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 Board of Governors of the Federal Reserve System

 Commodity Futures Trading Commission 

 Federal Deposit Insurance Corporation

Office of the Comptroller of the Currency

Securities and Exchange Commission

Final Rules to Implement the “Volcker Rule”

Five financial regulatory agencies today adopted final rules implementing a provision of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act, commonly referred to as the Volcker Rule. The final

rules generally would prohibit banking entities from:

 engaging in short-term proprietary trading of securities, derivatives, commodity futures and options 

on these instruments for their own account.

 owning, sponsoring, or having certain relationships with hedge funds or private equity funds, referred 

to as ‘covered funds.’

As required by section 619 of the Dodd-Frank Act, the final rules, adopted under the Bank Holding 

Company Act, provide exemptions for certain activities, including market making, underwriting, hedging, 

trading in certain government obligations, and organizing and offering a hedge fund or private equity 

fund, among others. Like the Dodd-Frank Act, the final rules limit these exemptions if they involve a

material conflict of interest; a material exposure to high-risk assets or trading strategies; or a threat to the 

safety and soundness of the banking entity or to U.S. financial stability.

The five agencies -- the Board of Governors of the Federal Reserve System, the Office of the Comptroller 

of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission

and the Commodity Futures Trading Commission -- proposed the same common rules in 2011 and 2012. 

Those proposals generated more than 18,000 comment letters.

The Final Rules

The final rules provide key definitions and identify characteristics of prohibited and permitted activities 

and investments.

Proprietary Trading Prohibition – The final rules prohibit proprietary trading by banking 

entities. As required by the Dodd-Frank Act, the final rules include exemptions for:

Underwriting: This exemption requires that a banking entity act as an underwriter for a distribution of 

securities (including both public and private offerings) and that the trading desk’s underwriting position 

be related to that distribution. Consistent with the Dodd-Frank Act, the underwriting position must be 

designed not to exceed the reasonably expected near-term demands of customers.

Market making-related activities: Under this exemption, a trading desk is required to routinely stand 

ready to purchase and sell one or more types of financial instruments. The trading desk’s inventory in 

these types of financial instruments would have to be designed not to exceed, on an ongoing basis, the 

reasonably expected near-term demands of customers based on such things as historical demand and 

consideration of market factors. A market-making desk may hedge the risks of its market-making activity 
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under this exemption, provided it is acting in accordance with certain risk-management procedures

required under the final rules. 

Risk-mitigating hedging: This exemption would apply to hedging activity that is designed to reduce, and 

demonstrably reduces or significantly mitigates, specific, identifiable risks of individual or aggregated 

positions of the banking entity. The banking entity would also be required to conduct an analysis 

(including correlation analysis) supporting its hedging strategy, and the effectiveness of hedges must be 

monitored and recalibrated as necessary on an ongoing basis. The final rules also require banking entities 

to document, contemporaneously with the transaction, the hedging rationale for certain transactions that 

present heightened compliance risks.

Trading in certain government obligations. The final rules permit a banking entity to continue to engage 

in proprietary trading in U.S. government, agency, state, and municipal obligations. They also permit, in 

more limited circumstances, proprietary trading in the obligations of a foreign sovereign or its political 

subdivisions. 

Certain trading activities of foreign banking entities: The final rules generally do not prohibit trading 

by foreign banking entities, provided the trading decisions and principal risks of the foreign banking 

entity occur and are held outside of the United States. Such transactions may involve U.S. entities only 

under certain circumstances. Specifically, an exempt transaction may occur a) with the foreign operations 

of U.S. entities; b) in cleared transactions with an unaffiliated market intermediary acting as principal; or 

c) in cleared transactions through an unaffiliated market intermediary acting as agent, conducted 

anonymously on an exchange or similar trading facility.

Other permitted activities: The final rules exempt, provided certain requirements are met, trading on 

behalf of a customer in a fiduciary capacity or in riskless principal trades and activities of an insurance 

company for its general or separate account. 

 

Clarifying exclusions: The final rules clarify which activities are not considered proprietary trading, 

provided certain requirements are met, including trading solely as an agent, broker, or custodian; through 

a deferred compensation or similar plan; to satisfy a debt previously contracted; under certain repurchase 

and securities lending agreements; for liquidity management in accordance with a documented liquidity 

plan; in connection with certain clearing activities; or to satisfy certain existing legal obligations.

Covered Fund Prohibitions – The final rules prohibit banking entities from owning and 

sponsoring hedge funds and private equity funds, referred to as “covered funds.” Under the final rules, 

the definition of covered funds encompasses any issuer that would be an investment company under the 

Investment Company Act if it were not otherwise excluded by two provisions of that Act, section 3(c)(1) 

or 3(c)(7). The final rules also include in the definition of covered funds certain foreign funds and 

commodity pools, but defined in a more limited manner than under the proposed rule. 

Exclusions: The final rules exclude from the definition of covered fund certain entities with more general 

corporate purposes such as wholly-owned subsidiaries, joint ventures, and acquisition vehicles, as well as 

SEC-registered investment companies and business development companies. Other exclusions apply to

certain foreign funds publicly offered abroad, loan securitizations, insurance company separate accounts, 

and small business investment company and public welfare investments.

Permitted activities: As provided by the Dodd-Frank Act, the final rules permit a banking entity, subject 

to appropriate conditions, to invest in or sponsor a covered fund in connection with: organizing and 

offering the covered fund; underwriting or market making-related activities; certain types of risk-
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mitigating hedging activities; activities that occur solely outside of the United States and insurance 

company activities.

Clarifying Exclusions. The final rules clarify that, provided certain requirements are met, a banking 

entity is not engaging in prohibited covered fund activities or investments when it acts on behalf of 

customers as an agent, broker, custodian, or trustee or similar fiduciary capacity; through a deferred 

compensation or similar plan; or in the ordinary course of collecting a debt previously contracted.

Compliance Requirements – The final rules provide compliance requirements that vary based on 

the size of the banking entity and the amount of activities conducted, reducing the burden on smaller, less 

complex entities. Banking entities that do not engage in activities covered by the final rules would have 

no compliance program requirements.

Compliance program: The final rules generally would require banking entities to establish an internal 

compliance program reasonably designed to ensure and monitor compliance with the final rules. Larger 

banking entities would have to establish a more detailed compliance program, including a required CEO 

attestation; smaller entities engaged in modest activities would be subject to a simplified compliance 

regime. Banking entities that do not engage in any activity subject to the final rules, other than trading in 

exempt government and municipal obligations, are not required to establish a compliance program. 

Documentation: The final rules require the banking entities to maintain documentation so that the 

agencies can monitor their activities for instances of evasion. 

Metrics reporting: The final rules require banking entities with significant trading operations to report 

certain quantitative measurements designed to monitor certain trading activities. The reporting 

requirements would be phased in based on the type and size of the firm’s trading activities.

What’s Next?

The final rules become effective April 1, 2014. The Federal Reserve Board has extended the 

conformance period until July 21, 2015. Beginning June 30, 2014, banking entities with $50 billion or 

more in consolidated trading assets and liabilities will be required to report quantitative measurements.

Banking entities with at least $25 billion, but less than $50 billion, in consolidated trading assets and 

liabilities will become subject to this requirement on April 30, 2016. Those with at least $10 billion, but 

less than $25 billion, in consolidated trading assets and liabilities will become subject to the requirement 

on Dec. 31, 2016. The agencies will review the data collected prior to Sept. 30, 2015, and revise the

collection requirement as appropriate.