applicable requirements under 

§ 255.4(b)(2)(iii) and § 255.5(b)(1)(i)(A) and 

also must include appropriate metrics for the 

trading desk limits including, at a minimum, 

the ‘‘Risk Factor Sensitivities’’ and ‘‘Value-atRisk’’ metrics except to the extent any of the 

‘‘Risk Factor Sensitivities’’ or ‘‘Value-at-Risk’’ 

metrics are demonstrably ineffective for 

measuring and monitoring the risks of a 

trading desk based on the types of positions 

traded by, and risk exposures of, that desk. 

A. A banking entity must provide the 

following information for each limit reported 

pursuant to this quantitative measurement: 

The unique identification label for the limit 

reported in the Risk and Position Limits 

Information Schedule, the limit size 

(distinguishing between an upper and a 

lower limit), and the value of usage of the 

limit. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks engaged 

in covered trading activities. 

2. Risk Factor Sensitivities 

i. Description: For purposes of this 

appendix, Risk Factor Sensitivities are 

changes in a trading desk’s Comprehensive 

Profit and Loss that are expected to occur in 

the event of a change in one or more 

underlying variables that are significant 

sources of the trading desk’s profitability and 

risk. A banking entity must report the risk 

factor sensitivities that are monitored and 

managed as part of the trading desk’s overall 

risk management policy. Reported risk factor 

sensitivities must be sufficiently granular to 

account for a preponderance of the expected 

price variation in the trading desk’s holdings. 

A banking entity must provide the following 

information for each sensitivity that is 

reported pursuant to this quantitative 

measurement: The unique identification label 

for the risk factor sensitivity listed in the Risk 

Factor Sensitivities Information Schedule, 

the change in risk factor used to determine 

the risk factor sensitivity, and the aggregate 

change in value across all positions of the 

desk given the change in risk factor. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks engaged 

in covered trading activities. 

3. Value-at-Risk and Stressed Value-at-Risk 

i. Description: For purposes of this 

appendix, Value-at-Risk (‘‘VaR’’) is the 

measurement of the risk of future financial 

loss in the value of a trading desk’s 

aggregated positions at the ninety-nine 

percent confidence level over a one-day 

period, based on current market conditions. 

For purposes of this appendix, Stressed 

Value-at-Risk (‘‘Stressed VaR’’) is the 

measurement of the risk of future financial 

loss in the value of a trading desk’s 

aggregated positions at the ninety-nine 

percent confidence level over a one-day 

period, based on market conditions during a 

period of significant financial stress. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: For VaR, all trading desks 

engaged in covered trading activities. For 

Stressed VaR, all trading desks engaged in 

covered trading activities, except trading 

desks whose covered trading activity is 

conducted exclusively to hedge products 

excluded from the definition of ‘‘financial 

instrument’’ under § 255.3(d)(2). 

b. Source-of-Revenue Measurements 

1. Comprehensive Profit and Loss Attribution 

i. Description: For purposes of this 

appendix, Comprehensive Profit and Loss 

Attribution is an analysis that attributes the 

daily fluctuation in the value of a trading 

desk’s positions to various sources. First, the 

daily profit and loss of the aggregated 

positions is divided into three categories: (i) 

Profit and loss attributable to a trading desk’s 

existing positions that were also positions 

held by the trading desk as of the end of the 

prior day (‘‘existing positions’’); (ii) profit 

and loss attributable to new positions 

resulting from the current day’s trading 

activity (‘‘new positions’’); and (iii) residual 

profit and loss that cannot be specifically 

attributed to existing positions or new 

positions. The sum of (i), (ii), and (iii) must 

equal the trading desk’s comprehensive profit 

and loss at each point in time. 

A. The comprehensive profit and loss 

associated with existing positions must 

reflect changes in the value of these positions 

on the applicable day. 

The comprehensive profit and loss from 

existing positions must be further attributed, 

as applicable, to changes in (i) the specific 

risk factors and other factors that are 

monitored and managed as part of the trading 

desk’s overall risk management policies and 

procedures; and (ii) any other applicable 

elements, such as cash flows, carry, changes 

in reserves, and the correction, cancellation, 

or exercise of a trade. 

B. For the attribution of comprehensive 

profit and loss from existing positions to 

specific risk factors and other factors, a 

banking entity must provide the following 

information for the factors that explain the 

preponderance of the profit or loss changes 

due to risk factor changes: The unique 

identification label for the risk factor or other 

factor listed in the Risk Factor Attribution 

Information Schedule, and the profit or loss 

due to the risk factor or other factor change. 

C. The comprehensive profit and loss 

attributed to new positions must reflect 

commissions and fee income or expense and 

market gains or losses associated with 

transactions executed on the applicable day. 

New positions include purchases and sales of 

financial instruments and other assets/ 

liabilities and negotiated amendments to 

existing positions. The comprehensive profit 

and loss from new positions may be reported 

in the aggregate and does not need to be 

further attributed to specific sources. 

D. The portion of comprehensive profit and 

loss that cannot be specifically attributed to 

known sources must be allocated to a 

residual category identified as an 

unexplained portion of the comprehensive 

profit and loss. Significant unexplained 

profit and loss must be escalated for further 

investigation and analysis. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks engaged 

in covered trading activities. 

c. Positions, Transaction Volumes, and 

Securities Inventory Aging Measurements 

1. Positions 

i. Description: For purposes of this 

appendix, Positions is the value of securities 

and derivatives positions managed by the 

trading desk. For purposes of the Positions 

quantitative measurement, do not include in 

the Positions calculation for ‘‘securities’’ 

those securities that are also ‘‘derivatives,’’ as 

those terms are defined under subpart A; 

instead, report those securities that are also 

derivatives as ‘‘derivatives.’’ 1 A banking 

entity must separately report the trading 

desk’s market value of long securities 

positions, market value of short securities 

positions, market value of derivatives 

receivables, market value of derivatives 

payables, notional value of derivatives 

receivables, and notional value of derivatives 

payables. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks that rely 

on § 255.4(a) or § 255.4(b) to conduct 


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2See §§ 255.2(i), (bb). 

3See §§ 255.2(i), (bb). 

underwriting activity or market-makingrelated activity, respectively. 

2. Transaction Volumes 

i. Description: For purposes of this 

appendix, Transaction Volumes measures 

four exclusive categories of covered trading 

activity conducted by a trading desk. A 

banking entity is required to report the value 

and number of security and derivative 

transactions conducted by the trading desk 

with: (i) Customers, excluding internal 

transactions; (ii) non-customers, excluding 

internal transactions; (iii) trading desks and 

other organizational units where the 

transaction is booked in the same banking 

entity; and (iv) trading desks and other 

organizational units where the transaction is 

booked into an affiliated banking entity. For 

securities, value means gross market value. 

For derivatives, value means gross notional 

value. For purposes of calculating the 

Transaction Volumes quantitative 

measurement, do not include in the 

Transaction Volumes calculation for 

‘‘securities’’ those securities that are also 

‘‘derivatives,’’ as those terms are defined 

under subpart A; instead, report those 

securities that are also derivatives as 

‘‘derivatives.’’ 2 Further, for purposes of the 

Transaction Volumes quantitative 

measurement, a customer of a trading desk 

that relies on § 255.4(a) to conduct 

underwriting activity is a market participant 

identified in § 255.4(a)(7), and a customer of 

a trading desk that relies on § 255.4(b) to 

conduct market making-related activity is a 

market participant identified in § 255.4(b)(3). 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks that rely 

on § 255.4(a) or § 255.4(b) to conduct 

underwriting activity or market-makingrelated activity, respectively. 

3. Securities Inventory Aging 

i. Description: For purposes of this 

appendix, Securities Inventory Aging 

generally describes a schedule of the market 

value of the trading desk’s securities 

positions and the amount of time that those 

securities positions have been held. 

Securities Inventory Aging must measure the 

age profile of a trading desk’s securities 

positions for the following periods: 0–30 

Calendar days; 31–60 calendar days; 61–90 

calendar days; 91–180 calendar days; 181– 

360 calendar days; and greater than 360 

calendar days. Securities Inventory Aging 

includes two schedules, a security assetaging schedule, and a security liability-aging 

schedule. For purposes of the Securities 

Inventory Aging quantitative measurement, 

do not include securities that are also 

‘‘derivatives,’’ as those terms are defined 

under subpart A.3

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks that rely 

on § 255.4(a) or § 255.4(b) to conduct 

underwriting activity or market-making 

related activity, respectively. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Chapter I 

Authority and Issuance 

For the reasons set forth in the 

Common Preamble, the Commodity 

Futures Trading Commission proposes 

to amend Part 75 to chapter I of Title 17 

of the Code of Federal Regulations as 

follows: 

PART 75—PROPRIETARY TRADING 

AND CERTAIN INTERESTS IN AND 

RELATIONSHIPS WITH COVERED 

FUNDS 

■ 54. The authority for part 75 

continues to read as follows: 

Authority: 12 U.S.C. 1851. 

■ 55. Revise § 75.2 to read as follows: 

§ 75.2 Definitions. 

Unless otherwise specified, for 

purposes of this part: 

(a) Affiliate has the same meaning as 

in section 2(k) of the Bank Holding 

Company Act of 1956 (12 U.S.C. 

1841(k)). 

(b) Applicable accounting standards 

means U.S. generally accepted 

accounting principles, or such other 

accounting standards applicable to a 

banking entity that the Commission 

determines are appropriate and that the 

banking entity uses in the ordinary 

course of its business in preparing its 

consolidated financial statements. 

(c) Bank holding company has the 

same meaning as in section 2 of the 

Bank Holding Company Act of 1956 (12 

U.S.C. 1841). 

(d) Banking entity. (1) Except as 

provided in paragraph (d)(2) of this 

section, banking entity means: 

(i) Any insured depository institution; 

(ii) Any company that controls an 

insured depository institution; 

(iii) Any company that is treated as a 

bank holding company for purposes of 

section 8 of the International Banking 

Act of 1978 (12 U.S.C. 3106); and 

(iv) Any affiliate or subsidiary of any 

entity described in paragraphs (d)(1)(i), 

(ii), or (iii) of this section. 

(2) Banking entity does not include: 

(i) A covered fund that is not itself a 

banking entity under paragraphs 

(d)(1)(i), (ii), or (iii) of this section; 

(ii) A portfolio company held under 

the authority contained in section 

4(k)(4)(H) or (I) of the BHC Act (12 

U.S.C. 1843(k)(4)(H), (I)), or any 

portfolio concern, as defined under 13 

CFR 107.50, that is controlled by a small 

business investment company, as 

defined in section 103(3) of the Small 

Business Investment Act of 1958 (15 

U.S.C. 662), so long as the portfolio 

company or portfolio concern is not 

itself a banking entity under paragraphs 

(d)(1)(i), (ii), or (iii) of this section; or 

(iii) The FDIC acting in its corporate 

capacity or as conservator or receiver 

under the Federal Deposit Insurance Act 

or Title II of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act. 

(e) Board means the Board of 

Governors of the Federal Reserve 

System. 

(f) CFTC means the Commodity 

Futures Trading Commission. 

(g) Dealer has the same meaning as in 

section 3(a)(5) of the Exchange Act (15 

U.S.C. 78c(a)(5)). 

(h) Depository institution has the 

same meaning as in section 3(c) of the 

Federal Deposit Insurance Act (12 

U.S.C. 1813(c)). 

(i) Derivative. (1) Except as provided 

in paragraph (i)(2) of this section, 

derivative means: 

(i) Any swap, as that term is defined 

in section 1a(47) of the Commodity 

Exchange Act (7 U.S.C. 1a(47)), or 

security-based swap, as that term is 

defined in section 3(a)(68) of the 

Exchange Act (15 U.S.C. 78c(a)(68)); 

(ii) Any purchase or sale of a 

commodity, that is not an excluded 

commodity, for deferred shipment or 

delivery that is intended to be 

physically settled; 

(iii) Any foreign exchange forward (as 

that term is defined in section 1a(24) of 

the Commodity Exchange Act (7 U.S.C. 

1a(24)) or foreign exchange swap (as 

that term is defined in section 1a(25) of 

the Commodity Exchange Act (7 U.S.C. 

1a(25)); 

(iv) Any agreement, contract, or 

transaction in foreign currency 

described in section 2(c)(2)(C)(i) of the 

Commodity Exchange Act (7 U.S.C. 

2(c)(2)(C)(i)); 

(v) Any agreement, contract, or 

transaction in a commodity other than 

foreign currency described in section 

2(c)(2)(D)(i) of the Commodity Exchange 

Act (7 U.S.C. 2(c)(2)(D)(i)); and 

(vi) Any transaction authorized under 

section 19 of the Commodity Exchange 

Act (7 U.S.C. 23(a) or (b)); 

(2) A derivative does not include: 

(i) Any consumer, commercial, or 

other agreement, contract, or transaction 

that the CFTC and SEC have further 

defined by joint regulation, 

interpretation, guidance, or other action 

as not within the definition of swap, as 

that term is defined in section 1a(47) of 

the Commodity Exchange Act (7 U.S.C. 

1a(47)), or security-based swap, as that 

term is defined in section 3(a)(68) of the 

Exchange Act (15 U.S.C. 78c(a)(68)); or 

(ii) Any identified banking product, as 

defined in section 402(b) of the Legal 

Certainty for Bank Products Act of 2000 


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(7 U.S.C. 27(b)), that is subject to section 

403(a) of that Act (7 U.S.C. 27a(a)). 

(j) Employee includes a member of the 

immediate family of the employee. 

(k) Exchange Act means the Securities 

Exchange Act of 1934 (15 U.S.C. 78a et 

seq.). 

(l) Excluded commodity has the same 

meaning as in section 1a(19) of the 

Commodity Exchange Act (7 U.S.C. 

1a(19)). 

(m) FDIC means the Federal Deposit 

Insurance Corporation. 

(n) Federal banking agencies means 

the Board, the Office of the Comptroller 

of the Currency, and the FDIC. 

(o) Foreign banking organization has 

the same meaning as in section 

211.21(o) of the Board’s Regulation K 

(12 CFR 211.21(o)), but does not include 

a foreign bank, as defined in section 

1(b)(7) of the International Banking Act 

of 1978 (12 U.S.C. 3101(7)), that is 

organized under the laws of the 

Commonwealth of Puerto Rico, Guam, 

American Samoa, the United States 

Virgin Islands, or the Commonwealth of 

the Northern Mariana Islands. 

(p) Foreign insurance regulator means 

the insurance commissioner, or a 

similar official or agency, of any country 

other than the United States that is 

engaged in the supervision of insurance 

companies under foreign insurance law. 

(q) General account means all of the 

assets of an insurance company except 

those allocated to one or more separate 

accounts. 

(r) Insurance company means a 

company that is organized as an 

insurance company, primarily and 

predominantly engaged in writing 

insurance or reinsuring risks 

underwritten by insurance companies, 

subject to supervision as such by a state 

insurance regulator or a foreign 

insurance regulator, and not operated 

for the purpose of evading the 

provisions of section 13 of the BHC Act 

(12 U.S.C. 1851). 

(s) Insured depository institution has 

the same meaning as in section 3(c) of 

the Federal Deposit Insurance Act (12 

U.S.C. 1813(c)), but does not include an 

insured depository institution that is 

described in section 2(c)(2)(D) of the 

BHC Act (12 U.S.C. 1841(c)(2)(D)). 

(t) Limited trading assets and 

liabilities means, with respect to a 

banking entity, that: 

(1) The banking entity has, together 

with its affiliates and subsidiaries on a 

worldwide consolidated basis, trading 

assets and liabilities (excluding trading 

assets and liabilities involving 

obligations of or guaranteed by the 

United States or any agency of the 

United States) the average gross sum of 

which over the previous consecutive 

four quarters, as measured as of the last 

day of each of the four previous 

calendar quarters, is less than 

$1,000,000,000; and 

(2) The Commission has not 

determined pursuant to § 75.20(g) or (h) 

of this part that the banking entity 

should not be treated as having limited 

trading assets and liabilities. 

(u) Loan means any loan, lease, 

extension of credit, or secured or 

unsecured receivable that is not a 

security or derivative. 

(v) Moderate trading assets and 

liabilities means, with respect to a 

banking entity, that the banking entity 

does not have significant trading assets 

and liabilities or limited trading assets 

and liabilities. 

(w) Primary financial regulatory 

agency has the same meaning as in 

section 2(12) of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (12 U.S.C. 5301(12)). 

(x) Purchase includes any contract to 

buy, purchase, or otherwise acquire. For 

security futures products, purchase 

includes any contract, agreement, or 

transaction for future delivery. With 

respect to a commodity future, purchase 

includes any contract, agreement, or 

transaction for future delivery. With 

respect to a derivative, purchase 

includes the execution, termination 

(prior to its scheduled maturity date), 

assignment, exchange, or similar 

transfer or conveyance of, or 

extinguishing of rights or obligations 

under, a derivative, as the context may 

require. 

(y) Qualifying foreign banking 

organization means a foreign banking 

organization that qualifies as such under 

section 211.23(a), (c) or (e) of the 

Board’s Regulation K (12 CFR 211.23(a), 

(c), or (e)). 

(z) SEC means the Securities and 

Exchange Commission. 

(aa) Sale and sell each include any 

contract to sell or otherwise dispose of. 

For security futures products, such 

terms include any contract, agreement, 

or transaction for future delivery. With 

respect to a commodity future, such 

terms include any contract, agreement, 

or transaction for future delivery. With 

respect to a derivative, such terms 

include the execution, termination 

(prior to its scheduled maturity date), 

assignment, exchange, or similar 

transfer or conveyance of, or 

extinguishing of rights or obligations 

under, a derivative, as the context may 

require. 

(bb) Security has the meaning 

specified in section 3(a)(10) of the 

Exchange Act (15 U.S.C. 78c(a)(10)). 

(cc) Security-based swap dealer has 

the same meaning as in section 3(a)(71) 

of the Exchange Act (15 U.S.C. 

78c(a)(71)). 

(dd) Security future has the meaning 

specified in section 3(a)(55) of the 

Exchange Act (15 U.S.C. 78c(a)(55)). 

(ee) Separate account means an 

account established and maintained by 

an insurance company in connection 

with one or more insurance contracts to 

hold assets that are legally segregated 

from the insurance company’s other 

assets, under which income, gains, and 

losses, whether or not realized, from 

assets allocated to such account, are, in 

accordance with the applicable contract, 

credited to or charged against such 

account without regard to other income, 

gains, or losses of the insurance 

company. 

(ff) Significant trading assets and 

liabilities. 

(1) Significant trading assets and 

liabilities means, with respect to a 

banking entity, that: 

(i) The banking entity has, together 

with its affiliates and subsidiaries, 

trading assets and liabilities the average 

gross sum of which over the previous 

consecutive four quarters, as measured 

as of the last day of each of the four 

previous calendar quarters, equals or 

exceeds $10,000,000,000; or 

(ii) The Commission has determined 

pursuant to § 75.20(h) of this part that 

the banking entity should be treated as 

having significant trading assets and 

liabilities. 

(2) With respect to a banking entity 

other than a banking entity described in 

paragraph (3), trading assets and 

liabilities for purposes of this paragraph 

(ff) means trading assets and liabilities 

(excluding trading assets and liabilities 

involving obligations of or guaranteed 

by the United States or any agency of 

the United States) on a worldwide 

consolidated basis. 

(3)(i) With respect to a banking entity 

that is a foreign banking organization or 

a subsidiary of a foreign banking 

organization, trading assets and 

liabilities for purposes of this paragraph 

(ff) means the trading assets and 

liabilities (excluding trading assets and 

liabilities involving obligations of or 

guaranteed by the United States or any 

agency of the United States) of the 

combined U.S. operations of the top-tier 

foreign banking organization (including 

all subsidiaries, affiliates, branches, and 

agencies of the foreign banking 

organization operating, located, or 

organized in the United States). 

(ii) For purposes of paragraph (ff)(3)(i) 

of this section, a U.S. branch, agency, or 

subsidiary of a banking entity is located 

in the United States; however, the 

foreign bank that operates or controls 

that branch, agency, or subsidiary is not 


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considered to be located in the United 

States solely by virtue of operating or 

controlling the U.S. branch, agency, or 

subsidiary. 

(gg) State means any State, the District 

of Columbia, the Commonwealth of 

Puerto Rico, Guam, American Samoa, 

the United States Virgin Islands, and the 

Commonwealth of the Northern Mariana 

Islands. 

(hh) Subsidiary has the same meaning 

as in section 2(d) of the Bank Holding 

Company Act of 1956 (12 U.S.C. 

1841(d)). 

(ii) State insurance regulator means 

the insurance commissioner, or a 

similar official or agency, of a State that 

is engaged in the supervision of 

insurance companies under State 

insurance law. 

(jj) Swap dealer has the same meaning 

as in section 1(a)(49) of the Commodity 

Exchange Act (7 U.S.C. 1a(49)). 

■ 56. Amend § 75.3 by: 

■ a. Revising paragraph (b); 

■ b. Redesignating paragraphs (c) 

through (e) as paragraphs (d) through (f); 

■ c. Adding a new paragraph (c); 

■ d. Revising paragraph (e)(3); 

■ e. Adding paragraph (e)(10); 

■ f. Redesignating paragraphs (f)(5) 

through (f)(13) as paragraphs (f)(6) 

through (f)(14); 

■ g. Adding a new paragraph (f)(5); and 

■ h. Adding paragraph (g). 

The revisions and additions read as 

follows: 

§ 75.3 Prohibition on proprietary trading. 

* * * * * 

(b) Definition of trading account. 

Trading account means any account 

that is used by a banking entity to: 

(1)(i) Purchase or sell one or more 

financial instruments that are both 

market risk capital rule covered 

positions and trading positions (or 

hedges of other market risk capital rule 

covered positions), if the banking entity, 

or any affiliate of the banking entity, is 

an insured depository institution, bank 

holding company, or savings and loan 

holding company, and calculates riskbased capital ratios under the market 

risk capital rule; or 

(ii) With respect to a banking entity 

that is not, and is not controlled directly 

or indirectly by a banking entity that is, 

located in or organized under the laws 

of the United States or any State, 

purchase or sell one or more financial 

instruments that are subject to capital 

requirements under a market risk 

framework established by the homecountry supervisor that is consistent 

with the market risk framework 

published by the Basel Committee on 

Banking Supervision, as amended from 

time to time. 

(2) Purchase or sell one or more 

financial instruments for any purpose, if 

the banking entity: 

(i) Is licensed or registered, or is 

required to be licensed or registered, to 

engage in the business of a dealer, swap 

dealer, or security-based swap dealer, to 

the extent the instrument is purchased 

or sold in connection with the activities 

that require the banking entity to be 

licensed or registered as such; or 

(ii) Is engaged in the business of a 

dealer, swap dealer, or security-based 

swap dealer outside of the United 

States, to the extent the instrument is 

purchased or sold in connection with 

the activities of such business; or 

(3) Purchase or sell one or more 

financial instruments, with respect to a 

financial instrument that is recorded at 

fair value on a recurring basis under 

applicable accounting standards. 

(c) Presumption of compliance. (1)(i) 

Each trading desk that does not 

purchase or sell financial instruments 

for a trading account defined in 

paragraphs (b)(1) or (b)(2) of this section 

may calculate the net gain or net loss on 

the trading desk’s portfolio of financial 

instruments each business day, 

reflecting realized and unrealized gains 

and losses since the previous business 

day, based on the banking entity’s fair 

value for such financial instruments. 

(ii) If the sum of the absolute values 

of the daily net gain and loss figures 

determined in accordance with 

paragraph (c)(1)(i) of this section for the 

preceding 90-calendar-day period does 

not exceed $25 million, the activities of 

the trading desk shall be presumed to be 

in compliance with the prohibition in 

paragraph (a) of this section. 

(2) The Commission may rebut the 

presumption of compliance in 

paragraph (c)(1)(ii) of this section by 

providing written notice to the banking 

entity that the Commission has 

determined that one or more of the 

banking entity’s activities violates the 

prohibitions under subpart B. 

(3) If a trading desk operating 

pursuant to paragraph (c)(1)(ii) of this 

section exceeds the $25 million 

threshold in that paragraph at any point, 

the banking entity shall, in accordance 

with any policies and procedures 

adopted by the Commission: 

(i) Promptly notify the Commission; 

(ii) Demonstrate that the trading 

desk’s purchases and sales of financial 

instruments comply with subpart B; and 

(iii) Demonstrate, with respect to the 

trading desk, how the banking entity 

will maintain compliance with subpart 

B on an ongoing basis. 

* * * * * 

(e) * * * 

(3) Any purchase or sale of a security, 

foreign exchange forward (as that term 

is defined in section 1a(24) of the 

Commodity Exchange Act (7 U.S.C. 

1a(24)), foreign exchange swap (as that 

term is defined in section 1a(25) of the 

Commodity Exchange Act (7 U.S.C. 

1a(25)), or physically-settled crosscurrency swap, by a banking entity for 

the purpose of liquidity management in 

accordance with a documented liquidity 

management plan of the banking entity 

that, with respect to such financial 

instruments: 

(i) Specifically contemplates and 

authorizes the particular financial 

instruments to be used for liquidity 

management purposes, the amount, 

types, and risks of these financial 

instruments that are consistent with 

liquidity management, and the liquidity 

circumstances in which the particular 

financial instruments may or must be 

used; 

(ii) Requires that any purchase or sale 

of financial instruments contemplated 

and authorized by the plan be 

principally for the purpose of managing 

the liquidity of the banking entity, and 

not for the purpose of short-term resale, 

benefitting from actual or expected 

short-term price movements, realizing 

short-term arbitrage profits, or hedging a 

position taken for such short-term 

purposes; 

(iii) Requires that any financial 

instruments purchased or sold for 

liquidity management purposes be 

highly liquid and limited to financial 

instruments the market, credit, and 

other risks of which the banking entity 

does not reasonably expect to give rise 

to appreciable profits or losses as a 

result of short-term price movements; 

(iv) Limits any financial instruments 

purchased or sold for liquidity 

management purposes, together with 

any other instruments purchased or sold 

for such purposes, to an amount that is 

consistent with the banking entity’s 

near-term funding needs, including 

deviations from normal operations of 

the banking entity or any affiliate 

thereof, as estimated and documented 

pursuant to methods specified in the 

plan; 

(v) Includes written policies and 

procedures, internal controls, analysis, 

and independent testing to ensure that 

the purchase and sale of financial 

instruments that are not permitted 

under §§ 75.6(a) or (b) of this subpart are 

for the purpose of liquidity management 

and in accordance with the liquidity 

management plan described in 

paragraph (e)(3) of this section; and 

(vi) Is consistent with the 

Commission’s supervisory 

requirements, guidance, and 


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expectations regarding liquidity 

management; 

* * * * * 

(10) Any purchase (or sale) of one or 

more financial instruments that was 

made in error by a banking entity in the 

course of conducting a permitted or 

excluded activity or is a subsequent 

transaction to correct such an error, and 

the erroneously purchased (or sold) 

financial instrument is promptly 

transferred to a separately-managed 

trade error account for disposition. 

(f) * * * 

(5) Cross-currency swap means a swap 

in which one party exchanges with 

another party principal and interest rate 

payments in one currency for principal 

and interest rate payments in another 

currency, and the exchange of principal 

occurs on the date the swap is entered 

into, with a reversal of the exchange of 

principal at a later date that is agreed 

upon when the swap is entered into. 

* * * * * 

(g) Reservation of Authority: (1) The 

Commission may determine, on a caseby-case basis, that a purchase or sale of 

one or more financial instruments by a 

banking entity either is or is not for the 

trading account as defined at 12 U.S.C. 

1851(h)(6). 

(2) Notice and Response 

Procedures.—(i) Notice. When the 

Commission determines that the 

purchase or sale of one or more 

financial instruments is for the trading 

account under paragraph (g)(1) of this 

section, the Commission will notify the 

banking entity in writing of the 

determination and provide an 

explanation of the determination. 

(ii) Response. (A) The banking entity 

may respond to any or all items in the 

notice. The response should include any 

matters that the banking entity would 

have the Commission consider in 

deciding whether the purchase or sale is 

for the trading account. The response 

must be in writing and delivered to the 

designated Commission official within 

30 days after the date on which the 

banking entity received the notice. The 

Commission may shorten the time 

period when, in the opinion of the 

Commission, the activities or condition 

of the banking entity so requires, 

provided that the banking entity is 

informed promptly of the new time 

period, or with the consent of the 

banking entity. In its discretion, the 

Commission may extend the time period 

for good cause. 

(B) Failure to respond within 30 days 

or such other time period as may be 

specified by the Commission shall 

constitute a waiver of any objections to 

the Commission’s determination. 

(iii) After the close of banking entity’s 

response period, the Commission will 

decide, based on a review of the banking 

entity’s response and other information 

concerning the banking entity, whether 

to maintain the Commission’s 

determination that the purchase or sale 

of one or more financial instruments is 

for the trading account. The banking 

entity will be notified of the decision in 

writing. The notice will include an 

explanation of the decision. 

■ 57. Amend § 75.4 by: 

■ a. Revising paragraph (a)(2); 

■ b. Adding paragraph (a)(8); 

■ c. Revising paragraph (b)(2); 

■ d. Revising the introductory text of 

paragraph (b)(3)(i); 

■ e. In paragraph (b)(5) revising the 

references to ‘‘inventory’’ to read 

‘‘positions’’; and 

■ f. Adding paragraph (b)(6). 

The revisions and additions to read as 

follows: 

§ 75.4 Permitted underwriting and market 

making-related activities. 

(a) * * * 

(2) Requirements. The underwriting 

activities of a banking entity are 

permitted under paragraph (a)(1) of this 

section only if: 

(i) The banking entity is acting as an 

underwriter for a distribution of 

securities and the trading desk’s 

underwriting position is related to such 

distribution; 

(ii)(A) The amount and type of the 

securities in the trading desk’s 

underwriting position are designed not 

to exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties, taking into account the 

liquidity, maturity, and depth of the 

market for the relevant type of security, 

and (B) reasonable efforts are made to 

sell or otherwise reduce the 

underwriting position within a 

reasonable period, taking into account 

the liquidity, maturity, and depth of the 

market for the relevant type of security; 

(iii) In the case of a banking entity 

with significant trading assets and 

liabilities, the banking entity has 

established and implements, maintains, 

and enforces an internal compliance 

program required by subpart D of this 

part that is reasonably designed to 

ensure the banking entity’s compliance 

with the requirements of paragraph (a) 

of this section, including reasonably 

designed written policies and 

procedures, internal controls, analysis, 

and independent testing identifying and 

addressing: 

(A) The products, instruments or 

exposures each trading desk may 

purchase, sell, or manage as part of its 

underwriting activities; 

(B) Limits for each trading desk, in 

accordance with paragraph (a)(8)(i) of 

this section; 

(C) Internal controls and ongoing 

monitoring and analysis of each trading 

desk’s compliance with its limits; and 

(D) Authorization procedures, 

including escalation procedures that 

require review and approval of any 

trade that would exceed a trading desk’s 

limit(s), demonstrable analysis of the 

basis for any temporary or permanent 

increase to a trading desk’s limit(s), and 

independent review of such 

demonstrable analysis and approval; 

(iv) The compensation arrangements 

of persons performing the activities 

described in this paragraph (a) are 

designed not to reward or incentivize 

prohibited proprietary trading; and 

(v) The banking entity is licensed or 

registered to engage in the activity 

described in this paragraph (a) in 

accordance with applicable law. 

* * * * * 

(8) Rebuttable presumption of 

compliance. 

(i) Risk limits. 

(A) A banking entity shall be 

presumed to meet the requirements of 

paragraph (a)(2)(ii)(A) of this section 

with respect to the purchase or sale of 

a financial instrument if the banking 

entity has established and implements, 

maintains, and enforces the limits 

described in paragraph (a)(8)(i)(B) and 

does not exceed such limits. 

(B) The presumption described in 

paragraph (8)(i)(A) of this section shall 

be available with respect to limits for 

each trading desk that are designed not 

to exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties, based on the nature and 

amount of the trading desk’s 

underwriting activities, on the: 

(1) Amount, types, and risk of its 

underwriting position; 

(2) Level of exposures to relevant risk 

factors arising from its underwriting 

position; and 

(3) Period of time a security may be 

held. 

(ii) Supervisory review and oversight. 

The limits described in paragraph 

(a)(8)(i) of this section shall be subject 

to supervisory review and oversight by 

the Commission on an ongoing basis. 

Any review of such limits will include 

assessment of whether the limits are 

designed not to exceed the reasonably 

expected near term demands of clients, 

customers, or counterparties. 

(iii) Reporting. With respect to any 

limit identified pursuant to paragraph 

(a)(8)(i) of this section, a banking entity 

shall promptly report to the 

Commission (A) to the extent that any 


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limit is exceeded and (B) any temporary 

or permanent increase to any limit(s), in 

each case in the form and manner as 

directed by the Commission. 

(iv) Rebutting the presumption. The 

presumption in paragraph (a)(8)(i) of 

this section may be rebutted by the 

Commission if the Commission 

determines, based on all relevant facts 

and circumstances, that a trading desk 

is engaging in activity that is not based 

on the reasonably expected near term 

demands of clients, customers, or 

counterparties. The Commission will 

provide notice of any such 

determination to the banking entity in 

writing. 

(b) * * * 

(2) Requirements. The market makingrelated activities of a banking entity are 

permitted under paragraph (b)(1) of this 

section only if: 

(i) The trading desk that establishes 

and manages the financial exposure 

routinely stands ready to purchase and 

sell one or more types of financial 

instruments related to its financial 

exposure and is willing and available to 

quote, purchase and sell, or otherwise 

enter into long and short positions in 

those types of financial instruments for 

its own account, in commercially 

reasonable amounts and throughout 

market cycles on a basis appropriate for 

the liquidity, maturity, and depth of the 

market for the relevant types of financial 

instruments; 

(ii) The trading desk’s market-making 

related activities are designed not to 

exceed, on an ongoing basis, the 

reasonably expected near term demands 

of clients, customers, or counterparties, 

based on the liquidity, maturity, and 

depth of the market for the relevant 

types of financial instrument(s). 

(iii) In the case of a banking entity 

with significant trading assets and 

liabilities, the banking entity has 

established and implements, maintains, 

and enforces an internal compliance 

program required by subpart D of this 

part that is reasonably designed to 

ensure the banking entity’s compliance 

with the requirements of paragraph (b) 

of this section, including reasonably 

designed written policies and 

procedures, internal controls, analysis 

and independent testing identifying and 

addressing: 

(A) The financial instruments each 

trading desk stands ready to purchase 

and sell in accordance with paragraph 

(b)(2)(i) of this section; 

(B) The actions the trading desk will 

take to demonstrably reduce or 

otherwise significantly mitigate 

promptly the risks of its financial 

exposure consistent with the limits 

required under paragraph (b)(2)(iii)(C) of 

this section; the products, instruments, 

and exposures each trading desk may 

use for risk management purposes; the 

techniques and strategies each trading 

desk may use to manage the risks of its 

market making-related activities and 

positions; and the process, strategies, 

and personnel responsible for ensuring 

that the actions taken by the trading 

desk to mitigate these risks are and 

continue to be effective; 

(C) Limits for each trading desk, in 

accordance with paragraph (b)(6)(i) of 

this section; 

(D) Internal controls and ongoing 

monitoring and analysis of each trading 

desk’s compliance with its limits; and 

(E) Authorization procedures, 

including escalation procedures that 

require review and approval of any 

trade that would exceed a trading desk’s 

limit(s), demonstrable analysis that the 

basis for any temporary or permanent 

increase to a trading desk’s limit(s) is 

consistent with the requirements of this 

paragraph (b), and independent review 

of such demonstrable analysis and 

approval; 

(iv) In the case of a banking entity 

with significant trading assets and 

liabilities, to the extent that any limit 

identified pursuant to paragraph 

(b)(2)(iii)(C) of this section is exceeded, 

the trading desk takes action to bring the 

trading desk into compliance with the 

limits as promptly as possible after the 

limit is exceeded; 

(v) The compensation arrangements of 

persons performing the activities 

described in this paragraph (b) are 

designed not to reward or incentivize 

prohibited proprietary trading; and 

(vi) The banking entity is licensed or 

registered to engage in activity 

described in this paragraph (b) in 

accordance with applicable law. 

(3) * * * 

(i) A trading desk or other 

organizational unit of another banking 

entity is not a client, customer, or 

counterparty of the trading desk if that 

other entity has trading assets and 

liabilities of $50 billion or more as 

measured in accordance with the 

methodology described in definition of 

‘‘significant trading assets and 

liabilities’’ contained in § 75.2 of this 

part, unless: 

* * * * * 

(6) Rebuttable presumption of 

compliance.—(i) Risk limits. (A) A 

banking entity shall be presumed to 

meet the requirements of paragraph 

(b)(2)(ii) of this section with respect to 

the purchase or sale of a financial 

instrument if the banking entity has 

established and implements, maintains, 

and enforces the limits described in 

paragraph (b)(6)(i)(B) of this section and 

does not exceed such limits. 

(B) The presumption described in 

paragraph (6)(i)(A) of this section shall 

be available with respect to limits for 

each trading desk that are designed not 

to exceed the reasonably expected near 

term demands of clients, customers, or 

counterparties, based on the nature and 

amount of the trading desk’s market 

making-related activities, on the: 

(1) Amount, types, and risks of its 

market-maker positions; 

(2) Amount, types, and risks of the 

products, instruments, and exposures 

the trading desk may use for risk 

management purposes; 

(3) Level of exposures to relevant risk 

factors arising from its financial 

exposure; and 

(4) Period of time a financial 

instrument may be held. 

(ii) Supervisory review and oversight. 

The limits described in paragraph 

(b)(6)(i) of this section shall be subject 

to supervisory review and oversight by 

the Commission on an ongoing basis. 

Any review of such limits will include 

assessment of whether the limits are 

designed not to exceed the reasonably 

expected near term demands of clients, 

customers, or counterparties. 

(iii) Reporting. With respect to any 

limit identified pursuant to paragraph 

(b)(6)(i) of this section, a banking entity 

shall promptly report to the 

Commission (A) to the extent that any 

limit is exceeded and (B) any temporary 

or permanent increase to any limit(s), in 

each case in the form and manner as 

directed by the Commission. 

(iv) Rebutting the presumption. The 

presumption in paragraph (b)(6)(i) of 

this section may be rebutted by the 

Commission if the Commission 

determines, based on all relevant facts 

and circumstances, that a trading desk 

is engaging in activity that is not based 

on the reasonably expected near term 

demands of clients, customers, or 

counterparties. The Commission will 

provide notice of any such 

determination to the banking entity in 

writing. 

■ 58. Amend § 75.5 by revising 

paragraph (b), the introductory text of 

paragraph (c)(1), and adding paragraph 

(c)(4) to read as follows: 

§ 75.5 Permitted risk-mitigating hedging 

activities. 

* * * * * 

(b) Requirements. (1) The riskmitigating hedging activities of a 

banking entity that has significant 

trading assets and liabilities are 

permitted under paragraph (a) of this 

section only if: 


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(i) The banking entity has established 

and implements, maintains and enforces 

an internal compliance program 

required by subpart D of this part that 

is reasonably designed to ensure the 

banking entity’s compliance with the 

requirements of this section, including: 

(A) Reasonably designed written 

policies and procedures regarding the 

positions, techniques and strategies that 

may be used for hedging, including 

documentation indicating what 

positions, contracts or other holdings a 

particular trading desk may use in its 

risk-mitigating hedging activities, as 

well as position and aging limits with 

respect to such positions, contracts or 

other holdings; 

(B) Internal controls and ongoing 

monitoring, management, and 

authorization procedures, including 

relevant escalation procedures; and 

(C) The conduct of analysis and 

independent testing designed to ensure 

that the positions, techniques and 

strategies that may be used for hedging 

may reasonably be expected to reduce or 

otherwise significantly mitigate the 

specific, identifiable risk(s) being 

hedged; 

(ii) The risk-mitigating hedging 

activity: 

(A) Is conducted in accordance with 

the written policies, procedures, and 

internal controls required under this 

section; 

(B) At the inception of the hedging 

activity, including, without limitation, 

any adjustments to the hedging activity, 

is designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks, including 

market risk, counterparty or other credit 

risk, currency or foreign exchange risk, 

interest rate risk, commodity price risk, 

basis risk, or similar risks, arising in 

connection with and related to 

identified positions, contracts, or other 

holdings of the banking entity, based 

upon the facts and circumstances of the 

identified underlying and hedging 

positions, contracts or other holdings 

and the risks and liquidity thereof; 

(C) Does not give rise, at the inception 

of the hedge, to any significant new or 

additional risk that is not itself hedged 

contemporaneously in accordance with 

this section; 

(D) Is subject to continuing review, 

monitoring and management by the 

banking entity that: 

(1) Is consistent with the written 

hedging policies and procedures 

required under paragraph (b)(1)(i) of this 

section; 

(2) Is designed to reduce or otherwise 

significantly mitigate the specific, 

identifiable risks that develop over time 

from the risk-mitigating hedging 

activities undertaken under this section 

and the underlying positions, contracts, 

and other holdings of the banking 

entity, based upon the facts and 

circumstances of the underlying and 

hedging positions, contracts and other 

holdings of the banking entity and the 

risks and liquidity thereof; and 

(3) Requires ongoing recalibration of 

the hedging activity by the banking 

entity to ensure that the hedging activity 

satisfies the requirements set out in 

paragraph (b)(1)(ii) of this section and is 

not prohibited proprietary trading; and 

(iii) The compensation arrangements 

of persons performing risk-mitigating 

hedging activities are designed not to 

reward or incentivize prohibited 

proprietary trading. 

(2) The risk-mitigating hedging 

activities of a banking entity that does 

not have significant trading assets and 

liabilities are permitted under paragraph 

(a) of this section only if the riskmitigating hedging activity: 

(i) At the inception of the hedging 

activity, including, without limitation, 

any adjustments to the hedging activity, 

is designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks, including 

market risk, counterparty or other credit 

risk, currency or foreign exchange risk, 

interest rate risk, commodity price risk, 

basis risk, or similar risks, arising in 

connection with and related to 

identified positions, contracts, or other 

holdings of the banking entity, based 

upon the facts and circumstances of the 

identified underlying and hedging 

positions, contracts or other holdings 

and the risks and liquidity thereof; and 

(ii) Is subject, as appropriate, to 

ongoing recalibration by the banking 

entity to ensure that the hedging activity 

satisfies the requirements set out in 

paragraph (b)(2) of this section and is 

not prohibited proprietary trading. 

(c) * * * (1) A banking entity that has 

significant trading assets and liabilities 

must comply with the requirements of 

paragraphs (c)(2) and (3) of this section, 

unless the requirements of paragraph 

(c)(4) of this section are met, with 

respect to any purchase or sale of 

financial instruments made in reliance 

on this section for risk-mitigating 

hedging purposes that is: 

* * * * * 

(4) The requirements of paragraphs 

(c)(2) and (3) of this section do not 

apply to the purchase or sale of a 

financial instrument described in 

paragraph (c)(1) of this section if: 

(i) The financial instrument 

purchased or sold is identified on a 

written list of pre-approved financial 

instruments that are commonly used by 

the trading desk for the specific type of 

hedging activity for which the financial 

instrument is being purchased or sold; 

and 

(ii) At the time the financial 

instrument is purchased or sold, the 

hedging activity (including the purchase 

or sale of the financial instrument) 

complies with written, pre-approved 

hedging limits for the trading desk 

purchasing or selling the financial 

instrument for hedging activities 

undertaken for one or more other 

trading desks. The hedging limits shall 

be appropriate for the: 

(A) Size, types, and risks of the 

hedging activities commonly 

undertaken by the trading desk; 

(B) Financial instruments purchased 

and sold for hedging activities by the 

trading desk; and 

(C) Levels and duration of the risk 

exposures being hedged. 

■ 59. Amend § 75.6 by revising 

paragraph (e)(3) and removing 

paragraph (e)(6) to read as follows: 

§ 75.6 Other permitted proprietary trading 

activities. 

* * * * * 

(e) * * * 

(3) A purchase or sale by a banking 

entity is permitted for purposes of this 

paragraph (e) if: 

(i) The banking entity engaging as 

principal in the purchase or sale 

(including relevant personnel) is not 

located in the United States or 

organized under the laws of the United 

States or of any State; 

(ii) The banking entity (including 

relevant personnel) that makes the 

decision to purchase or sell as principal 

is not located in the United States or 

organized under the laws of the United 

States or of any State; and 

(iii) The purchase or sale, including 

any transaction arising from riskmitigating hedging related to the 

instruments purchased or sold, is not 

accounted for as principal directly or on 

a consolidated basis by any branch or 

affiliate that is located in the United 

States or organized under the laws of 

the United States or of any State. 

* * * * * 

§ 75.10 [Amended] 

■ 60. Amend § 75.10 by: 

■ a. In paragraph (c)(8)(i)(A) revising the 

reference to ‘‘§ 75.2(s)’’ to read 

‘‘§ 75.2(u)’’; 

■ b. Removing paragraph (d)(1); 

■ c. Redesignating paragraphs (d)(2) 

through (d)(10) as paragraphs (d)(1) 

through (d)(9); 

■ d. In paragraph (d)(5)(i)(G) revising 

the reference to ‘‘(d)(6)(i)(A)’’ to read 

‘‘(d)(5)(i)(A)’’; and 


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■ e. In paragraph (d)(9) revising the 

reference to ‘‘(d)(9)’’ to read ‘‘(d)(8)’’ and 

the reference to ‘‘(d)(10)(i)(A)’’ to read 

‘‘(d)(9)(i)(A)’’ and the reference to 

‘‘(d)(10)(i)’’ to read ‘‘(d)(9)(i)’’. 

■ 61. Amend § 75.11 by revising 

paragraph (c) to read as follows: 

§ 75.11 Permitted organizing and offering, 

underwriting, and market making with 

respect to a covered fund. 

* * * * * 

(c) Underwriting and market making 

in ownership interests of a covered 

fund. The prohibition contained in 

§ 75.10(a) of this subpart does not apply 

to a banking entity’s underwriting 

activities or market making-related 

activities involving a covered fund so 

long as: 

(1) Those activities are conducted in 

accordance with the requirements of 

§ 75.4(a) or § 75.4(b) of subpart B, 

respectively; and 

(2) With respect to any banking entity 

(or any affiliate thereof) that: Acts as a 

sponsor, investment adviser or 

commodity trading advisor to a 

particular covered fund or otherwise 

acquires and retains an ownership 

interest in such covered fund in reliance 

on paragraph (a) of this section; or 

acquires and retains an ownership 

interest in such covered fund and is 

either a securitizer, as that term is used 

in section 15G(a)(3) of the Exchange Act 

(15 U.S.C. 78o–11(a)(3)), or is acquiring 

and retaining an ownership interest in 

such covered fund in compliance with 

section 15G of that Act (15 U.S.C. 78o– 

11) and the implementing regulations 

issued thereunder each as permitted by 

paragraph (b) of this section, then in 

each such case any ownership interests 

acquired or retained by the banking 

entity and its affiliates in connection 

with underwriting and market making 

related activities for that particular 

covered fund are included in the 

calculation of ownership interests 

permitted to be held by the banking 

entity and its affiliates under the 

limitations of § 75.12(a)(2)(ii); 

§ 75.12(a)(2)(iii), and § 75.12(d) of this 

subpart. 

§ 75.12 [Amended] 

■ 62. In subpart C, section 75.12 is 

amended by: 

■ a. In paragraphs (c)(1) and (d) revising 

the references to ‘‘§ 75.10(d)(6)(ii)’’ to 

read ‘‘§ 75.10(d)(5)(ii)’’; 

■ b. Removing paragraph (e)(2)(vii); and 

■ c. Redesignating the second instance 

of paragraph (e)(2)(vi) as paragraph 

(e)(2)(vii). 

■ 63. Amend § 75.13 by revising 

paragraphs (a) and (b)(3) and removing 

(b)(4)(iv) to read as follows: 

§ 75.13 Other permitted covered fund 

activities and investments. 

(a) Permitted risk-mitigating hedging 

activities. (1) The prohibition contained 

in § 75.10(a) of this subpart does not 

apply with respect to an ownership 

interest in a covered fund acquired or 

retained by a banking entity that is 

designed to reduce or otherwise 

significantly mitigate the specific, 

identifiable risks to the banking entity 

in connection with: 

(i) A compensation arrangement with 

an employee of the banking entity or an 

affiliate thereof that directly provides 

investment advisory, commodity trading 

advisory or other services to the covered 

fund; or 

(ii) A position taken by the banking 

entity when acting as intermediary on 

behalf of a customer that is not itself a 

banking entity to facilitate the exposure 

by the customer to the profits and losses 

of the covered fund. 

(2) Requirements. The risk-mitigating 

hedging activities of a banking entity are 

permitted under this paragraph (a) only 

if: 

(i) The banking entity has established 

and implements, maintains and enforces 

an internal compliance program in 

accordance with subpart D of this part 

that is reasonably designed to ensure the 

banking entity’s compliance with the 

requirements of this section, including: 

(A) Reasonably designed written 

policies and procedures; and 

(B) Internal controls and ongoing 

monitoring, management, and 

authorization procedures, including 

relevant escalation procedures; and 

(ii) The acquisition or retention of the 

ownership interest: 

(A) Is made in accordance with the 

written policies, procedures, and 

internal controls required under this 

section; 

(B) At the inception of the hedge, is 

designed to reduce or otherwise 

significantly mitigate one or more 

specific, identifiable risks arising (1) out 

of a transaction conducted solely to 

accommodate a specific customer 

request with respect to the covered fund 

or (2) in connection with the 

compensation arrangement with the 

employee that directly provides 

investment advisory, commodity trading 

advisory, or other services to the 

covered fund; 

(C) Does not give rise, at the inception 

of the hedge, to any significant new or 

additional risk that is not itself hedged 

contemporaneously in accordance with 

this section; and 

(D) Is subject to continuing review, 

monitoring and management by the 

banking entity. 

(iii) With respect to risk-mitigating 

hedging activity conducted pursuant to 

paragraph (a)(1)(i), the compensation 

arrangement relates solely to the 

covered fund in which the banking 

entity or any affiliate has acquired an 

ownership interest pursuant to 

paragraph (a)(1)(i) and such 

compensation arrangement provides 

that any losses incurred by the banking 

entity on such ownership interest will 

be offset by corresponding decreases in 

amounts payable under such 

compensation arrangement. 

* * * * * 

(b) * * * 

(3) An ownership interest in a covered 

fund is not offered for sale or sold to a 

resident of the United States for 

purposes of paragraph (b)(1)(iii) of this 

section only if it is not sold and has not 

been sold pursuant to an offering that 

targets residents of the United States in 

which the banking entity or any affiliate 

of the banking entity participates. If the 

banking entity or an affiliate sponsors or 

serves, directly or indirectly, as the 

investment manager, investment 

adviser, commodity pool operator or 

commodity trading advisor to a covered 

fund, then the banking entity or affiliate 

will be deemed for purposes of this 

paragraph (b)(3) to participate in any 

offer or sale by the covered fund of 

ownership interests in the covered fund. 

* * * * * 

■ 64. Amend § 75.14 by revising 

paragraph (a)(2)(ii)(B) as follows: 

§ 75.14 Limitations on relationships with a 

covered fund. 

(a) * * * 

(2) * * * 

(ii) * * * 

(B) The chief executive officer (or 

equivalent officer) of the banking entity 

certifies in writing annually no later 

than March 31 to the Commission (with 

a duty to update the certification if the 

information in the certification 

materially changes) that the banking 

entity does not, directly or indirectly, 

guarantee, assume, or otherwise insure 

the obligations or performance of the 

covered fund or of any covered fund in 

which such covered fund invests; and 

* * * * * 

■ 65. Amend § 75.20 by: 

■ a. Revising paragraphs (a), (c), (d), and 

(f)(2); 

■ b. Revising the introductory text of 

paragraphs (b) and (e) 

■ c. Adding paragraphs (g) and (h). 

The revisions amd additions to read 

as follows: 

§ 75.20 Program for compliance; reporting. 

(a) Program requirement. Each 

banking entity (other than a banking 


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entity with limited trading assets and 

liabilities) shall develop and provide for 

the continued administration of a 

compliance program reasonably 

designed to ensure and monitor 

compliance with the prohibitions and 

restrictions on proprietary trading and 

covered fund activities and investments 

set forth in section 13 of the BHC Act 

and this part. The terms, scope, and 

detail of the compliance program shall 

be appropriate for the types, size, scope, 

and complexity of activities and 

business structure of the banking entity. 

(b) Banking entities with significant 

trading assets and liabilities. With 

respect to a banking entity with 

significant trading assets and liabilities, 

the compliance program required by 

paragraph (a) of this section, at a 

minimum, shall include: 

* * * * * 

(c) CEO attestation. 

(1) The CEO of a banking entity 

described in paragraph (2) must, based 

on a review by the CEO of the banking 

entity, attest in writing to the 

Commission, each year no later than 

March 31, that the banking entity has in 

place processes reasonably designed to 

achieve compliance with section 13 of 

the BHC Act and this part. In the case 

of a U.S. branch or agency of a foreign 

banking entity, the attestation may be 

provided for the entire U.S. operations 

of the foreign banking entity by the 

senior management officer of the U.S. 

operations of the foreign banking entity 

who is located in the United States. 

(2) The requirements of paragraph 

(c)(1) apply to a banking entity if: 

(i) The banking entity does not have 

limited trading assets and liabilities; or 

(ii) The Commission notifies the 

banking entity in writing that it must 

satisfy the requirements contained in 

paragraph (c)(1). 

(d) Reporting requirements under the 

Appendix to this part. (1) A banking 

entity engaged in proprietary trading 

activity permitted under subpart B shall 

comply with the reporting requirements 

described in the Appendix, if: 

(i) The banking entity has significant 

trading assets and liabilities; or 

(ii) The Commission notifies the 

banking entity in writing that it must 

satisfy the reporting requirements 

contained in the Appendix. 

(2) Frequency of reporting: Unless the 

Commission notifies the banking entity 

in writing that it must report on a 

different basis, a banking entity with 

$50 billion or more in trading assets and 

liabilities (as calculated in accordance 

with the methodology described in the 

definition of ‘‘significant trading assets 

and liabilities’’ contained in § 75.2 of 

this part of this part) shall report the 

information required by the Appendix 

for each calendar month within 20 days 

of the end of each calendar month. Any 

other banking entity subject to the 

Appendix shall report the information 

required by the Appendix for each 

calendar quarter within 30 days of the 

end of that calendar quarter unless the 

Commission notifies the banking entity 

in writing that it must report on a 

different basis. 

(e) Additional documentation for 

covered funds. A banking entity with 

significant trading assets and liabilities 

shall maintain records that include: 

* * * * * 

(f) * * * 

(2) Banking entities with moderate 

trading assets and liabilities. A banking 

entity with moderate trading assets and 

liabilities may satisfy the requirements 

of this section by including in its 

existing compliance policies and 

procedures appropriate references to the 

requirements of section 13 of the BHC 

Act and this part and adjustments as 

appropriate given the activities, size, 

scope, and complexity of the banking 

entity. 

(g) Rebuttable presumption of 

compliance for banking entities with 

limited trading assets and liabilities. 

(1) Rebuttable presumption. Except as 

otherwise provided in this paragraph, a 

banking entity with limited trading 

assets and liabilities shall be presumed 

to be compliant with subpart B and 

subpart C and shall have no obligation 

to demonstrate compliance with this 

part on an ongoing basis. 

(2) Rebuttal of presumption. 

(i) If upon examination or audit, the 

Commission determines that the 

banking entity has engaged in 

proprietary trading or covered fund 

activities that are otherwise prohibited 

under subpart B or subpart C, the 

Commission may require the banking 

entity to be treated under this part as if 

it did not have limited trading assets 

and liabilities. 

(ii) Notice and Response Procedures. 

(A) Notice. The Commission will 

notify the banking entity in writing of 

any determination pursuant to 

paragraph (g)(2)(i) of this section to 

rebut the presumption described in this 

paragraph (g) and will provide an 

explanation of the determination. 

(B) Response. 

(I) The banking entity may respond to 

any or all items in the notice described 

in paragraph (g)(2)(ii)(A) of this section. 

The response should include any 

matters that the banking entity would 

have the Commission consider in 

deciding whether the banking entity has 

engaged in proprietary trading or 

covered fund activities prohibited under 

subpart B or subpart C. The response 

must be in writing and delivered to the 

designated Commission official within 

30 days after the date on which the 

banking entity received the notice. The 

Commission may shorten the time 

period when, in the opinion of the 

Commission, the activities or condition 

of the banking entity so requires, 

provided that the banking entity is 

informed promptly of the new time 

period, or with the consent of the 

banking entity. In its discretion, the 

Commission may extend the time period 

for good cause. 

(II) Failure to respond within 30 days 

or such other time period as may be 

specified by the Commission shall 

constitute a waiver of any objections to 

the Commission’s determination. 

(C) After the close of banking entity’s 

response period, the Commission will 

decide, based on a review of the banking 

entity’s response and other information 

concerning the banking entity, whether 

to maintain the Commission’s 

determination that banking entity has 

engaged in proprietary trading or 

covered fund activities prohibited under 

subpart B or subpart C. The banking 

entity will be notified of the decision in 

writing. The notice will include an 

explanation of the decision. 

(h) Reservation of authority. 

Notwithstanding any other provision of 

this part, the Commission retains its 

authority to require a banking entity 

without significant trading assets and 

liabilities to apply any requirements of 

this part that would otherwise apply if 

the banking entity had significant or 

moderate trading assets and liabilities if 

the Commission determines that the size 

or complexity of the banking entity’s 

trading or investment activities, or the 

risk of evasion of subpart B or subpart 

C, does not warrant a presumption of 

compliance under paragraph (g) of this 

section or treatment as a banking entity 

with moderate trading assets and 

liabilities, as applicable. 

■ 66. Revise the Appendix to Part 75 to 

read as follows: 

Appendix to Part 75—Reporting and 

Recordkeeping Requirements for 

Covered Trading Activities 

I. Purpose 

a. This appendix sets forth reporting and 

recordkeeping requirements that certain 

banking entities must satisfy in connection 

with the restrictions on proprietary trading 

set forth in subpart B (‘‘proprietary trading 

restrictions’’). Pursuant to § 75.20(d), this 

appendix applies to a banking entity that, 

together with its affiliates and subsidiaries, 

has significant trading assets and liabilities. 


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These entities are required to (i) furnish 

periodic reports to the Commission regarding 

a variety of quantitative measurements of 

their covered trading activities, which vary 

depending on the scope and size of covered 

trading activities, and (ii) create and maintain 

records documenting the preparation and 

content of these reports. The requirements of 

this appendix must be incorporated into the 

banking entity’s internal compliance program 

under § 75.20. 

b. The purpose of this appendix is to assist 

banking entities and the Commission in: 

(i) Better understanding and evaluating the 

scope, type, and profile of the banking 

entity’s covered trading activities; 

(ii) Monitoring the banking entity’s covered 

trading activities; 

(iii) Identifying covered trading activities 

that warrant further review or examination 

by the banking entity to verify compliance 

with the proprietary trading restrictions; 

(iv) Evaluating whether the covered trading 

activities of trading desks engaged in market 

making-related activities subject to § 75.4(b) 

are consistent with the requirements 

governing permitted market making-related 

activities; 

(v) Evaluating whether the covered trading 

activities of trading desks that are engaged in 

permitted trading activity subject to §§ 75.4, 

75.5, or 75.6(a)–(b) (i.e., underwriting and 

market making-related related activity, riskmitigating hedging, or trading in certain 

government obligations) are consistent with 

the requirement that such activity not result, 

directly or indirectly, in a material exposure 

to high-risk assets or high-risk trading 

strategies; 

(vi) Identifying the profile of particular 

covered trading activities of the banking 

entity, and the individual trading desks of 

the banking entity, to help establish the 

appropriate frequency and scope of 

examination by the Commission of such 

activities; and 

(vii) Assessing and addressing the risks 

associated with the banking entity’s covered 

trading activities. 

c. Information that must be furnished 

pursuant to this appendix is not intended to 

serve as a dispositive tool for the 

identification of permissible or 

impermissible activities. 

d. In addition to the quantitative 

measurements required in this appendix, a 

banking entity may need to develop and 

implement other quantitative measurements 

in order to effectively monitor its covered 

trading activities for compliance with section 

13 of the BHC Act and this part and to have 

an effective compliance program, as required 

by § 75.20. The effectiveness of particular 

quantitative measurements may differ based 

on the profile of the banking entity’s 

businesses in general and, more specifically, 

of the particular trading desk, including 

types of instruments traded, trading activities 

and strategies, and history and experience 

(e.g., whether the trading desk is an 

established, successful market maker or a 

new entrant to a competitive market). In all 

cases, banking entities must ensure that they 

have robust measures in place to identify and 

monitor the risks taken in their trading 

activities, to ensure that the activities are 

within risk tolerances established by the 

banking entity, and to monitor and examine 

for compliance with the proprietary trading 

restrictions in this part. 

e. On an ongoing basis, banking entities 

must carefully monitor, review, and evaluate 

all furnished quantitative measurements, as 

well as any others that they choose to utilize 

in order to maintain compliance with section 

13 of the BHC Act and this part. All 

measurement results that indicate a 

heightened risk of impermissible proprietary 

trading, including with respect to otherwisepermitted activities under §§ 75.4 through 

75.6(a)–(b), or that result in a material 

exposure to high-risk assets or high-risk 

trading strategies, must be escalated within 

the banking entity for review, further 

analysis, explanation to the Commission, and 

remediation, where appropriate. The 

quantitative measurements discussed in this 

appendix should be helpful to banking 

entities in identifying and managing the risks 

related to their covered trading activities. 

II. Definitions 

The terms used in this appendix have the 

same meanings as set forth in §§ 75.2 and 

75.3. In addition, for purposes of this 

appendix, the following definitions apply: 

Applicability identifies the trading desks 

for which a banking entity is required to 

calculate and report a particular quantitative 

measurement based on the type of covered 

trading activity conducted by the trading 

desk. 

Calculation period means the period of 

time for which a particular quantitative 

measurement must be calculated. 

Comprehensive profit and loss means the 

net profit or loss of a trading desk’s material 

sources of trading revenue over a specific 

period of time, including, for example, any 

increase or decrease in the market value of 

a trading desk’s holdings, dividend income, 

and interest income and expense. 

Covered trading activity means trading 

conducted by a trading desk under §§ 75.4, 

75.5, 75.6(a), or 75.6(b). A banking entity may 

include in its covered trading activity trading 

conducted under §§ 75.3(e), 75.6(c), 75.6(d), 

or 75.6(e). 

Measurement frequency means the 

frequency with which a particular 

quantitative metric must be calculated and 

recorded. 

Trading day means a calendar day on 

which a trading desk is open for trading. 

III. Reporting and Recordkeeping 

a. Scope of Required Reporting 

1. Quantitative measurements. Each 

banking entity made subject to this appendix 

by § 75.20 must furnish the following 

quantitative measurements, as applicable, for 

each trading desk of the banking entity 

engaged in covered trading activities and 

calculate these quantitative measurements in 

accordance with this appendix: 

i. Risk and Position Limits and Usage; 

ii. Risk Factor Sensitivities; 

iii. Value-at-Risk and Stressed Value-atRisk; 

iv. Comprehensive Profit and Loss 

Attribution; 

v. Positions; 

vi. Transaction Volumes; and 

vii. Securities Inventory Aging. 

2. Trading desk information. Each banking 

entity made subject to this appendix by 

§ 75.20 must provide certain descriptive 

information, as further described in this 

appendix, regarding each trading desk 

engaged in covered trading activities. 

3. Quantitative measurements identifying 

information. Each banking entity made 

subject to this appendix by § 75.20 must 

provide certain identifying and descriptive 

information, as further described in this 

appendix, regarding its quantitative 

measurements. 

4. Narrative statement. Each banking entity 

made subject to this appendix by § 75.20 

must provide a separate narrative statement, 

as further described in this appendix. 

5. File identifying information. Each 

banking entity made subject to this appendix 

by § 75.20 must provide file identifying 

information in each submission to the 

Commission pursuant to this appendix, 

including the name of the banking entity, the 

RSSD ID assigned to the top-tier banking 

entity by the Board, and identification of the 

reporting period and creation date and time. 

b. Trading Desk Information 

1. Each banking entity must provide 

descriptive information regarding each 

trading desk engaged in covered trading 

activities, including: 

i. Name of the trading desk used internally 

by the banking entity and a unique 

identification label for the trading desk; 

ii. Identification of each type of covered 

trading activity in which the trading desk is 

engaged; 

iii. Brief description of the general strategy 

of the trading desk; 

iv. A list of the types of financial 

instruments and other products purchased 

and sold by the trading desk; an indication 

of which of these are the main financial 

instruments or products purchased and sold 

by the trading desk; and, for trading desks 

engaged in market making-related activities 

under § 75.4(b), specification of whether each 

type of financial instrument is included in 

market-maker positions or not included in 

market-maker positions. In addition, indicate 

whether the trading desk is including in its 

quantitative measurements products 

excluded from the definition of ‘‘financial 

instrument’’ under § 75.3(d)(2) and, if so, 

identify such products; 

v. Identification by complete name of each 

legal entity that serves as a booking entity for 

covered trading activities conducted by the 

trading desk; and indication of which of the 

identified legal entities are the main booking 

entities for covered trading activities of the 

trading desk; 

vii. For each legal entity that serves as a 

booking entity for covered trading activities, 

specification of any of the following 

applicable entity types for that legal entity: 

A. National bank, Federal branch or 

Federal agency of a foreign bank, Federal 

savings association, Federal savings bank; 

B. State nonmember bank, foreign bank 

having an insured branch, State savings 

association; 

C. U.S.-registered broker-dealer, U.S.- 

registered security-based swap dealer, U.S.- 


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registered major security-based swap 

participant; 

D. Swap dealer, major swap participant, 

derivatives clearing organization, futures 

commission merchant, commodity pool 

operator, commodity trading advisor, 

introducing broker, floor trader, retail foreign 

exchange dealer; 

E. State member bank; 

F. Bank holding company, savings and 

loan holding company; 

G. Foreign banking organization as defined 

in 12 CFR 211.21(o); 

H. Uninsured State-licensed branch or 

agency of a foreign bank; or 

I. Other entity type not listed above, 

including a subsidiary of a legal entity 

described above where the subsidiary itself is 

not an entity type listed above; 

2. Indication of whether each calendar date 

is a trading day or not a trading day for the 

trading desk; and 

3. Currency reported and daily currency 

conversion rate. 

c. Quantitative Measurements Identifying 

Information 

Each banking entity must provide the 

following information regarding the 

quantitative measurements: 

1. A Risk and Position Limits Information 

Schedule that provides identifying and 

descriptive information for each limit 

reported pursuant to the Risk and Position 

Limits and Usage quantitative measurement, 

including the name of the limit, a unique 

identification label for the limit, a 

description of the limit, whether the limit is 

intraday or end-of-day, the unit of 

measurement for the limit, whether the limit 

measures risk on a net or gross basis, and the 

type of limit; 

2. A Risk Factor Sensitivities Information 

Schedule that provides identifying and 

descriptive information for each risk factor 

sensitivity reported pursuant to the Risk 

Factor Sensitivities quantitative 

measurement, including the name of the 

sensitivity, a unique identification label for 

the sensitivity, a description of the 

sensitivity, and the sensitivity’s risk factor 

change unit; 

3. A Risk Factor Attribution Information 

Schedule that provides identifying and 

descriptive information for each risk factor 

attribution reported pursuant to the 

Comprehensive Profit and Loss Attribution 

quantitative measurement, including the 

name of the risk factor or other factor, a 

unique identification label for the risk factor 

or other factor, a description of the risk factor 

or other factor, and the risk factor or other 

factor’s change unit; 

4. A Limit/Sensitivity Cross-Reference 

Schedule that cross-references, by unique 

identification label, limits identified in the 

Risk and Position Limits Information 

Schedule to associated risk factor 

sensitivities identified in the Risk Factor 

Sensitivities Information Schedule; and 

5. A Risk Factor Sensitivity/Attribution 

Cross-Reference Schedule that crossreferences, by unique identification label, 

risk factor sensitivities identified in the Risk 

Factor Sensitivities Information Schedule to 

associated risk factor attributions identified 

in the Risk Factor Attribution Information 

Schedule. 

d. Narrative Statement 

Each banking entity made subject to this 

appendix by § 75.20 must submit in a 

separate electronic document a Narrative 

Statement to the Commission describing any 

changes in calculation methods used, a 

description of and reasons for changes in the 

banking entity’s trading desk structure or 

trading desk strategies, and when any such 

change occurred. The Narrative Statement 

must include any information the banking 

entity views as relevant for assessing the 

information reported, such as further 

description of calculation methods used. If a 

banking entity does not have any information 

to report in a Narrative Statement, the 

banking entity must submit an electronic 

document stating that it does not have any 

information to report in a Narrative 

Statement. 

e. Frequency and Method of Required 

Calculation and Reporting 

A banking entity must calculate any 

applicable quantitative measurement for each 

trading day. A banking entity must report the 

Narrative Statement, the Trading Desk 

Information, the Quantitative Measurements 

Identifying Information, and each applicable 

quantitative measurement electronically to 

the Commission on the reporting schedule 

established in § 75.20 unless otherwise 

requested by the Commission. A banking 

entity must report the Trading Desk 

Information, the Quantitative Measurements 

Identifying Information, and each applicable 

quantitative measurement to the Commission 

in accordance with the XML Schema 

specified and published on the Commission’s 

website. 

f. Recordkeeping 

A banking entity must, for any quantitative 

measurement furnished to the Commission 

pursuant to this appendix and § 75.20(d), 

create and maintain records documenting the 

preparation and content of these reports, as 

well as such information as is necessary to 

permit the Commission to verify the accuracy 

of such reports, for a period of five years from 

the end of the calendar year for which the 

measurement was taken. A banking entity 

must retain the Narrative Statement, the 

Trading Desk Information, and the 

Quantitative Measurements Identifying 

Information for a period of five years from 

the end of the calendar year for which the 

information was reported to the Commission. 

IV. Quantitative Measurements 

a. Risk-Management Measurements 

1. Risk and Position Limits and Usage 

i. Description: For purposes of this 

appendix, Risk and Position Limits are the 

constraints that define the amount of risk that 

a trading desk is permitted to take at a point 

in time, as defined by the banking entity for 

a specific trading desk. Usage represents the 

value of the trading desk’s risk or positions 

that are accounted for by the current activity 

of the desk. Risk and position limits and their 

usage are key risk management tools used to 

control and monitor risk taking and include, 

but are not limited to, the limits set out in 

§ 75.4 and § 75.5. A number of the metrics 

that are described below, including ‘‘Risk 

Factor Sensitivities’’ and ‘‘Value-at-Risk,’’ 

relate to a trading desk’s risk and position 

limits and are useful in evaluating and 

setting these limits in the broader context of 

the trading desk’s overall activities, 

particularly for the market making activities 

under § 75.4(b) and hedging activity under 

§ 75.5. Accordingly, the limits required under 

§ 75.4(b)(2)(iii) and § 75.5(b)(1)(i)(A) must 

meet the applicable requirements under 

§ 75.4(b)(2)(iii) and § 75.5(b)(1)(i)(A) and also 

must include appropriate metrics for the 

trading desk limits including, at a minimum, 

the ‘‘Risk Factor Sensitivities’’ and ‘‘Value-atRisk’’ metrics except to the extent any of the 

‘‘Risk Factor Sensitivities’’ or ‘‘Value-at-Risk’’ 

metrics are demonstrably ineffective for 

measuring and monitoring the risks of a 

trading desk based on the types of positions 

traded by, and risk exposures of, that desk. 

A. A banking entity must provide the 

following information for each limit reported 

pursuant to this quantitative measurement: 

the unique identification label for the limit 

reported in the Risk and Position Limits 

Information Schedule, the limit size 

(distinguishing between an upper and a 

lower limit), and the value of usage of the 

limit. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks engaged 

in covered trading activities. 

2. Risk Factor Sensitivities 

i. Description: For purposes of this 

appendix, Risk Factor Sensitivities are 

changes in a trading desk’s Comprehensive 

Profit and Loss that are expected to occur in 

the event of a change in one or more 

underlying variables that are significant 

sources of the trading desk’s profitability and 

risk. A banking entity must report the risk 

factor sensitivities that are monitored and 

managed as part of the trading desk’s overall 

risk management policy. Reported risk factor 

sensitivities must be sufficiently granular to 

account for a preponderance of the expected 

price variation in the trading desk’s holdings. 

A banking entity must provide the following 

information for each sensitivity that is 

reported pursuant to this quantitative 

measurement: The unique identification label 

for the risk factor sensitivity listed in the Risk 

Factor Sensitivities Information Schedule, 

the change in risk factor used to determine 

the risk factor sensitivity, and the aggregate 

change in value across all positions of the 

desk given the change in risk factor. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks engaged 

in covered trading activities. 

3. Value-at-Risk and Stressed Value-at-Risk 

i. Description: For purposes of this 

appendix, Value-at-Risk (‘‘VaR’’) is the 

measurement of the risk of future financial 

loss in the value of a trading desk’s 

aggregated positions at the ninety-nine 

percent confidence level over a one-day 

period, based on current market conditions. 

For purposes of this appendix, Stressed 

Value-at-Risk (‘‘Stressed VaR’’) is the 


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1See §§ 75.2(i), (bb). For example, under this part, 

a security-based swap is both a ‘‘security’’ and a 

‘‘derivative.’’ For purposes of the Positions 

quantitative measurement, security-based swaps are 

reported as derivatives rather than securities. 

2See §§ 75.2(i), (bb). 3See §§ 75.2(i), (bb). 

measurement of the risk of future financial 

loss in the value of a trading desk’s 

aggregated positions at the ninety-nine 

percent confidence level over a one-day 

period, based on market conditions during a 

period of significant financial stress. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: For VaR, all trading desks 

engaged in covered trading activities. For 

Stressed VaR, all trading desks engaged in 

covered trading activities, except trading 

desks whose covered trading activity is 

conducted exclusively to hedge products 

excluded from the definition of ‘‘financial 

instrument’’ under § 75.3(d)(2). 

b. Source-of-Revenue Measurements 

1. Comprehensive Profit and Loss Attribution 

i. Description: For purposes of this 

appendix, Comprehensive Profit and Loss 

Attribution is an analysis that attributes the 

daily fluctuation in the value of a trading 

desk’s positions to various sources. First, the 

daily profit and loss of the aggregated 

positions is divided into three categories: (i) 

Profit and loss attributable to a trading desk’s 

existing positions that were also positions 

held by the trading desk as of the end of the 

prior day (‘‘existing positions’’); (ii) profit 

and loss attributable to new positions 

resulting from the current day’s trading 

activity (‘‘new positions’’); and (iii) residual 

profit and loss that cannot be specifically 

attributed to existing positions or new 

positions. The sum of (i), (ii), and (iii) must 

equal the trading desk’s comprehensive profit 

and loss at each point in time. 

A. The comprehensive profit and loss 

associated with existing positions must 

reflect changes in the value of these positions 

on the applicable day. The comprehensive 

profit and loss from existing positions must 

be further attributed, as applicable, to 

changes in (i) the specific risk factors and 

other factors that are monitored and managed 

as part of the trading desk’s overall risk 

management policies and procedures; and (ii) 

any other applicable elements, such as cash 

flows, carry, changes in reserves, and the 

correction, cancellation, or exercise of a 

trade. 

B. For the attribution of comprehensive 

profit and loss from existing positions to 

specific risk factors and other factors, a 

banking entity must provide the following 

information for the factors that explain the 

preponderance of the profit or loss changes 

due to risk factor changes: the unique 

identification label for the risk factor or other 

factor listed in the Risk Factor Attribution 

Information Schedule, and the profit or loss 

due to the risk factor or other factor change. 

C. The comprehensive profit and loss 

attributed to new positions must reflect 

commissions and fee income or expense and 

market gains or losses associated with 

transactions executed on the applicable day. 

New positions include purchases and sales of 

financial instruments and other assets/ 

liabilities and negotiated amendments to 

existing positions. The comprehensive profit 

and loss from new positions may be reported 

in the aggregate and does not need to be 

further attributed to specific sources. 

D. The portion of comprehensive profit and 

loss that cannot be specifically attributed to 

known sources must be allocated to a 

residual category identified as an 

unexplained portion of the comprehensive 

profit and loss. Significant unexplained 

profit and loss must be escalated for further 

investigation and analysis. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks engaged 

in covered trading activities. 

c. Positions, Transaction Volumes, and 

Securities Inventory Aging Measurements 

1. Positions 

i. Description: For purposes of this 

appendix, Positions is the value of securities 

and derivatives positions managed by the 

trading desk. For purposes of the Positions 

quantitative measurement, do not include in 

the Positions calculation for ‘‘securities’’ 

those securities that are also ‘‘derivatives,’’ as 

those terms are defined under subpart A; 

instead, report those securities that are also 

derivatives as ‘‘derivatives.’’ 1 A banking 

entity must separately report the trading 

desk’s market value of long securities 

positions, market value of short securities 

positions, market value of derivatives 

receivables, market value of derivatives 

payables, notional value of derivatives 

receivables, and notional value of derivatives 

payables. 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks that rely 

on § 75.4(a) or § 75.4(b) to conduct 

underwriting activity or market-makingrelated activity, respectively. 

2. Transaction Volumes 

i. Description: For purposes of this 

appendix, Transaction Volumes measures 

four exclusive categories of covered trading 

activity conducted by a trading desk. A 

banking entity is required to report the value 

and number of security and derivative 

transactions conducted by the trading desk 

with: (i) Customers, excluding internal 

transactions; (ii) non-customers, excluding 

internal transactions; (iii) trading desks and 

other organizational units where the 

transaction is booked in the same banking 

entity; and (iv) trading desks and other 

organizational units where the transaction is 

booked into an affiliated banking entity. For 

securities, value means gross market value. 

For derivatives, value means gross notional 

value. For purposes of calculating the 

Transaction Volumes quantitative 

measurement, do not include in the 

Transaction Volumes calculation for 

‘‘securities’’ those securities that are also 

‘‘derivatives,’’ as those terms are defined 

under subpart A; instead, report those 

securities that are also derivatives as 

‘‘derivatives.’’ 2 Further, for purposes of the 

Transaction Volumes quantitative 

measurement, a customer of a trading desk 

that relies on § 75.4(a) to conduct 

underwriting activity is a market participant 

identified in § 75.4(a)(7), and a customer of 

a trading desk that relies on § 75.4(b) to 

conduct market making-related activity is a 

market participant identified in § 75.4(b)(3). 

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks that rely 

on § 75.4(a) or § 75.4(b) to conduct 

underwriting activity or market-makingrelated activity, respectively. 

3. Securities Inventory Aging 

i. Description: For purposes of this 

appendix, Securities Inventory Aging 

generally describes a schedule of the market 

value of the trading desk’s securities 

positions and the amount of time that those 

securities positions have been held. 

Securities Inventory Aging must measure the 

age profile of a trading desk’s securities 

positions for the following periods: 0–30 

calendar days; 31–60 calendar days; 61–90 

calendar days; 91–180 calendar days; 181– 

360 calendar days; and greater than 360 

calendar days. Securities Inventory Aging 

includes two schedules, a security assetaging schedule, and a security liability-aging 

schedule. For purposes of the Securities 

Inventory Aging quantitative measurement, 

do not include securities that are also 

‘‘derivatives,’’ as those terms are defined 

under subpart A.3

ii. Calculation Period: One trading day. 

iii. Measurement Frequency: Daily. 

iv. Applicability: All trading desks that rely 

on § 75.4(a) or § 75.4(b) to conduct 

underwriting activity or market-making 

related activity, respectively. 

Dated: May 31, 2018. 

Joseph M. Otting, 

Comptroller of the Currency. 

By order of the Board of Governors of the 

Federal Reserve System, May 30, 2018. 

Ann E. Misback, 

Secretary of the Board. 

Dated at Washington, DC, on May 31, 2018. 

By order of the Board of Directors. 

Federal Deposit Insurance Corporation. 

Valerie Jean Best, 

Assistant Executive Secretary. 

By the Securities and Exchange 

Commission. 

Dated: June 5, 2018. 

Brent J. Fields, 

Secretary. 

Issued in Washington, DC, on June 11, 

2018, by the Commodity Futures Trading 

Commission. 

Robert Sidman, 

Deputy Secretary of the Commodity Futures 

Trading Commission. 

[FR Doc. 2018–13502 Filed 7–16–18; 8:45 am] 

BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P; 

8011–01–P; 6351–01–P 


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