1

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

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 75 

RIN 3038-AE72 

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 255 

Release no. BHCA-[#]; File no. [###]

RIN 3235-AM10 

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: Final rule.

SUMMARY: The OCC, Board, FDIC, SEC, and CFTC are adopting amendments to the 

regulations implementing section 13 of the Bank Holding Company 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. These final amendments are intended to provide banking 
2

entities with clarity about what activities are prohibited and to improve supervision and 

implementation of section 13.

DATES:

Effective Date: The effective date for this release is January 1, 2020.

Compliance Date: Banking entities must comply with the final amendments by January 1, 

2021. The 2013 rule will remain in effect until the compliance date, and a banking entity must 

continue to comply with the 2013 rule. Alternatively, a banking entity may voluntarily comply, 

in whole or in part, with the amendments adopted in this release prior to the compliance date, 

subject to the agencies’ completion of necessary technological changes. 

FOR FURTHER INFORMATION CONTACT: 

OCC: Roman Goldstein, Risk Specialist, Treasury and Market Risk Policy, (202) 649-

6360; Tabitha Edgens, Counsel; Mark O’Horo, Senior Attorney, Chief Counsel’s Office, (202) 

649-5490; 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: Flora Ahn, Special Counsel, (202) 452-2317, Gregory Frischmann, Senior 

Counsel, (202) 452-2803, Kirin Walsh, Attorney, (202) 452-3058, or Sarah Podrygula, Attorney, 

(202) 912-4658, Legal Division, Cecily Boggs, Senior Financial Institution Policy Analyst, (202) 

530-6209, David Lynch, Deputy Associate Director, (202) 452-2081, David McArthur, Senior 

Economist, (202) 452-2985, Division of Supervision and Regulation; Board of Governors of the 

Federal Reserve System, 20th and C Streets, NW., Washington, DC 20551. 

FDIC: Bobby R. Bean, Associate Director, bbean@fdic.gov, Michael E. Spencer, Chief, 

Capital Markets Strategies, michspencer@fdic.gov, Andrew D. Carayiannis, Senior Policy 

Analyst, acarayiannis@fdic.gov, or Brian Cox, Senior Policy Analyst, brcox@fdic.gov, Capital 
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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, Sam Litz, Attorney-Adviser, Aaron 

Washington, Special Counsel, or Carol McGee, Assistant Director, at (202) 551-5870, Office of 

Derivatives Policy and Trading Practices, Division of Trading and Markets, and Matthew Cook, 

Senior Counsel, Benjamin Tecmire, Senior Counsel, and Jennifer Songer, Branch Chief 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: Cantrell Dumas, Special Counsel, (202) 418-5043, cdumas@cftc.gov; Jeffrey 

Hasterok, Data and Risk Analyst, (646) 746-9736, jhasterok@cftc.gov, Division 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: 

Table of Contents

I. Background

II. Notice of Proposed Rulemaking 

III. Overview of the Final Rule and Modifications from the Proposal

A. The Final Rule

B. Agency Coordination and Other Comments

IV. Section by Section Summary of the Final Rule
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A. Subpart A—Authority and Definitions

B. Subpart B—Proprietary Trading Restrictions

C. Subpart C—Covered Fund Activities and Investments

D. Subpart D—Compliance Program Requirement; Violations

E. Subpart E—Metrics

V. Administrative Law Matters

A. Use of Plain Language

B. Paperwork Reduction Act

C. Regulatory Flexibility Act Analysis

D. Riegle Community Development and Regulatory Improvement Act

E. OCC Unfunded Mandates Reform Act Determination

F. SEC Economic Analysis

G. Congressional Review Act

I. Background

Section 13 of the Bank Holding Company Act of 1956 (BHC Act),1 also known as the 

Volcker Rule, 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).2 The statute expressly exempts from 

these prohibitions various activities, including among other things:

• Trading in U.S. government, agency, and municipal obligations; 

• Underwriting and market making-related activities; 

 1

 12 U.S.C. 1851. 

2

 Id. 
5

• 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.3 

In addition, section 13 of the BHC Act contains several exemptions that permit banking entities 

to engage in certain activities with respect to covered funds, subject to certain restrictions 

designed to ensure that banking entities do not rescue investors in those funds from loss, and do 

not guarantee nor expose themselves to significant losses due to investments in or other 

relationships with these funds.4

Authority under section 13 for developing and adopting regulations to implement the 

prohibitions and restrictions of section 13 of the BHC Act is shared among the Board, the FDIC, 

the OCC, the SEC, and the CFTC (individually, an agency, and collectively, the agencies).5

 The 

agencies issued a final rule implementing section 13 of the BHC Act in December 2013 (the 

2013 rule), and those provisions became effective on April 1, 2014.6

Since the adoption of the 2013 rule, the agencies have gained several years of experience 

implementing the 2013 rule, and banking entities have had more than five years of becoming 

familiar and complying with the 2013 rule. The agencies have received various communications 

from the public and other sources since adoption of the 2013 rule and over the course of the 2013 

 3

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

4

 E.g., 12 U.S.C. 1851(d)(1)(G).

5

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

6

 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). 
6

rule’s implementation. Staffs of the agencies also have held numerous meetings with banking 

entities and other market participants to discuss the 2013 rule and its implementation. In 

addition, the data collected in connection with the 2013 rule, compliance efforts by banking 

entities, and the agencies’ experiences in reviewing trading, investment, and other activity under 

the 2013 rule have provided valuable insights into the effectiveness of the 2013 rule. Together, 

these experiences have highlighted areas in which the 2013 rule may have resulted in ambiguity, 

overbroad application, or unduly complex compliance routines or may otherwise not have been 

as effective or efficient in achieving its purpose as intended or expected.

II. Notice of Proposed Rulemaking

Based on their experience implementing the 2013 rule, the agencies published a notice of 

proposed rulemaking (the proposed rule or proposal) on July 17, 2018, that proposed 

amendments to the 2013 rule. These amendments sought to provide greater clarity and certainty 

about what activities are prohibited under the 2013 rule and to improve the effective allocation of 

compliance resources where possible.

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The agencies sought to address a number of targeted areas for revision in the proposal. 

First, the agencies proposed further tailoring to make the scale of compliance activity required by 

the 2013 rule commensurate with a banking entity’s size and level of trading activity. In 

particular, the agencies proposed to establish three categories of banking entities based on the 

firms’ level of trading activity – those with significant trading assets and liabilities, those with 

moderate trading assets and liabilities, and those with limited trading assets and liabilities.

8

 The 

 7

 Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain 

Interests in, and Relationships With, Hedge Funds and Private Equity Funds, 83 FR 33432 (July 

17, 2018).

8

 See 83 FR 33437, 40–42.
7

agencies also invited comments on whether certain definitions, including “banking entity”9 and 

“trading desk,”10 and “covered fund”11 should be modified.

The agencies also proposed making several changes to subpart B of the 2013 rule, which 

implements the statutory prohibition on proprietary trading and the various statutory exemptions 

to this prohibition. The agencies proposed revisions to the trading account definition,12

including replacing the short-term intent prong of the trading account definition in the 2013 rule

with a new prong based on the accounting treatment of a position (the accounting prong) and, 

with respect to trading activity subject only to the accounting prong, establishing a presumption 

of compliance with the prohibition on proprietary trading, based on the absolute value of a 

trading desk’s profit and loss.13 Under the proposed accounting prong, the trading account 

would have encompassed financial instruments recorded at fair value on a recurring basis under 

applicable accounting standards. 

In addition, the proposal would have modified several of the exemptions and exclusions 

from the prohibition on proprietary trading in subpart B to clarify how banking entities may 

qualify for those exemptions and exclusions, as well as to reduce associated compliance burdens. 

For example, the agencies proposed revising the 2013 rule’s exemptions for underwriting and 

market making-related activities,14 the exemption for risk-mitigating hedging activities,15 the 

 9

 See 83 FR 33442–46.

10 See 83 FR 33453–54.

11 See 83 FR 33471-82.

12 The definition of “trading account” is a threshold definition that determines whether the 

purchase or sale of a financial instrument by a banking entity is subject to the restrictions and 

requirements of section 13 of the BHC Act and the 2013 rule.

13 See 83 FR 33446–51.

14 See 83 FR 33454–62.
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exemption for trading by a foreign banking entity that occurs solely outside of the United 

States,16 and the liquidity management exclusion.17 In addition, the agencies proposed 

establishing an exclusion for transactions to correct trading errors.18 

The agencies also proposed certain modifications to the prohibitions in subpart C on 

banking entities directly or indirectly acquiring or retaining an ownership interest in, or having 

certain relationships with, a covered fund. For example, the proposed rule would have modified 

provisions related to the underwriting or market making of ownership interests in covered 

funds19 and the exemption for certain permitted covered fund activities and investments outside 

of the United States. The proposal also would have expanded a banking entity’s ability to 

engage in hedging activities involving an ownership interest in a covered fund.20 In addition, the 

agencies requested comment regarding tailoring the definition of “covered fund,” including 

potential additional exclusions,21 and revising the provisions limiting banking entities’ 

relationships with covered funds.22

To enhance compliance efficiencies, the agencies proposed tailoring the compliance 

requirements based on new compliance tiers. The proposed rule would have applied the sixpillar compliance program, and a CEO attestation requirement largely consistent with the 2013 

rule, to firms with significant trading assets and liabilities and eliminated the enhanced minimum 

 15 See 83 FR 33464–67.

16 See 83 FR 33467–70.

17 See 83 FR 33451–52.

18 See 83 FR 33452–53.

19 See 83 FR 33482–83

20 See 83 FR 33483–86.

21 See 83 FR 33471–82.

22 See 83 FR 33486–87.
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standards for compliance programs in Appendix B of the 2013 rule.23 Firms with moderate 

trading assets and liabilities would have been required to adhere to a simplified compliance 

program, with a CEO attestation requirement,24 and firms with limited trading assets and 

liabilities would have had a presumption of compliance with the rule.25 The proposal also 

included a reservation of authority specifying that the agencies could impose additional 

requirements on banking entities with limited or moderate trading assets and liabilities if 

warranted.

26 The proposal would have revised the metrics reporting and recordkeeping 

requirements by, for example, applying those requirements based on a banking entity’s size and 

level of trading activity, eliminating some metrics, and adding a limited set of new metrics to 

enhance compliance efficiencies. 27 In addition, the agencies requested comment on whether 

some or all of the reported quantitative measurements should be made publically available.

The agencies invited comment on all aspects of the proposal, including specific proposed 

revisions and questions posed by the agencies. The agencies received over 75 unique comments 

from banking entities and industry groups, public interest groups, and other organizations and 

individuals. In addition, the agencies received approximately 3,700 comments from individuals 

using a version of a short form letter to express opposition to the proposed rule. For the reasons 

discussed below, the agencies are now adopting a final rule that incorporates a number of 

modifications.

III. Overview of the Final Rule and Modifications from the Proposal

 23 See 83 FR 33487–89; 33490–94.

24 See 83 FR 33489.

25 See 83 FR 33490.

26 See 83 FR 33454.

27 See 83 FR 33494–514.
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A. The Final Rule

Similar to the proposal, the final rule includes a risk-based approach to revising the 2013 

rule that relies on a set of clearly articulated standards for both prohibited and permitted 

activities and investments. The final rule is intended to further tailor and simplify the rule to 

allow banking entities to more efficiently provide financial services in a manner that is consistent 

with the requirements of section 13 of the BHC Act. 

The comments the agencies received from banking entities and financial services industry 

trade groups were generally supportive of the proposal, with the exception of the proposed 

accounting prong, and provided recommendations for further targeted changes. The agencies 

also received a few comments in opposition to the proposal from various organizations and 

individuals.28 As described further below, the agencies have adopted many of the proposed 

changes to the 2013 rule, with certain targeted adjustments based on comments received. 

Furthermore, the agencies intend to issue an additional notice of proposed rulemaking that would 

propose additional, specific changes to the restrictions on covered fund investments and 

activities and other issues related to the treatment of investment funds under the regulations 

implementing section 13 of the BHC Act. 

The final rule includes the same general three-tiered approach to tailoring the compliance 

program requirements as the proposal. However, based on comments received, the agencies 

have modified the threshold for banking entities in the “significant” compliance category from 

$10 billion in gross trading assets and liabilities to $20 billion in gross trading assets and 

liabilities. The final rule also includes modifications to the calculation of trading assets and 

 28 See, e.g., Senators Merkley et al.; Elise J. Bean (Bean); National Association of FederallyInsured Credit Unions (NAFCU); Better Markets, Inc. (Better Markets); Americans for Financial 

Reform (AFR); Volcker Alliance; Occupy the SEC; and Volcker 2.0 Form Letter.
11

liabilities for purposes of determining which compliance tier a banking entity falls into by 

excluding certain financial instruments that banking entities are permitted to trade without limit 

under section 13. Additionally, the final rule aligns the methodologies for calculating the 

“limited” and “significant” compliance thresholds for foreign banking organizations by basing 

both thresholds on the trading assets and liabilities of the firm’s U.S. operations.29

The final rule also includes many of the proposed changes to the proprietary trading 

restrictions, with certain changes based on comments received. One such change is that the final 

rule does not include the proposed accounting prong in the trading account definition. Instead, 

the final rule retains a modified version of the short-term intent prong and replaces the 2013 

rule’s rebuttable presumption that financial instruments held for fewer than 60 days are within 

the short-term intent prong of the trading account with a rebuttable presumption that financial 

instruments held for 60 days or longer are not within the short-term intent prong of the trading 

account. The final rule also provides that a banking entity that is subject to the market risk 

capital rule prong of the trading account definition is not also subject to the short-term intent 

prong, and a banking entity that is not subject to the market risk capital rule prong may elect to 

apply the market risk capital rule prong (as an alternative to the short-term intent prong). 

Additionally, the final rule modifies the liquidity management exclusion from the proprietary 

trading restrictions to permit banking entities to use a broader range of financial instruments to 

manage liquidity, and it adds new exclusions for error trades, certain customer-driven swaps, 

hedges of mortgage servicing rights, and purchases or sales of instruments that do not meet the 

 29 Under the proposal, the “limited” compliance threshold would have been based on the trading 

assets and liabilities of a foreign banking organization’s worldwide operations whereas the 

“significant” compliance threshold would have been based on the trading assets and liabilities of 

a foreign banking organization’s U.S. operations.
12

definition of trading assets or liabilities. Furthermore, the final rule revises the trading desk 

definition to provide more flexibility to banking entities to align the definition with other trading 

desk definitions in existing or planned compliance programs. This modified definition also will 

provide for consistent treatment across different regulatory regimes. 

The final rule also includes the proposed changes to the exemptions from the prohibitions 

in section 13 of the BHC Act for underwriting and market making-related activities, riskmitigating hedging, and trading by foreign banking entities solely outside the United States. The 

final rule also includes the proposed changes to the covered funds provisions for which specific 

rule text was proposed, including with respect to permitted underwriting and market making and 

risk-mitigating hedging with respect to a covered fund, as well as investment in or sponsorship of 

covered funds by foreign banking entities solely outside the United States and the exemption for 

prime brokerage transactions. With respect to the exemptions for underwriting and market 

making-related activities, the final rule adopts the presumption of compliance with the 

reasonably expected near-term demand requirement for trading within certain internal limits, but 

instead of requiring banking entities to promptly report limit breaches or increases to the 

agencies, banking entities are required to maintain and make available upon request records of 

any such breaches or increases and follow certain internal escalation and approval procedures in 

order to remain qualified for the presumption of compliance.

With respect to the compliance program requirements, the final rule includes the changes 

from the proposal to eliminate the enhanced compliance requirements in Appendix B of the 2013 

rule and to tailor the compliance program requirements based on the size of the banking entity’s 

trading activity. However, different from the proposal, the final rule only applies the CEO 

attestation requirement to firms with significant trading assets and liabilities. Also, in response 
13

to comments, the final rule includes modifications to the metrics collection requirements to, 

among other things, eliminate certain metrics and reduce the compliance burden associated with 

the requirement. 

The final amendments will be effective on January 1, 2020. In order to give banking 

entities a sufficient amount of time to comply with the changes adopted, banking entities will not 

be required to comply with the final amendments until January 1, 2021. However, banking 

entities may voluntarily comply, in whole or in part, with the amendments adopted in this release 

prior to the compliance date, subject to the agencies’ completion of necessary technical changes. 

In particular, the agencies need to complete certain technological programming in order to accept 

metrics compliant with the final amendments. The agencies will conduct a test run with banking 

entities of the revised metrics submission format. A banking entity seeking to switch to the 

revised metrics prior to January 1, 2021, must first successfully test submission of the revised 

metrics in the new XML format. Accordingly, banking entities should work with each 

appropriate agency to determine how and when to voluntarily comply with the metrics 

requirements under the final rules and to notify such agencies of their intent to comply, prior to 

the January 1, 2021, compliance date. 

B. Interagency Coordination and Other Comments

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 
14

advantages or imposing disadvantages to the companies affected . . . .”30 The agencies recognize 

that coordinating with each other to the greatest extent practicable with respect to regulatory 

interpretations, examinations, supervision, and sharing of information is important to 

maintaining consistent oversight, promoting compliance with section 13 of the BHC Act and 

implementing regulations, and to fostering 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.

In the proposal, the agencies requested comment on interagency coordination regarding 

the Volcker Rule in general and asked several specific questions relating to transparency, 

efficiency, and safety and soundness.31 Numerous commenters, including banking entities and 

industry groups, suggested that the agencies more effectively coordinate Volcker Rule related 

supervision, examinations, and enforcement, in order to improve efficiency and predictability in 

supervision and oversight.

32 For example, several commenters suggested that Volcker Rule

related supervision should be conducted solely by a bank’s prudential onsite examiner,33 and that 

the two market regulators be required to consult and coordinate with the prudential onsite 

examiner.34 Several commenters encouraged the agencies to memorialize coordination and 

 30 12 U.S.C. 1851(b)(2)(B)(ii).

31 83 FR 33436.

32 See, e.g., American Bankers Association (ABA); Institute of International Bankers (IIB); 

BB&T; Committee on Capital Markets Regulation (CCMR); Japanese Bankers Association 

(JBA); and the CFA Institute (CFA). Commenters also recommended designating to one agency 

the task of interpreting the implementing regulations and issuing guidance to smaller banking 

entities. See, e.g., Credit Suisse and Lori Nuckolls.

33 See, e.g., ABA; Arvest Bank (Arvest); Credit Suisse; and Financial Services Forum (FSF).

34 See ABA.
15

information sharing between the agencies by entering into a formal written agreement, such as an 

interagency Memorandum of Understanding.35

Several comment letters from public interest organizations suggested that the agencies 

have not provided sufficient transparency when implementing and enforcing the Volcker Rule, 

and urged the agencies to make public certain information related to enforcement actions, 

metrics, and covered funds activities.36 In addition, several commenters, including a member of 

Congress, argued that the agencies have not adequately explained or provided evidence to 

support the current rulemaking.37 

The agencies agree with commenters that interagency coordination plays an important

role in the effective implementation and enforcement of the Volcker Rule, and acknowledge the 

benefits of providing transparency in proposing and adopting rules to implement section 13 of 

the BHC Act. Accordingly, the agencies have endeavored to provide specificity and clarity in 

the final rule to avoid conflicting interpretations or uncertainty. The final rule also includes 

notice and response procedures that provide a greater degree of certainty about the process by 

which the agencies will make certain determinations under the final rule. The agencies continue 

to recognize the benefits of consistent application of the rules implementing section 13 of the 

BHC Act and intend to continue to consult with each other when formulating guidance on the 

final rule that would be shared with the public generally. That said, the agencies also are 

mindful of the need to strike an appropriate balance between public disclosure and the protection 

 35 See, e.g., ABA; BB&T; CCMR; and FSF.

36 See, e.g., AFR; Public Citizen; Volcker Alliance; and CFA.

37 See, e.g., CAP; Merkley; and Public Citizen.
16

of sensitive, confidential information, and the agencies are generally restricted from disclosing

sensitive, confidential business and supervisory information on a firm-specific basis.

Several commenters provided general comments regarding the proposal and the current

rulemaking. For example, several public interest commenters suggested that the proposed rule 

did not provide a sufficient financial disincentive against proprietary trading and encouraged the 

agencies to adopt certain limitations on compensation arrangements.

38 A commenter also 

suggested possible penalties for rule violations and encouraged the agencies to elaborate on the 

consequences of significant violations of the rule.39 Other commenters recommended that the 

agencies impose strong penalties on banking entities that break the law.

40 The agencies believe 

that the appropriate consequences for a violation of the rule will likely depend on the specific 

facts and circumstances in individual cases, as well as each agency’s statutory authority under 

section 13, and therefore are not amending the rule to provide for specific penalties or financial 

disincentives for violations. Finally, several commenters suggested that the proposed rule is too 

complex and may provide too much deference to a banking entity’s internal procedures and 

models (for example, in provisions related to underwriting, market making, and hedging), and 

that the proposed revisions would make the rule less effective.41 As discussed further below, the 

agencies believe that the particular changes adopted in the final rule are meaningfully simpler 

and streamlined compared to the 2013 rule, and are appropriate for the reasons described in 

greater detail below.

 38 See, e.g., Public Citizen and CAP.

39 See Public Citizen.

40 See Volcker 2.0 Form Letter.

41 See, e.g., Systemic Risk Council and Oonagh McDonald.
17

IV. Section by Section Summary of the Final Rule

A. Subpart A—Authority and Definitions

1. Section __.2: Definitions

a. Banking Entity

Section 13(a)(1)(A) of the BHC Act prohibits a banking entity from engaging in 

proprietary trading or acquiring or retaining an ownership interest, or sponsoring, a covered fund, 

unless the activity is otherwise permissible under section 13.42 Therefore, the definition of the 

term “banking entity” defines the scope of entities subject to restrictions under the rule. Section 

13(h)(1) of the BHC Act defines the term “banking entity” to include (i) any insured depository 

institution (as defined by statute); (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 such entity.43 

The regulations implementing this provision are consistent with the statute and also exclude 

covered funds that are not themselves banking entities, certain portfolio companies, and the 

FDIC acting in its corporate capacity as conservator or receiver.44

In addition, the agencies note that, 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, and certain community banks and their 

 42 12 U.S.C. 1851(a)(1)(A). A banking entity may engage in an activity that is permissible 

under section 13 of the BHC Act only to the extent permitted by any other provision of Federal 

and State law, and subject to other applicable restrictions. See 12 U.S.C. 1851(d)(1).

43 12 U.S.C. 1851(h)(1). 

44 See 2013 rule §__.2(c). 
18

affiliates.45 Section 203 of the Economic Growth, Regulatory Relief, and Consumer Protection 

Act (EGRRCPA) amended the definition of “banking entity” in the Volcker Rule to exclude 

certain community banks from the definition of insured depository institution, the general result 

of which was to exclude community banks and their affiliates and subsidiaries from the scope of 

the Volcker Rule.46 On July 22, 2019, the agencies adopted a final rule amending the definition 

of “insured depository institution,” in a manner consistent with EGRRCPA.

47

The proposed rule did not propose specific rule text to amend the definition of “banking 

entity,” but invited comment on a number of specific issues.48 The agencies received several 

comments about the “banking entity” definition, many of which asked that the agencies revise 

this definition to exclude specific types of entities. 

Several commenters expressed concern about the treatment of certain funds that are 

excluded from the definition of “covered fund” in the 2013 rule, including registered investment 

companies (RICs), foreign public funds (FPFs), and, with respect to a foreign banking entity,

certain foreign funds offered and sold outside of the United States (foreign excluded funds).49 In 

particular, these commenters noted that when a banking entity invests in such funds, or has 

certain corporate governance rights or other control rights with respect to such funds, the funds 

 45 See final rule §__.2(r). 

46 Public Law 115–174 (May 24, 2018). 

47 See 84 FR 35008.

48 See 83 FR 33442-446.

49 See, e.g., ABA; American Investment Council (AIC); Bundesverband Investment (BVI);

Canadian Bankers Association (CBA); European Banking Federation (EBF); Federated Investors 

II; Financial Services Agency and Bank of Japan (FSA/Bank of Japan); European Fund and 

Asset Management Association (EFAMA); and IIB.
19

could meet the definition of “banking entity” for purposes of the Volcker Rule.50 Concerns 

about certain funds’ potential status as banking entities arise, in part, because of the interaction 

between the statute’s and the 2013 rule’s definitions of the terms “banking entity” and “covered 

fund.” Sponsors of RICs, FPFs, and foreign excluded funds have noted that the treatment of 

such funds as “banking entities” would disrupt bona fide asset management activities (including 

fund investment strategies that may include proprietary trading or investing in covered funds), 

which these sponsors argued would be inconsistent with section 13 of the BHC Act.51 

Commenters also noted that treatment of RICs, FPFs, and foreign excluded funds as “banking 

entities” would put such banking entity-affiliated funds at a competitive disadvantage compared 

to funds not affiliated with a banking entity, and therefore not subject to restrictions under 

section 13 of the BHC Act.

52 In general, commenters also asserted that the treatment of RICs, 

FPFs, and foreign excluded funds as banking entities would not further the policy objectives of 

section 13 of the BHC Act.53

Several commenters suggested that the agencies exclude from the definition of “banking 

entity” foreign excluded funds.

54 These commenters generally noted that failing to exclude such 

funds from the definition of “banking entity” in the 2013 rule has the unintended consequence of 

 50 Id.

51 See, e.g., IIB and Securities Industry and Financial Markets Association (SIFMA).

52 See, e.g., Capital One et al.; Credit Suisse; EBF; and Investment Adviser Association (IAA).

53 See, e.g., ABA; EBF; and Investment Company Institute (ICI).

54 Id. In addition to the requests from commenters for the agencies to exclude foreign excluded 

funds from the “banking entity” definition, commenters also asked the agencies to adopt other 

amendments to address the treatment of such funds, including by providing a presumption of 

compliance for such funds (CBA; EBF; and IIB), to permit a banking entity to elect to treat a 

foreign excluded fund as a covered fund (CBA; EBF; and IIB), and to permanently extend the 

temporary relief currently provided to foreign excluded funds (IIB). 
20

imposing proprietary trading restrictions and compliance obligations on foreign excluded funds 

that are in some ways more burdensome than the requirements that would apply under the 2013 

rule to covered funds. Another commenter expressed opposition to carving out foreign excluded 

funds from the definition of banking entity.55 The staffs of the agencies continue to consider 

ways in which the regulations may be amended in a manner consistent with the statutory 

definition of “banking entity,” or other appropriate actions that may be taken, to address any 

unintended consequences of section 13 of the BHC Act and the 2013 rule. The agencies intend 

to issue a separate proposed rulemaking that specifically addresses the fund structures under the 

rule, including the treatment of foreign excluded funds. 

To provide additional time to complete this rulemaking, the Federal banking agencies 

released a policy statement on July 17, 2019, in response to concerns about the treatment of 

foreign excluded funds. This policy statement provides that the Federal banking agencies would 

not propose to take action during the two-year period ending on July 21, 2021, against a foreign 

banking entity based on attribution of the activities and investments of a qualifying foreign 

excluded fund to the foreign banking entity,56 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 §__.13(b) of the 2013 rule, as if the 

 55 See Data Boiler Technologies, LLC (Data Boiler).

56 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.
21

qualifying foreign excluded fund were a covered fund.57

Several commenters expressed concern with the treatment of RICs and FPFs, which are 

subject to significant regulatory requirements in the United States and foreign jurisdictions, 

respectively. These commenters encouraged the agencies to consider excluding such entities 

from the definition of “banking entity.”58 In the past, the staffs of the agencies issued several 

FAQs to address the treatment of RICs and FPFs.59 One of these staff FAQs provides guidance 

about the treatment of RICs and FPFs during the period in 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 so-called seeding period).

60 Another 

FAQ stated that staffs of the agencies would not view the activities and investments of an FPF 

that meets certain eligibility requirements in the 2013 rule as being attributed to the banking 

entity for purposes of section 13 of the BHC Act or the 2013 rule, where the banking entity 

(i) does not own, control, or hold with the power to vote 25 percent or more of any class of 

 57 See Board of Governors of the Federal Reserve System, Federal Deposit Insurance 

Corporation, and Office of the Comptroller of the Currency, “Statement regarding Treatment of 

Certain Foreign Funds under the Rules Implementing Section 13 of the Bank Holding Company 

Act” (July 17, 2019). This policy statement continued the position of the Federal banking 

agencies that was released on July 21, 2017, and the position that the agencies expressed in the 

proposal. See 83 FR 33444.

58 See, e.g., CCMR; IAA; ICI; and Capital One et al. One commenter also expressed support for 

a narrower exclusion for RICs and FPFs that would apply only during a non-time-limited seeding 

period. JP Morgan Asset Management.

59 See https://www.occ.treas.gov/topics/capitalmarkets/financial-markets/trading-volckerrule/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.ht

m (CFTC).

60 Id., FAQ 16. 
22

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. Similarly, this FAQ stated that the 

staffs of the agencies would not view the FPF to be a banking entity for purposes of section 13 of 

the BHC Act and the 2013 rule solely by virtue of its relationship with the sponsoring banking 

entity, where these same conditions are met.61

As noted above, the agencies intend to issue a separate proposal addressing and 

requesting comment on the covered fund provisions and other fund-related issues. The final rule 

does not modify or revoke any previously issued staff FAQs or guidance related to RICs, FPFs, 

and foreign excluded funds.62

Apart from these topics, the agencies received numerous other comments about the 

treatment of entities as “banking entities” under section 13 of the BHC Act. In general, these 

commenters requested that the agencies provide additional exclusions from the definition of 

“banking entity” for various types of entities. One commenter suggested that, as an alternative to 

excluding certain entities from the banking entity definition, the agencies could exempt the 

activities of these entities from the proprietary trading and covered fund prohibitions.63

One commenter recommended that the agencies provide a general exemption from the 

banking entity definition for investment funds, except in circumstances where the investment 

fund is determined to have been organized to permit the banking entity sponsor to engage in 

 61 Id., FAQ 14.

62 The FAQs represent the views of staff of the agencies. They are not rules, regulations, or 

statements of the agencies. Furthermore, the agencies have neither approved nor disapproved 

their content. The FAQs, like all staff guidance, have no legal force or effect: they do not alter or 

amend applicable law, and they create no new or additional obligations for any person.

63 See Bank Policy Institute (BPI). 
23

impermissible proprietary trading.64 Some commenters encouraged the agencies to exclude 

employee securities companies from the definition of “banking entity.”65 One commenter 

argued that despite a banking entity’s role as a general partner in employee securities companies, 

treating such entities as “banking entities” does not further the policy goals of section 13 of the 

BHC Act.66 Several commenters encouraged the agencies to exclude from the definition of 

“banking entity” any non-consolidated subsidiaries not operated or managed by a banking entity, 

on the basis that such entities were never intended to be subject to section 13 of the BHC Act.67 

Another commenter said the agencies should exclude from the definition of “banking entity” all 

employee compensation plans, regardless of whether such plans are qualified or non-qualified.68 

Other commenters suggested that the agencies should exclude subsidiaries of foreign banking 

entities that do not engage in trading activities in the United States, or otherwise limit application 

to foreign subsidiaries of foreign banking groups.

69 Other commenters requested modification of 

the definition of “banking entity” to exclude parent companies and affiliates of industrial loan 

companies, noting that such companies are generally not subject to other restrictions on their 

 64 See EFAMA.

65 See, e.g., ABA and FSF.

66 See ABA.

67 See, e.g., ABA; BPI; SIFMA; JBA.

68 See BB&T.

69 See JBA. This commenter suggested that in the absence of an exclusion for such entities, 

simplified compliance program requirements should apply to foreign subsidiaries of foreign 

banking entities that do not engage in trading activities in the United States. The agencies 

believe that several of the other changes in this final rule will provide relief to foreign banking 

entities that engage in no trading activities in the United States, including simplifications to the 

exemption for foreign banking entities engaged in trading outside of the United States, and more 

tailored compliance program requirements. See also FSA/Bank of Japan; IIB.
24

activities under the BHC Act.70 

One commenter encouraged the agencies to exclude international banks from the 

definition of “banking entity” if they have limited U.S. trading assets and liabilities.71 This 

commenter also encouraged the agencies to exclude certain non-U.S. commercial companies that 

are comparable to U.S. merchant banking portfolio companies.72 This commenter argued that 

excluding these entities would not pose material risks to the financial stability of the United 

States. 

Some commenters suggested that the agencies should clarify the standards for what 

constitutes “control” in the context of determining whether an entity is an “affiliate” or 

“subsidiary” for purposes of the definition of “banking entity” in the Volcker Rule.73 One 

commenter suggested that the definition of “banking entity” should include only a company in 

which a banking entity owns, controls, or has the power to vote 25 percent or more of a class of 

voting securities of the company.74 

The definition of “banking entity” in section 13 of the BHC Act uses the definition of 

control in section 2 of the BHC Act.75 Under the BHC Act, “control” is defined by a threepronged test. A company has control over another company if the first company (i) directly or 

indirectly or acting through one or more other persons owns, controls, or has power to vote 25 

 70 See, e.g., EnerBank USA (EnerBank); Marketplace Lending Association; National 

Association of Industrial Bankers.

71 See IIB. This commenter also proposed modifying the manner in which “banking entity” 

status is determined by disaggregating separate, independent corporate groups.

72 Id.

73 See, e.g., EnerBank and Capital One et al. See 12 U.S.C. 1841(a)(2)(C).

74 See Capital One et al.

75 12 U.S.C. 1841(a)(2); 12 CFR 225.2(e).
25

percent or more of any class of voting securities of the other company; (ii) controls in any 

manner the election of a majority of the directors of the other company; or (iii) directly or 

indirectly exercises a controlling influence over the management or policies of the other 

company.76 The Board recently issued a proposed rulemaking that would clarify the standards 

for evaluating whether one company exercises a controlling influence over another company for 

purposes of the BHC Act.77 

The final rule does not amend the definition of banking entity. Commenters raised 

important considerations with respect to the consequences of the current “banking entity” 

definition under section 13 of the BHC Act and the 2013 rule. The agencies believe that other 

amendments to the requirements of the regulations implementing the Volcker Rule may address 

some of the issues raised by commenters. Certain concerns raised by commenters may need to

be addressed through amendments to section 13 of the BHC Act.

78 In addition, as noted above, 

the agencies intend to revisit the fund-related provisions of the Volcker Rule in a separate 

rulemaking.

b. Limited, Moderate, and Significant Trading Assets and Liabilities

The proposal would have established three categories of banking entities based on their 

level of trading activity, as measured by the average gross trading assets and liabilities of the 

banking entity and its subsidiaries and affiliates (excluding obligations of or guaranteed by the 

 76 Id.

77 See “Control and Divestiture Proceedings,” 84 FR 21,634-666 (May 14, 2019).

78 See, e.g., Economic Growth, Regulatory Relief, and Consumer Protection Act § 203 

(excluding community banks from the definition of “banking entity”).
26

United States or any agency of the United States) over the previous four consecutive quarters.79 

These categories would have been used to calibrate compliance requirements for banking 

entities, with the most stringent compliance requirements applicable to those with the greatest 

level of trading activities. 

The first category would have included firms with “significant” trading assets and 

liabilities, defined as those banking entities that have consolidated trading assets and liabilities 

equal to or exceeding $10 billion.80 The second category would have included firms with 

“moderate” trading assets and liabilities, which would have included those banking entities that 

have consolidated trading assets and liabilities of $1 billion or more, but with less than $10 

billion in consolidated trading assets and liabilities.81 The final category would have included 

firms with “limited” trading assets and liabilities, defined as those banking entities that have less 

than $1 billion in consolidated trading assets and liabilities.82 The proposal would have also 

provided the agencies with a reservation of authority to require a banking entity with limited or 

moderate trading assets and liabilities to apply the compliance program requirements of a higher 

compliance tier if an agency determined that the size or complexity of the banking entity’s 

trading or investment activities, or the risk of evasion of the requirements of the rule, warranted 

 79 See proposed rule §__.2(t), (v), (ff). Under the proposal, a foreign banking entity’s trading 

assets and liabilities would have been calculated based on worldwide trading assets and liabilities 

with respect to the $1 billion threshold between limited and moderate trading assets and 

liabilities, but based on the trading assets and liabilities only of its combined U.S. operations 

with respect to the $10 billion threshold between moderate and significant trading assets and 

liabilities. See proposed rule §__.2(t)(1), (ff)(2)-(3).

80 Proposed rule §__.2(ff). 

81 Proposed rule §__.2(v). 

82 Proposed rule §__.2(t). 
27

such treatment.83 The proposal also solicited comment as to whether there should be further 

tailoring of the thresholds for a banking entity that is an affiliate of another banking entity with 

significant trading assets and liabilities, if that entity generally operates on a basis that is separate 

and independent from its affiliates and parent companies.84

Commenters provided feedback on multiple aspects of the tiered compliance framework, 

including the level of the proposed thresholds between the categories ($1 billion and $10 billion 

in trading assets and liabilities), the manner in which “trading assets and liabilities” should be 

measured, and alternative approaches that commenters believed would be preferable to the 

proposed three-tiered compliance framework. As described further below, after consideration of 

the comments received, the agencies are adopting a three-tiered compliance framework that is 

consistent with the proposal, with targeted adjustments to further tailor compliance program 

requirements based on the level of a firm’s trading activities, and in light of concerns raised by 

commenters.85 The agencies believe that this approach will increase compliance efficiencies for 

all banking entities relative to the 2013 rule and the proposal, and will 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. 

Several commenters expressed support for the proposed three-tiered compliance 

framework in the proposal.86 One commenter noted that the 2013 rule’s compliance regime, 

which imposes significant compliance obligations on all banking entities with $50 billion or 

more in total consolidated assets, does not appropriately tailor compliance obligations to the 

 83 Proposed rule §__.20(h). 

84 See 83 FR at 33442 (question 7).

85 See final rule § __.2(s), (u), (ee).

86 See, e.g., BB&T Corporation; CFA; CCMR; and State Street Corporation (State Street).
28

scope of activities covered under the regulation, particularly for firms engaged in limited trading 

activities.87 Other commenters expressed general opposition to the proposed three-tiered

compliance program.88 Another commenter expressed concern in particular that banking entities

with “limited” trading assets and liabilities would have been presumed compliant with the 

requirements of section 13 of the BHC Act under the proposed rule.

89 Some commenters also 

suggested that the agencies adopt a two-tiered compliance program, bifurcating banking entities 

into those with and without significant trading assets and liabilities.90 One commenter expressed 

opposition to tailoring compliance requirements for banking entities that operate separately and 

independently from their affiliates, by calculating trading assets and liabilities for such entities 

independent of the activities of affiliates.91 The agencies believe that the three-tiered framework 

set forth in the proposal, subject to the additional amendments described below, appropriately 

differentiates among banking entities for the purposes of tailoring compliance requirements. 

Specifically, the agencies believe that the significant differences in business models and 

activities among banking entities that would have significant trading assets and liabilities, 

moderate trading assets and liabilities, and limited trading assets and liabilities, as described 

below, support having a three-tiered compliance framework.

A few commenters recommended that the agencies raise the proposed $1 billion 

threshold between banking entities with limited and moderate trading assets and liabilities.92 

 87 See State Street.

88 See, e.g., Bean; Data Boiler Technologies; and Occupy the SEC. 

89 See Occupy the SEC.

90 See, e.g., ABA; Capital One et al.; and KeyCorp and KeyBank (KeyCorp).

91 See Data Boiler Technologies.

92 See, e.g., ABA; Capital One et al.; and BPI.
29

These commenters suggested that raising this threshold to $5 billion in trading assets and 

liabilities would be consistent with the objective of the proposal to have the most streamlined 

requirements imposed on banking entities with a relatively small amount of trading activities. 

Other commenters recommended that the threshold between banking entities with limited and 

moderate trading activities was appropriate or should be set at a lower level.93 The agencies 

believe that the compliance obligations applicable to banking entities with limited trading assets 

and liabilities are most appropriately reserved for banking entities below the $1 billion threshold 

set forth in the proposal. Such banking entities tend to have simpler business models and do not 

have large trading operations that would warrant the expanded compliance obligations applicable 

to banking entities with moderate and significant trading assets and liabilities. As discussed 

further below, these banking entities also hold a relatively small amount of the trading assets and 

liabilities in the U.S. banking system. Therefore, the final rule adopts the threshold from the 

proposed rule for determining whether a banking entity has limited trading assets and 

liabilities.

94

Several commenters recommended that the agencies modify the threshold for 

“significant” trading assets and liabilities.95 Generally, these commenters expressed support for 

raising the threshold from $10 billion in trading assets and liabilities to $20 billion in trading 

 93 See, e.g., Data Boiler (encouraging the agencies to lower the threshold to $500 million in 

trading assets and liabilities) and B&F Capital Markets (B&F) (expressing support for the 

proposed $1 billion threshold).

94 See final rule § __.2(s)(2)-(3).

95 See, e.g., ABA; Bank of New York Mellon Corporation, Northern Trust Corporation, and 

State Street Corporation (Custody Banks); New England Council; Capital One et al.; SIFMA; 

State Street; and BPI.
30

assets and liabilities.

96 These commenters noted that this change would have minimal impact on 

the number of banking entities that would remain categorized as having significant trading assets 

and liabilities.97 Several commenters also noted that increasing the threshold from $10 billion to 

$20 billion would provide additional certainty to banking entities that are near or approaching the 

$10 billion threshold, because market events or unusual customer demands could cause such 

banking entities to exceed (permanently or on a short-term basis) the $10 billion trading assets 

and liabilities threshold.98 The final rule adopts the change recommended by several 

commenters to raise the threshold from $10 billion to $20 billion for calculating whether a 

banking entity has significant trading assets and liabilities.99 

The agencies estimate that, under the final rule with the increased threshold from $10 

billion to $20 billion described above, banking entities classified as having significant trading

assets and liabilities would hold approximately 93 percent of the trading assets and liabilities in 

the U.S. banking system. The agencies also estimate that banking entities with significant 

trading assets and liabilities and those with moderate trading assets and liabilities in combination 

would hold approximately 99 percent of the trading assets and liabilities in the U.S. banking 

system. Therefore, both of these thresholds will tailor the compliance obligations under the final 

rule for all firms by virtue of imposing greater compliance obligations on those banking entities

with the most substantial levels of trading activities. 

One commenter suggested that the agencies index the compliance tier thresholds to 

 96 Id.

97 Id.

98 See, e.g., ABA; Capital One et al.; and SIFMA.

99 See final rule § __.2(ee)(1)(i).
31

inflation.100 At present, the agencies do not believe that the additional complexity associated 

with inflation-indexing the thresholds in the final rule is necessary in light of the other changes to 

the thresholds and calculation methodologies described below, including the increase in the 

threshold for firms with significant trading assets and liabilities from $10 billion to $20 billion, 

and the modifications to the calculation of trading assets and liabilities adopted in the final 

rule.

101

Commenters recommended that the regulations incorporate a number of changes to the 

methodology used in the proposed rule to classify firms into different compliance tiers. Some 

commenters recommended that the agencies apply a consistent methodology to foreign banking 

entities to classify such firms as having significant trading assets and liabilities, moderate trading 

assets and liabilities, or limited trading assets and liabilities.102 For purposes of classifying the 

banking entity as having significant trading assets and liabilities, the proposal would have 

included only the trading assets and liabilities of the combined U.S. operations of a foreign 

banking entity, but used the banking entity’s worldwide trading assets and liabilities for purposes 

of classifying the firm as having either limited trading assets and liabilities or moderate trading 

assets and liabilities.103 Commenters recommended that the agencies apply a consistent standard 

for classifying a foreign banking entity as having significant trading assets and liabilities, 

moderate trading assets and liabilities, or limited trading assets and liabilities, and that the most 

appropriate measure would look only at the combined U.S. operations of such a banking 

 100 See Capital One et al.

101 See, e.g., final rule § __.2(ee)(1)(i).

102 See, e.g., IIB and JBA.

103 See proposed rule § __.2(t)(1), (ff)(2)-(3).
32

entity.

104 These commenters noted that classifying foreign banking entities based on their global 

trading activities could have the result of imposing extensive compliance obligations on the nonU.S. trading activities of a banking entity with minimal U.S. trading activities.

105

The final rule adopts a consistent methodology for calculating the trading assets and 

liabilities of foreign banking entities across all categories, taking into account only the trading 

assets and liabilities of such banking entities’ combined U.S. operations.106 The agencies believe 

this approach is appropriate, particularly for foreign firms with little or no U.S. trading activity 

but substantial worldwide trading operations. The agencies further believe that the trading 

activities of foreign banking entities that occur outside of the United States and are booked into 

such foreign banking entities (or into their foreign affiliates), pose substantially less risk to the 

U.S. financial system than trading activities booked into a U.S. banking entity, including a U.S. 

banking entity that is an affiliate of a foreign banking entity. This approach is also appropriate in 

light of provisions in section 13 of the BHC Act that provide foreign banking entities with 

significant flexibility to conduct trading and covered fund activities outside of the United 

States.107 

One commenter expressed concern that the regulations did not give banking entities 

sufficient guidance as to how to calculate their trading assets and liabilities, and asked that the 

regulations expressly permit a banking entity to rely on home jurisdiction accounting standards 

when calculating trading assets and liabilities.108 In light of the changes to the methodology for 

 104 See, e.g., IIB and JBA.

105 Id.

106 See final rule § __.2(s)(3), (ee)(3).

107 See Section 13(d)(1)(H), (I) (12 U.S.C. 1851(d)(1)(H), (I)). 

108 See JBA.
33

calculating trading assets and liabilities noted above, in particular using combined U.S. trading 

assets and liabilities for establishing the appropriate compliance tier for foreign banking entities, 

the agencies believe that further clarifications to the standards for calculating “trading assets and 

liabilities” are not necessary for banking entities to have sufficient information available as to the 

manner in which to calculate trading assets and liabilities.

A few commenters suggested that the threshold for “significant trading assets and 

liabilities” should be determined based on the relative size of the banking entity’s total trading 

assets and liabilities as compared to other metrics, such as total consolidated assets or capital, 

thereby establishing a banking entity’s compliance requirements based on the significance of 

trading activities to the banking entity.

109 Some commenters suggested that the use of trading 

assets and liabilities alone as a metric to classify banking entities for determining compliance 

obligations was inappropriate.110 The agencies believe that a banking entity’s trading assets and 

liabilities, as calculated under the methodology described in the final rule, is an appropriate 

metric to use in establishing compliance requirements for banking entities. Imposing compliance 

obligations on a banking entity based on the relative significance of trading activities to the firm 

could have the result of imposing fewer compliance obligations on a larger banking entity with 

identical trading activities to a smaller counterpart, simply because of that entity’s larger size. 

Several commenters recommended that the regulations exclude particular types of trading 

assets and liabilities for purposes of determining whether a banking entity has significant trading 

assets and liabilities, moderate trading assets and liabilities, or limited trading assets and 

liabilities. In particular, some commenters encouraged the agencies to exclude all government 

 109 See, e.g., ABA; Capital One et al.

110 See, e.g., Data Boiler and John Hoffman.
34

obligations and other assets and liabilities that are not subject to the prohibition on proprietary 

trading under section 13 of the BHC Act and the regulations.111 The final rule modifies the 

methodology for calculating a firm’s trading assets and liabilities to exclude all financial 

instruments that are obligations of, or guaranteed by, the United States, or that are obligations, 

participations, or other instruments of or guaranteed by an agency of the United States or a 

government-sponsored enterprise as described in the regulations.112 As commenters noted, 

banking entities are permitted to engage in trading activities in these products under section 13 of 

the BHC Act and the implementing regulations, and therefore the exclusion of such instruments 

for the final rule will result in a more appropriately tailored standard than under the proposal. 

The agencies also believe that the calculation of trading assets and liabilities, subject to these 

modifications, should continue to be relatively simple for banking entities and the agencies, 

without requiring the imposition of additional reporting requirements. 

A few commenters recommended that certain de minimis risk portfolios, such as matched 

derivatives holdings and loan-related swaps, be excluded from the calculation of trading assets 

and liabilities.113 Another commenter recommended the calculation of trading assets and 

liabilities should exclude insurance assets.114 Another commenter proposed that the trading 

assets and liabilities of non-consolidated affiliates be excluded, because tracking the trading 

assets and liabilities of such subsidiaries on an ongoing basis may present significant practical 

burdens.115 As discussed herein, the final rule makes several amendments to the methodology 

 111 See, e.g., BMO Financial Group (BMO); Capital One et al.; and KeyCorp.

112 See final rule § __.2(s)(2), (3); see also final rule § __.6(a)(1), (2)

113 See, e.g., ABA; Arvest; and BOK Financial (BOK).

114 See Insurance Coalition.

115 See JBA.
35

for calculating trading assets and liabilities, for example by excluding securities issued or 

guaranteed by certain government-sponsored enterprises, and by calculating trading assets and 

liabilities for foreign banking entities based only on the combined U.S. operations of such 

banking entities.

116 The agencies believe that the revisions in the final rule should simplify the 

manner in which a banking entity calculates its trading assets and liabilities. However, the final 

rule does not adopt the changes recommended by a few commenters to exclude trading assets 

and liabilities associated with particular business activities or business lines, other than the 

express modifications noted above, or to exclude the trading assets and liabilities of certain types 

of subsidiaries. Rather, the final rule adopts an approach that is intended to be straightforward 

and consistent and allow banking entities greater ability to leverage regulatory reports that 

banking entities are already required to prepare under existing law, such as the Form Y9-C and 

the Call Report.

117

Some commenters noted that the regulations should clarify the manner in which a 

banking entity should calculate trading assets and liabilities, and make clear whether it would be 

appropriate to rely on regulatory reporting forms such as the Board’s Consolidated Financial 

Statements for Holding Companies, Form FR Y-9C or call report information, or other 

regulatory reporting forms.118 Other commenters recommended that the agencies clarify whether 

the calculation of “trading assets and liabilities” should include only positions that would be 

within the scope of the “trading account” definition, or should otherwise exclude certain types of 

 116 See final rule § __.2(s)(2)-(3), (ee)(2)-(3).

117 Compliance obligations are determined on a consolidated basis under the final rule. For that 

reason, where a banking entity has an unconsolidated subsidiary, the banking entity would not 

need to examine additional financial reports to determine its compliance obligations.

118 See, e.g., Bank of Oklahoma; KeyCorp; BPI; and Capital One et al Banks.
36

instruments.119 The agencies support banking entities relying on current regulatory reporting 

forms to the extent possible to determine their compliance obligations under the final rule. As 

discussed above, the calculation of significant trading assets and liabilities, moderate trading 

assets and liabilities, and limited trading assets and liabilities is based on a four-quarter average, 

and therefore would not require daily or more frequent monitoring of trading assets and 

liabilities.120

A few commenters encouraged the agencies to include transition periods for a banking 

entity that moves to a higher compliance tier, to allow the banking entity time to comply with the 

different expectations under the compliance tier.121 Some commenters said that the regulations 

should permit a banking entity to breach a threshold for a higher compliance category without 

needing to comply with the heightened compliance requirements applicable to banking entities

with that level of trading assets and liabilities, provided the banking entity’s trading assets and 

liabilities drop below the relevant threshold within a limited period of time.122 The final rule 

does not adopt transition periods or cure periods as recommended by commenters. The 

calculation of a banking entity’s trading assets and liabilities is calculated based on a 4-quarter 

average, which should provide banking entities with ample notice to come into compliance with 

the requirements of the final rule when crossing from having limited to moderate trading assets 

and liabilities, or from moderate to significant trading assets and liabilities.123 

 119 See, e.g., BMO and Capital One et al.

120 See final rule § __.2(s)(1)(i), (ee)(1)(i).

121 See, e.g., ABA; BPI; Custody Banks; Capital One et al.; and State Street.

122 See State Street.

123 A banking entity approaching a compliance threshold is encouraged to contact its primary 

financial regulatory agency to discuss the steps the banking entity should take to satisfy its 

compliance obligations under the new threshold.
37

One commenter recommended that the agencies provide for notice and response 

procedures prior to exercising the reservation of authority to require a banking entity to apply the 

requirements of a higher compliance program tier, and, if a banking entity is determined to be 

required to apply increased compliance program requirements, it should be given a two-year 

conformance period to come into compliance with such requirements.124 After considering this 

comment, the agencies believe that the notice and response procedures provided in the proposal 

for rebutting the presumption of compliance for banking entities with limited trading assets and 

liabilities would also be appropriate with respect to an agency exercising this reservation of 

authority. However, the agencies believe that providing an automatic two-year conformance 

period would be inappropriate, especially in instances where the agency has concerns regarding 

evasion of the requirements of the final rule. Therefore, the agencies are adopting the 

reservation of authority with a modification to require that the agencies exercise such authority in 

accordance with the notice and response procedures in section __.20(i) of the final rule.125 To 

the extent that an agency exercises this authority to require a banking entity to apply increased 

compliance program requirements, an appropriate conformance period shall be determined 

through the notice and response procedures.

B. Subpart B—Proprietary Trading Restrictions

Section 13(a)(1)(A) of the BHC Act prohibits a banking entity from engaging in 

proprietary trading unless otherwise permitted in section 13. Section 13(h)(4) of the BHC Act 

defines proprietary trading, in relevant part, 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, a 

 124 See BPI.

125 See final rule § __.20(i).
38

security, derivative, contract of sale of a commodity for future delivery, or other financial 

instrument that the agencies include by rule. Section 13(h)(6) of the BHC Act defines “trading 

account” to mean any account used for acquiring or taking positions in the securities and 

instruments described in section 13(h)(4) 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, by rule determine.126 Section 3 of the implementing 

regulations defines “proprietary trading,” “trading account,” and several related definitions.

1. Section __.3: Prohibition on Proprietary Trading and Related Definitions

a. Trading Account

The 2013 rule’s definition of trading account includes three prongs and a rebuttable 

presumption. The short-term intent prong includes within the definition of trading account the 

purchase or sale of one or more financial instruments principally for the purpose of (A) shortterm resale, (B) benefitting from actual or expected short-term price movements, (C) realizing 

short-term arbitrage profits, or (D) hedging one or more positions resulting from the purchases or 

sales of financial instruments for the foregoing purposes.127 Under the 2013 rule’s rebuttable 

presumption, the purchase (or sale) of a financial instrument by a banking entity is presumed to 

be for the trading account under the short-term intent prong if the banking entity holds the 

financial instrument for fewer than sixty days or substantially transfers the risk of the financial 

instrument within sixty days of the purchase (or sale). A banking entity could rebut the 

presumption by demonstrating, based on all relevant facts and circumstances, that the banking 

 126 12 U.S.C. 1851(h)(6).

127 See 2013 rule § __.3(b)(1)(i).
39

entity did not purchase (or sell) the financial instrument principally for any of the purposes 

described in the short-term intent prong.128

The market risk capital rule prong (market risk capital prong) includes within the 

definition of trading account the purchase or sale of one or more financial instruments that are 

both covered positions and trading positions under the market risk capital rule (or hedges of 

other covered positions under the market risk capital rule), 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 risk-based capital ratios under the market risk capital

rule.

129

Finally, the dealer prong includes within the definition of trading account any purchase or 

sale of one or more financial instruments for any purpose if the banking entity (A) 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 (B) 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.130

 128 See 2013 rule § __.3(b)(2).

129 See 2013 rule § __.3(b)(1)(ii).

130 See 2013 rule § __.3(b)(1)(iii). An insured depository institution may be registered as a swap 

dealer, but only the swap dealing activities that require it to be so registered are covered by the 

dealer trading account. 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 is included in the trading account only if the 
40

The proposal would have replaced the 2013 rule’s short-term intent prong with a new 

third prong based on the accounting treatment of a position (the accounting prong). The proposal 

also would have added a presumption of compliance with the proposed rule’s prohibition on 

proprietary trading for trading desks whose activities are not covered by the market risk capital

prong or the dealer prong if the activities did not exceed a specified quantitative threshold. The 

proposal would have retained a modified version of the market risk capital prong and would have 

retained the dealer prong unchanged from the 2013 rule. As described in detail below, the final 

rule retains the three-pronged definition of trading account from the 2013 rule and does not adopt 

the proposed accounting prong or presumption of compliance with the proprietary trading 

prohibition. Rather, the final rule makes targeted changes to the definition of trading account. 

Among other changes, the final rule eliminates the 2013 rule’s rebuttable presumption 

and replaces it with a rebuttable presumption that financial instruments held for sixty days or 

more are not included in the trading account under the short-term intent prong.131 The agencies 

believe that the market risk capital prong, which expressly includes certain short-term trading 

activities, is an appropriate interpretation of the statutory definition of trading account for all 

firms subject to the market risk capital rule.132 Therefore, the final rule provides that banking 

entities that are subject to the market risk capital prong are not subject to the short-term intent 

 

instrument falls within the definition of trading account under at least one of the other prongs. 

See 79 FR at 5549.

131 See final rule § __.3(b)(4).

132 See 12 U.S.C. § 1851(h)(6); see also Instructions for Preparation of Consolidated Financial 

Statements for Holding Companies, Trading Assets and Liabilities, Schedule HC-D, available at 

https://www.federalreserve.gov/reportforms/forms/FR_Y-9C20190731_i.pdf, and Instructions for 

Preparation of Consolidated Reports of Condition and Income, Schedule RC-D, available at

https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_FFIEC041_201803_i.pdf.
41

prong.133 However, the final rule provides that banking entities that are subject to the short-term 

intent prong may elect to apply the market risk capital prong instead of the short-term intent 

prong.134 These changes are designed to simplify and tailor the trading account definition in a 

manner that is consistent with section 13 of the BHC Act and applicable safety and soundness

standards.

i. Accounting Prong

The proposed accounting prong would have provided that “trading account” meant 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.135 Such 

instruments generally include, but are not limited to, derivatives, trading securities, and 

available-for-sale securities. The proposed inclusion of this prong in the definition of “trading 

account” was intended to provide greater certainty and clarity to banking entities than the shortterm intent prong in the 2013 rule about which transactions would be included in the trading 

account, because banking entities could more readily determine which positions are recorded at 

fair value on their balance sheets.136

Many commenters strongly opposed replacing the short-term intent prong with the 

accounting prong.137 These commenters asserted that the accounting prong could 

 133 See final rule § __.3(b)(2)(i). 

134 See final rule § __.3(b)(2)(ii).

135 See proposed rule § __.3(b)(3); 83 FR at 33447-48.

136 See 83 FR at 33447-48.

137 See, e.g., BOK; New York Community Bank (NYCB); IAA; ABA; KeyCorp; International 

Swaps and Derivatives Association (ISDA); Mortgage Bankers Association (MBA); Commercial 

Real Estate Finance Council (CREFC), Mortgage Bankers Association, and the Real Estate 

Roundtable (Real Estate Associations); State Street; Chatham Financial et al. (Chatham); Capital 
42

inappropriately scope in, among other things: over $400 billion in available-for-sale debt 

securities;138 certain long term investments;139 static hedging of long term investments;140

traditional asset-liability management activities;141 derivative transactions entered into for any 

purpose and duration;142 long-term holdings of commercial mortgage-backed securities;143 seed 

capital investments;144 investments that are expressly permitted under the covered fund 

provisions;145 investments in connection with employee compensation;146 bank holding 

company-permissible investments in enterprises engaging in activities that are part of the 

business of banking or incidental thereto, as well as other investments made pursuant to the BHC 

Act;147 and financial holding company merchant banking investments.148 Some commenters 

argued that the accounting prong was inconsistent with the statute;149 would lead to increased 

regulatory burden and uncertainty;150 could encourage banking entities not to elect to account for 

 

One et al.; BPI; FSF; Goldman Sachs; SIFMA; Center for Capital Markets Competitiveness 

(CCMC); IIB; Credit Suisse; EBF; and Arvest.

138 See, e.g., BPI and SIFMA.

139 See, e.g., Capital One et al.; BPI; SIFMA; and CCMR.

140 See, e.g., BPI and ISDA.

141 See, e.g., KeyCorp; BPI; Capital One et al.; FSF; and Goldman Sachs.

142 See e.g., ISDA and BPI.

143 See MBA.

144 See, e.g., ICI; Capital One et al.; Credit Suisse; FSF; and SIFMA.

145 See, e.g., Capital One et al. and BPI.

146 See, e.g., Capital One et al. and BPI.

147 See Capital One et al.

148 See Capital One et al.

149 See, e.g., Capital One et al; CCMC; IAA; ABA; ISDA; Credit Suisse; CREFC; BPI; FSF; 

Goldman Sachs; and SIFMA.

150 See, e.g., CCMC; JBA; Structured Finance Industry Group (SFIG); IIB; American Action 

Forum; ABA; BPI; ISDA; and SIFMA.
43

financial instruments at fair value, thereby reducing transparency into banking entities’ financial 

reporting and frustrating risk management practices that are based on the fair value option;151

could result in disparate treatment of the same activity between two banking entities where one 

banking entity elects the fair value option and the other does not;152 would have a 

disproportionately negative impact on midsize and regional banks;153 could negatively impact 

the securitization industry if liquidity for asset-backed securities is impeded;154 could 

inappropriately scope in investment advisers’ use of seed capital to develop products, services, or 

strategies for asset management clients;155 could lead to increased burden for international banks 

by requiring them to apply both local accounting standards and U.S. generally accepted 

accounting principles (GAAP) to non-U.S. positions, one for regular accounting purposes and 

one specifically for assessing compliance with the regulations implementing section 13 of the 

BHC Act;156 that the exclusions and exemptions from the prohibition on proprietary trading in 

the 2013 rule are ill-suited with respect to positions captured by the accounting prong;157 and that 

fair valuation of assets and liabilities under applicable accounting standards is not indicative of 

short-term trading intent.158

 151 See, e.g., BPI and IIB.

152 See BPI.

153 See, e.g., BOK; ABA; and NYCB.

154 See SFIG.

155 See IAA.

156 See IIB.

157 See, e.g., SIFMA; BPI; CCMR; FSF; and BB&T.

158 See, e.g., Capital One et al.; ABA; BPI; FSF; SIFMA; and Credit Suisse.
44

Some commenters expressed a preference for the 2013 rule’s short-term intent prong over 

the accounting prong.159 Other commenters suggested revisions to the accounting prong if 

adopted, such as excluding from the definition of trading account any financial instrument for 

which financial institutions record the change in value in other comprehensive income;160

expressly excluding available-for-sale portfolios from the accounting prong;161 and clarifying 

that non-U.S. banking entities are permitted to use accounting standards adopted by individual 

banking entities other than International Financial Reporting Standards and GAAP.162 One 

commenter expressed concern that a banking entity could circumvent the prohibition on 

proprietary trading by recording financial instruments at amortized cost instead of fair value.163

Some commenters supported adopting the accounting prong.164 One commenter urged 

the agencies to retain the short-term intent prong and to adopt the accounting prong as an 

additional test without any presumption of compliance.165 Another commenter argued that the 

accounting prong should be implemented as a new presumption within the short-term trading 

prong.166 This commenter urged the agencies to revise the accounting prong by codifying 

language from the applicable accounting standards and coupling this with preamble language 

indicating that the agencies intend to interpret the accounting prong in a manner that is consistent 

 159 See, e.g., Chatham; BPI; SIFMA; IIB; Credit Suisse; and Arvest.

160 See BOK.

161 See BOK.

162 See JBA.

163 See Volcker Alliance.

164 See, e.g., Public Citizen; CAP; Better Markets; and AFR.

165 See CAP.

166 See Better Markets.
45

with GAAP and international accounting codifications and guidance, thereby allowing the 

agencies to definitively interpret the text rather than accounting authorities, who might not 

consider the regulations implementing section 13 of the BHC Act when making further changes 

to accounting standards.167

After considering all comments received,168 the agencies are not adopting the accounting 

prong in the final rule. The agencies agree with commenters’ concerns that the accounting prong 

would have inappropriately scoped in many financial instruments and activities that section 13 of 

the BHC Act was not intended to capture, including some long-term investments. In addition, 

the accounting prong would have inappropriately scoped in entire categories of financial 

instruments, regardless of the banking entity’s purpose for buying or selling the instrument, such 

as all derivatives and equity securities with a readily determinable fair value. Furthermore, the 

accounting prong would have captured certain seeding activity that would otherwise be permitted 

under subpart C of the regulations implementing section 13 of the BHC Act. As noted in the 

preamble to the proposed rule, the impetus behind replacing the short-term intent prong with the 

accounting prong was to address the uncertain application of the short-term intent prong to 

certain trades.169 As discussed in detail below, the agencies have modified the short-term intent 

prong to provide more clarity. The agencies have also provided further clarity to the trading 

account definition in the final rule by adding additional exclusions from the “proprietary trading” 

 167 See Better Markets.

168 See, e.g., BOK; NYCB; IAA; ABA; KeyCorp; ISDA; MBA; Real Estate Associations; State 

Street; Chatham; Capital One et al.; BPI; FSF; Goldman Sachs; SIFMA; CCMC; IIB; Credit 

Suisse; EBF; CREFC; and Arvest.

169 See 83 FR at 33448.
46

definition. The agencies are adopting these clarifying measures as a more tailored approach to 

address the difficulties that have arisen under the existing short-term intent prong. 

ii. Presumption of Compliance with the Prohibition on 

Proprietary Trading 

Under the accounting prong, the proposal would have added a presumption of 

compliance with the proprietary trading prohibition based on an objective, quantitative measure 

of a trading desk’s activities.170 Under this proposed presumption of compliance, the activities 

of a trading desk of a banking entity that are not covered by the market risk capital prong or the 

dealer prong—i.e., the activities that would be within the trading account under the proposed 

accounting prong—would have been presumed to comply with the proposed rule’s prohibition 

on proprietary trading if the activities did not exceed a specified quantitative threshold. The 

trading desk would have remained subject to the prohibition on proprietary trading and, unless 

the desk engaged in a material level of trading activity (or the presumption of compliance was 

rebutted), the desk would not have been required to comply with the more extensive 

requirements that would otherwise apply under the proposal to demonstrate compliance. The 

agencies proposed to use the absolute value of the trading desk’s profit and loss on a 90-

calendar-day rolling basis as the relevant quantitative measure for this threshold.

Two commenters supported adopting the presumption of compliance with the prohibition 

on proprietary trading.171 Several commenters opposed adopting this presumption of 

 170 See proposed rule § __.3(c); 83 FR at 33449-51.

171 See, e.g., New England Council and CFA.
47

compliance.172 Some of these commenters argued that the presumption of compliance could 

allow banks to evade the restrictions on proprietary trading by splitting trades over multiple 

trading desks.173 One of these commenters suggested that the presumption of compliance for 

trading desk activities that would have been within the trading account under the accounting 

prong in the proposed rule could invite proprietary trading within the $25 million threshold.174

Another commenter had several concerns with this proposal, including that not all businesses 

calculate daily profits and losses, and that even businesses that do not sell a single position 

within a 90-day period might exceed $25 million in unrealized gains and losses.175 Two 

commenters asserted there is no statutory basis to permit a de minimis amount of proprietary 

trading.176 Other commenters asserted that the presumption could increase regulatory burden.177

Several commenters argued that, if the presumption is adopted, the threshold should be 

increased,178 or the method of calculating profit and loss should be modified.179 Many 

commenters stated that the proposed trading desk-level presumption of compliance did not 

adequately address the overbreadth of the accounting prong.180

After considering the comments, the agencies have decided not to adopt a trading desklevel presumption of compliance with the prohibition on proprietary trading. As discussed in the 

 172 See, e.g., Volcker Alliance; Public Citizen; CAP; Bean; Feng; AFR; and Better Markets.

173 See, e.g., Volcker Alliance; Public Citizen; CAP; and Bean.

174 See Public Citizen.

175 See IIB.

176 See, e.g., Bean and CAP.

177 See, e.g., BOK; BPI; IIB; and JBA.

178 See, e.g., BOK; BPI; IIB; and Capital One et al.

179 See, e.g., CFA.

180 See, e.g., Capital One et al.; BPI; FSF; and SIFMA.
48

preamble to the proposal, this presumption of compliance would have been available only for a 

trading desk’s activities that would have been within the trading account under the proposed 

accounting prong, and not for a trading desk that is subject to the market risk capital prong or the 

dealer prong of the trading account definition. This presumption of compliance was intended to 

address the potential impact of the accounting prong, which the proposal recognized would have 

been a significant change from the 2013 rule. In particular, the proposal noted that the proposed 

trading desk-level presumption of compliance with the prohibition on proprietary trading was 

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 the 

proposed accounting prong.181 Since the agencies are not adopting the accounting prong and are 

adopting additional clarifying revisions to the short-term intent prong, the agencies have 

determined it is not necessary to adopt the presumption of compliance. 

iii. Short-term intent prong

The 2013 rule’s short-term intent prong included within the definition of trading account 

the purchase or sale of one or more financial instruments principally for the purpose of (A) shortterm resale, (B) benefitting from actual or expected short-term price movements, (C) realizing 

short-term arbitrage profits, or (D) hedging one or more positions resulting from the purchases or 

sales of financial instruments for the foregoing purposes.182 Under the 2013 rule’s rebuttable 

presumption, the purchase (or sale) of a financial instrument by a banking entity was presumed 

to be for the trading account under the short-term intent prong if the banking entity held the

financial instrument for fewer than sixty days or substantially transferred the risk of the financial 

 181 See 83 FR at 33449.

182 See 2013 rule § __.3(b)(1)(i).
49

instrument within sixty days of the purchase (or sale). A banking entity could rebut the 

presumption by demonstrating, based on all relevant facts and circumstances, that the banking 

entity did not purchase (or sell) the financial instrument principally for any of the purposes 

described in the short-term intent prong.183

Several commenters stated that, for banking entities that are subject to the market risk 

capital prong, the short-term intent prong is redundant.184 In addition, several commenters stated 

that the final rule should eliminate the short-term intent prong altogether, as proposed.185 Other 

commenters stated that, consistent with the statutory definition of trading account, the agencies 

should not eliminate the short-term intent prong.186 One commenter suggested re-adopting the 

short-term intent prong but defining the term “short-term” differently based on asset class.187

Several commenters supported retaining the short-term intent prong with modifications, such as 

eliminating or reversing the rebuttable presumption or aligning the short-term intent prong more 

closely with the market risk capital prong.188 The agencies agree that there is substantial overlap 

between the short-term intent prong and the market risk capital prong and have revised the 

definition of trading account accordingly.

Under the final rule, the definition of trading account includes any account that is used by 

a banking entity to purchase or sell one or more financial instruments principally for the purpose 

 183 See 2013 rule § __.3(b(2).

184 See, e.g., Capital One et al.; BPI; FSF; KeyCorp; and SIFMA.

185 See, e.g., JBA; Credit Suisse; CREFC; and SIFMA.

186 See AFR and Bean.

187 See Occupy the SEC.

188 See, e.g., SIFMA; BPI; State Street; Chatham; FSF; CCMR; ABA; KeyCorp; Capital One et 

al.; Arvest; and IIB.
50

of short-term resale, benefitting from actual or expected short-term price movements, realizing 

short-term arbitrage profits, or hedging one or more of the positions resulting from the purchases 

or sales of financial instruments for the foregoing purposes.189 The agencies believe that it is 

necessary to include a prong other than the market risk capital prong or the dealer prong to 

define “trading account” for banking entities that are subject to the final rule but are not subject 

to the market risk capital prong. The agencies believe that requiring banking entities that are not 

subject to the market risk capital rule to apply the market risk capital prong in order to identify 

the scope of positions subject to the Volcker Rule’s proprietary trading provisions could be 

unduly complex and burdensome for banking entities with smaller and less active trading 

activities. The final rule allows a banking entity not subject to the market risk capital prong to 

define its trading account by reference to either the short-term intent prong or the market risk 

capital prong because both tests are consistent with the statutory definition of trading account;

this flexible approach for banking entities with less trading activities is appropriate for various 

reasons, including because these banking entities are already familiar with the short-term intent 

prong.190

Under the final rule, the regulatory short-term intent prong applies only to a banking 

entity that is not subject to the market risk capital prong and that has not elected to apply the 

market risk capital prong to determine the scope of the banking entity’s trading account.191 For 

purposes of the final rule, a banking entity is subject to the market risk capital prong if it, or any 

affiliate with which the banking entity is consolidated for regulatory reporting purposes, 

 189 See final rule § __.3(b)(1)(i).

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

191 See final rule § __.3(b)(2)(i), (ii).
51

calculates risk-based capital ratios under the market risk capital rule.

192 Applying the short-term 

intent prong only to banking entities whose trading account is not covered by the market risk 

capital prong will simplify application of the rule. No longer applying the short-term intent 

prong to banking entities that are subject to the market risk capital prong is appropriate because 

the scope of activities captured by the short-term intent prong is substantially similar to the scope 

of activities captured by the market risk capital prong. Indeed, the preamble to the 2013 rule 

noted that the definition of trading position in the market risk capital rule largely parallels the 

statutory definition of trading account,193 which in turn mirrors the language in the short-term 

intent prong. Accordingly, the agencies believe that a banking entity should be subject either to 

the short-term intent prong or to the market risk capital prong, but not both.194

The final rule allows a banking entity that is not subject to the market risk capital prong 

to elect to apply the market risk capital prong in place of the short-term intent prong.195 The 

final rule includes this option to provide parity between smaller banking entities that are not 

subject to the market risk capital rule and larger banking entities with active trading businesses 

that are subject to the market risk capital prong.196 Under the final rule, a banking entity that is 

 192 See 12 CFR part 3, subpart F; part 217, subpart F; part 324, subpart F.

193 See 79 FR at 5548.

194 A number of commenters suggested that, due to the overlap between the market risk capital

prong and the short-term intent prong, banking entities that are subject to the market risk capital

prong should not also be subject to the short-term intent prong. See, e.g., Capital One et al.; BPI; 

FSF; Goldman Sachs; CREFC; and SIFMA.

195 See final rule § __.3(b)(2)(ii).

196 Several commenters recommended defining the trading account solely by reference to the 

dealer prong and market risk capital prong for banking entities subject to the market risk capital 

rule. See, e.g., Capital One et al.; BPI; FSF; Goldman Sachs; CREFC; and SIFMA. One 

commenter suggested that banking entities that are not subject to the market risk capital rule and 

subject to a third prong should be allowed to elect to be treated as a banking entity subject to the 
52

not subject to the market risk capital rule may choose to define its trading account as if the 

banking entity were subject to the market risk capital prong. If a banking entity opts into the 

market risk capital prong, the banking entity’s trading account would include all accounts used 

by the banking entity to purchase or sell one or more financial instruments that would be covered 

positions and trading positions under the market risk capital rule if the banking entity were 

subject to the market risk capital rule. Banking entities that do not make this election will 

continue to apply the short-term intent prong. 

Under the final rule, an election to apply the market risk capital prong must be consistent 

among a banking entity and all of its wholly owned subsidiaries.197 This consistency 

requirement is intended to facilitate banking entities’ compliance with the proprietary trading 

prohibition by subjecting wholly owned legal entities within a firm to the same definition. 

Requiring a consistent definition of “trading account” is particularly important to simplify 

compliance because a trading desk may book trades into different legal entities within an 

organization, and having a consistent definition of “trading account” among these entities should 

help ensure that each banking entity can identify relevant trading activity and meet its 

compliance obligations under the final rule. This requirement is also expected to facilitate the 

agencies’ supervision of compliance with the final rule. This consistency requirement would 

apply only to a banking entity and its wholly owned subsidiaries. In the case of minority-owned 

subsidiaries or other subsidiaries that the banking entity does not functionally control, it may be 

impractical for one banking entity within the organization to ensure that all affiliates will make a 

 

market risk capital rule for purposes of the regulations implementing section 13 of the BHC Act. 

This approach would maintain parity between banking entities that are subject to the market risk 

capital rule and those that are not. See SIFMA.

197 See final rule § __.3(b)(3).
53

consistent election. However, the relevant primary financial regulatory agency may subject a 

banking entity that is not a wholly owned subsidiary to the consistency requirement if the agency 

determines it is necessary to prevent evasion of the rule’s requirements. When exercising this 

authority, the relevant primary financial regulatory agency will follow the same notice and 

response procedures used elsewhere in the final rule. 

iv. 60-day Rebuttable Presumption

The proposal would have eliminated the 2013 rule’s 60-day rebuttable presumption. 

Many commenters supported the proposed rule’s elimination of this rebuttable presumption.198

Some commenters urged the agencies to establish a presumption that positions held for more 

than 60 days are not proprietary trading.199 Some commenters suggested that the agencies 

should presume, for banking entities not subject to the market risk capital rule, that financial 

instruments held for longer than 60 days, or that have an original maturity or remaining maturity 

upon acquisition of fewer than 60 days to their stated maturities, are not for the banking entity’s 

trading account.200 One commenter suggested that any third prong to the definition of trading 

account that applies to banking entities that are not subject to the market risk capital rule should

have a rebuttable presumption that any position held by the banking entity as principal for 60 

days or more is not for the trading account, as well as a reasonable challenge procedure through 

which a banking entity would be provided an opportunity to demonstrate to its primary financial 

regulatory agency that positions held for fewer than 60 days do not constitute proprietary 

 198 See, e.g., State Street; Chatham; BPI; FSF; CCMR; and CFA.

199 See, e.g., ABA; KeyCorp; Capital One et al.; State Street; and Arvest.

200 See, e.g., ABA; Arvest; BPI; SIFMA; and IIB.
54

trading.201 Several commenters asked that the agencies—if they do not eliminate the 

presumption—provide guidance on the rebuttal process,202 or make certain revisions to the 

presumption, such as revising the “substantial transfer of risk” language;203 exempting financial 

instruments close to maturity;204 and excluding hedging activity.205 Some commenters argued, 

in contrast, that the 60-day rebuttable period was under-inclusive.206 One commenter argued that 

any position purchased or sold within 180 days should be automatically included within the 

definition of trading account, or, in the alternative, that the presumption should be extended from 

60 to 180 days, and the agencies should mandate ongoing monitoring and disclosure of all 

components, excluded or not, of the banking entities’ reported trading account assets.207 This 

commenter also argued that there should not be a presumption that certain positions are not 

within the trading account; that documentation requirements for rebutting the presumption 

should be clearly specified and the criteria more restrictive; that all arbitrage positions should be 

presumed to be trading positions; and that the definition of “short-term” should vary by asset 

class. Another commenter generally opposed eliminating the 60-day rebuttable presumption.208

After considering all comments received, the agencies are eliminating the 60-day 

rebuttable presumption from the 2013 rule and establishing a new rebuttable presumption that 

 201 See SIFMA.

202 See, e.g., ABA; Arvest; BPI; SIFMA; State Street; and FSF.

203 See, e.g., ABA and Arvest.

204 Id.

205 See Capital One et al.

206 See AFR and Occupy the SEC.

207 See Occupy the SEC.

208 See Bean.
55

financial instruments held for sixty days or more are not within the short-term intent prong. 

Since the 2013 rule came into effect, the agencies have found that the rebuttable presumption has 

captured many activities that should not be included in the definition of proprietary trading,209

which, under the statute, only covers buying and selling 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).210 Several commenters supported eliminating the 2013 rule’s 

rebuttable presumption for this reason or due to difficulties in rebutting the presumption.211

Given the type of activities that have triggered the 2013 rule’s rebuttable presumption but that 

are not undertaken principally for the purpose of selling in the near-term,212 the agencies have 

concluded that it is not appropriate to continue to presume short-term trading intent from holding 

a financial instrument for fewer than 60 days. 

However, the agencies recognize the utility for both the agencies and the subject banking 

entities of an objective time-based standard.213 The final rule contains a new rebuttable 

presumption: The purchase or sale of a financial instrument presumptively lacks short-term 

trading intent if the banking entity holds the financial instrument for 60 days or longer and does 

 209 For example, asset-liability, liquidity management activities, transactions to correct error 

trades and loan-related swaps. See Part IV.B.2.b.i-iii.

210 12 U.S.C. 1851(h)(4) and (6).

211 See, e.g., State Street; Chatham; BPI; FSF; CCMR; and CFA.

212 Such activities include a foreign branch of a U.S. banking entity purchasing a foreign 

sovereign debt obligation with remaining maturity of fewer than 60 days in order to meet foreign 

regulatory requirements. Similarly, error correcting trades and matched derivative transactions, 

discussed infra may have triggered the 2013 rule’s rebuttable presumption but are not undertaken 

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).

213 See 79 FR at 5550; see also ABA; KeyCorp; Capital One et al.; State Street; Arvest; and 

SIFMA.
56

not transfer substantially all of the risk of the financial instrument within 60 days of the purchase 

(or sale).214 The agencies agree with commenters that a banking entity subject to the short-term 

intent prong that holds an instrument for at least 60 days should receive the benefit of a 

presumption that the trade was not entered into 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. Replacing 

the 2013 rule’s rebuttable presumption with a rebuttable presumption that financial instruments 

held for sixty days or longer are not within the short-term intent prong will provide clarity for 

banking entities with respect to such positions, without imposing the burden associated with the 

2013 rule’s rebuttable presumption. 

In light of the revision to the 60-day rebuttable presumption, the agencies do not believe 

it is necessary to provide a formal challenge procedure with respect to financial instruments that 

are purchased or sold within 60 days. Under the final rule, such activity is no longer 

presumptively within a banking entity’s trading account.

As in the 2013 rule, the final rule’s presumption only applies to the short-term intent 

prong and does not apply to the market risk capital or dealer prongs

v. Market Risk Capital Prong Modification

The proposal would have revised the market risk capital prong to apply to the activities of 

foreign banking organizations (FBOs) to take into account the different market risk frameworks 

FBOs may have in their home countries.215 Specifically, the proposal included within the market 

risk capital prong an alternative definition that permitted a banking entity that is not, and is not 

 214 See final rule § __.3(b)(4).

215 See proposed rule § __. 3(b)(1)(ii); 83 FR at 33447.
57

controlled directly or indirectly by a banking entity that is, located in or organized under the laws 

of the United States or any State, to include any account used by the banking entity to purchase 

or sell one or more financial instruments that are subject to risk-based capital requirements under 

a market risk framework established by the home-country supervisor that is consistent with the 

market risk framework published by the Basel Committee on Banking Supervision (Basel 

Committee), as amended from time to time. 

One commenter asserted that, under some foreign regulatory market risk capital 

frameworks, this expansion would capture positions that are not held for short-term trading.216

This commenter advocated adopting a flexible approach where foreign banking entities could 

exclude a position subject to a foreign jurisdiction’s market risk capital framework from the 

trading account by demonstrating that the position was not acquired for short-term purposes or 

otherwise should not be treated as a trading account position.217

After considering the comments on this issue,

218 the agencies have decided not to modify 

the market risk capital prong to incorporate foreign market risk capital frameworks. The 

agencies believe that relying on the short-term intent prong, market risk capital prong, and dealer 

prong will ensure consistent treatment of U.S. and foreign banking entities. Foreign banking 

entities that are not subject to the market risk capital rule may continue to use the short-term 

intent prong to define their trading accounts. However, a banking entity, including a foreign 

banking entity, may elect to apply the market risk capital prong in determining the scope of its 

 216 See IIB.

217 See id.

218 See IIB (noting that the scope of some foreign supervisory market risk capital frameworks 

may capture positions that are not held solely for short-term purposes and thus should be out of 

scope for purposes of the final rule).
58

trading account. As discussed above, a banking entity that uses the market risk capital prong to 

determine the scope of its trading account is not also subject to the short-term intent prong. This 

approach will provide appropriate parity between U.S. and foreign banking entities and will also 

maintain consistency with the statutory trading account definition.219

Accordingly, the final rule retains a market risk capital prong that is substantially similar 

to that in the 2013 rule. The final rule’s market risk capital prong includes within the definition 

of trading account any account that is used by a banking entity to purchase or sell one or more 

financial instruments that are both covered positions and trading positions under the market risk 

capital rule (or hedges of other covered positions under the market risk capital rule), if the 

banking entity, or any affiliate that is consolidated with the banking entity for regulatory 

reporting purposes, calculates risk-based capital ratios under the market risk capital rule.

220

 219 In the course of developing the final rule, the agencies have considered the prudential actions 

of foreign regulators in this area and the resulting effects on U.S. and non-U.S. financial 

institutions and the relevant markets in which they participate.

220 See final rule § __.3(b)(1)(ii). The final rule’s market risk capital prong has, however, been 

modified as compared to the 2013 rule to account for a banking entity that is not consolidated 

with an affiliate (for regulatory reporting purposes) that calculates risk-based capital ratios under 

the market risk capital rule. For example, the trading positions of a broker-dealer that is not 

consolidated with its parent bank holding company will not be included in the holding 

company’s trading positions in the holding company’s Form FR Y-9C. In such an instance, even 

though the broker-dealer is affiliated with an entity that calculates risk-based capital ratios under 

the market risk capital rule, it would not be subject to the market capital risk prong due to the 

fact that the broker-dealer is not consolidated with the affiliate for regulatory reporting purposes. 

As a result, the broker-dealer would be subject to the amended short-term intent prong and the 

dealer prong (with respect to instruments purchased or sold in connection with the activities that 

require the broker-dealer to be licensed or registered as such). It may, however, be able to elect 

to use the market risk capital prong (as an alternative to the short-term intent prong) by following 

the procedures described above. 
59

In addition, the final rule includes a transition period for banking entities as they become 

subject to the market risk capital prong.

221 Under the final rule, if a banking entity is subject to 

the short-term intent prong and then becomes subject to the market risk capital prong, the 

banking entity may continue to apply the short-term intent prong instead of the market risk 

capital prong for one year from the date on which it becomes, or becomes consolidated for 

regulatory reporting purposes with, a banking entity that calculates risk-based capital ratios 

under the market risk capital rule. The agencies are adopting this transition period to provide 

banking entities a reasonable period to update compliance programs.

The market risk capital rule includes a position that is reported as a covered position for 

regulatory reporting purposes on applicable reporting forms.222 Certain banking entities that 

may be subject to, or elect to apply, the market risk capital prong may not report positions on 

applicable regulatory reporting forms as trading assets or trading liabilities. Therefore, the final 

rule amends the definition of “market risk capital rule covered position and trading position” to 

clarify that this definition includes any position that meets the criteria to be a covered position 

and a trading position, without regard to whether the financial instrument is reported as a covered 

position or trading position on any applicable regulatory reporting forms. The final rule also 

modifies the definition of “market risk capital rule” to update a cross-reference to the Board’s 

 221 Unlike the Volcker Rule compliance program requirements, which are based on average 

gross trading assets and liabilities over the prior four quarters, the thresholds in the market risk 

capital rule are based on the most recent quarter.

222 See 12 CFR 3.202; 12 CFR 217.202; 12 CFR 324.202 (defining “covered position”).
60

capital rules and to clarify what the applicable market risk capital rule would be for a firm 

electing to apply the market risk capital prong.

223

vi. Dealer Prong

The proposal did not propose revisions to the dealer prong. However, several 

commenters requested that the agencies clarify that not all purchases and sales of financial 

instruments by a dealer are captured by the dealer prong.224 Specifically, these commenters 

requested that the agencies clarify that the dealer prong does not capture purchases or sales made 

by a dealer in a non-dealing capacity, including financial instruments purchased for long-term 

investment purposes.

225 Among other things, those commenters noted that without such 

modifications, the dealer prong may require a position-by-position analysis to confirm whether a 

long-term investment is part of the trading account. Another commenter requested that the 

agencies revise the dealer prong to ensure that derivatives activities remain in the trading account 

without regard to potential SEC and CFTC actions on the de minimis thresholds or other 

registration requirements, and that such derivatives activities do not benefit from any 

presumption of compliance.226 The final rule retains the 2013 rule’s dealer prong without any 

substantive change.227

 223 See 12 CFR part 217.

224 See, e.g., BPI; FSF; and SIFMA. 

225 See e.g., BPI; FSF; and SIFMA.

226 See Better Markets.

227 In response to the commenter, the agencies clarify that banking entities that are licensed or 

registered (or required to be licensed or registered) as dealers, swap dealers, or security-based 

swap dealers analyze the types of activities that would be captured by the dealer prong without 

regard to the de minimis thresholds for swap dealer or security-based swap dealer registration. 

However, regardless of whether a banking entity is so licensed or registered, the banking entity is 
61

The final rule’s dealer prong includes within the definition of trading account any 

account that the banking entity uses to purchase or sell one or more financial instruments for any 

purpose if the banking entity (A) 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 (B) 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.228 In response 

to commenters and consistent with the 2013 rule, the agencies reaffirm that a banking entity may 

be licensed or registered as a dealer, but only the types of activities that require it to be so 

licensed or registered are covered by the dealer prong. Thus, if a banking entity purchases or 

sells a financial instrument in connection with activities that are not the types of activities that 

would trigger registration as a dealer, the purchase or sale of the financial instrument is not 

covered by the dealer prong. However, it may be included in the trading account under the 

short-term intent prong or the market risk capital prong, as applicable.229 Moreover, in response 

to commenters’ concerns that the existing rule may require dealers to conduct a position-byposition analysis of their trading activities to determine whether a position is captured by the 

dealer prong, the agencies believe that the changes being adopted today, particularly the 

 

also required to determine whether a purchase or sale of a financial instrument would be 

captured by either the short-term intent prong or the market risk capital prong, as applicable.

228 See final rule § __.3(b)(1)(iii).

229 See final rule § __.3(b)(1)(i), (ii).
62

exclusions for financial instruments that are not trading assets or liabilities,230 should help 

alleviate those concerns by narrowing the range of transactions covered by the rule.

b. Proprietary Trading Exclusions

Section __.3 of the 2013 rule generally prohibits a banking entity from engaging in 

proprietary trading. In addition to defining the scope of trading activity subject to the prohibition 

on proprietary trading, the 2013 rule also provides several exclusions from the definition of 

proprietary trading. Based on experience implementing the 2013 rule, the agencies proposed 

modifying the exclusion for liquidity management and adopting new exclusions for transactions 

made to correct errors and for certain offsetting swap transactions. In addition, the agencies 

requested comment regarding whether any additional exclusions should be added, for example, 

to address certain derivatives entered into in connection with a customer lending transaction. 

The agencies are adopting the liquidity management exclusion as proposed, with a modification 

to encompass non-deliverable cross-currency swaps, and additional exclusions for the following 

activities: (i) trading activity to correct trades made in error, (ii) loan-related and other customer 

accommodation swaps, (iii) matched derivative transactions, (iv) hedges of mortgage servicing 

rights where trading in the underlying mortgage servicing rights is not prohibited by the rule; and 

(v) financial instruments that do not meet the definition of trading assets or trading liabilities 

under applicable reporting forms.

i. Liquidity Management Exclusion Amendments

The 2013 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 

 230 See infra section IV.B.1.b.v.
63

management plan.231 This exclusion contains several requirements. First, the liquidity 

management exclusion is limited by its terms to securities and requires that transactions be 

conducted 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 banking entity’s liquidity management

plan; 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 2013 rule and the banking 

entity’s liquidity management plan. Finally, the plan must be consistent with the supervisory 

requirements, guidance, and expectations regarding liquidity management of the agency 

 231 See 2013 rule § __.3(d)(3).
64

responsible for regulating the banking entity. The 2013 rule established these requirements to 

provide some safeguards to ensure that the liquidity management exclusion is not misused for the 

purpose of impermissible proprietary trading.232 While some safeguards around a banking 

entity’s liquidity management are appropriate, the restrictions under the 2013 rule have limited 

the ability of banking entities to engage in certain types of bona fide liquidity management 

activities.

The proposal would have amended 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,233 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.234 Foreign exchange forwards, foreign exchange swaps, 

and physically settled cross-currency swaps are often used by trading desks of foreign branches 

and subsidiaries of a U.S. banking entity to manage liquidity in foreign jurisdictions.235 The 

proposal would have provided that a banking entity could use foreign exchange forwards, foreign 

exchange swaps, and physically settled cross-currency swaps for liquidity management purposes 

provided that the use of such financial instruments was in accordance with a documented 

liquidity management plan.236 

 232 See 79 FR at 5555.

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

234 See proposed rule § __.3(e)(3).

235 See 83 FR at 33451-52

236 See id.
65

Many commenters supported the proposed expansion of activities covered by the 

liquidity management exclusion.237 However, some commenters expressed the view that the 

expansion did not go far enough and should be expanded to include other types of financial

instruments.238 One commenter asserted that expanding the scope of the liquidity management 

exclusion would streamline compliance for banking entities without introducing additional safety 

and soundness concerns or the risk of impermissible proprietary trading.239 Some commenters

said that non-deliverable currency derivatives should also qualify for the exclusion, because 

there are some currencies for which physically settled cross-currency swaps are not available.240 

Additionally, other commenters argued that given the role of derivatives in liquidity risk 

management, the agencies should expand the exclusion further to cover all derivatives, including 

interest rate swaps.241 Certain commenters suggested that the agencies should further expand the 

liquidity management exclusion to include all financial instruments that would be convenient and 

useful for managing liquidity and asset-liability mismatch risks of the organization.242

Several commenters claimed that the eligibility criteria of the liquidity management 

exclusion are opaque and confusing, and suggested modifying, clarifying, or eliminating some or 

 237 See, e.g., ISDA; Goldman Sachs; ABA; SIFMA; IIB; BPI; GFMCA; CFA; New England 

Council, CCMC; Capital One et al., FSF; and State Street.

238 See, e.g., ISDA; ABA; FSF; New England Council; CCMC; Capital One et al.; Goldman 

Sachs; SIFMA; IIB; Credit Suisse; and State Street.

239 See ISDA.

240 See, e.g., Global Financial Markets Association (GFMA) (noting that certain non-deliverable 

financial instruments are also used for liquidity management purposes); SIFMA; State Street; 

JBA; ABA; BPI; IIB; and Credit Suisse.

241 See, e.g., FSF; Capital One et al.; IIB; and JBA.

242 See, e.g., IIB and State Street.
66

all of the requirements.243 For example, several commenters argued that the requirement to 

maintain a documented liquidity management plan with certain enumerated elements is 

unnecessarily prescriptive.244 Some commenters stated that banking entities do not rely on the 

exclusion due to the number and limiting nature of the requirements.245 Some commenters 

argued that the agencies should be promoting, rather than restricting, appropriate liquidity 

management and structural interest rate risk management activities, and that the retention of 

these requirements is not consistent with the removal of the prescriptive requirements of 

Appendix B in the 2013 rule.246 Other commenters argued that the agencies should eliminate the 

compliance-related requirements and permit banking entities to design and manage their liquidity 

management function according to their existing internal compliance frameworks.247 In 

addition, a commenter recommended clarifying whether treasury functions within banking 

entities may manage global liquidity through the newly added financial instruments.248

In contrast, other commenters did not support the proposed expansion of the liquidity 

management exclusion.249 One commenter asserted that the proposed rule fails to demonstrate 

the need for providing banks greater opportunity to use foreign currency transactions to manage 

their liquidity needs when those needs are already being met via the securities markets.250

 243 See, e.g., Capital One et al.; BPI; JBA; SIFMA; CCMC; and FSF.

244 See, e.g., ISDA; KeyCorp; IIB; CCMC; SIFMA; and Goldman Sachs.

245 See, e.g., FSF and Credit Suisse.

246 See, e.g., SIFMA and Goldman Sachs.

247 See, e.g., BPI; IIB; and FSF.

248 See ABA.

249 See, e.g., Volcker Alliance; Data Boiler; NAFCU; Public Citizen; CAP; Occupy the SEC; 

and Merkley. 

250 See Bean.
67

Another commenter argued that the proposed change would create concern for the currency 

markets by making it easier for trading desks to trade these instruments for speculative purposes 

under the guise of legitimate liquidity management.251 One commenter argued that the proposal 

would encourage banking entities to exclude impermissible trades as liquidity management and 

engage in speculative currency trading. As a result, it would increase banks’ risk-taking and 

moral hazard, reducing the effectiveness of regulatory oversight.252 In addition, some 

commenters suggested that the agencies did not provide sufficient justification to support the 

proposed changes to the exclusion.253

After reviewing the comments received, the agencies are adopting the liquidity 

management exclusion substantially as proposed, but with a modification to permit the use of 

non-deliverable cross-currency swaps. The agencies recognize the various types of financial 

instruments that can be used by a banking entity for liquidity management as noted by 

commenters. However, the agencies continue to believe, as stated in the proposal, that the 

purpose of the expansion is to streamline compliance for banking entities operating in foreign 

jurisdictions.254 Thus, the final rule expands the liquidity management exclusion to permit the 

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 cross-currency swaps255

 251 See Volcker Alliance.

252 See Data Boiler.

253 See, e.g., Public Citizen and Bean.

254 See 83 FR at 33451-52.

255 As proposed, the final rule defines a cross-currency 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 
68

entered into by a banking entity for the purpose of liquidity management in accordance with a 

documented liquidity management plan.256 

In response to commenters’ concerns that physically settled cross-currency swaps are not 

available for some currencies (e.g., due to currency controls), the exclusion also encompasses 

non-deliverable cross-currency swaps. For currencies where physically settled cross-currency 

swaps are not available, a banking entity may have had to engage in procedures such as using 

spot transactions or holding currency at foreign custodians, which could be inefficient. Allowing

banking entities to use non-deliverable cross-currency swaps can provide greater flexibility in 

conducting liquidity management in these situations. Even though physically settled crosscurrency swaps are available in many currencies, the agencies believe it is appropriate to allow 

non-deliverable cross-currency swaps to be used for liquidity management in all currencies. 

Requiring physical settlement for some cross-currency swaps but not others would make the 

exclusion more difficult for banking entities to use and for the agencies to monitor, particularly if 

currency controls change, causing the list of currencies for which physical settlement is 

permitted to change. These administrative hurdles would negate many of the benefits of 

allowing the use of non-deliverable cross-currency swaps.

Regarding the assertion that banking entities could meet their liquidity needs in the 

securities markets, the agencies have found that, to the contrary, 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. As foreign branches and 

 

the swap is entered into, with a reversal of the exchange of principal at a later date that is agreed 

upon for when the swap is entered. 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.

256 See final rule § __.3(d)(3).
69

subsidiaries of U.S. banking entities often have liquidity requirements mandated by foreign 

jurisdictions, U.S. banking entities often use foreign exchange products to address currency risk 

arising from holding this liquidity in foreign currencies. Thus, these foreign exchange products 

are important for liquidity management and should be included in the expansion of the liquidity 

management exclusion.

The agencies believe that adding foreign exchange forwards, foreign exchange swaps, 

and cross-currency swaps to the exclusion addresses the primary liquidity management needs for 

foreign entities, and therefore are declining to expand the exclusion to other products as

suggested by some commenters. While some commenters asserted that further expanding the 

liquidity management exclusion would streamline compliance without introducing additional 

safety and soundness or proprietary trading concerns, the agencies believe that the range of 

financial instruments that will qualify for the exclusion under the final rule will be sufficient for 

managing banking entities’ liquidity risks. 

The final rule permits a banking entity to purchase or sell foreign exchange forwards, 

foreign exchange swaps, and cross-currency swaps to the same extent that a banking entity may 

purchase or sell securities under the liquidity management exclusion in the 2013 rule, and the 

conditions that apply for securities transactions also apply to transactions in foreign exchange 

forwards, foreign exchange swaps, and cross-currency swaps.257

The agencies acknowledge that, as stated in the proposal, 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, as compared to foreign exchange forwards and foreign exchange 

 257 See § __.3(e)(3)(i)-(vi) of the final rule. 
70

swaps.258 However, the agencies believe that the requirement to conduct liquidity management 

in accordance with a documented liquidity management plan appropriately limits the use of 

cross-currency swaps to activities conducted for liquidity management purposes, and therefore 

banking entities’ use of these swaps should not adversely affect currency markets, as one 

commenter warned. Under the plan, the purpose of the transactions must be liquidity

management. The timing of purchases and sales, the types and duration of positions taken and 

the incentives provided to managers of these purchases and sales must all indicate that managing 

liquidity, and not taking short-term profits (or limiting short-term losses), is the purpose of these 

activities. Thus, to be in compliance with the plan, cross-currency swaps must be used 

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.

259 

Regarding the assertion from some commenters that the compliance-related requirements 

for the liquidity management exclusion are opaque or unnecessarily prescriptive, the agencies 

believe it is important to retain these requirements in order to provide clarity in administration of 

the rule and to protect against potential misuse of the liquidity management exclusion for 

proprietary trading. As noted above, the documented liquidity management plan, required under 

the 2013 rule and retained in the final rule,

260 is a key element in assuring that liquidity 

management is the purpose of the relevant transactions. The agencies do not believe that the 

final rule will stand as an obstacle to or otherwise impair the ability of banking entities to 

 258 See 83 FR at 33452.

259 See § __.3(d)(3)(ii) of the final rule.

260 See § __.3(d)(3).
71

manage their liquidity risks. Although other changes to the 2013 rule in the final rule, such as 

the elimination of Appendix B, reflect efforts to tailor compliance obligations, the agencies 

believe it is important to be explicit in maintaining targeted compliance requirements for specific 

provisions of the final rule, such as the liquidity management exclusion. 

The agencies believe that the six required elements of the liquidity management plan help 

to mitigate commenters’ concerns that the proposal would have encouraged banking entities to 

exclude impermissible trades as liquidity management or increase risk-taking. Under the 

liquidity management plan required by the final rule, the exclusion does not apply to activities 

undertaken with the stated purpose or effect of hedging aggregate risks incurred by the banking

entity or its affiliates related to asset-liability mismatches or other general market risks to which 

the entity or affiliates may be exposed. Further, the exclusion does not apply to any trading

activities that expose banking entities to substantial risk from fluctuations in market values, 

unrelated to the management of near-term funding needs, regardless of the stated purpose of the 

activities.

261

This final rule also includes a change to one of the liquidity management exclusion’s 

requirements. The 2013 rule requires that activity conducted under the liquidity management 

exclusion be consistent with applicable “supervisory requirements, guidance, and 

expectations.”262 Consistent with changes elsewhere in the final rule and with the Federal 

banking agencies’ Interagency Statement Clarifying the Role of Supervisory Guidance,

263 the 

 261 See 79 FR at 5555.

262 See 2013 rule § __.3(d)(3)(vi).

263 Interagency Statement Clarifying the Role of Supervisory Guidance (Sept. 11, 2018; 

https://www.occ.gov/news-issuances/news-releases/2018/nr-ia-2018-97a.pdf, 

https://www.fdic.gov/news/news/financial/2018/fil18049.html, 
72

agencies are removing references to guidance and expectations from the regulatory text of the 

liquidity management exclusion. In addition, the final rule includes conforming changes that 

reflect the addition of foreign exchange forwards, foreign exchange swaps, and cross-currency 

swaps as permissible contracts in conjunction with the other criteria under the exclusion.264

ii. Transactions to Correct Bona Fide Trade Errors

The proposal included an exclusion from the definition of proprietary trading for trading 

errors and subsequent correcting transactions.265 As discussed in the proposal, the exclusion was 

intended to address situations in which a banking entity erroneously executes 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 § __.3(d)(7) of the 2013 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. As the proposal noted, banking entities have expressed concern that, however, 

under the 2013 rule, the initial trading error and any corrective transactions could, depending on 

the facts and circumstances involved, fall within the proprietary trading definition if the 

 

https://www.federalreserve.gov/supervisionreg/srletters/sr1805.htm). The final rule similarly 

removes references to “guidance” from subparts A and C.

264 The term “financial instruments” is substituted for the term “securities” when referring to 

what contracts are permitted under the exclusion.

265 See 83 FR at 33452-53.
73

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.

To address this concern, the agencies proposed a new exclusion from the definition of 

proprietary trading for trading errors and subsequent correcting transactions. The proposal noted 

that the availability of this exclusion would depend on the facts and circumstances of the 

transactions, such as whether the banking entity made reasonable efforts to prevent errors from 

occurring, or identified and corrected trading errors in a timely and appropriate manner. The 

proposed exclusion required that banking entities, once they identified purchases or sales made 

in error, transfer the financial instrument to a separately managed trade error account for 

disposition. The proposal would have required that this separately managed trade error account 

be monitored and managed by personnel independent from the traders responsible for the error, 

and that banking entities monitor and manage trade error corrections and trade error accounts.

The majority of commenters generally supported the proposed exclusion for trade 

errors.266 Some commenters noted that, consistent with operational risk management practices, 

bona fide trade error activity is separately managed and classified as an operational loss when 

there is a loss event or a “near miss” when error activity results in a gain.267 Many commenters 

urged the agencies not to mandate a separately managed trade error account, but to permit 

banking entities to resolve trading errors in accordance with internal policies and procedures to 

avoid duplicative resolution systems and unnecessary regulatory costs.268 One commenter 

argued that error trades are clearly outside the scope of activities meant to be prohibited by the 

 266 See, e.g., ABA; BB&T; Capital One et al.; BPI; FSF; CFA; and JBA.

267 See, e.g., ABA; BB&T; BPI; Capital One et al.; and FSF.

268 See, e.g., ABA; Credit Suisse; FSF; JBA; and SIFMA.
74

statute, so it should not be necessary to include any additional documentation or administrative 

requirements related to them.269 One comment letter requested that the agencies clarify that the 

exclusion covers both pre-settlement trade errors (where the error is identified and corrected 

prior to being settled in the client’s account and is settled in a separately managed trade error 

account) and post-settlement trade errors (where the trade error is settled in and posted directly to 

the client’s account).270

One commenter supported providing an exclusion for bona fide error trades, but 

suggested certain changes to the proposed exclusion.271 This commenter expressed concern that 

the proposed exclusion did not provide sufficient protections to ensure that banking entities 

correct errors in a timely and comprehensive manner and do not use the exclusion to facilitate 

directional exposures. To this end, the commenter recommended requiring banking entities to 

establish reasonably designed controls, including periodic exception reports containing certain 

specified fields. These reports, the commenter argued, should be provided to independent 

personnel in the second line-of-defense, including compliance and risk personnel, and escalated 

internally in accordance with the banking entity’s internal policies and procedures. The 

commenter also recommended requiring periodic error trade testing and audits conducted by the 

second line-of-defense.

One commenter argued against a blanket exclusion for error trades, and urged the 

agencies to require any profit from error trades be forfeited to the U.S. Treasury, thereby 

removing any incentive for a banking entity to erroneously classify intentional financial positions 

 269 See SIFMA.

270 See Capital One et al.

271 See Better Markets.
75

as error trades.272 Another commenter argued that the proposal did not adequately explain or 

provide sufficient data to justify the necessity of providing an exclusion for error trades, and that 

the exclusion could be used to evade the prohibition on proprietary trading.273

After weighing the comments received, the agencies are excluding from the definition of 

“proprietary trading” 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.274 The agencies do not believe bona fide trading 

errors and correcting transactions are proprietary trading. Under the 2013 rule, trading errors and 

subsequent transactions to correct such errors could trigger the short-term intent prong’s 60-day 

rebuttable presumption and thus could be considered to be presumptively within the trading 

account. In addition, trading errors and correcting transactions could be within the definition of 

proprietary trading under the market risk prong or dealer prong. While the final rule eliminates 

the 2013 rule’s 60-day rebuttable presumption,275 the agencies believe it is useful and 

appropriate to clarify in the final rule that trading errors and subsequent correcting transactions 

are not proprietary trading because banking entities do not enter into these transactions 

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).276 Rather, the principal purpose of a trading 

error correction is to remedy a mistake made in the ordinary course of the banking entity’s 

 272 See Public Citizen.

273 See CAP.

274 Final rule § __.3(d)(10).

275 See final rule § __.3(b)(4).

276 See 12 U.S.C. 1851(h)(6).
76

permissible activities.277 Accordingly, the agencies are adopting this exclusion to provide clarity 

regarding bona fide trading errors and subsequent correcting transactions. 

Consistent with feedback from several commenters,278 the exclusion in the final rule does 

not require banking entities to transfer erroneously purchased (or sold) financial instruments to a 

separately managed trade error account for disposition. The agencies agree that this requirement 

could have resulted in duplicative resolution systems and imposed undue regulatory costs, which 

are not appropriate in light of the narrow class of bona fide trading errors that fall within the 

exclusion. As with all exclusions and permitted trading activities, the agencies intend to monitor 

use of this exclusion for evasion. For example, the magnitude or frequency of errors could 

indicate that the trading activity is inconsistent with this exclusion. 

The agencies have considered comments suggesting that the agencies should impose on 

banking entities certain reporting, auditing, and testing requirements specifically related to trade 

error transactions.279 As noted above, the agencies believe mandating requirements such as these 

could lead to undue costs for banking entities, which are not appropriate in light of the narrow 

class of bona fide trading errors that fall within the exclusion. Such bona fide trade errors and 

subsequent correcting transactions do not fall within the statutory definition of “proprietary 

trading” because they lack the requisite short-term intent. Accordingly, the agencies do not find 

it necessary to impose additional requirements with respect to such activities. Further, the 

agencies do not agree that any profits resulting from trade error transactions should be remitted 

to the U.S. Treasury.

 277 See, e.g., BPI and FSF.

278 See, e.g., ABA; Credit Suisse; FSF; JBA; and SIFMA.

279 See Better Markets.
77

iii. Matched Derivative Transactions

The proposal requested comment on the treatment of loan-related swaps between a 

banking entity and customers that have received loans from the banking entity.280 The proposal 

explained that, in a loan-related swap transaction, a banking entity enters into a swap with a 

customer in connection with the customer’s loan and contemporaneously offsets the swap with a 

third party. The swap with the customer is directly related to the terms of the customer’s loan.281

In one typical type of loan-related swap, a banking entity seeks to make a floating-rate loan to a 

customer that could have the benefit to the banking entity of reducing the banking entity’s 

interest rate risk, but the customer would prefer to have the economics of a fixed-rate loan.282 To 

achieve a result that addresses these divergent preferences, the banking entity makes a floatingrate loan to the customer and contemporaneously or nearly contemporaneously enters into a

floating rate to fixed rate interest rate swap with the same customer and an offsetting swap with 

another counterparty.283 As a result, the customer receives economic treatment similar to a 

fixed-rate loan.284 The banking entity has entered into the preferred floating rate loan, provided 

the customer with the customer’s preferred fixed rate economics though the interest rate swap 

with the customer and offset its market risk exposure from the customer-facing interest rate swap

through a swap with another counterparty.

285

 280 See 83 FR at 33462-64.

281 See id. at 33462.

282 Id.

283 Id.

284 Id.

285 Id. In this example, the banking entity retains the counterparty risk from both swaps. 

However, depending on the type of swap and the particular transaction, the banking entity may 
78

Loan-related swaps have presented a compliance challenge particularly for smaller nondealer banking entities.286 These banking entities may enter into loan-related swaps infrequently, 

and the decision to do so tends to be situational and dependent on changes in market conditions 

as well as on the interaction of a number of factors specific to the banking entity, such as the 

nature of the customer relationship.287

The proposal sought comment on whether loan-related swaps should be excluded from 

the definition of proprietary trading, exempted from the prohibition on proprietary trading, or 

permitted under the exemption for market making-related activities.

288 The proposal also asked 

whether other types of swaps, such as end-user customer-driven swaps that are used by a 

customer to hedge commercial risk should be treated the same way as loan-related swaps.289 The 

proposal also requested 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.290

Most commenters supported allowing loan-related swaps, either by adopting an exclusion 

from the definition of proprietary trading,291 creating a new exemption for loan-related swaps,292

 

be able to manage the counterparty risk, for example, by clearing the transaction at a clearing 

agency or derivatives clearing organization acting as a central counterparty, as applicable.

286 Id.

287 Id. at 33463.

288 Id.

289 Id. at 33464.

290 Id. at 33463.

291 See, e.g., BOK; ABA; Covington & Burling LLP (Covington); JBA; Chatham; Credit Suisse;

BPI; SIFMA; IIB, Covington; Arvest; IIB; KeyCorp; and Capital One et al.
79

or clarifying that banking entities could enter into loan-related swaps under existing 

exemptions.293 The majority of these commenters supported explicitly excluding loan-related 

swaps from the definition of proprietary trading.294 These commenters noted that loan-related 

swap transactions generally do not fall within the statutory definition of trading account and that 

these transactions are important risk-mitigating activities.295 Commenters stated that providing 

an exclusion or permitted activity exemption for loan-related swaps would prevent section 13 of 

the BHC Act from having an unintended chilling effect on an important and prudent lendingrelated activity.296 Commenters also stated that these types of swap transactions are important 

tools that facilitate bank customers’ ability to manage their risks.297 One commenter opposed 

providing an exclusion for loan-related swaps, arguing that these activities instead should be 

conducted under the risk-mitigating hedging exemption.298

Two commenters requested that the agencies adopt a permitted activity exemption for 

loan-related swaps or revise the existing exemption for market making-related activities if the 

agencies do not explicitly exclude loan-related swaps from the definition of proprietary 

trading.299 In addition, two commenters suggested that the exemption for riskless principal 

 292 See, e.g., Covington and BPI.

293 See, e.g., Covington; BPI; SIFMA; Credit Suisse; and BB&T.

294 See, e.g., BOK; ABA; Covington; JBA; Chatham; Credit Suisse; BPI; SIFMA; IIB, 

Covington; Arvest; IIB; KeyCorp; and Capital One et al.

295 See, e.g., BOK; ABA; Covington; JBA; Chatham; Arvest; and IIB.

296 See, e.g., Covington and Credit Suisse.

297 See, e.g., Arvest and BOK.

298 See Data Boiler.

299 See, e.g., Covington and BPI.
80

transactions in § __.6(c)(2) of the 2013 rule could cover loan-related swaps.300 These 

commenters and two others suggested that excluding loan-related swaps from the definition of 

proprietary trading would be more effective than adopting a new permitted activity exemption or 

relying on an existing permitted activity exemption.301

Two commenters argued that banking entities should be allowed to engage in loan-related 

swaps using the exemption for market making-related activities.

302 Several other commenters 

asserted that the market-making exemption is a poor fit for loan-related swaps and that the 

market-making exemption’s requirements were unduly burdensome with respect to this activity, 

particularly for smaller banking entities.303

Several commenters supported excluding additional derivatives activities from the 

definition of proprietary trading, such as customer-driven matched-book trades that enable 

customers to hedge commercial risk regardless of whether the swaps are related to a loan.304

Commenters noted that such customer-driven matched-book trades do not expose banking 

entities to risk other than counterparty credit risk.305 Moreover, these trades reduce risks to the 

bank’s customer and thus also reduce the risk of the banking entity’s loans to that customer.306

 300 See, e.g., SIFMA and Credit Suisse.

301 See, e.g., Covington; BPI; SIFMA; and Credit Suisse.

302 See, e.g., BB&T and Credit Suisse (Credit Suisse noted, however, that an exclusion would be 

preferable to using the market-making exemption).

303 See, e.g., IIB; Covington; SIFMA; Capital One et al.; BPI; and B&F.

304 See, e.g., BOK; JBA; ABA; Capital One et al.; and KeyCorp.

305 See, e.g., BOK and ABA.

306 See, e.g., BOK.
81

Three commenters requested that the exclusion be expanded to cover instances where a 

banking entity enters into a loan-related swap with a customer but does not offset that swap with 

a third party.307

One commenter urged the agencies to adopt a definition of loan-related swaps that is 

substantially similar to the definition adopted by the CFTC for swaps executed in connection 

with originating loans to customers, and to include in the definition, the derivatives transaction 

entered into with a dealer to offset the risk of the customer-facing swap.308 Another commenter 

opposed using the CFTC’s definition, noting that the CFTC’s definition would not address 

commodity-based matched-book derivative transactions.309 One commenter recommended 

defining “customer-facing loan-related swap” to mean any swap with a customer or affiliate 

thereof in which the rate, asset, liability, or other notional item underlying the swap with the 

customer or affiliate thereof is, or is directly related to, a financial term of a loan or other credit 

facility with the customer or affiliate thereof (including, without limitation, the loan or other 

credit facility’s duration, rate of interest, currency or currencies, or principal amount).310 The 

same commenter stated that the exclusion should not include a timing requirement with respect 

to the offsetting swap or, if a timing condition is included, the banking entity should be required 

to enter into the offsetting swap “contemporaneously or substantially contemporaneously” with 

the customer-facing loan-related swap.311

 307 See, e.g., ABA; Arvest; and IIB.

308 See Chatham.

309 See BOK.

310 See Covington.

311 See id.
82

After considering the comments received, the agencies are excluding from the definition 

of “proprietary trading” entering into a customer-driven swap or a customer-driven securitybased swap and a matched swap or security-based swap if: (i) the transactions are entered into 

contemporaneously; (ii) the banking entity retains no more than minimal price risk312; and (iii) 

the banking entity is not a registered dealer, swap dealer, or security-based swap dealer.313 The 

agencies are adopting this exclusion to provide greater certainty for non-dealer banking entities 

that engage in these customer-driven matched-book swap transactions.

Under the 2013 rule, these customer-driven matched swap transactions could trigger the 

short-term intent prong’s rebuttable presumption and thus would be presumptively within the 

trading account. Although the agencies are eliminating the 2013 rule’s rebuttable 

presumption,314 the agencies believe that it is nevertheless useful and appropriate to clarify in the 

final rule that these customer-driven matched swap transactions are not proprietary trading 

because banking entities do not enter into these transactions 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).315 For this reason, the agencies are providing an exclusion for these activities from 

the proprietary trading definition rather than requiring them to be conducted pursuant to the riskmitigating hedging exemption, as one commenter suggested.

The agencies believe that adopting this exclusion will reduce costs for non-dealer 

banking entities and avoid disrupting a common and traditional banking service provided to 

 312 Price risk is the risk of loss on a fair-value position that could result from movements in

market prices.

313 Final rule § __.3(d)(11).

314 See final rule § __.3(b)(4).

315 See 12 U.S.C. 1851(h)(6).
83

small and medium-sized businesses. This exclusion will provide a greater degree of certainty 

that these customer-driven matched swap transactions are outside the scope of the final rule. 

Consistent with feedback received from commenters,316 the exclusion in the final rule is 

not limited to loan-related swaps.317 Thus, the exclusion in the final rule could apply to a swap 

with a customer in connection with the customer’s end-user activity (provided that all the terms 

of the exclusion are met). For example, a corn farmer is a customer of a non-dealer banking 

entity. To manage its risk with respect to the price of corn, the corn farmer enters into a swap on 

corn prices with the banking entity. The banking entity contemporaneously enters into a cornprice swap with another counterparty to offset the price risk of the swap with the corn farmer. 

The swap with the corn farmer and the offsetting swap with the counterparty have matching 

terms such that the banking entity retains no more than minimal price risk. The agencies have 

determined that it is appropriate to exclude these types of transactions from the definition of 

proprietary trading because, like matched loan-related swaps discussed above, banking entities 

do not enter into these customer-driven transactions 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).318

 316 See, e.g., BOK; JBA; ABA; Capital One et al.; and KeyCorp.

317 As a result, the agencies are not adopting a definition of “loan-related swap” substantially 

similar to the definition adopted by the CFTC for swaps executed in connection with originating 

loans to customers, as requested by one customer. See Chatham. The agencies also note that this 

exclusion does not impact the “insured depository institution swaps in connection with 

originating loans to customers” provisions in the CFTC’s definition of “swap dealer.” See 17 

CFR 1.3, Swap dealer, paragraphs (4)(i)(C) and (5). Additionally, this exclusion does not affect 

any other aspects of the “swap dealer” definition in CFTC regulations, or how that term is 

interpreted by the CFTC.

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

Several conditions must be met for the exclusion to apply.319 The exclusion applies only 

to banking entities that are not registered dealers, swap dealers, or security-based swap dealers. 

This approach is consistent with feedback from commenters noting that primarily smaller 

banking entities have faced compliance challenges with respect to customer-driven swaps 

activities.320 Banking entities that are registered dealers, swap dealers, or security-based swap 

dealers generally engage in these activities on a more regular basis and therefore have been able 

to conduct their derivatives activities pursuant to the exemption for market making-related

activities. Although some commenters argued that the exemption for market making-related 

activities is too burdensome to apply to this type of activity,321 the agencies note that the final 

rule streamlines certain requirements of that exemption.

322

The exclusion only applies to transactions where one of the two matched swaps or 

security-based swaps is customer-driven, in that the transaction is entered into for a customer’s 

valid and independent business purposes. In addition, the hedging swap or hedging securitybased swap must match the customer-driven swap or customer-driven security-based swap. The 

banking entity may retain no more than minimal price risk between the two swaps or securitybased swaps.323 Finally, the banking entity must enter into the customer-driven swap or customer 

driven security-based swap contemporaneously with the matching swap or matching security-

 319 If a transaction does not satisfy all of the conditions of the exclusion but is not within the 

definition of trading account, the transaction would not constitute proprietary trading.

320 See, e.g., Chatham; ABA; and Covington.

321 See, e.g., IIB; Covington; SIFMA; Capital One et al.; BPI; and B&F.

322 See final rule § __.4(b).

323 The banking entity would retain minimal price risk if the economic terms of the two swaps 

(e.g., index, amount, maturity, and underlying reference asset or index) match.
85

based swap.324 These conditions carve out from the exclusion activities whose principal purpose 

is resale in the near term.325 For example, if a banking entity entered into a hedging swap whose 

economic terms did not match the terms of the customer-driven swap, the banking entity would 

be exposed to price risk and could be speculating on short-term price movements. Similarly, if a 

banking entity waited multiple days between entering into a customer-driven swap and entering 

into the offsetting swap, the banking entity could be speculating on short-term price movements 

during the unhedged period of the swap transaction. In either case, the banking entity could be 

engaged in proprietary trading.326 The requirements in the final rule’s exclusion are intended to 

limit the exclusion to activities that the agencies have determined lack the requisite short-term

trading intent.

The agencies have considered the comments requesting an exclusion for unmatched loanrelated swaps and determined that such an exclusion is not necessary in the final rule.327 For 

example, if a bank provides a loan to a customer and enters into a swap with the customer related 

directly to the terms of that loan but does not offset that customer-driven swap with a third-party, 

the exclusion does not apply. Although the exclusion may not apply, the agencies believe that 

this type of activity is unlikely to be within the trading account under the final rule, particularly 

because the agencies are not adopting the proposed accounting prong. Entering into such a loan-

 324 The exclusion only applies to transactions where the customer-driven swap or customerdriven security-based swap is offset by a matching swap or security-based swap on a one-for-one 

basis. The exclusion does not apply to portfolio-hedged derivatives transactions.

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

326 Whether the banking entity is actually engaged in impermissible proprietary trading would 

depend on the facts and circumstances of the particular transaction.

327 See ABA and Arvest.
86

related swap would be proprietary trading only if the purchase or sale of the swap is principally 

for short term trading purposes or is otherwise within the definition of trading account.328

iv. Hedges of Mortgage Servicing Rights or Assets 

The final rule excludes from the definition of proprietary trading any purchase or sale of 

one or more financial instruments that the banking entity uses to hedge mortgage servicing rights 

or mortgage servicing assets in accordance with a documented hedging strategy. The agencies 

are adopting this exclusion to clarify the scope of the prohibition on proprietary trading and to 

provide parity between banking entities that are subject to the market risk capital prong and 

banking entities that are subject to the short-term intent prong.

Section 13 of the BHC Act defines “trading account” to mean “any account used for 

acquiring or taking positions in ... 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),” and any such other accounts that the agencies determine by rule. The 

purchase or sale of a financial instrument as part of a bona fide mortgage servicing rights or 

mortgage servicing asset hedging program is not within the statutory definition of “trading 

account” under the short-term intent prong because the principal purpose of such a purchase or 

sale is hedging rather than short-term resale for profit. 

The agencies have determined to explicitly exclude this type of hedging activity from the 

definition of “proprietary trading” to provide greater clarity to banking entities that are subject to 

the short-term intent prong in light of changes made elsewhere in the final rule. Under the final 

rule, banking entities that are subject to the market risk capital prong (or that elect to apply the 

 328 See final rule § __.3(b).
87

market risk capital prong) are not subject to the short-term intent prong. The market risk capital

rule explicitly excludes intangibles, including servicing assets, from the definition of “covered 

position.” Financial instruments used to hedge mortgage servicing rights or assets generally 

would not be captured under the market risk capital prong. Therefore, absent an explicit 

exclusion, banking entities that are subject to the market risk capital prong have more certainty 

than banking entities that are subject to the short-term intent prong that the purchase or sale of a 

financial instrument to hedge mortgage servicing rights or mortgage servicing assets is not 

proprietary trading. The agencies are explicitly excluding mortgage servicing rights and 

mortgage servicing asset hedging activity to provide banking entities that are not subject to the 

market risk capital prong (or that elect to apply the market risk capital prong) the same degree of 

certainty. As described in part IV.B.1.a.iii of this Supplementary Information, the final rule 

seeks to provide parity between smaller banking entities that are not subject to the market risk 

capital rule and larger banking entities with active trading businesses that are subject to the 

market risk capital prong. The agencies believe an express exclusion for mortgage servicing 

rights and mortgage servicing hedging activity is useful in light of the revision to the trading 

account definition that applies the short-term intent prong only to banking entities that are not 

subject to the market risk capital prong.

This exclusion applies only to bona fide hedging activities, conducted in accordance with 

a documented hedging strategy. This requirement will assist the agencies in monitoring for 

evasion or abuse. In addition, the agencies note that banking entities’ mortgage servicing 

activities and related hedging activities remain subject to applicable law and regulation, 

including the Federal banking agencies’ safety and soundness standards.
88

v. Financial Instruments that Are Not Trading Assets or Trading 

Liabilities 

The final rule excludes from the trading account any purchase or sale of a financial 

instrument that does not meet the definition of “trading asset” or “trading liability” under the 

banking entity’s applicable reporting form. As with the exclusion for hedges of mortgage 

servicing rights or assets, the agencies are adopting this exclusion to clarify the scope of the 

prohibition on proprietary trading and to provide parity between banking entities that are subject 

to the market risk capital prong (or that elect to apply the market risk capital prong) and banking 

entities that are subject to the short-term intent prong.

The agencies have determined to exclude the purchase or sale of assets that would not 

meet the definition of trading asset or trading liability from the definition of “proprietary trading” 

to provide greater clarity to banking entities that are subject to the short-term intent prong. As 

described above, under the final rule, banking entities that are subject to the market risk capital

prong (or that elect to apply the market risk capital prong) are not subject to the short-term intent 

prong.329 Under the market risk capital prong, a purchase or sale of a financial instrument is 

within the trading account if it would be both a covered position and trading position under the 

market risk capital rule. In general, a position is a covered position under the market risk capital

prong if it is a trading asset or trading liability (whether on- or off-balance sheet).330 Thus, the 

exclusion for financial instruments that are not “trading assets and liabilities” extends the same 

 329 See final rule § __.3(b).

330 See 12 CFR 3.202(b); 12 CFR 217.202(b); 12 CFR 324.202(b). In addition, the market risk 

capital rule’s “covered position” definition expressly includes and excludes additional classes of 

instruments. 
89

certainty to banking entities subject to the short-term intent prong as is provided by operation of 

the market risk capital prong. 

One commenter recommended that the agencies modify the short-term intent prong to 

include only financial instruments that meet the definition of trading assets and liabilities and 

that are held for the purpose of short-term trading.331 The agencies have determined that 

including only financial instruments that meet the definition of trading assets and liabilities (by 

excluding instruments that do not meet this definition) is appropriate because the trading asset 

and liability definitions used for regulatory reporting purposes incorporate substantially the same 

short-term trading standard as the short-term intent prong and section 13 of the BHC Act. The 

Call Report and FR Y-9C provide that trading activities typically include, among other activities, 

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.”332 This language is substantially identical to the statutory definition of trading 

account, which applies to 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)....”333 Therefore, excluding any 

purchase or sale of a financial instrument that would not be classified as a trading asset or trading 

liability on these applicable reporting forms is consistent with the statutory definition of trading 

account in section 13 of the BHC Act. This exclusion is expected to provide additional clarity to 

 331 See SIFMA.

332 See, e.g., Instructions for Preparation of Consolidated Reports of Condition and Income, 

FFIEC 031 and FFIEC 041, Schedule RC-D; Instructions for Preparation of Consolidated 

Financial Statements for Holding Companies, Reporting Form FR Y-9C, Schedule HC-D. 

333 12 U.S.C. 1851(h)(6). 
90

banking entities subject to the short-term intent prong, while also better aligning the compliance 

program requirements with the scope of activities subject to section 13 of the BHC Act. 

This exclusion applies to any purchase or sale of a financial instrument that does not meet 

the definition of “trading asset” or “trading liability” under the applicable reporting form as of 

the effective date of this final rule. The final rule references the reporting forms in effect as of 

the final rule’s effective date to ensure the scope of the exclusion remains consistent with the 

statutory trading account definition. Because the reporting forms are used for many purposes 

and are generally based on generally accepted accounting principles, future revisions to the 

reporting forms could define “trading asset” and “trading liability” inconsistently with the 

“trading account” definition in section 13 of the BHC Act. Further, tying the exclusion to the 

reporting forms currently in effect will provide greater certainty to banking entities. If the scope 

of the exclusion were subject to change based on revisions to the applicable reporting forms, it 

could require banking entities to make corresponding changes to compliance systems to remain 

in compliance with the rule, which could result in disruption both for banking entities and the 

agencies. Accordingly, the final rule excludes any purchase or sale of a financial instrument that 

does not meet the definition of trading asset or trading liability under the applicable reporting 

form as of the effective date of the final rule.

c. Trading Desk

The 2013 rule applies certain requirements at the “trading desk”-level of organization.334

The 2013 rule defined “trading desk” to mean the smallest discrete unit of organization of a 

 334 See 2013 rule §§ __.4, __.5, App. A., App. B; final rule §§ __.4, __.5, App. A.
91

banking entity that purchases or sells financial instruments for the trading account of the banking 

entity or an affiliate thereof.335

As noted in the proposal, some banking entities had indicated that, in practice, the 2013 

rule’s definition of trading account had led to uncertainty regarding the meaning of “smallest 

discrete unit.”336 In addition, banking entities had communicated that this definition has caused 

confusion and duplicative compliance and reporting efforts for banking entities that also define 

trading desks for purposes unrelated to the 2013 rule, including for internal risk management and 

reporting and calculating regulatory capital requirements.337 In response to these concerns, the 

proposal included a detailed request for comment on whether to revise the trading desk definition 

to align with the trading desk concept used for other purposes.338 Specifically, the proposal 

requested comment on using a multi-factor trading desk definition based on the same criteria 

typically used to establish trading desks for other operational, management, and compliance 

purposes.339

Commenters that addressed the definition of “trading desk” generally supported revising 

the definition along the lines contemplated in the proposal.340 Commenters asserted that the 

2013 rule’s “smallest discrete unit language” was subjective, ambiguous, and had been 

interpreted in different ways.341 Commenters said that adopting a multi-factor definition would 

 335 2013 rule § __.3(e)(13).

336 See 83 FR at 33453.

337 See id.

338 See id.

339 See id.

340 See, e.g., ABA; ISDA 1; CCMC; SIFMA 2; Goldman Sachs; FSF; JBA; and AFR.

341 See, e.g., ABA and CCMC.
92

be preferable to the 2013 rule’s definition because a multi-factor definition would align the 

definition of trading desk with other operational and managerial structures, whereas the 2013 

rule’s definition could be interpreted to require banking entities to designate certain units of 

organization as trading desks purely for purposes of the regulations implementing section 13 of 

the BHC Act.342 One commenter supported the multi-factor definition in the proposal but 

recommended that the agencies should be required to approve the initial trading desk 

designations and any changes in trading desk designations.343 One commenter said the agencies 

should allow the unit of the trading desk to be determined at the discretion of each financial 

institution344 and another said it is not necessary to introduce complexity into how banking 

entities organize their internal operations.

345

The final rule adopts a multi-factor definition that is substantially similar to the definition 

included in the request for comment in the proposal, except that the first prong has been revised 

and the reference to incentive compensation has been removed. This multi-factor definition will 

align the criteria used to define trading desk for purposes of the regulations implementing section 

13 of the BHC Act with the criteria used to establish trading desks for other operational, 

management, and compliance purposes. 

The definition of trading desk includes a new second prong that explicitly aligns the 

definition with the market risk capital rule.

346 The final rule provides that, for a banking entity 

 342 See, e.g., ABA; ISDA 1; CCMC; SIFMA 2; Goldman Sachs; FSF; and JBA.

343 See AFR.

344 See JBA.

345 See CCMC.

346 Currently, the market risk capital rule does not include a definition of “trading desk.” 

However, the federal banking agencies expect to implement the Basel Committee’s revised 
93

that calculates risk-based capital ratios under the market risk capital rule, or a consolidated 

affiliate of a banking entity that calculates risk-based ratios under market risk capital rule, 

“trading desk” means a unit of organization that purchases or sells financial instruments for the 

trading account of the banking entity or an affiliate thereof that is established by the banking 

entity or its affiliate for purposes of capital requirements under the market risk capital rule.347

This change specifies that, for a banking entity that is subject to the market risk capital prong, the 

trading desk established for purposes of the market risk capital rule must be the same unit of 

organization that is established as a trading desk under the regulations implementing section 13 

of the BHC Act. This prong of the trading desk definition is expected to simplify the supervisory 

activities of the Federal banking agencies that also oversee compliance with the market risk 

capital rule because the same unit of organization can be assessed for purposes of both the 

market risk capital rule and section 13 of the BHC Act, which will reduce complexity and cost 

for banking entities, and improve the effectiveness of the final rule. Together with providing 

firms with the flexibility to leverage existing or planned compliance programs in order to satisfy 

the elements of § __.20 as appropriate, the agencies expect aligning the definition of trading desk 

will minimize compliance burden on banking entities subject to both rules.

To further align the final rule’s trading desk concept with the market risk capital rule, the 

final rule provides that a trading desk must be “structured by the banking entity to implement a 

 

market risk capital standards, which do. See Basel Committee on Banking Supervision, 

“Minimum Capital Requirements for Market Risk,” MAR12 (Feb. 2019). The federal banking 

agencies expect their revised market risk capital rule will include a definition of “trading desk” 

that is consistent with the trading desk concept described in the “Minimum Capital Requirements 

for Market Risk,” and the multifactor approach in this final rule.

347 See final rule § __.3(e)(13)(ii).
94

well-defined business strategy.”348 This further aligns the trading desk definition with the 

definition of “trading desk” in the Basel Committee’s minimum capital requirements for market 

risk.349 This change will ensure that banking entities that are subject to the market risk capital

prong and banking entities that are not subject to the market risk capital prong have comparable 

trading desk definitions. In general, a well-defined business strategy typically includes a written 

description of a desk’s objectives, including the economics behind its trading and hedging 

strategies, as well as the instruments and activities the desk will use to accomplish its objectives. 

A desk’s well-defined business strategy may also include an annual budget and staffing plan and 

management reports. 

Like the proposal, the final rule states that a trading desk is organized to ensure 

appropriate setting, monitoring, and management review of the desk’s trading and hedging 

limits, current and potential future loss exposures, and strategies. The final rule also states that a 

trading desk is characterized by a clearly-defined unit that: (i) engages in coordinated trading 

activity with a unified approach to its key elements; (ii) operates subject to a common and 

calibrated set of risk metrics, risk levels, and joint trading limits; (iii) submits compliance reports 

and other information as a unit for monitoring by management; and (iv) books its trades together. 

The agencies consider a unit to be “clearly-defined” if it meets these four factors. 

The proposal included a multi-factor definition of trading desk that referenced incentive 

compensation as one defining factor. However, the banking agencies do not incorporate 

incentive compensation in regulatory capital rules generally, and therefore omitting this criterion

would better align the trading desk definition between the market risk capital rule and the 

 348 Final rule § __.3(e)(13)(i)(A).

349 See Basel Committee on Banking Supervision, Minimum Capital Requirements for Market 

Risk (Feb. 2019).
95

Volcker Rule. Thus, the final rule does not incorporate any reference to incentive 

compensation.350

The final rule does not require the agencies to approve banking entities’ initial trading 

desk designations and any changes in trading desk designations, as one commenter had 

recommended.351 The agencies believe such an approval process is unnecessary for purposes of 

the final rule because the agencies intend to continue assessing banking entities’ trading desk 

designations as part of the agencies’ ongoing supervision of banking entities’ compliance with 

the final rule as well as other safety and soundness regulations, as applicable. At the same time, 

the final rule does not allow the trading desk to be set completely at the discretion of the banking 

entity, as one commenter suggested.352 The adopted definition will provide flexibility to allow 

banking entities to define their trading desks based on the same criteria typically used for other 

operational, management, and compliance purposes but would not be so broad as to hinder the 

agencies’ or banking entities’ ability to detect prohibited proprietary trading.

d. Reservation of Authority

The proposal included a reservation of authority that would have permitted 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.353 The preamble 

requested comment on whether such a reservation of authority would be necessary in connection 

 350 Compare 83 FR at 33453 with final rule § __.3(e)(13)(i)(B).

351 See AFR.

352 See JBA.

353 See 83 FR at 33454.
96

with the proposed trading account definition, which would have focused on objective factors to 

define proprietary trading. The agencies explained that this approach may have produced results 

that were over- or under- inclusive with respect to the statutory trading account definition. The 

agencies further explained that the reservation of authority could provide appropriate balance by 

recognizing the subjective elements of the statute in light of the bright-line approach of the 

proposed accounting prong. 

Two commenters supported adopting the reservation of authority.354 Both of these 

commenters noted the importance of coordination and consistent application of the reservation of 

authority, particularly in instances where the primary financial regulatory agency may vary by 

legal entity within a firm.

355 One of these commenters suggested that the agencies keep such 

authority in reserve for use solely in those circumstances wherein poor management is putting an 

institution at risk of failure.356

The final rule does not include the proposed reservation of authority.357 The revised 

trading account definition in the final rule retains a short-term intent standard that largely tracks 

the statutory standard.358 Because the final trading account definition does not include the 

 354 See, e.g., BB&T and CFA.

355 Id.

356 See CFA.

357 See proposed rule § __.3(g).

358 Although banking entities that are subject to the market risk capital prong are not subject to 

the short-term intent prong, the market risk capital prong incorporates a substantially similar 

short-term intent standard. As described above, the market risk capital rule’s definition of 

trading position largely parallels the statutory definition of trading account, which in turn mirrors 

the language in the short-term intent prong.
97

proposed accounting prong and is aligned with the statutory standard, the agencies do not find it 

necessary to retain a reservation of authority. 

2. Section __.4: Permitted Underwriting and Market Making Related 

Activities

a. Current Exemptions for Underwriting and Market Making–

Related Activities359

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 or 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 (RENTD).360 As the agencies noted when they adopted the 2013 

rule, client-oriented financial services, which include underwriting, market making, and asset 

management services, are important to the U.S. financial markets and the participants in those 

markets.361 

 359 In contrast to the proposal, the discussions of the exemptions for underwriting and market 

making-related activity have been combined in order to avoid any unnecessary redundancy as 

well as any confusion that could arise to the extent there are differences in the way that otherwise 

identical provisions of those exemptions operate. However, the two exemptions remain separate 

and distinct. Banking entities seeking to rely on one or both exemptions are required to comply 

with the requirements and legal standards contained in each applicable exemption, and will 

continue to be required to do so following adoption of the final rule. 

360 12 U.S.C. 1851(d)(1)(B).

361 See 79 FR at 5615.
98

In particular, underwriters play a key role in facilitating issuers’ access to funding, and 

are accordingly important to the capital formation process and to economic growth.362 For 

example, underwriters can help reduce issuers’ costs of capital by mitigating potential 

information asymmetries between issuers and their potential investors.363 Similarly, market 

makers operate to help ensure that securities, commodities, and derivatives markets in the United 

States remain well-functioning by, among other things, providing important intermediation and 

liquidity.364 At the same time, however, the agencies also recognized that providing appropriate 

latitude to banking entities to provide such client-oriented services need not and should not 

conflict with clear, robust, and effective implementation of the statute’s prohibitions and 

restrictions.365 

Accordingly, the 2013 rule follows a comprehensive, multi-faceted approach to 

implementing the statutory exemptions for underwriting and market making-related activities. 

Specifically, section __.4(a) of the 2013 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 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 RENTD, and reasonable efforts be made to sell or otherwise 

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

363 Id.

364 See 79 FR at 5576.

365 See 79 FR at 5541.
99

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 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: 

o The products, instruments, or exposures each trading desk may purchase, sell, 

or manage as part of its underwriting activities; 

o Limits for each trading desk, based on the nature and amount of the trading 

desk’s underwriting activities, including RENTD, on the (1) amount, types, 

and risk of the trading desk’s underwriting position, (2) level of exposures to 

relevant risk factors arising from the trading desk’s underwriting position, and 

(3) period of time a security may be held; 

o Internal controls and ongoing monitoring and analysis of each trading desk’s 

compliance with its limits; and 

o 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;
100

• 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. 

Similarly, section __.4(b) of the 2013 rule implements the statutory exemption for market 

making-related activities and sets forth the requirements that all banking entities must meet in 

order to rely on the exemption. Among other things, the 2013 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 marketmaker inventory are designed not to exceed, on an ongoing basis, RENTD, 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 exemption for market making-related activities, including reasonably 
101

designed written policies and procedures, internal controls, analysis, and independent 

testing identifying and assessing certain specified factors;366

• To the extent that any required limit367 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 making-related 

activities are designed not to reward or incentivize prohibited proprietary trading; and

• The banking entity is licensed or registered to engage in market making-related 

activities in accordance with applicable law.368

In the several years since the adoption of the 2013 rule, public commenters have 

observed that the significant and costly compliance requirements in the existing exemptions may 

unnecessarily constrain underwriting and market making without a corresponding reduction in 

the type of trading activities that the rule was designed to prohibit.369 As the agencies noted in 

the proposal, implementation of the 2013 rule has indicated that the existing approach to give 

effect to the statutory standard of RENTD may be overly broad and complex, and also may 

inhibit otherwise permissible activity.370 

 366 See 2013 rule §__.4(b)(2)(iii).

367 See 79 FR at 5615.

368 2013 rule § __.4(b)(2). This provision was not intended to expand the scope of licensing or

registration requirements under relevant U.S. or foreign law that are applicable to a banking

entity engaged in market-making activities, but rather to recognize that compliance with 

applicable law is an essential indicator that a banking entity is engaged in market-making 

activities. See 79 FR at 5620.

369 83 FR at 33435, 33459.

370 83 FR at 33445-46.
102

Accordingly, the proposal was intended to tailor, streamline, and clarify the requirements 

that a banking entity must satisfy to avail itself of either exemption for underwriting or market 

making-related activities. In particular, the proposal intended to provide a clearer way to 

determine if a trading desk’s activities satisfy the statutory requirement that underwriting or 

market making-related activity, as applicable, be designed not to exceed RENTD. Specifically, 

the proposal would have established a presumption, available to banking entities both with and 

without significant trading assets and liabilities, that trading within internally set limits satisfies 

the requirement that permitted activities must be designed not to exceed RENTD.371 In addition, 

the agencies also proposed to tailor the exemption for underwriting and market making-related 

activities’ 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.372

b. Proposed presumption of compliance with the statutory RENTD 

requirement

As described above, the statutory exemptions for underwriting and market makingrelated activities in section 13(d)(1)(B) of the BHC Act requires that such activities be designed 

not to exceed RENTD.373 Consistent with the statute, for the purposes of the exemption for 

underwriting activities, section __.4(a)(2)(ii) of the 2013 rule requires that the amount and type 

of the securities in the trading desk’s underwriting position be designed not to exceed RENTD, 

and reasonable efforts are made to sell or otherwise reduce the underwriting position within a 

 371 Proposed rules §__.4(a)(8) and §__.4(b)(6).

372 83 FR at 33438 and 33459.

373 12 U.S.C. 1851(d)(1)(B).
103

reasonable period, taking into account the liquidity, maturity, and depth of the market for the 

relevant type of security.374 

Similarly, for the purposes of the exemption for market making-related activities, section 

__.4(b)(2)(ii) of the 2013 rule requires that 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, RENTD, based on certain factors and analysis.375 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.376 Under § __.4(b)(2)(iii)(C) of the 2013 rule, a banking entity must 

account for these considerations when establishing limits for each trading desk.377

In the proposal, the agencies recognized that the prescriptive standards for meeting the 

statutory RENTD requirements in the exemptions for underwriting and market making-related 

activities were complex, costly, and did not provide bright line conditions under which trading 

activity could be classified as permissible underwriting or market making-related activity.378 

Accordingly, the agencies sought comment on a proposal to implement this key statutory factor –

in connection with both relevant exemptions – in a manner designed to provide banking entities 

 374 2013 rule §__.4(a)(2)(ii). 

375 2013 rule §__.4(b)(2)(ii). 

376 Id. 

377 2013 rule § __.4(b)(2)(iii)(C).

378 See 83 FR at 33455, 33459.
104

and the agencies with greater certainty and clarity about what activity constitutes permissible 

underwriting or market making-related activity pursuant to the applicable exemption.379 

Instead of the approach taken in the 2013 rule, the agencies proposed to establish the 

articulation and use of internal limits as a key mechanism for conducting trading activity in 

accordance with the rule’s exemptions for underwriting and market making-related activities.380 

Specifically, the proposal would have provided that the purchase or sale of a financial instrument 

by a banking entity would be presumed to be designed not to exceed RENTD if the banking 

entity establishes internal 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.381 As stated in the proposal, the agencies 

believe that this approach would provide banking entities with more flexibility and certainty in 

conducting permissible underwriting and market making-related activities.382

Under the proposal, all banking entities, regardless of their volume of trading assets and 

liabilities, would have been able to voluntarily avail themselves of the presumption of 

compliance with the RENTD requirement by establishing and complying with these internal

limits. With respect to the underwriting exemption, the proposal would have provided that a 

banking entity would establish internal limits for each trading desk that are designed not to 

 379 Id.

380 As stated in the proposal, as a consequence of the changes to focus on limits, many of the 

requirements of the 2013 rule relating to limits associated with the exemptions for underwriting 

and market making-related activities would be incorporated into this requirement and modified 

or removed as appropriate in the proposal. 

381 See proposed rule §__.4(a)(8); proposed rule §__.4(b)(6).

382 83 FR at 33438.
105

exceed RENTD, 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.383

With respect to the exemption for market making-related activities, the proposal would 

have provided that 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 RENTD 

requirement by establishing and complying with internal limits. Specifically, the proposal would 

have provided that a banking entity would establish internal limits for each trading desk that are 

designed not to exceed RENTD, 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.384

In the case of both exemptions, the proposal provided that banking entities utilizing the 

applicable presumption of compliance with the RENTD requirement would have been required 

to maintain internal policies and procedures for setting and reviewing desk-level risk limits.385 

 383 Proposed rule §__.4(a)(8)(i).

384 Proposed rule §__.4(6)(i)(B).

385 See 83 FR at 33456, 33460. Under the proposal, banking entities with significant trading 

assets and liabilities would have continued to be required to establish internal limits for each 
106

The proposed approach would not have required that a banking entity’s limits be based on any 

specific or mandated analysis, as required with respect to RENTD analysis under the 2013 rule. 

Rather, a banking entity would have established the limits according to its own internal analyses 

and processes around conducting its underwriting activities and market making-related activities 

in accordance with section 13(d)(1)(B).386 In addition, the proposal would have required, for 

both the exemption for underwriting and market making-related activities, a banking entity to 

promptly report to the appropriate agency when a trading desk exceeds or increases its internal 

limits.387 

The proposal also provided that internal limits established by a banking entity for the 

presumption of compliance with the statutory RENTD requirement under both the exemption for 

underwriting and market making-related activities would have been subject to review and 

oversight by the appropriate agency on an ongoing basis. Any review of such limits would have 

assessed whether or not those limits are established based on the statutory standard – i.e., the 

 

trading desk as part of the underwriting compliance program requirement in § __.4(a)(2)(iii)(B), 

the elements of which would cross-reference directly to the requirement in proposed §

__.4(a)(8)(i). Similarly, banking entities with significant trading assets and liabilities would 

have continued to be required to establish internal limits for each trading desk as part of the 

compliance program requirement for market making-related activity in § __.4(b)(2)(iii)(C), the 

elements of which would cross-reference directly to the requirement in proposed § __.4(b)(6)(i). 

Banking entities without significant trading assets and liabilities would have no longer been 

required to establish a compliance program that is specific for the purposes of complying with 

the either exemption, but would need to establish, implement, maintain and enforce internal 

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.

386 See 83 FR at 33456, 34460. In the proposal, the agencies indicated that they expected that 

the risk and position limits metric that is required for certain banking entities under the 2013 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 and market making-related 

activities of banking entities subject to the metrics reporting and recordkeeping requirements of 

the Appendix. 

387 Proposed rule §__.4(a)(8)(iii); proposed rule §__.4(b)(6)(iii).
107

trading desk’s RENTD, based on the nature and amount of the trading desk’s underwriting or 

market making-related activities.388 

Finally, under the proposal, the presumption of compliance with the statutory RENTD 

requirement for permissible underwriting and market making-related activities could have been 

rebutted by the appropriate 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 

RENTD on an ongoing basis. The agency would have provided notice of any such determination 

to the banking entity in writing.389

The agencies requested comment on the proposed addition of a presumption that 

conducting underwriting or market making-related activities within internally set limits satisfies 

the requirement that permitted such activities be designed not to exceed RENTD. 

c. Commenters’ Views

General Approach of a presumption of compliance with the statutory RENTD requirement

As discussed above, the agencies proposed to establish the articulation and use of internal 

limits as a key mechanism for conducting trading activity in accordance with the rule’s 

exemptions for underwriting and market making-related activities.390 A number of commenters 

expressed support for the general approach of a presumption of compliance to satisfy the 

RENTD standard.391 Claiming that the 2013 rule has chilled market making-related activities and 

is complex and costly and does not provide bright line conditions under which trading can 

 388 See 83 FR at 33456. 

389 See proposed rule §__.4(a)(8)(iv); proposed rule §__.4(b)(6)(iv).

390 See proposed rule §__.4(a)(8); proposed rule §__.4(b)(6).

391 See, e.g., Credit Suisse; SIFMA; State Street; Real Estate Associations; and BOK.
108

clearly be classified as permissible market making-related activities, one commenter asserted that 

the general approach would significantly improve upon the approach of the 2013 rule.392 

One commenter supported the proposed approach on the basis that the presumption 

would allow banking entities to estimate and manage inventory limits in a more holistic manner 

to allow for greater and more efficient liquidity and pricing for its clients.393 That commenter 

argued that, in comparison to the 2013 rule, a presumption will more effectively leverage 

existing industry practices and reporting requirements related to managing market-making 

inventory, such as maintaining daily VaR metrics by product and position limits compared to 

relative levels of client activity.394 Another suggested that because internally set limits are 

developed and applied by each banking entity in light of capital requirements and risk 

management it would be reasonable to provide a presumption of compliance tied to internally set 

limits.395 Finally, one commenter said that the approach would provide a more efficient use of 

compliance resources and allow banking entities to tailor compliance requirements to its specific 

underwriting and market making-related activities.

396

Several commenters, however, expressed concerns about the creation of a presumption of 

compliance to satisfy the statutory RENTD standard.397 For example, commenters argued that 

the proposed presumption is not consistent with the statute,398 with one commenter claiming that 

 392 See SIFMA.

393 See State Street.

394 Id.

395 See JBA.

396 See ABA.

397 See, e.g., Merkley; AFR; Bean; Better Markets; Center for American Progress (CAP); Public 

Citizen; Volcker Alliance; and Data Boiler.

398 See, e.g., Bean; Better Markets; CAP; and Public Citizen.
109

the statutory requirement was intended to constrain bank activities, not bank risks.399 

Commenters expressed concerns that the proposed presumption of compliance is too deferential 

to banking entities400 and would reward aggressive banking entities that set their risk limits too 

high.401 One commenter argued that the limits would not constrain proprietary trading because 

the proposed presumption of compliance with RENTD allows banking entities to raise their 

limits and does not distinguish between permissible and impermissible proprietary trades within 

risk limits.402 Another commenter disagreed with a presumption of compliance for underwriting 

activity, asserting that this approach would undermine well-established principles of safety and 

soundness, particularly given what the commenter referred to as a general lack of scrutiny over 

bank-developed risk limits.403

Required Analysis for establishing risk limits

As discussed above, the agencies recognized in the proposal that the prescriptive 

standards in the 2013 rule for meeting the RENTD requirements were complex, costly, and did 

not provide bright line conditions under which trading can clearly be classified as permissible 

proprietary trading.404 As a result, the proposal would not have required that a banking entity’s 

limits be based on any specific or mandated analysis, as was required under the 2013 rule. 

Rather, under the presumption of compliance with the RENTD requirement in the proposal, a 

banking entity would have established limits according to its own internal analyses and processes 

 399 See AFR.

400 See, e.g., AFR; Bean; CAP; Public Citizen; Volcker Alliance; and Data Boiler.

401 See, e.g., Bean and Volcker Alliance.

402 See Better Markets.

403 See NAFCU.

404 See 83 FR 33459.
110

around conducting its underwriting and market making-related activities in accordance with 

section 13(d)(1)(B) of the BHC Act.405 Several commenters provided their views on this 

element of the proposal.

Two commenters supported the agencies’ contention in the proposal that the prescriptive 

standards in the 2013 rule were complex, costly, and did not provide bright line conditions under 

which trading can clearly be classified as permissible proprietary trading.406 Some commenters 

said that removing certain conditions, such as the demonstrable analysis of historical customer 

demand in §__.4(b)(2)(ii)(B) of the 2013 rule, would increase flexibility and provide certainty 

for banking entities to engage in market making-related activities since current or reasonably 

forecasted market demand may be different than historical data may suggest.407 

Several commenters, however, expressed concerns about the proposed removal of the 

demonstrable analysis requirement. Some commenters argued that the removal of this 

requirement will make it harder to for the agencies to rebut the presumption or determine when 

banking entities have not properly set their RENTD limits.408 One commenter argued that by not 

requiring a demonstrable analysis, the proposed rule will allow banking entities to engage in 

trading activities only superficially tied to customer demand.409 One commenter expressed a 

belief that the demonstrable analysis cannot be effectively replaced by other metrics in the 

 405 See 83 FR at 33460. In the proposal, the agencies noted that they expect that the risk and 

position limits metric that is already required for certain banking entities under the 2013 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-related activities of banking 

entities subject to the metrics reporting and recordkeeping requirements of the Appendix. 

406 See, e.g., Capital One et al. and SIFMA.

407 See FSF; State Street and SIFMA.

408 See Merkley; Volcker Alliance; and Data Boiler.

409 See Better Markets.
111

proposal, such as the risk and position limits and usage metric in the Appendix because this 

metric does not provide information on customer demand relative to trading inventories.410

To increase flexibility and certainty for banking entities engaged in permitted activities, 

several of the commenters that supported the general approach of the presumption of compliance 

with the RENTD requirement requested that this proposed requirement be modified in certain 

ways. One commenter suggested that the presumption should be available to trading desks that 

establish internal limits appropriate for their risk appetite, risk capacity, and business strategy 

and hold themselves out as a market maker.411 A commenter requested that the agencies revise 

the presumption to make it available to a banking entity that sets, in a manner agreed to with its 

onsite prudential examiner and consistent with the intent and purposes of section 13 of the BHC, 

internal RENTD limits based on factors relevant to the reasonable near-term demand of clients, 

customers and counterparties, which are calibrated with the intention of not exceeding 

RENTD.412 One commenter suggested that, instead of adhering to the more prescriptive aspects 

of the proposed RENTD presumption, the trading desks of moderate and limited trading assets 

and liabilities banking entities should be given discretion to adopt internal risk limits appropriate 

to the activities of the desk subject to other existing bank regulations, supervisory review, and 

oversight by the appropriate agency and still be able to utilize the presumption of compliance.413 

Some commenters requested that the agencies clarify aspects of the proposal’s RENTD 

presumption. Commenters asked the agencies to clarify that supervisors and examiners will not 

 410 See AFR.

411 See JBA.

412 See SIFMA (recommended that such factors might include, for example, anticipated market 

volatility and current client inquiries and other indications of client interest, among many others); 

FSF.

413 See Capital One et al.
112

impose a one-size fits all approach given the differences in business models among banking 

entities.414 While opposed to the general approach of a presumption of compliance with the 

statutory RENTD requirement, one commenter suggested that, if the agencies adopt the 

presumption of compliance, additional guidance should be given to banking entities regarding 

the factors to consider when setting the limits required to establish the presumption of 

compliance, as the factors in the proposal were too broad and malleable.415 Another commenter 

suggested that the agencies clarify that the presumption of compliance should include activitybased limits as a part of its risk-limit structure, such as financial instrument holding periods, 

notional size and inventory turnover, because activity-based limits are reflective of client 

demand and an appropriate statutory substitute compared to risk-based limits, which can be 

hedged.416

Specific to the underwriting exemption, one commenter asserted that underwriting 

activity can be sporadic due to client demand or market factors, which may result in low limit 

utilization and a rebuttal of the presumption of compliance even when the underwriting position

itself is identifiable as part of a primary or follow-on offering of securities.

417 The commenter 

suggested that the agencies consider corporate actions, such as a debt offering, as an appropriate 

identifier of permissible underwriting.418 Another commenter suggested that the agencies permit 

 414 See CCMR and JBA (In particular, this commenter argued that the agencies should not 

compare banking entities as it would be an impediment to banking entities that are not the most 

conservative in its internal risk controls).

415 See Better Markets.

416 See BB&T. 

417 Id.

418 Id.
113

banking entities to set limits based on the absolute value of profits and losses in the case of an 

underwriting desk.419

Prompt Notifications

As discussed above, the proposal would have required a banking entity to promptly report 

to the appropriate agency when a trading desk exceeds or increases the internal limits it sets to 

avail itself of the RENTD presumption with respect to the exemptions for underwriting and 

market making-related activities.420 With two exceptions,421 commenters strongly opposed the 

proposal’s requirement that banking entities promptly report limit breaches.422 For example, 

many of these commenters stated that the notifications would be impractical and burdensome to 

banking entities423 and would not enhance the oversight capabilities of the agencies because the 

information is already otherwise available through ordinary supervisory processes,424 including 

the internal limits and usage metric.425 Two commenters asserted that the notices would provide 

little insight into how risk is managed.426 Some commenters expressed concern that complying 

 419 See JBA.

420 See proposed rule § __.4(a)(8)(iii); proposed rule § __.4(b)(6)(iii). 

421 See, e.g., CFA at 7 (stating that, some small and mid-sized institutions may not have strong 

internal controls and may be susceptible to the activities of a rogue trader, so the prompt notice 

requirements allow regulators to impose stricter controls if necessary); Data Boiler at 36 

(representing that the prompt reporting requirement would decrease opportunities for evasion of 

the rule’s requirements).

422 See, e.g., CCMC; BOK; ISDA; Real Estate Associations; Goldman Sachs; GFMA; CREFC; 

ABA; SIFMA; IIB; BB&T; JBA; FSF; Credit Suisse; and Capital One et al.

423 See, e.g., CCMR; Credit Suisse; GFMA; FSF; and JBA.

424 See, e.g., Credit Suisse; ABA; GFMA; IIB; BOK; and SIFMA.

425 See, e.g., FSF; JBA; ABA; Goldman Sachs; CREFC; and CCMC.

426 See, e.g., BOK (stating that limit excesses do not, of themselves, show that an institution has 

changed it strategy or risk tolerance and that reporting by financial institutions might detract 

from a focus on risk management and shift to a “number of times exceeded” view which 
114

with the requirement would be particularly challenging for banking entities with parents that are 

FBOs because these banking entities lack on-site examiners to receive notifications.427 A few 

commenters claimed that the prompt notification requirement provides incentives for banking 

entities to set their limits so high that they have fewer breaches and changes to limits.428 

Commenters also noted that, when risk limits are appropriately calibrated, breaches are not 

uncommon, and notifying the agencies of each breach could overwhelm the agencies.429

Another commenter argued that the prompt notification may chill traders’ willingness to request 

changes to limits where it would otherwise be appropriate to accommodate legitimate customer 

demand.430

As an alternative to the prompt notification requirement, many commenters suggested 

that the agencies require banking entities to make detailed records of limit changes and 

breaches.431 Other commenters suggested that the agencies rely on existing supervisory 

 

provides very little insight into how risk is managed); MBA (stating that prompt reporting would 

encourage the agencies to view events in isolation without consideration to facts and 

circumstances and that it would be more appropriate to review limit-events in the ordinary course 

of established supervisory process).

427 See, e.g., JBA (stating that it would be operationally difficult and costly for foreign 

headquarters to collect and report data to US regulators); IIB (stating that foreign trading desks 

would not have on-site examiners to receive reports and that the requirement could intrude into 

local supervisory matters).

428 See, e.g., Better Markets; Capital One et al.; and State Street.

429 See, e.g., GFMA and BOK (stating that limits that are never exceeded “may not be very useful 

limits.”).

430 See CCMC.

431 See, e.g., CCMR and BB&T.
115

processes to monitor limit breaches and increases,432 including the internal limits and usage 

metric.433 

Rebutting the Presumption 

As discussed above, under the proposal, the RENTD presumption could have been 

rebutted by the appropriate agency if the agency determined, based on all relevant facts and 

circumstances, that a trading desk is engaging in activity that is not based on the trading desk’s 

RENTD on an ongoing basis.434 

A few commenters discussed the rebuttal process. For example, one commenter 

requested that the agencies specify the procedures for an agency to rebut the presumption of 

compliance.435 Another commenter recommended that the agencies adopt a consistent procedure 

for challenging the presumptions in the rule.436 Another commenter stated that the proposal 

would only allow the agencies to challenge the risk limit approval and exception process, not the 

nexus between RENTD and the limits themselves.437

d. Final presumption of compliance with the statutory RENTD 

requirement

 432 See, e.g., FSF; GFMA; and Real Estate Associations.

433 See, e.g., FSF; JBA; and ABA. 

434 See proposed rule §__.4(a)(8)(iv); proposed rule § __.4(b)(6)(iv).

435 See MBA.

436 See IIB.

437 See Better Markets.
116

The agencies are adopting the presumption of compliance with the RENTD requirement 

for both the exemptions for underwriting and market making-related activities largely as 

proposed, but with modifications intended to be responsive to commenters’ concerns.438 

The agencies are mindful of the concerns raised by commenters regarding the general 

approach of relying on a banking entity’s internal limits to satisfy the statutory RENTD 

requirement.439 With respect to the comments described above that the presumption would not 

be consistent with the statute, the agencies note that the statute permits underwriting and market 

making-related activities to the extent that such activities are designed not to exceed RENTD. 

Accordingly, under the final rule the presumption will be available to each trading desk that 

establishes, implements, maintains, and enforces internal limits that are designed not to exceed 

RENTD.440 In addition, with respect to the commenter who expressed concern that the 

presumption would undermine safety and soundness due to a perceived lack of general scrutiny 

over banking entity-developed limits, the agencies note that these internal limits will be subject 

to supervisory review and oversight, which constrains banking entities’ ability to set their limits 

too high. Further, the agencies may review such limits to assess whether or not those limits are 

 438 In addition to the changes described in this section, the presumption of compliance has been 

moved into a new paragraph (c) in § __.4, as opposed to including separate provisions under 

each of the two relevant exemptions. That change was intended solely for clarity and to avoid 

any unnecessary duplication in light of the fact that the process for complying with the 

presumption of compliance is identical for both exemptions. New paragraph (c) does, however, 

recognize that the limits banking entities will be required to implement, maintain, and enforce 

will differ as between the exemptions for underwriting and market making-related activities. See

final rule §§__.4(c)(2)(A) and __.4(c)(2)(B). 

439 As noted above, this includes commenters who argue that such amendments will undermine 

the operation of the 2013 rule, lead to increased risk taking among banking entities, and conflict 

with the statutory requirements in section 13(d)(1)(B) of the BHC Act. See supra notes 28, 36–

41 and accompanying text.

440 For consistency with the final rule’s RENTD requirement, the sub-heading for §__.4(c)(1) 

has been changed from “risk limits” to “limits.”
117

consistent with the statutory RENTD standard. This allows the supervisors and examiners to 

look to the articulation and use of limits to distinguish between permissible and impermissible 

proprietary trading. The agencies believe that the presumption of compliance, along with the 

other requirements of the final rule’s exemptions for underwriting and market making-related 

activities, create a framework that will allow banking entities and the agencies to determine 

whether a trading activity has been designed not to exceed RENTD.

Further, the agencies are concerned that compliance with the 2013 rule’s exemptions for

underwriting and market making-related activities may be unnecessarily complex and costly to 

achieve the intended goal of compliance with these exemptions. For example, as noted in the 

proposal, a number of banking entities have indicated that even after conducting a number of 

complex and intensive analyses to meet the “demonstrable analysis” requirements for the 

exemption for market making-related activities, they still may be unable to gain comfort that 

their bona fide market making-related activity meets the factors.441 Further, the absence of clear, 

bright-line standards for assessing compliance with the statutory RENTD standard may be 

unnecessarily constraining underwriting and market making, two critical functions to the health 

and well-being of financial markets in the United States. 

The agencies note commenters’ concerns regarding the removal of “demonstrable 

analysis” requirement will make it harder for agencies to rebut the presumption of compliance 

with the RENTD requirement or determine when banking entities have not properly set their 

RENTD limits. The agencies believe, however, that requiring a banking entity’s internal limits 

to be based on RENTD as a requirement for utilizing the presumption of compliance should help 

 441 83 FR at 33459.
118

to simplify compliance with, and oversight of, that statutory standard by placing the focus on 

how those limits are established, maintained, implemented, and enforced. 

Accordingly, under the rule, a banking entity will be presumed to meet the RENTD 

requirements in §__.4 (a)(2)(ii)(A) or §__.4(b)(2)(ii) with respect to the purchase or sale of a 

financial instrument if the banking entity has established and implements, maintains, and 

enforces the limits for the relevant trading desk as described in the final rule.442 With respect to 

underwriting activities, the presumption will be available to each trading desk that establishes, 

implements, maintains, and enforces internal limits that are designed not to exceed RENTD, 

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.443

With respect to market making-related activities, the presumption will be available to 

each trading desk that establishes, implements, maintains, and enforces risk and position limits 

that are designed not to exceed RENTD, based on the nature and amount of the trading desk’s 

market making-related activities, that address the:

(1) Amount, types, and risks of its market-maker positions;

 442 See final rule, §__.4(c)(1)(i).

443 See final rule §__.4(c)(1)(ii)(A). The language in this paragraph of the rule has been 

modified slightly from the proposal to clarify that such limits should take into account the 

liquidity, maturity, and depth of the market for the relevant types of financial instruments. As 

this language comes directly from the RENTD requirement in §__.4 (a)(2)(ii)(A), the agencies 

do not view this as a substantive change. Rather, the agencies believe that it is important to 

emphasize in the rule text that the limit used to satisfy the presumption of compliance for one 

type of financial instrument will not necessarily be the same for other types of financial 

instruments and that the particular characteristics of the relevant market should be taken into 

account throughout the process of setting these limits.
119

(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.444

Some commenters also noted that the agencies should not take a “one-size-fits-all” 

approach to the limits that must be established to satisfy the presumption of compliance with 

RENTD on the basis that not all of the proposed limits may be applicable to every type of 

financial instrument, particularly derivatives.445 In response to these commenters, the agencies 

have modified the rule text to clarify that the limits required to be established by a banking entity 

in order to satisfy the presumption of compliance must address certain items. The agencies 

recognize that certain of the enumerated items, which are unchanged from the proposal, may be 

more easily applied for desks that engage in market-making in securities rather than derivatives, 

and emphasize that section __.4(b), both as currently in effect and as amended, is intended to 

provide banking entities with the flexibility to determine appropriate limits for market makingrelated activities that are designed not to exceed RENTD, taking into account the liquidity, 

maturity, and depth of the market for the relevant types of financial instruments. 

With respect to derivatives, certain of the enumerated items may not be effective for 

designing market making-related activities not to exceed RENTD, which is ultimately the 

primary purpose of adopting a presumption of compliance based on the establishment and use of 

 444 See final rule §__.4(c)(1)(ii)(B). For the reasons described in connection with the limits 

required as satisfy the presumption of compliance in connection with the underwriting 

exemption, the language in this paragraph has been modified slightly from the proposal to clarify 

that such limits must take into account the liquidity, maturity, and depth of the market for the 

relevant types of financial instruments. See id.

445 See e.g., FSF, SIFMA.
120

internal limits.446 Under those circumstances, the agencies acknowledge that it may be 

appropriate for banking entities to establish limits based on specific conditions that would need 

to be satisfied in order to utilize the presumption of compliance, rather than a fixed number of 

market-maker positions.447

For example, for a desk that engages in market making-related activities only with 

respect to derivatives (or derivatives and non-financial instruments), the requirement to establish, 

implement, maintain, and enforce limits designed not to exceed RENTD could be satisfied to the 

extent the banking entity establishes limits on the market making desk’s level of exposures to 

relevant risk factors arising from its financial exposure and such limits are designed not to 

exceed RENTD (including derivatives positions related to a request from a client, customer, or 

counterparty), based on the nature and amount of the trading desk’s market making-related 

activities. Such limits would be consistent with the underlying purpose of the exemption for 

market making-related activities, which is to implement the restriction on a banking entity’s 

proprietary trading activities while still allowing market makers to provide intermediation and 

liquidity services necessary to the functioning of our financial markets.

Consistent with the proposal, the limits used to satisfy the presumption of compliance 

under the final rule will be subject to supervisory review and oversight by the applicable agency 

 446 As previously noted, the final rule also replaces the existing definition of “market makerinventory” with a definition of “market-maker positions.” This change was intended to reflect 

the fact that requiring banking entities seeking to rely on the presumption of compliance with the 

RENTD requirement to have limits on market maker-inventory is generally unworkable in the 

context of derivatives. See infra note 458 and accompanying text.

447 The agencies note that this discussion does not encompass or impact the CFTC’s or SEC’s 

treatment of market-making in derivatives for purposes other than section 13 of the BHC Act and 

the rule.
121

on an ongoing basis.448 Moreover, the final rule provides that the presumption of compliance 

may be rebutted by the applicable agency if such agency determines, taking into account the 

liquidity, maturity, and depth of the market for the relevant types of financial instruments and 

based on all relevant facts and circumstances, that a trading desk is engaging in activity that is 

not designed not to exceed RENTD. 449 In a modification from the proposed rule, the final rule 

contains additional language that specifies that the agencies will take into account the liquidity, 

maturity, and depth of the market for the relevant types of financial instruments when 

determining whether to rebut the presumption of compliance. This change is intended to provide 

additional clarity regarding the factors the agencies will consider when making this 

determination. In response to commenters’ concerns about the rebuttal process, the final rule 

specifies that any such rebuttal of the presumption must be made in accordance with the notice 

and response procedures in subpart D of the rule.450

The agencies are, however, persuaded by the arguments raised by some commenters with 

respect to the proposed requirement that a banking entity promptly report to the appropriate 

agency when a trading desk exceeds or increases its internal limits to avail itself of the RENTD 

presumption with respect to the exemptions for underwriting and market making-related 

 448 See final rule §__.4(c)(2). The supervisory review provision in the proposed rule stated that 

“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.” 

Sections___.4(c)(1)(i)-(ii) of the final rule clearly stipulate that such limits must be designed not 

to exceed the reasonably expected near term demand of clients, customers, or counterparties. To 

avoid redundancy, this language has been omitted from §__.4(c)(2) in the final rule.

449 See final rule §__.4(c)(4).

450 See infra notes 655–58 and accompanying text (discussion of the notice and response 

procedures in §__.20(i)). 
122

activity.451 The agencies recognize that limits that are set so high as to never be breached are not 

necessarily meaningful limits. Thus, breaches of appropriately set limits may occur with a 

frequency that does not justify notifying the agencies for every single breach. The agencies 

recognize that the burdens associated with preparing and reporting such information may not be 

justified in light of the potential benefits of such requirement. 

Accordingly, the final rule instead requires banking entities to maintain and make 

available to the applicable agency, upon request, records regarding (1) any limit that is exceeded 

and (2) any temporary or permanent increase to any limit(s), in each case in the form and manner 

as directed by the agency.452 Moreover, when a limit is breached or increased, the presumption 

of compliance with RENTD will continue to be available so long as the banking entity: (1) takes 

action as promptly as possible after a breach to bring the trading desk into compliance; and 

(2) follows established written authorization procedures, including escalation procedures that 

require review and approval of any trade that exceeds 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.453 The agencies believe that 

this requirement will provide the agencies with sufficient information to determine whether a 

banking entity’s existing limits are appropriately calibrated to comply with the RENTD 

requirement for that particular financial instrument.454

 451 See proposed rule §§ __.4(a)(8)(iii) and __.4(b)(6)(iii). See also supra note 387 and 

accompanying text.

452 See final rule §__.4(c)(3)(i). 

453 See final rule §__.4(c)(3)(i). 

454 The agencies note that the final rule requires that banking entities with significant trading 

assets and liabilities must record and report the quantitative measurements contained in the 

Appendix to the final rule. See infra Subpart E— Metrics: Appendix to Part [●]—Reporting and 
123

e. Additional changes to the final rule’s underwriting and market

making–related activities exemptions

In addition to the changes described above, the final rule’s exemptions for underwriting 

and market making-related activities contain several other conforming and clarifying changes. 

Consistent with the proposed rule, the structure of §__.4(a)(ii) in the final rule has been modified 

to clarify that the applicable paragraph contains two separate and distinct requirements.455 In 

addition, several definitions used in the final rule’s exemptions for underwriting and market

making-related activities have also been modified. Specifically, the phrase “paragraph (b)” has 

been replaced with “this section” in the definition of “underwriting position” because the defined 

term is used in several places.

456 The definition of “financial exposure” has been similarly 

modified.457 Finally, the final rule, however, replaces the existing definition of “market makerinventory” with a definition for “market-maker positions” to correspond with the language in 

§__.4(c)(ii)(B)(1), which is the only place such definition is used.

458

f. Compliance program and other requirements for underwriting 

and market making-related activities

2013 Rule Compliance Program Requirements

 

Recordkeeping Requirements. The agencies believe that the risk and position limits metric will 

also help banking entities and the agencies monitor the underwriting and market making-related 

activities of banking entities with significant trading assets and liabilities. 

455 Unlike the 2013 rule, §__.4(a)(ii) in the final rule contains subparagraphs (A) and (B).

456 See §__.4(a)(6).

457 See §__.4(b)(4). 

458 See §__.4(c)(ii)(B)(1). With respect to the exemption for market making-related activities, 

the rebuttable presumption of compliance for the RENTD requirement in the final rule requires, 

among other things, that a trading desk establish, implement, and enforce limits on the amounts, 

types, and risks of its market-maker positions. 
124

The underwriting exemption in §__.4(a) of the 2013 rule requires a banking entity to 

establish, implement, maintain, and enforce an internal 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) certain 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;459 (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.

The exemption for market making-related activities in the 2013 rule contains similar 

requirements. Specifically, § __.4(b) of the 2013 rule requires that a banking entity establish, 

implement, maintain, and enforce an internal 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 

 459 These factors include 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.
125

instruments each trading desk stands ready to purchase and sell in accordance with the 

exemption for market making-related 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), and 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) the limits 

for each trading desk, based on the nature and amount of the trading desk’s market makingrelated activities, including the reasonably expected near term demands of clients, customers, or 

counterparties;460 (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 level independent of the trading desk) of such 

demonstrable analysis and approval.

Proposed Compliance Program Requirement

Feedback from market participants and agency oversight have indicated that the 

compliance program requirements of the existing exemptions for underwriting and market 

 460 Specifically, such limits include the: (1) amount, types, and risks of its market-maker 

inventory; (2) amount, types, and risks of the products, instruments, and exposures the trading 

desk may use for risk management purposes; (3) the level of exposures to relevant risk factors 

arising from its financial exposure; and (4) period of time a financial instrument may be held.
126

making-related activities may be unduly complex and burdensome for banking entities with 

smaller and less active trading activities. In the proposed rule, the agencies proposed a tiered 

approach to such compliance program requirements, to make these requirements commensurate 

with the size, scope, and complexity of the relevant banking entity’s trading activities and 

business structure. Under the proposed 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 exemptions for 

underwriting and market making-related activities. However, the agencies proposed to eliminate 

such compliance program requirements for banking entities that have moderate or limited trading 

assets and liabilities.

461

Comments on the Proposed Compliance Program Requirement

Some commenters did not support the removal of the underwriting or market makingspecific compliance program requirements for banking entities with limited and moderate trading 

assets and liabilities under the proposal. For example, one commenter urged the agencies to 

require all banking entities to establish, implement, maintain, and enforce such compliance 

program, independent of any presumption of compliance.462 This commenter indicated that there 

are “exceedingly low incremental costs” associated with most elements of the RENTD 

compliance and controls framework for the exemptions for underwriting and market makingrelated activities, even for those banking entities with limited or moderate trading assets and 

 461 Under the 2013 rule, the compliance program requirement in §__.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.

462 See Better Markets.
127

liabilities.

463 In the commenter’s view, minimal incremental costs support the retention of such 

requirements, which are further justified by the increased stability of financial institutions and 

financial markets as a result of the 2013 rule.464 

Further, that same commenter asserted that the compliance requirements under the 2013 

rule permit too much discretion for banking entities to implement policies, procedures, and 

controls, noting that judgments on the effectiveness of implemented controls depend on the 

methodologies used by banking entities’ testing functions, and argued that the agencies should 

consider additional capital and activities-based requirements specifically tied to the reported 

inventory of trading assets, taking into account the total size of those trading assets, the overall 

capital position of the financial institution, and the average holding period or aging of trading 

assets, which may indicate that inventories are unrelated to underwriting and market making 

activities.465 Similarly, another commenter indicated that a tiered compliance approach would 

not be appropriate because it considered the proposed categorization of entities in terms of 

trading assets and liabilities to be flawed.466

Other commenters supported the revisions under the proposed rule to apply the market 

making-related activities’ compliance program requirements only to those banking entities with 

significant trading assets and liabilities. For example, one commenter expressed concern that the 

market making-related activities’ compliance program requirements under the 2013 rule have 

contributed to decreased market making activities with, and increased costs for, banking entities’ 

 463 Id.

464 Id.

465 Id.

466 See Data Boiler.
128

commercial end-user counterparties.467 This commenter indicated that applying the market 

making-related activities’ compliance program requirements only to banking entities with 

significant trading assets and liabilities would allow banking entities to develop more efficient 

compliance and liquidity risk management programs, which would ultimately reduce transaction 

costs for commercial end users.468 

Another commenter expressed the view that the proposed approach of applying the 

compliance program requirements under the exemptions for underwriting and market makingrelated activities only to those banking entities with significant trading assets and liabilities was 

an appropriate means of reducing the regulatory burdens on banks with limited or moderate

trading and underwriting exposures.

469 That commenter noted that such approach would 

continue to allow for the appropriate monitoring of these activities to ensure compliance with the 

provisions of the 2013 rule.470

Final Compliance Program Requirement

The agencies believe that the compliance program requirements that apply specifically to 

the exemptions for underwriting and market making-related activities play an important role in 

facilitating and monitoring a banking entity’s compliance with the requirements of those 

exemptions. However, the agencies also believe that those requirements can be appropriately 

tailored to the nature of the underwriting and market making activities conducted by each 

banking entity. It also is important to recognize that the removal of such compliance program 

requirements for banking entities that do not have significant trading assets and liabilities would 

 467 See Coalition of Derivatives End Users.

468 Id.

469 See CFA.

470 Id.
129

not relieve those banking entities of the obligation to comply with the other requirements of the 

exemptions for underwriting and market making-related activities, including RENTD 

requirements, under the final rule. 

Accordingly, and after consideration of the comments, the agencies continue to believe 

that removing the §__.4 compliance program requirements for banking entities that do not have 

significant trading assets and liabilities as a condition to engaging in permitted underwriting and 

market making-related activities should provide these banking entities with additional flexibility 

to tailor their compliance programs in a way that takes into account the risk profile and relevant 

trading activities of each particular trading desk. 

The agencies recognize that banking entities that do not have significant trading assets 

and liabilities may incur costs to establish, implement, maintain, and enforce the compliance 

program requirements applicable to permitted underwriting activities under the 2013 rule. As the 

trading activities of banking entities that do not have significant trading activities comprise 

approximately seven percent of the total U.S. trading activity subject to the Volcker Rule, the 

agencies believe the costs of the compliance program requirement would be disproportionate to 

the banking entity’s trading activity and the risk posed to U.S. financial stability. Accordingly, 

eliminating the §__.4 compliance program requirements for permitted underwriting and market

making-related activities conducted by banking entities that do not have significant trading assets 

and liabilities may reduce compliance costs without materially impacting conformance with the 

objectives set forth in section 13 of the BHC Act. Applying these specific compliance 

requirements only to banking entities with significant trading assets and liabilities also is 

consistent with the modifications to the general compliance program requirements for these 

banking entities under §__.20 of the final rule, as discussed below.
130

Accordingly, § __.4(a)(2)(iii) of the final rule will require banking entities with 

significant trading assets and liabilities, as a condition to complying with the underwriting 

exemption, to establish and implement, maintain, and enforce an internal compliance program 

required by subpart D that is reasonably designed to ensure the banking entity’s compliance with 

the requirements of the exemption, 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 §__.4(a)(2)(ii)(A);

471

(C) Written 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; and

(D) Internal controls and ongoing monitoring and analysis of each trading desk’s 

compliance with its limits.

With respect to the exemption for market making-related activities, § __.4(a)(b)(iii) of the 

final rule will require banking entities with significant trading assets and liabilities to establish 

and implement, maintain, and enforce an internal compliance program required by subpart D that 

is reasonably designed to ensure the banking entity’s compliance with the requirements of the 

 471 Final rule §__.4(a)(2)(ii)(A) requires that the amount and type of the securities in the trading 

desk’s underwriting position are designed not to exceed RENTD, taking into account the 

liquidity, maturity, and depth of the market for the relevant type of security; and (B) that 

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.
131

exemption, 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 §__.4(b)(2)(i);472

(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 §__.4 (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 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 §__.4(b)(2)(ii);

473

(D) Written 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; and

 472 Final rule §__.4(b)(2)(i) 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.

473 Final rule §__.4(b)(2)(ii) requires that the trading desk’s market making-related activities are 

designed not to exceed, on an ongoing basis, RENTD, taking into account the liquidity, maturity, 

and depth of the market for the relevant type of security.
132

(E) Internal controls and ongoing monitoring and analysis of each trading desk’s 

compliance with its limits.

The agencies are clarifying in the final rule that the authorization procedures for banking 

entities with significant trading assets and liabilities of proposed §__.4(a)(2)(iii)(D) and 

§__.4(b)(2)(iii)(E) are to be in writing pursuant to §__.4(a)(2)(iii)(C) and §__.4(b)(2)(iii)(D). 

Requiring that these authorization procedures are written provides a basis for which banking 

entities and supervisors can review for compliance with the underwriting and market making 

exemption compliance requirements.

Sections __.4(a)(2)(iii) (which sets forth the compliance program requirements for the 

underwriting exemption) and §__.4(b)(2)(iii) (which sets forth the compliance program 

requirements for the exemptions for market making-related activities) further provide that a 

banking entity with significant trading assets and liabilities may satisfy the requirements 

pertaining to limits and written authorization procedures by complying with the requirements 

pursuant to the presumption of compliance with the statutory RENTD requirement in § 

__.4(c).474 As such, §__.4(c)(1) provides for a rebuttable presumption that a banking entity’s 

purchase or sale of a financial instrument complies with the RENTD requirements in 

§__.4(a)(2)(ii)(A) and §__.4(b)(2)(ii) if the relevant trading desk establishes, implements, 

maintains, and enforces internal limits that 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. In taking this approach, the 

agencies recognize that requiring a banking entity to establish separate limits in accordance with 

 474 See supra section IV.B.2.d (discussing the requirements in the final rule associated with the 

presumption of compliance with the statutory RENTD requirement).
133

the statutory RENTD requirement would be unnecessary and may reduce the benefit of relying 

on internal limits set pursuant to §__.4(c)(1).

Additionally, in the case of a banking entity with significant trading assets and liabilities, 

the relevant exemption compliance requirements pertaining to written authorization procedures 

in §__.4(a)(2)(iii)(C) are not required if the criteria in §__.4(c) are satisfied. Without the 

requirement to establish limits pursuant to §__.4(a)(iii)(B), such a requirement for written 

authorization procedures would be unnecessary. Further, because §__.4(c)(3)(ii)(2) contains 

written authorization procedures, also requiring written authorization procedures in 

§__.4(a)(2)(iii)(C) would be duplicative. 

These revisions clarify that banking entities with significant trading assets and liabilities

that establish limits and written authorization procedures pursuant to the rebuttable presumption 

of compliance do not have to establish a second set of limits and written authorization 

procedures pursuant to the compliance program requirements of the underwriting or market 

making exemptions. Regardless of whether a banking entity with significant trading assets and 

liabilities relies on the presumption of compliance in §__.4(c), every banking entity with 

significant trading assets and liabilities is required to maintain limits and written authorization 

procedures for purposes of complying with the exemption for permitted underwriting or market 

making-related activities under § ___.4.

The agencies are removing the proposed rule’s requirement for a banking entity with 

significant trading assets and liabilities that, to the extent that any limit identified pursuant to 

§__.4(b)(2)(iii)(C) of the proposed rule 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. 

Instead, this requirement is being moved to §__.4(c), the rebuttable presumption of compliance 
134

for banking entities that establish internal limits pursuant to §__.4(c)(1). Such requirements 

would be redundant for a banking entity with significant trading assets and liabilities that is 

required, on an ongoing basis, to ensure that its trading desk’s market making activities are 

designed not to exceed RENTD while also establishing limits designed not to exceed RENTD.

475 

In addition, the written authorization procedures476 require internal compliance processes to 

handle such limit breaches.

g. Other comments

Finally, some commenters recommended changes to certain aspects of the existing 

exemptions for underwriting and market making-related activities in the 2013 rule that were not 

specifically proposed. For example, one commenter suggested that the agencies eliminate the 

limitations on treating banking entities with greater than $50 billion in trading assets and 

liabilities as clients, customers, or counterparties.477 As stated in the 2013 rule, the agencies 

believe that removing this limitation could make it difficult to meaningfully distinguish between 

permitted market making-related activity and impermissible proprietary trading, and allow a 

trading desk to maintain an outsized inventory and to justify such inventory levels as being 

tangentially related to expected market-wide demand.

478 The agencies also believe that banking 

entities engaged in substantial trading activity do not typically act as customers to other market 

makers.479 As a result, the agencies have retained the 2013 rule’s definition of client, customer, 

or counterparty. Another commenter suggested broadening the scope of the exemption for 

 475 See final rule §__.4(b)(2)(iii)(C).

476 See final rule §__.4(b)(2)(iii)(D).

477 See CCMC. 

478 See 79 FR 5607.

479 See 79 FR 5606-5607.
135

underwriting activities to encompass any activity that assists persons or entities in accessing the 

capital markets or raising capital.480 The agencies believe the final rule’s changes provide 

additional clarity while maintaining consistency with statutory objectives. Accordingly, after 

consideration of these comments, the agencies have decided not to make any changes to the 

exemptions for underwriting or market making-related activities other than those discussed 

above.

h. Market making hedging 

As noted in the proposal, during implementation of the 2013 rule, the agencies received a 

number of inquiries regarding the circumstances under which banking entities could elect to 

comply with the market making risk management provisions permitted in § __.4(b) or 

alternatively the risk-mitigating hedging requirements under § __.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 exemption market making-related activities’ 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.481

Each trading desk engaging in a transaction with an affiliated trading desk that meets the 

definition of proprietary trading must rely on an exemption or exclusion in order for the 

transaction to be permissible. As noted in the proposal, 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 

 480 See ISDA.

481 83 FR at 33464.
136

not separately engage in market making-related activity. In the proposal, the agencies requested 

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 internal limits or RENTD levels under the exemption for market making-related 

activities.482

The agencies also requested 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 was 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 was intended to permit 

efficient internal risk management strategies within the limits established for each desk.483

The agencies also requested 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 § __.4(b) (market making desk) would be permitted to enter into a 

transaction with the market making desk in reliance on the market making desk’s risk 

management policies and procedures. 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 

 482 Id.

483 Id.
137

making desk’s behalf. If the affiliated unit did not independently satisfy the requirements of the 

exemption for market making-related activities with respect to the transaction, it would be 

permitted to rely on the exemption for market making-related activities 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; 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 risk-mitigating 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 § __.5 for such activity.484

The commenters were generally in favor of permitting affiliated trading desks to treat 

each other as a client, customer, or counterparty for the purposes of establishing risk limits or 

RENTD levels under the exemption for market making-related activities,485 particularly for 

banking entities that service customers in different jurisdictions. One commenter, however, did 

not support this approach, and expressed that it would be difficult to validate banking entities’ 

RENTD limits if affiliates could be considered as a client, customer, or counterparty.486

One commenter argued that affiliated trading desks with different mandates should be 

able to treat each other as a client, customer, or counterparty as long as each desk stays within its 

 484 Id.

485 See, e.g., HSBC; JBA; and IIB. 

486 See Data Boiler.
138

limits, because such an approach would allow banking entities to take an enterprise-wide view of 

risk management.487 

Two commenters explained that, to increase efficiencies, certain internationally active 

banking entities employ a “hub-and-spoke” model, where trading desks at local entities (spoke) 

enter into transactions with major affiliates (hub) that manage the risks of, and source trading 

positions for, the local entities.488 One of these commenters expressed that these trading desks 

have trouble demonstrating they are indeed market making desks without intra-entity and interaffiliate transactions being treated as transactions with a client, customer, or counterparty.489 

The other commenter expressed that, under the hub-and-spoke model, treating the “spoke” 

trading desk as a client, customer, or counterparty, would allow the hub desk to look through to 

the customer of the local entity since the hub is acting as the ultimate market maker.490 

After consideration of comments, the agencies continue to recognize that, under certain 

circumstances, a trading desk may undertake market making risk management activities for one 

or more affiliated trading desks491 and trading desks may rely on the exemption for market 

making-related activities for its transactions with affiliated trading desks. The agencies, 

however, are declining to permit banking entities to treat affiliated trading desks as “clients, 

customers, or counterparties”492 for the purposes of determining a trading desk’s RENTD 

pursuant to §__.4(b)(2)(ii) of the exemption for market making-related activities.

 487 See IIB.

488 See HSBC and JBA.

489 See JBA.

490 See HSBC.

491 See 79 FR at 5594.

492 §__.4(b)(3).
139

The agencies believe that, under the exemption for market making-related activities, each 

trading desk must be able to independently tie its activities to the RENTD of external customers 

that the trading desk services. Allowing a desk to treat affiliated trading desks as customers for 

purposes of RENTD would allow the desk to accumulate financial instruments if it has a reason 

to believe that other internal desks will be interested in acquiring the positions in the near term. 

Those other desks could then acquire the positions from the first desk at a later time when they 

have a reasonable expectation of near term demand from external customers. The agencies also 

believe that generally allowing a desk to treat other internal desks as customers for purposes of 

RENTD could impede monitoring of market making-related activity and detection of 

impermissible proprietary trading since a banking entity could aggregate in a single trading desk 

the RENTD of trading desks that engage in multiple different trading strategies and aggregate a 

larger volume of trading activities.493 

With respect to the arguments raised by these commenters that permitting this treatment 

would facilitate efficient risk management,494 the agencies believe that the amendments to the 

risk-mitigating hedging exemption in the final rule495 and the amendments to the liquidity 

management exemption in the final rule496 will provide banking entities with additional 

flexibility to manage risks more efficiently than the 2013 rule.

 493 See 79 FR at 5590.

494 See HSBC; JBA; and IIB.

495 The agencies are streamlining several aspects of the risk-mitigating hedging exemption for 

banking entities with and without significant trading assets and liabilities. See final rule §__.5;

See also section IV.B.3, infra.

496 The agencies have expanded the types of financial instruments eligible for the exclusion to 

include for exchange forwards and foreign exchange swaps. See final rule §__.3(e); See also 

section IV.B.1.b.i, supra.
140

Further, the agencies note that while affiliated trading desks may not consider each other 

clients, customers, or counterparties, transactions between affiliated trading desks may be 

permitted under the exemption for market making-related activities in certain circumstances that 

do not require the expansion of a trading desk’s market making limits based on internal 

transactions. Returning to the example from the proposal and described above497 concerning an 

interest rate swaps desk transferring some of the risk of a financial instrument to an affiliated FX 

swaps desk, if the FX swaps desk acts as a market maker in FX swaps, the FX swaps desk may 

be able to rely on the exemption for market making-related activities for its transactions with the 

interest rate swaps desk if those transactions are consistent with the requirements of the 

exemption for market making-related activities, including the FX swaps desk’s RENTD.498 

Further, if the FX swaps desk does not independently satisfy the requirements of the exemption 

for market making-related activities with respect to the transaction, it would be permitted to rely 

on the exemption for market making-related activities available to the market making desk for 

the transaction under certain conditions. If the banking entity has significant trading assets and 

liabilities, the FX swaps desk would be permitted to rely on the exemption for market makingrelated activities if: (i) the FX swaps desk acts in accordance with the interest rate swaps desk’s 

risk management policies and procedures established in accordance with § __.4(b)(2)(iii) and 

(ii) the resulting risk-mitigating position is attributed to the interest rate swaps desk’s financial 

exposure (and not the FX swaps desk’s financial exposure) and is included in the interest rate 

swaps desk’s daily profit and loss calculation. If the banking entity does not have significant 

 497 See Part IV.B.2.h, supra; see also 83 FR 33463.

498 The interest rate market making desk can rely on the exemption for market making-related 

activities for the FX swap it enters into with the FX swaps desk provided the interest rate market 

making desk enters into the FX swap to hedge its market making-related position and otherwise 

complies with the requirements of the exemption for market making-related activities. 
141

trading assets and liabilities, the FX swaps desk would be permitted to rely on the exemption for 

market making-related activities if the resulting risk-mitigating position is attributed to the 

interest rate swaps desk’s financial exposure (and not the FX swaps desk’s financial exposure) 

and is included in the interest rate swaps desk’s daily profit and loss calculation. If the FX swaps 

desk cannot independently satisfy the requirements of the exemption for market making-related

activities with respect to its transactions with the interest rate swaps desk, the risk-mitigating 

hedging exemption would be available, provided the conditions of that exemption are met.

3. Section __.5: Permitted Risk-Mitigating Hedging Activities

a. Section __.5 of the 2013 Rule

Section 13(d)(1)(C) of the BHC Act provides an exemption from the prohibition on 

proprietary trading 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 __.5 of the 2013 rule implements section 13(d)(1)(C).

Section __.5 of the 2013 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. Under the 2013 rule, risk-mitigating 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 

compliance program that meets specific requirements, including the requirement to conduct 

certain correlation analysis, to support its compliance with the terms of the exemption, and the 

compensation arrangements of persons performing risk-mitigating hedging activities must be 
142

designed not to reward or incentivize prohibited proprietary trading.499 In addition, the hedging 

activity itself must meet specified conditions. For example, at inception, the hedge 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.500 Finally, § __.5 establishes certain documentation requirements 

with respect to the purchase or sale of financial instruments made in reliance of the riskmitigating exemption under certain circumstances.501

b. Proposed Amendments to Section __.5

i. Correlation Analysis for Section __.5(b)(1)(iii)

The agencies proposed to remove the specific requirement to conduct a correlation 

analysis for risk-mitigating hedging activities.502 In particular, the agencies proposed to remove 

the words “including correlation analysis” from the requirement that the banking entity seeking 

to engage in risk-mitigating hedging activities conduct “analysis, including correlation analysis, 

and independent testing” designed to ensure that hedging activities may reasonably be expected 

to reduce or mitigate the risks being hedged. Thus, the requirement to conduct an analysis would 

have remained, but the banking entity would have had flexibility to apply a type of analysis that 

was appropriate to the facts and circumstances of the hedge and the underlying risks targeted.503 

 499 See 2013 rule § __.5(b)(1) and (3).

500 See 2013 rule § __.5(b)(2).

501 See 2013 rule § __.5(c).

502 See 83 FR at 33465.

503 See 83 FR at 33465.
143

The agencies noted that they have become aware of practical difficulties with the 

correlation analysis requirement, which according to banking entities can add delays, costs, and 

uncertainty to permitted risk-mitigating hedging.504 The agencies anticipated that removing the

correlation analysis requirement would reduce uncertainties in meeting the analysis requirement 

without significantly impacting the conditions that risk-mitigating hedging activities must meet 

in order to qualify for the exemption.505

The agencies also noted that section 13 of the BHC Act does not specifically require this 

correlation analysis.506 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 . . . .”507 The 2013 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 Sections __.5(b)(1)(iii), 

__.5(b)(2)(ii), and __.5(b)(2)(iv)(B)

The agencies stated in the proposal that the requirements in § __.5(b)(1)(iii), § 

__.5(b)(2)(ii), and § __.5(b)(2)(iv)(B), that a risk-mitigating hedging activity demonstrably 

reduces or otherwise significantly mitigates specific risks, is not directly required by section 

13(d)(1)(C) of the BHC Act.508 The statute instead requires that the hedge be designed to reduce 

 504 See id.

505 See id.

506 See 83 FR at 33465.

507 12 U.S.C. 1851(d)(1)(C).

508 See 83 FR at 33465.
144

or otherwise significantly mitigate specific risks.509 Thus, the agencies proposed to remove the 

“demonstrably reduces or otherwise significantly mitigates” specific risk requirement from § 

__.5(b)(2)(ii) and § __.5(b)(2)(iv)(B). This change would retain the requirement that the hedging 

activity be designed to reduce or otherwise significantly mitigate one or more specific, 

identifiable risks, while providing banking entities with the flexibility to apply a type of analysis 

that was appropriate to the facts and circumstances of the hedge and the underlying risks 

targeted. 

The agencies also proposed to remove parallel provisions in § __.5(b)(1)(iii). In 

particular, the agencies proposed to delete the word “demonstrably” from the requirement that 

“the positions, techniques and strategies that may be used for hedging may reasonably be 

expected to demonstrably reduce or otherwise significantly mitigate the specific, identifiable 

risk(s) being hedged” in § __.5(b)(1)(iii). This change would have meant that the banking 

entity’s analysis and testing would have had to show that the hedging may be expected to reduce 

or mitigate the risks being hedged, but without the specific requirement that such reduction or 

mitigation be demonstrable. The agencies also proposed to delete the requirement in § 

__.5(b)(1)(iii) that “such correlation analysis demonstrates that the hedging activity 

demonstrably reduces or otherwise significantly mitigates the specific, identifiable risk(s) being 

hedged” because this requirement was not necessary if the “correlation analysis” and 

“demonstrable” requirements were deleted.

The agencies noted that, 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 risk-mitigating

 509 See id.
145

hedging activity. For example, in some circumstances 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, and therefore the firm would not enter into 

what would otherwise be effective hedges of foreseeable risks.510

iii. Reduced Compliance Requirements for Banking Entities that 

do not have Significant Trading Assets and Liabilities for 

Section __.5(b) and (c)

For banking entities that do not have significant trading assets and liabilities, the agencies 

proposed to eliminate the requirements for a separate internal compliance program for riskmitigating hedging under § __.5(b)(1); certain of the specific requirements of § __.5(b)(2); the 

limits on compensation arrangements for persons performing risk-mitigating activities in 

§ __.5(b)(3); and the documentation requirements for certain hedging activities in § __.5(c).511 

In place of those requirements, the agencies proposed a new § __.5(b)(2) that would require that 

the risk-mitigating hedging activities 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.512 The proposal also 

included conforming changes to § __.5(b)(1) and § __.5(c) of the 2013 rule to make the 

 510 See id.

511 See 83 FR at 33466.

512 Id.
146

requirements of those sections applicable only to banking entities that have significant trading 

assets and liabilities.513

The agencies explained that these requirements are overly burdensome and complex for

banking entities that do not have significant trading assets and liabilities, which are generally less 

likely to engage in the types of trading activities and hedging strategies that would necessitate 

these additional compliance requirements. Given these considerations, the agencies believed that 

removing the requirements for banking entities that do not have significant trading assets and 

liabilities would be unlikely to materially increase risks to the safety and soundness of the 

banking entity or U.S. financial stability. The agencies also believed that the proposed 

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.514

iv. Reduced Documentation Requirements for Banking Entities 

that have Significant Trading Assets and Liabilities for Section 

__.5(c)

For banking entities that have significant trading assets and liabilities, the agencies 

proposed to retain the enhanced documentation requirements for the hedging transactions 

identified in § __.5(c)(1) to permit evaluation of the activity.515 However, the agencies proposed 

a new paragraph (c)(4) in § __.5 that would eliminate the enhanced documentation requirement 

 513 Id.

514 Id.

515 Id.
147

for hedging activities that meets certain conditions.516 Under new paragraph (c)(4) in §__.5, 

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 pre-approved 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.517 In addition, 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.518

The agencies explained that certain of the regulatory purposes of these documentation 

requirements, such as facilitating subsequent evaluation of the hedging activity and prevention of 

evasion, are less relevant in circumstances where common hedging strategies are used 

repetitively. Therefore the agencies believed that the enhanced documentation requirements 

were not necessary in such instances and that reducing them would make beneficial riskmitigating activity more efficient and effective. The agencies intended that the conditions on the 

pre-approved limits would provide clarity regarding the limits needed to comply with 

requirements.519

c. Commenters’ Views 

 516 Id.

517 Id.

518 Id.

519 See 83 FR at 33466-67.
148

One commenter argued that the requirements associated with the 2013 rule’s riskmitigating hedging exemption have been overly prescriptive, cumbersome, and unnecessary for 

sound and efficient risk management.520 Many commenters supported the agencies’ efforts to 

reduce costs and uncertainty and improve the utility of the risk-mitigating hedging exemption.521

More specifically, commenters agreed with the recommendations to remove the correlation 

analysis requirement, remove the requirement that a hedge demonstrably reduce or otherwise 

significantly mitigate one or more specific risks, and reduce the enhanced documentation 

requirements.522

Although some commenters supported the agencies’ effort to reduce the compliance 

burden in the risk-mitigating hedging exemption, others argued that the agencies did not go far 

enough. Several commenters argued that the agencies should reduce the enhanced 

documentation requirements and go further to remove these requirements for all banking 

entities.523 Another commenter urged the agencies to eliminate the enhanced documentation 

requirements altogether in light of the proposed rule’s robust compliance framework.524 In 

addition, a commenter suggested targeted modifications to the provision, including permitting 

certain types of hedging in line with internal risk limits, allowing aggregate assessment of 

hedging, and clarifying how firms can comply with the provision.525

 520 See SIFMA.

521 See, e.g., State Street; FSF; ABA; BPI; and SIFMA.

522 See, e.g., State Street; FSF; ABA; BPI; and SIFMA.

523 See, e.g., SIFMA; JBA; ABA; BPI; FSF; and CREFC.

524 See BPI.

525 See Credit Suisse.
149

In contrast, other commenters did not support the agencies’ proposed changes to the 

compliance obligations associated with the risk-mitigating hedging exemption.

526 One 

commenter argued that eliminating the correlation analysis requirement would eliminate the 

primary means used by most banks today to ensure a hedging activity is, in fact, offsetting 

risk.527 Moreover, the same commenter argued that eliminating the existing regulatory 

requirement that banks show a hedge “demonstrably reduces” or “significantly mitigates” the 

risks targeted by the hedge would be a direct repudiation of the statute, because that type of 

demonstration is required by the statute.528 Another commenter argued that the various changes 

proposed by the agencies would lead to uncontrollable speculations.529

d. Final Rule

i. Correlation Analysis for Section __.5(b)(1)(i)(C)

The agencies are adopting §__.5(b)(1)(iii) as proposed, but renumbered as 

§__.5(b)(1)(i)(C). Based on the agencies’ implementation experience of the 2013 rule and 

commenters’ feedback on the proposed changes, the agencies are removing the requirement that 

a correlation analysis be the type of analysis used to assess risk-mitigating hedging activities. 

The agencies continue to believe, as stated in the proposal, that allowing banking entities to use 

the type of analysis that is appropriate to the hedging activities in question will avoid the 

 526 See, e.g., Volcker Alliance; Bean; Data Boiler; CFA; AFR; NAFCU; Merkley; Better 

Markets; CAP; Systemic Risk Council; and Public Citizen.

527 See Bean.

528 See Bean.

529 See Data Boiler.
150

uncertainties discussed in the proposal without substantially impacting the conditions that riskmitigating hedging activities must meet in order to qualify for the exemption.530 

Furthermore, section 13 of the BHC Act does not require that the analysis used by the 

banking entity be a 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 . . . .”531 The agencies believe the continuing requirement that the 

banking entity conduct “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” will effectively 

implement the statute.

The agencies anticipate that the banking entity’s flexibility to apply the type of analysis 

that is appropriate to assess the particular hedging activity at issue will facilitate the appropriate 

use of risk-mitigating hedging under the exemption. Regarding the comment asserting that 

correlation analysis is the primary means used by banking entities to test whether a hedging 

activity is offsetting risk, the agencies note that if this is the case it would be reasonable to expect 

that the banking entity would use correlation analysis to satisfy the regulatory requirements with 

respect to that hedging activity. However, if another type of analysis is more appropriate, the 

banking entity would have the flexibility to use that form of analysis instead.

ii. Hedge Demonstrably Reduces or Otherwise Significantly 

Mitigates Specific Risks for Sections __.5(b)(1)(i)(C), 

__.5(b)(1)(ii)(B) and __.5(b)(1)(ii)(D)(2)

 530 See 83 FR at 33465.

531 12 U.S.C. 1851(d)(1)(C).
151

The agencies are adopting § __.5(b)(1)(iii), § __.5(b)(2)(ii), and §__.5(b)(2)(iv)(B) as 

proposed, but renumbered as §__.5(b)(1)(i)(C), §__.5(b)(1)(ii)(B) and §__.5(b)(1)(ii)(D)(2). As 

stated in the proposal, the requirement that the reduction or mitigation of specific risks resulting 

from a risk-mitigating hedging activity be demonstrable is not directly required by section 

13(d)(1)(C) of the BHC Act.532 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 risk-mitigating 

hedging activity. The agencies continue to believe that in some circumstances, it may be 

difficult for banking entities to know with sufficient certainty that a potential hedging activity 

that a banking entity seeks to commence will continuously demonstrably reduce or significantly 

mitigate an identifiable risk after it is implemented, even if the banking entity is able to enter into 

a hedge reasonably designed to reduce or significantly mitigate such a risk. As stated in the 

proposal, unforeseeable changes in market conditions, event risk, sovereign risk, and other 

factors that cannot be known with certainty in advance of undertaking a hedging transaction

could reduce or eliminate the otherwise intended hedging benefits.533 In these events, the 

requirement that a hedge “demonstrably reduce” or “significantly mitigate” the identifiable risks

could create uncertainty with respect to the hedge’s continued eligibility for the exemption. In 

such cases, a banking entity may determine not to enter into what would otherwise be a 

reasonably designed hedge of foreseeable risks out of concern that the banking entity may not be 

able to effectively comply with the requirement that such a hedge demonstrably reduces such 

risks due to the possibility of unforeseen risks occur. Therefore, the final rule removes the 

 532 See 83 FR at 33465.

533 See id.
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“demonstrably reduces or otherwise significantly mitigates” specific risk requirement from 

§__.5(b)(1)(i)(C), §__.5(b)(1)(ii)(B) and §__.5(b)(1)(ii)(D)(2).

The agencies do not agree with a commenter’s assertion that the requirement that banking 

entities show that a hedge “demonstrably” reduces or significantly mitigates the risks is a core 

requirement under section 13 of the BHC Act. Instead, the statute expressly permits hedging 

activities that are “designed to reduce the specific risks of the banking entity.”534 The final rule 

maintains the requirement that hedging activity undertaken pursuant to §__.5 be designed to 

reduce or otherwise mitigate specific, identifiable risks. Hedging activity must also be subject to 

ongoing recalibration by the banking entity to ensure that the hedging activity satisfies the 

requirement that the activity is designed to reduce or otherwise significantly mitigate one or 

more specific, identifiable risks even after changes in market conditions or other factors. In light 

of these requirements, the agencies do not find it necessary to require that the hedge 

“demonstrably reduce” risk to the banking entity on an ongoing basis. 

iii. Reduced Compliance Requirements for Banking Entities that 

do not have Significant Trading Assets and Liabilities for 

Section __.5(b)(2) and Section __.5(c)

The agencies are adopting §§ __.5(b)(2) and __.5(c) as proposed. Consistent with the 

changes in the final rule relating to the scope of the requirements for banking entities that do not 

have significant trading assets and liabilities, the agencies are also revising the requirements in 

§§ __.5(b)(2) and __.5(c) for banking entities that do not have significant trading assets and 

liabilities. For these firms, the agencies are eliminating the requirements for a separate internal 

compliance program for risk-mitigating hedging under § __.5(b)(1); certain of the specific 

 534 12 U.S.C. 1851(d)(1)(C). 
153

requirements of § __.5(b)(2); the limits on compensation arrangements for persons performing 

risk-mitigating activities in § __.5(b)(1)(iii); and the documentation requirements for those 

activities in § __.5(c). Based on comments received, the agencies have determined that these 

requirements are overly burdensome and complex for banking entities with moderate trading 

assets and liabilities, in light of the reduced scale of their trading and hedging activities. 

In place of those requirements, new § __.5(b)(2) requires that risk-mitigating 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 continue 

to believe that these tailored requirements for banking entities without significant trading assets 

and liabilities effectively implement the statutory requirement that the hedging transactions be 

designed to reduce specific risks the banking entity incurs. The agencies believe that the 

remaining requirements for a firm with moderate trading assets and liabilities would be effective 

in ensuring such banking entities engage only in permissible risk-mitigating hedging activities. 

The agencies also note that reducing these compliance requirements for banking entities that do 

not have significant trading assets and liabilities is unlikely to materially increase risks to the 

safety and soundness of the banking entity or U.S. financial stability. Therefore, the agencies are 

eliminating and modifying these requirements for banking entities that do not have significant 

trading assets and liabilities. In connection with these changes, the final rule also includes 

conforming changes to §§ __.5(b)(1) and __.5(c) of the 2013 rule to make the requirements of 
154

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 

__.5(c)

The agencies are adopting § __.5(c) as proposed. The final rule retains the enhanced 

documentation requirements for banking entities that have significant trading assets and 

liabilities for hedging transactions identified in § __.5(c)(1) to permit evaluation of the activity. 

Although this documentation requirement results in more extensive compliance efforts, the 

agencies continue to believe it serves an important role to prevent evasion of the requirements of 

section 13 of the BHC Act and the final rule.

The hedging transactions identified in § __.5(c)(1) include hedging activity that is not 

established by the specific trading desk that creates or is responsible for the underlying positions, 

contracts, or other holdings the risks of which the hedging activity is designed to reduce; is 

effected through a financial instrument, exposure, 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 such trading desk may use for hedging; or established to hedge 

aggregated positions across two or more trading desks. The agencies believe that hedging 

transactions established at a different trading desk, or which are not identified in the relevant 

policies, may present or reflect heightened potential for prohibited proprietary trading. In other 

words, the further removed hedging activities are from the specific positions, contracts, or other 

holdings the banking entity intends to hedge, the greater the danger that such activity is not 

limited to hedging specific risks of individual or aggregated positions, contracts, or other
155

holdings of the banking entity. For this reason, the agencies do not agree with commenters who 

argued that the enhanced documentation requirements should be removed for all banking 

entities.

However, based on the agencies’ experience during the first several years of 

implementation of the 2013 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 regularly and that 

do not raise the concerns of those trades prohibited by the rule. In those instances, the 

documentation requirements of § __.5(c) of the 2013 rule are less necessary for purposes of

evaluating the hedging activity and preventing evasion. In weighing the significantly reduced 

regulatory and supervisory utility of additional documentation of common hedging trades against 

the complexity of complying with the enhanced documentation requirements, the agencies have 

determined 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 riskmitigating activity more efficient and potentially improve the timeliness of important riskmitigating hedging activity, the effectiveness of which can be time sensitive.

Therefore, § __.5(c)(4) of the final rule eliminates the enhanced documentation 

requirement for hedging activities that meet certain conditions. In excluding a trading desk’s 

common hedging instruments from the enhanced documentation requirements in § __.5(c), the 

final rule seeks to distinguish between those financial instruments that are commonly used for a 

trading desk’s ordinary hedging activities and those that are not. The final rule requires the 

banking entity to have in place appropriate limits so that less common or more unusual levels of 

hedging activity would still be subject to the enhanced documentation requirements. The final 
156

rule provides that the enhanced documentation requirement does not apply to purchases and sales 

of financial instruments for hedging activities that are identified on a written list of financial 

instruments pre-approved 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, 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. These hedging limits must 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 final rule. The 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 considered comments that suggested additional targeted modifications to 

the risk-mitigating hedging requirements, but believe that the suggested modifications would add 

additional complexity and administrative burden without significantly changing the efficiency 

and effectiveness of the final rule. Additionally, the agencies believe that because the final rule 

maintains significant requirements for hedging activities to qualify for the exemption, it should 

not lead to uncontrollable speculation, as one commenter warned.

4. Section __.6(e): Permitted Trading Activities of a Foreign Banking Entity 
157

Section 13(d)(1)(H) of the BHC Act535 permits certain foreign banking entities to engage 

in proprietary trading that occurs solely outside of the United States (the foreign trading 

exemption);

536 however, the statute does not define when a foreign banking entity’s trading 

occurs “solely outside of the United States.” The 2013 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 §__.4(c) of the BHC Act,537 the 2013 rule provides that the foreign trading exemption is 

available only if:

538 

(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. 

 535 Section 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).

536 This section’s discussion of the concept of “solely outside of the United States” is provided 

solely for purposes of the rule’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.

537 12 U.S.C. 1843(c)(9), (13). See 2013 rule § __.6(e)(1)(i) and (ii).

538 See 2013 rule § __.6(e).
158

(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. 

(iii) The purchase or sale, including any transaction arising from risk-mitigating 

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 (the financing 

prong). 

(v) The purchase or sale is not conducted with or through any U.S. entity,539 except if 

the purchase or sale is conducted: 

(A) 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 counterparty prong);540

 539 “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 rule 

§ __.6(e)(4).

540 A foreign banking entity wishing to engage in trading activities with a U.S. entity’s foreign 

affiliate generally must rely on the counterparty prong.
159

(B) with an unaffiliated market intermediary acting as principal, provided the 

transaction is promptly cleared and settled through a clearing agency or 

derivatives clearing organization acting as a central counterparty; or 

(C) through an unaffiliated market intermediary, provided the transaction is 

conducted anonymously (i.e., each party to the transaction is unaware of the 

identity of the other party(ies)) 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 rule, foreign banking entities have asserted that certain of 

these criteria limit their ability to make use of the statutory exemption for trading activity that 

occurs outside of the United States, which has adversely impacted their foreign trading 

operations. Additionally, many foreign banking entities have suggested that the full set of 

eligibility criteria to rely on the exemption for foreign trading activity are unnecessary to 

accomplish the policy objectives of section 13 of the BHC Act. This information has raised 

concerns that the current requirements for the exemption may be overly restrictive and not 

effective in permitting foreign banks to engage in foreign trading activities consistent with the 

policy objective of the statute. 

The proposal would have modified the requirements for the foreign trading exemption so 

that it would be more usable by foreign banking entities. Specifically, the proposal would have 

retained the first three requirements of the 2013 rule, with a modification to the first requirement, 

and would have removed the last two requirements of § __.6(e)(3). As a result, § __.6(e)(3), as 

modified by the proposal, would have required that for a foreign banking entity to be eligible for 

this exemption:
160

(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 risk-mitigating 

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 have maintained 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 

have retained the 2013 rule’s requirement that the purchase or sale, including any transaction 

arising from a related risk-mitigating hedging transaction, may not be accounted for as principal 

by the U.S. operations of the foreign banking entity. However, the proposal would have replaced 

the first 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 are not 

located in the United States. 
161

Under the proposed approach, the requirements for the foreign trading exemption focused 

on whether the banking entity that engages in or that decides to engage in the purchase or sale as 

principal (including any relevant personnel) is located in the United States. The proposed 

modifications recognized that some limited involvement by U.S. personnel (e.g., arranging or 

negotiating) would be consistent with 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 of the BHC 

Act and the implementing regulations. 

The proposal also would have eliminated the financing prong and the counterparty prong. 

Under the proposal, these changes would have focused the key requirements of the foreign 

trading exemption on the principal actions and risk of the transaction. In addition, the proposal 

would have removed the financing prong to address concerns that the fungibility of financing has 

made this requirement in certain circumstances difficult to apply in practice to determine 

whether a particular financing is tied to a 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 have amended the 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 were designed to 
162

require that the principal risks of the transaction occur and remain solely outside of the United 

States.

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 proposed 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. These changes were intended 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. 

The proposal would have removed the counterparty prong and focused 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 in the United States was intended to align with the 

statute’s definition of “proprietary trading” as “engaging as principal for the trading account of 

the banking entity.”541 The proposal would have scaled back those requirements that were not 

critical for this determination and thus would not be needed in the final rule. Therefore, the 

 541 See 12 U.S.C. 1851(h)(4) (emphasis added).
163

proposal would have removed the requirements of § __.6(e)(3) since they are less directly 

relevant to these considerations. 

Consistent with the 2013 rule, the exemption under the proposal would not have 

exempted 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, for example, 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 § __.6(e) of 

the 2013 rule, so long as the U.S. banking entity complies with the requirements of § __.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 rule, would not have imposed 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 obligation would 

have been 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 

potentially could have given 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-related activities exemption or other exemptions under the 

rule. This competitive disparity in turn could create a significant potential for regulatory 

arbitrage. In this respect, the agencies sought to mitigate this concern through other changes in 

the proposal; for example, U.S. banking entities would have continued to be able to engage in all 
164

of the activities permitted under the 2013 rule and the proposal, including the simplified and 

streamlined requirements for market making and risk-mitigating hedging and other types of 

trading activities. 

In general, commenters supported the proposed changes.542 However, a number of 

commenters requested further modifications to the foreign trading exemption. For example, 

some commenters requested that the agencies clarify the definition of “relevant personnel” to 

mean employees that conduct risk management, and not the traders or others associated with 

executing the transaction.543 One commenter requested clarification that the proposed changes 

not constrain foreign banking entities from delegating investment authority to non-affiliated U.S. 

investment advisers.544 Another commenter supported eliminating the conduct restriction.545 

One commenter proposed several additional modifications, including further simplifying the 

exemption to only focus on where the transaction is booked, clarifying certain terms (e.g., subservicing, dark pools, engaging in), and including inter-affiliate or intra-bank transactions in the 

exemption.546 This commenter also requested that the agencies include execution as one of the 

examples of limited involvement.

547

A few commenters opposed the proposed changes to eliminate the financing and 

counterparty requirements.548 These commenters argued that the proposed changes might 

 542 See, e.g., ISDA; IIB; ABA; New England Council; BVI; HSBC; EBF; Credit Suisse; JBA 

FSF; and EFAMA.

543 See, e.g., HSBC and JBA.

544 See EFAMA.

545 See HSBC.

546 See JBA.

547 See JBA.

548 See, e.g., Bean; Data Boiler; and Better Markets.
165

provide foreign entities with a competitive advantage over domestic entities.549 One commenter 

asserted that the proposed changes would increase uncertainty and could increase the exposure of 

U.S. institutions to foreign proprietary trading losses.550 This commenter also argued that the 

agencies did not provide factual data to support the change and that the proposal was contrary to 

law.551 

After consideration of these comments, the agencies are adopting the changes to the 

foreign trading exemption as proposed. The proposal’s modifications in general sought 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 believe that this approach 

appropriately balances one of the key objectives of section 13 of the BHC Act by limiting the 

risks that proprietary trading poses to the U.S. financial system, while also modifying the 

application of section 13 as it applies to foreign banking entities, as required by section 

13(d)(1)(H). 

As noted in the preamble to the proposal, the statute contains an exemption that allows

foreign banking entities to engage in trading activity that is, only for purposes of the prohibitions 

of the statute, 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 

 549 See, e.g., Better Markets and FSF.

550 See Bean.

551 See Bean.
166

the perceived risks of those activities to U.S. banking entities and the U.S. financial system. The 

modified foreign trading exemption excludes from the statutory prohibitions transactions 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. The 

agencies also are confirming that the foreign trading exemption does not preclude a foreign 

banking entity from engaging a non-affiliated U.S. investment adviser as long as the actions and 

decisions of the banking entity as principal occur outside of the United States. By continuing to 

limit the risks of foreign banking entities’ proprietary trading activities to the U.S. financial 

system, the agencies believe that the rule continues to protect and promote the safety and 

soundness of banking entities and the financial stability of the United States, while also allowing 

U.S. markets to continue to operate efficiently in conjunction with foreign markets. 

C. Subpart C—Covered Fund Activities and Investments

1. Overview of Agencies’ Approach to the Covered Fund Provisions

The proposal included several proposed revisions to subpart C (the covered fund 

provisions). The proposal also sought comments on other aspects of the covered fund provisions 

beyond those changes for which specific rule text was proposed. As described further below, the 

agencies have determined to adopt, as proposed, the changes to subpart C for which specific rule 

text was proposed. The agencies continue to consider other aspects of the covered fund 

provisions on which the agencies sought comment in the proposal and intend to issue a separate 

proposed rulemaking that specifically addresses those areas.

The proposal sought comment on the 2013 rule’s general approach to defining the term 

“covered fund,” as well as the existing exclusions from the covered fund definition and potential 

new exclusions from this definition. The agencies received numerous comments on these 
167

aspects of the covered fund provisions. Some commenters encouraged the agencies to make 

significant revisions to these provisions, such as narrowing the covered fund “base definition”552

or providing additional exclusions from this definition.553 Other commenters argued that the 

agencies should not narrow the covered fund definition or should retain the definition in section 

13 of the BHC Act.554 Some commenters raised concerns about the agencies’ ability to finalize 

changes to the covered fund provisions for which the proposal did not provide specific rule

text.555 In light of the number and complexity of issues under consideration, the agencies intend 

to address these and other comments received on the covered fund provisions in a subsequent 

proposed rulemaking. 

In this final rule, the agencies are adopting only those changes to the covered fund 

provisions for which specific rule text was proposed.

556 Those changes are being adopted as 

final without change from the proposal for the reasons described below. While the agencies are 

not including any other changes to subpart C in this final rule, this approach does not reflect any 

final determination with respect to the comments received on other aspects of the covered fund 

provisions. The agencies continue to consider comments received and intend to address 

additional aspects of the covered funds provisions in the future covered funds proposal.

2. Section __.11: Permitted Organizing and Offering, Underwriting, and 

Market Making with Respect to a Covered Fund

 552 See, e.g., ABA; AIC; Center for American Entrepreneurship; Goldman Sachs; and JBA.

553 See, e.g., Capital One et al.; Credit Suisse; and SIFMA.

554 See, e.g., AFR and Occupy the SEC.

555 See, e.g., AFR; Bean; and Volcker Alliance.

556 In addition, consistent with changes described in Part IV.B.1.b.i of this Supplementary 

Information, the final rule removes references to “guidance” from subpart C.
168

Section 13(d)(1)(B) of the BHC Act permits a banking entity to purchase and sell 

securities and other instruments described in section 13(h)(4) of the BHC Act in connection with 

the banking entity’s underwriting or market making-related activities.557 The 2013 rule provides 

that the prohibition against acquiring or retaining an ownership interest in or sponsoring a 

covered fund does not apply to a banking entity’s underwriting or market making-related 

activities involving a covered fund as long as: 

• The banking entity conducts the activities in accordance with the requirements of the 

underwriting exemption in §__.4(a) of the 2013 rule or market making exemption in § 

__.4(b) of the 2013 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)558 and capital deduction requirement;

559 and

• The banking entity includes any ownership interest 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 (i) acts as a sponsor, investment adviser or commodity trading 

adviser 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 § __.11(a) of the 2013 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) 

 557 12 U.S.C. 1851(d)(1)(B).

558 2013 rule § __.12(a)(2)(iii). 

559 2013 rule § __.12(d). 
169

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 § __.11(b) of the 2013 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.560

The proposal would have removed the requirement that the banking entity include for 

purposes of the aggregate fund limit and capital deduction the value of any ownership interests 

of a third-party covered fund (i.e., covered funds that the banking entity does not advise or 

organize and offer pursuant to § __.11 of the final rule) acquired or retained in accordance with 

the underwriting or market-making exemptions in § __.4. Under the proposal, these limits, as 

well as the per-fund limit, would have applied only to a covered fund that the banking entity 

organizes or offers and in which the banking entity acquires or retains an ownership interest 

pursuant to § __.11(a) or (b) of the 2013 rule. The agencies proposed 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.

Several commenters supported eliminating these requirements for underwriting and 

market making in ownership interests in covered funds.561 Many of these commenters said this 

proposal would reduce the compliance burden for banking entities engaged in client-facing 

 560 See 2013 rule § __.11(c).

561 See, e.g., ABA; BPI; FSF; Goldman Sachs; IIB; ISDA; and SIFMA.
170

underwriting and market making activities and would facilitate these permitted activities.562 One 

of these commenters noted in particular the difficulties for banking entities to determine whether 

a third-party fund is a covered fund subject to the limits of the 2013 rule and to determine with 

certainty whether certain non-U.S. securities may be issued by covered funds.563 Some of these 

commenters argued that providing underwriting and market making in the interests in such funds 

increases liquidity and benefits the marketplace generally.564 One of these commenters also 

stated that this would facilitate capital-raising activities of covered funds and other issuers.565

Other commenters opposed this change because they believed that it would greatly expand 

banking entities’ ability to hold ownership interests in covered funds,566 and is contrary to 

section 13 of the BHC Act.567

Several commenters supported making additional revisions to § __.11 by eliminating the 

aggregate fund limit and capital deduction for other funds, such as affiliated funds or sponsored 

funds568 and advised funds.569 Certain of these commenters argued that underwriting and market 

making in interests in these covered funds would not expose banking entities to greater risk 

because ownership interests in such funds acquired in accordance with the risk-mitigating 

 562 See, e.g., BPI; FSF; ISDA; and SIFMA.

563 See SIFMA.

564 See ISDA.

565 See SIFMA.

566 See, e.g., AFR; Bean; and Volcker Alliance. 

567 See Bean. 

568 See ISDA.

569 See, e.g., BPI; ISDA; and SIFMA.
171

hedging, market-making or underwriting exemptions would nevertheless be subject to the 

restrictions contained in those exemptions.570

The agencies are eliminating the aggregate fund limit and the capital deduction 

requirement for the value of ownership interests in third-party covered funds acquired or retained 

in accordance with the underwriting or market-making exemption (i.e., covered funds that the 

banking entity does not advise or organize and offer pursuant to § __.11(a) or (b) of the final 

rule).571 The agencies believe this change will better align the compliance requirements for 

underwriting and market making involving covered funds with the risks those activities entail. In 

particular, the agencies understand that it has been difficult for banking entities to determine 

whether ownership interests in covered funds are being acquired or retained in the context of 

trading activities, especially for non-U.S. issuers. Banking entities have had to undertake an 

often time-consuming process to determine whether an issuer is a covered fund and the security 

issued is an ownership interest, all for the purpose of ensuring compliance with the aggregate 

fund limit and capital deduction requirement for the period of time that the banking entity holds 

the ownership interest as part of its otherwise permissible underwriting and market making 

 570 See, e.g., BPI and ISDA. 

571 As in the proposal, this requirement is also eliminated for underwriting and market-making 

activities involving funds with respect to which the banking entity 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. Such funds are not organized and offered 

pursuant to § __.11(a) or (b) of the final rule and thus treatment as a third-party fund is more 

appropriate for purposes of the underwriting and market-making exemption for covered funds. 

The agencies note, however, that other provisions of section 13 of the BHC Act, as well as other 

laws and regulations, limit banking entities’ ability to guarantee, assume, or otherwise insure the 

obligations or performance of covered funds. See 12 U.S.C. 1851(f); 12 U.S.C. 1851(d)(2); §§ 

__.14 and __.15 of the final rule. See also 12 CFR 7.1017 (limiting authority of national bank to 

act as a guarantor).
172

activities.572 These compliance challenges are heightened in the case of third-party funds. 

However, a banking entity can more readily determine whether a fund is a covered fund if the 

banking entity advises or organizes and offers the fund. Thus, the agencies are not eliminating 

the aggregate fund limit and capital deduction requirement for advised covered funds or covered 

funds that the banking entity organizes or offers. The agencies continue to consider whether the 

approach being adopted in the final rule may be extended to other issuers, such as funds advised 

by the banking entity, and intend to address and request additional comment on this issue in the 

future proposed rulemaking. 

The agencies disagree with the commenter who argued that eliminating the aggregate 

fund limit and capital deduction is contrary to section 13 of the BHC Act.573 An exemption from 

the prohibition on acquiring or retaining an ownership interest in a covered fund for underwriting 

and market making involving covered fund ownership interests is consistent with and supported 

by section 13 of the BHC Act.574 Section 13(d)(1)(B) provides a statutory exemption for 

underwriting and market making activities and, by its terms, applies to both prohibitions in 

section 13(a), whether on proprietary trading or covered fund activities. Section 13 does not 

require any per-fund or aggregate limits, or capital deduction, with respect to covered fund 

ownership interests acquired pursuant to the underwriting and market making exemption in 

 572 See SIFMA.

573 See Bean.

574 See 79 FR 5535, 5722. 
173

section 13(d)(1)(B), and eliminating these requirements with respect to third-party funds will 

improve the effectiveness of the statutory exemption for these activities.

575

The agencies also disagree with commenters who asserted that this change will greatly 

expand banking entities’ ability to hold ownership interests in covered funds.576 This exemption 

for underwriting and market making involving ownership interests in covered funds applies only 

to underwriting and market making activities conducted pursuant to the requirements in section 

13(d)(1)(B) of the BHC Act and § __.4 of the final rule. This exemption is intended to allow 

banking entities to engage in permissible underwriting and market making involving covered 

fund ownership interests to the same extent as other financial instruments. It is also intended to 

increase the effectiveness of the underwriting and market making exemptions in § __.4 by 

appropriately limiting the covered fund determinations a banking entity must make in the course 

of these permissible activities. For these reasons, and to limit the potential for evasion, the 

exemption for underwriting and market making involving ownership interests in covered funds 

continues to apply only to activities that satisfy the requirements of the underwriting or market 

making exemptions in § __.4.

One commenter argued that the aggregate fund limit should apply only at the global 

consolidated level for all firms.577 This commenter argued that measuring aggregate covered 

fund ownership at the parent-level is a better test of immateriality than measuring covered fund 

 575 The quantitative limits and capital deduction requirements in 12 U.S.C. 1851(d)(4)(B) are 

required to apply only in the case of seeding investments and other de minimis investments made 

pursuant to 12 U.S.C. 1851(d)(4)(B).

576 See, e.g., AFR; Bean; and Volcker Alliance.

577 See Credit Suisse.
174

investments at a lower level, such as at the level of an intermediate holding company.578 This 

commenter also said the agencies should expand the per-fund limit to allow bank-affiliated 

securitization investment managers to rely on applicable foreign risk retention regulations as a 

basis for exceeding the three percent per-fund limitation, provided that those foreign regulations

are generally comparable to U.S. requirements.579 Another commenter asserted that the 

preamble to the 2013 rule indicated that direct investments made alongside a covered fund 

should be aggregated for purposes of the per-fund limit in certain circumstances. 580 This 

commenter asked the agencies to clarify that the 2013 rule does not prohibit banking entities 

from making direct investments alongside covered funds, regardless of whether the fund is 

sponsored or the investments are coordinated, so long as such investments are otherwise 

authorized for such banking entities (e.g., under merchant banking authority). The agencies 

continue to consider these issues. As noted above, the agencies expect to address and request 

additional comments on these and other covered fund provisions in the future proposed 

rulemaking.

3. Section __.13: Other Permitted Covered Fund Activities 

a. Permitted Risk-Mitigating Hedging

Section 13(d)(1)(C) of the BHC Act provides an exemption for risk-mitigating hedging 

activities in connection with and related to individual or aggregated positions, contracts, or other 

holdings of a banking entity that are designed to reduce the specific risks to the banking entity in 

 578 Id.

579 Id. 

580 See Goldman Sachs. 
175

connection with and related to such positions, contracts, or other holdings.581 As described in the 

preamble to the proposal, the 2013 rule implemented this authority narrowly in the context of 

covered fund activities. Specifically, the 2013 rule permitted only limited risk-mitigating 

hedging activities involving ownership interests in covered funds for hedging employee 

compensation arrangements. 

Like the proposal, the final rule allows a banking entity to acquire or retain an ownership 

interest in a covered fund as a hedge 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. This provision is consistent with the agencies’ original 2011 proposal.582

The proposal also would have amended § __.13(a) to align with the proposed 

modifications to § __.5. In particular, the proposal would have required that a risk-mitigating 

hedging transaction pursuant to § __.13(a) be designed to reduce or otherwise significantly 

mitigate one or more specific, identifiable risks to the banking entity. It would have removed the 

requirement that the hedging transaction “demonstrably” reduces or otherwise significantly 

mitigates the relevant risks, consistent with the proposed modifications to § __.5.583

Several commenters supported permitting banking entities to acquire and retain 

ownership interests in covered funds as a hedge when acting as intermediary on behalf of a 

customer.584 Certain of these commenters argued that acquiring or retaining ownership interests 

in covered funds for this purpose (fund-linked products) is beneficial because it accommodates

 581 12 U.S.C. 1851(d)(1)(C).

582 See 83 FR at 33483-84.

583 See supra Part IV.B.3.b.ii.

584 See, e.g., ABA; BPI; FSF; Goldman Sachs; IIB; ISDA; SIFMA; and IIB. 
176

banking entities’ client facilitation and related risk management activities.585 Two commenters 

noted that restricting institutions’ ability to find the best hedge for a transaction may increase 

risks to safety and soundness and, conversely, permitting banking entities to use the best 

available hedge for risks arising from customer facilitation activities would promote safety and 

soundness and reduce risk.586 Several of these commenters also argued that fund-linked products 

are not a high-risk trading strategy.587 For example, one commenter argued that the magnitude 

of counterparty default risk that banking entities would face in acquiring or retaining a covered 

fund ownership interest under these circumstances (i.e., to hedge a position by the banking entity 

when acting as intermediary on behalf of a customer that is not itself a banking entity to facilitate 

exposure by the customer to a covered fund) is no different than any other counterparty default 

risk that banking entities face when entering into other risk-mitigating hedges.588 Other 

commenters opposed this change and noted that, at the time the 2013 rule was adopted, the 

agencies considered acting as principal in providing exposure to the profits and losses of a 

covered fund for a customer, even if hedged by the banking entity with ownership interests of the 

covered fund, to constitute a high-risk trading strategy.589 One commenter stated that the 

proposal did not offer specific examples or explain why such fund-linked products are 

necessary.590 Another commenter argued that the exemption for risk-mitigating hedging 

 585 See, e.g., BPI and FSF. 

586 See, e.g., FSF and SIFMA.

587 See, e.g., FSF; ISDA; and SIFMA.

588 See FSF. 

589 See, e.g., AFR and Volcker Alliance.

590 See AFR.
177

involving ownership interests in covered funds should be further restricted or completely 

removed from the rule.591

The final rule adopts the proposed revision without change. This exemption is tailored to 

permit bona fide customer facilitation activities and to limit the risk incurred directly by the 

banking entity. The new exemption in § __.13(a) extends only to 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 customer’s exposure to the profits and losses of the covered fund. The banking 

entity’s acquisition or retention of the ownership interest as a hedge must be designed to reduce 

or otherwise significantly mitigate one or more specific, identifiable risks arising out of a 

transaction conducted solely to accommodate a specific customer request with respect to the 

covered fund. As a result, a transaction conducted in reliance on this exemption must be 

customer-driven. A banking entity cannot rely on this exemption to solicit customer transactions 

in order to facilitate the banking entity’s own exposure to a covered fund. 

As some commenters noted, in the preamble to the 2013 rule, the agencies stated that 

they were not adopting an exemption for customer facilitation activities and related hedging 

activities involving ownership interests in covered funds because these activities could 

potentially expose a banking entity to the types of risks that section 13 of the BHC Act sought to 

address. However, in light of other comments received,592 the agencies do not believe that a 

banking entity’s customer facilitation activities and related hedging activities involving 

ownership interests in covered funds necessarily constitute high-risk trading strategies that could 

 591 See Occupy the SEC.

592 See, e.g., FSF; ISDA; and SIFMA.
178

threaten the safety and soundness of the banking entity. The agencies believe that, properly 

monitored and managed, these activities can be conducted without creating a greater degree of 

risk to the banking entity than the other customer facilitation activities permitted by the final 

rule.593 In particular, these activities remain subject to all of the final rule’s requirements for 

risk-mitigating hedging transactions, including requirements that such transactions must: 

• be designed to reduce or otherwise significantly mitigate the specific, identifiable 

risks to the banking entity; 

• be made in accordance with the banking entity’s written policies, procedures and 

internal controls; 

• 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 the risk-mitigating 

hedging requirements; and 

• be subject to continuing review, monitoring and management by the banking 

entity.594

In addition, these activities remain subject to § __.15 of the final rule and, therefore, to 

the extent they would in practice significantly increase the likelihood that the banking entity 

would incur a substantial financial loss or would pose a threat to the financial stability of the 

United States, they would not be permissible. The agencies are also adopting without change the 

amendment to align § __.13(a) with §__.5 by eliminating the requirement that a risk-mitigating

hedging transaction “demonstrably” reduces or otherwise significantly mitigates the relevant 

 593 See, e.g., final rule § __.3(d)(11).

594 See final rule § __.13.
179

risks. The agencies are adopting this amendment to § __.13(a) for the same reason the agencies 

are adopting the amendment to §__.5.

b. Permitted Covered Fund Activities and Investments Outside of the United 

States 

Section 13(d)(1)(I) of the BHC Act 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).595 Section 13 of the BHC Act does not further define “solely outside 

of the United States” (SOTUS). 

The 2013 rule established several conditions on the availability of the foreign fund 

exemption. Specifically, the 2013 rule provided 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 organized under the laws of the United States or of any State;

 595 Section 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).
180

• 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 United States or organized under the laws of the United States 

or of any State;

• The investment or sponsorship, including any transaction arising from riskmitigating 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”).596

Much like the similar requirement under the exemption for permitted trading activities of 

a foreign banking entity, the proposal would have removed the financing prong of the foreign 

fund exemption, while leaving in place the other requirements for an activity or investment to be 

considered “solely outside of the United States.” Removing the financing prong was intended to 

streamline the requirements of the foreign fund exemption with the intention of improving 

implementation of the statutory exemption.

 596 See final rule § __.13(b)(4).
181

Several commenters supported removing the financing prong from the foreign fund 

exemption.597 One commenter argued that this change would appropriately refocus the foreign 

fund exemption on the location of the activities of the banking entity as principal.598 Another 

commenter argued that the proposed changes to the foreign fund exemption, including removal 

of the financing prong, could promote international regulatory cooperation.599 Other 

commenters argued against eliminating the financing prong because it could result in a U.S. 

branch or affiliate that extends financing to bear some risks.600 

The agencies are adopting the proposal to remove the financing prong for the same 

reasons described above in section IV.B.4 for the trading outside of the United States exemption. 

This change focuses one of the key requirements of the foreign fund exemption on the principal 

actions and risk of the transaction. Removing the financing prong would also address concerns 

that the fungibility of financing has made this requirement in certain circumstances difficult to 

apply in practice to determine whether a particular financing is tied to a particular activity or 

investment. Eliminating the financing prong, while retaining the other prongs of the foreign fund 

exemption, strikes a better balance between the risks posed to U.S. banking entities and the U.S. 

financial system, on the one hand, and effectuating the statutory exemption for activities 

conducted solely outside of the United States, on the other. The agencies note that a U.S. 

banking entity’s affiliate lending activities remain subject to other laws and regulations—

 597 See, e.g., BPI; BVI; EBF; IIB; JBA; and New England Council.

598 See EBF.

599 See BPI.

600 See, e.g., Better Markets and CAP.
182

including sections 23A and 23B of the Federal Reserve Act and prudential safety and soundness 

standards, as applicable. 

One of the restrictions of the statutory exemption for covered fund activities conducted 

by foreign banking entities solely outside the United States is the restriction that “no ownership 

interest in such hedge fund or private equity fund is be offered for sale or sold to a resident of the 

United States.601 To implement this restriction, § __.13(b) of the 2013 rule requires, as one 

condition of the foreign fund exemption, that “no ownership interest in the covered fund is 

offered for sale or sold to a resident of the United States” (the “marketing restriction”).602 

The final rule, like the proposal, clarifies 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.

The final rule, like the proposal, also clarifies that 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.603 This revision adopts existing staff 

guidance addressing this issue.604 Several commenters supported this clarification.605 Some 

commenters argued that this clarification appropriately excludes from the marketing restriction 

 601 See 12 U.S.C. § 1851(d)(1)(I).

602 See final rule § __.13(b)(1)(iii).

603 See proposal § __.13(b)(3).

604 See supra note 59, FAQ 13.

605 See, e.g., AIC; BPI; BVI; IIB; and EBF.
183

those activities where the risk occurs and remains outside of the United States and reflects the 

intended extraterritorial limitations of the section 13 of the BHC Act.

606 In addition, commenters 

stated that codifying the previously issued staff guidance will provide greater clarity and 

certainty for non-U.S. banking entities making investments in third party funds (i.e., covered 

funds that the banking entity does not advise or organize and offer pursuant to § __.11(a) or (b)

of the final rule) and will enable long-term strategies in reliance on this provision.607

The agencies are adopting this clarification as proposed to formally incorporate the 

existing staff guidance. As staff noted in the previous staff guidance, 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.608 This ensures that the foreign 

banking entity seeking to rely on the foreign fund exemption does not engage in an offering of 

ownership interests that targets residents of the United States. This clarification limits 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), the foreign fund exemption may not be available in certain 

circumstances even though the risks and activities of a foreign banking entity with respect to its 

investment in the covered fund are solely outside the United States.

 606 See, e.g., EBF and IIB. 

607 See, e.g., AIC; BPI; and BVI. 

608 See supra note 59, FAQ 13.
184

One commenter asked the agencies to clarify that the requirement that the banking entity 

(including the relevant personnel) that makes the decision “to acquire or retain the ownership 

interest or act as sponsor to the covered fund” must not be located in the United States does not 

prohibit non-U.S. investment funds from utilizing the expertise of U.S. investment advisers 

under delegation agreements.609 This commenter noted that a foreign investment fund may 

appoint a qualified U.S. investment adviser for providing investment management or investment 

advisory services under delegation but that the ultimate responsibility for the investment 

decisions and compliance with statutory and contractual investment limits remains with the 

foreign management company that manages the foreign investment fund. As stated in the 

preamble to the 2013 rule, the foreign fund exemption permits the U.S. personnel and operations 

of a foreign banking entity to act as investment adviser to a covered fund in certain 

circumstances. For example, the U.S. personnel of a foreign banking entity may provide 

investment advice and recommend investment selections to the manager or general partner of a 

covered fund so long as the investment advisory activity in the United States does not result in 

U.S. personnel participating in the control of the covered fund or offering or selling an 

ownership interest to a resident of the United States.610 Consistent with the foreign trading 

exemption, as discussed above,611 the agencies also are confirming that under the final rule, the 

foreign fund exemption does not preclude a foreign banking entity from engaging a nonaffiliated U.S. investment adviser as long as the actions and decisions of the banking entity as 

 609 See BVI.

610 79 FR at 5741.

611 See supra Part IV.B.4.
185

principal occur outside of the United States. The agencies intend to address and request further 

comment on additional covered fund issues in a future proposed rulemaking.

4. Section __.14: Limitations on relationships with a covered fund

a. Relationships with a covered fund

Section 13(f) of the BHC Act provides that, with limited exceptions, no banking entity 

that serves, directly or indirectly, as the investment manager, investment adviser, or sponsor to a 

hedge fund or private equity fund, or that organizes and offers a hedge fund or private equity

fund pursuant to section 13(d)(1)(G), and no affiliate of such entity, may enter into a transaction 

with the fund, or with any other hedge fund or private equity fund that is controlled by such fund, 

that would be a “covered transaction,” as defined in section 23A of the Federal Reserve Act, as if 

such banking entity and the affiliate thereof were a member bank and the hedge fund or private 

equity fund were an affiliate thereof.612 The 2013 rule includes this prohibition as well.613 The 

proposal included a request for comment regarding the restrictions in section 13(f) of the BHC 

Act and §__.14 of the 2013 rule. As with the other covered fund issues for which no specific 

rule text was proposed, the agencies continue to consider the prohibition in section 13(f) of the 

BHC Act and intend to issue a separate proposed rulemaking that addresses this issue.

b. Prime Brokerage transactions

Section 13(f) of the BHC Act provides an exemption from the prohibition on covered 

transactions with a hedge fund or private equity fund for any prime brokerage transaction with a 

hedge fund or private equity fund in which a hedge fund or private equity fund managed, 

 612 See U.S.C. 1851(f)(1).

613 See final rule § __.14(a)(1).
186

sponsored, or advised by a banking entity has taken an ownership interest (a second-tier fund).614 

The statute by its terms permits a banking entity with a relationship to a hedge fund or private 

equity fund described in section 13(f) of the BHC Act to engage in prime brokerage transactions 

(that are covered transactions) only with second-tier funds and does not extend to hedge funds or 

private equity funds more generally.615 Under the statute, the exemption for prime brokerage 

transactions is available only so long as certain enumerated conditions are satisfied.616 The 2013 

rule included this exemption as well and similarly required satisfaction of certain enumerated 

conditions in order for a banking entity to engage in permissible prime brokerage transactions.617 

The 2013 rule’s conditions are that (i) the banking entity is in compliance with each of the 

limitations set forth in § __.11 of the 2013 rule with respect to a covered 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. 

 614 See U.S.C. 1851(f)(3).

615 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. Similarly, the final rule does not limit such covered 

transactions.

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

617 See final rule § __.14(a)(2)(ii).
187

The proposal retained each of the 2013 rule’s conditions for the prime brokerage 

exemption described above, including the requirement that certification be made to the 

appropriate agency for the banking entity.618 Staffs of the agencies previously issued guidance 

explaining when a banking entity was required to provide this certification during the 

conformance period.619 The proposal incorporated this guidance into the rule text by requiring 

banking entities to provide the CEO certification annually no later than March 31 of the relevant 

year.620 This change was 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. As under the 2013 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.621

One commenter recommended that the agencies expressly state that the CEO certification 

for purposes of the prime brokerage exemption is based on a reasonable review by the CEO and 

is made based on the knowledge and reasonable belief of the CEO.622 That commenter also 

requested that the agencies clarify that the term “prime brokerage transaction” includes 

transactions and services commonly provided in connection with prime brokerage transactions, 

as described under the 2013 rule, including: (1) lending and borrowing of financial assets, (2) 

provision of secured financing collateralized by financial assets, (3) repurchase and reverse 

 618 See 83 FR at 33486-87.

619 See supra note 59, FAQ 18.

620 See 83 FR at 33487.

621 This duty to update the certification is required as a condition of the statutory exemption. 

See 12 U.S.C. 1851(f)(3)(A)(ii).

622 See SIFMA.
188

repurchase of financial assets, (4) derivatives, (5) clearance and settlement of transactions, (6) 

“give-up” agreements, and (7) purchase and sale of financial assets from inventory.623 Similarly, 

another commenter requested that the agencies clarify that the term “prime brokerage 

transaction” applies to any transaction provided in connection with custody, clearance and 

settlement, securities borrowing or lending services, trade execution, financing, or data, 

operational, and administrative support regardless of which business line within the banking 

entity conducts the business.624 The same commenter suggested that any prime brokerage 

transaction with a second-tier covered fund should be presumed to comply with section __.14 of 

the rule and the prime brokerage exemption as long as it is executed in compliance with the 

requirements of Section 23B of the Federal Reserve Act.625 In addition, one commenter 

recommended limiting the prime brokerage exemption by, for instance, excluding financing and 

securities lending and borrowing from the prime brokerage exemption.626

The final rule adopts the proposed revision to the prime brokerage exemption with no 

changes. The agencies believe that codifying a deadline for CEO certification with respect to 

prime brokerage transactions will provide banking entities with greater certainty and facilitate 

supervision and review of the prime brokerage exemption. With respect to the other issues 

raised by commenters regarding the prime brokerage exemption in section 13(f) of the BHC Act, 

the agencies continue to consider these issues and intend to issue a separate proposed rulemaking 

that specifically addresses these issues.

 623 See id.

624 See ABA.

625 See id.

626 See Occupy the SEC.
189

D. Subpart D—Compliance Program Requirement; Violations.

1. Section __.20: Program for compliance; reporting

Section __.20 of the 2013 rule contains compliance program and metrics collection and 

reporting requirements. The 2013 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.627 To this end, the 2013 rule included a simplified compliance 

program for small banking entities and banking entities that did not engage in extensive trading 

activity.628 However, as the agencies noted in the proposal, public feedback has indicated that 

even determining whether a banking entity is eligible for the simplified compliance program 

could require significant analysis for small banking entities. In addition, certain traditional 

banking activities of small banks fall within the scope of the proprietary trading and covered 

fund prohibitions and exemptions, making banks engaging in these activities ineligible for the 

simplified compliance program. As the agencies noted in the proposal, public feedback has also 

indicated that the compliance program requirements are unduly burdensome for larger banking 

entities that must implement the rule’s enhanced compliance program, metrics, and CEO 

attestation requirements. Accordingly, the agencies proposed to revise the compliance program 

requirements to allow greater flexibility for banking entities in integrating the Volcker 

compliance and exemption requirements into existing compliance programs and to focus the 

requirements on the banking entities with the most significant and complex activities. 

 627 See 79 FR 5753.

628 Banking entities did not have any compliance program obligations under the 2013 rule if they 

do not engage in any covered activities other than trading in certain government, agency, State or 

municipal obligations. § __20(f)(1). Additionally, banking entities with $10 billion or less in 

total consolidated assets could satisfy the compliance program requirements under the 2013 rule 

by including appropriate references to the requirements of section 13 of the BHC Act and the 

implementing regulations in their existing policies and procedures. § __.20(f)(2). 
190

Specifically, the agencies proposed applying 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 have been subject to the six-pillar 

compliance program requirement (§ __.20(b) of the 2013 rule), the metrics reporting 

requirements (§ __.20(d) of the 2013 rule),629 the covered fund documentation 

requirements (§ __.20(e) of the 2013 rule), and the CEO attestation requirement 

(Appendix B of the 2013 rule).630

• Banking entities with moderate trading assets and liabilities. Banking entities with 

moderate trading assets and liabilities would have been required to establish the 

simplified compliance program (described in § __.20(f)(2) of the 2013 rule) and comply 

with the CEO attestation requirement.

• Banking entities with limited trading assets and liabilities. Banking entities with 

limited trading assets and liabilities would have been presumed to be in compliance with 

the proposal and would have had no obligation to demonstrate compliance with subpart B 

and subpart C of the implementing regulations on an ongoing basis. These banking 

entities would not have been required to demonstrate compliance with the rule unless and 

until the appropriate agency, based upon a review of the banking entity’s activities, 

 629 As discussed below, the proposal would have amended the Appendix A metrics requirements 

to reduce compliance-related inefficiencies while allowing for the collection of data to permit the 

agencies to better monitor compliance with section 13 of the BHC Act. In addition, the proposal 

would have eliminated Appendix B of the 2013 rule, which would have resulted in Appendix A 

being re-designated as the “Appendix.” 

630 Although the proposal would have eliminated Appendix B, as noted above, it would have 

continued to apply a modified version of the CEO attestation to banking entities without limited 

trading assets and liabilities.
191

determined that the banking entity should have been treated as if it did not have limited 

trading assets and liabilities.

After reviewing all of the comments to this section, the agencies are finalizing these 

changes largely as proposed, except for further tailoring application of the CEO attestation 

requirement to only banking entities with significant trading assets and liabilities and revising the 

notice and response procedures in subpart D to be more broadly applicable. 

a. Compliance Program Requirements for Banking Entities with 

Significant Trading Assets and Liabilities

i. Section 20(b) – Six-Pillar Compliance Program

Section __.20(b) of the 2013 rule specifies six elements that each compliance program 

required under that section must at a minimum contain.

The six elements specified in § __.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 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 rule;

• A management framework that clearly delineates responsibility and accountability for 

compliance with section 13 of the BHC Act and the 2013 rule and includes 

appropriate management review of trading limits, strategies, hedging activities, 
192

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 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 rule, these six elements have to be part of the required 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 (excluding trading permitted under § __.6(a) of the 2013 rule). 

The agencies proposed further tailoring the compliance program requirements to make 

the scale of compliance activity required by the rule commensurate with a banking entity’s size 

and level of trading activity. Specifically, the proposal would have applied the six-pillar 

compliance program requirements to banking entities with significant trading assets and 

liabilities and would have afforded flexibility to integrate the § __.20 compliance program 

requirements into other compliance programs of the banking entity. The proposal also would 

have eliminated the enhanced compliance program requirements found in Appendix B of the 
193

2013 rule,

631 except for the CEO attestation requirement discussed below. The proposal also 

would have revised the covered fund documentation requirements in § __.20(e), which applied to 

all banking entities with greater than $10 billion in total consolidated assets under the 2013 rule, 

to only apply to firms with significant trading assets and liabilities. 

Several commenters expressed support for the elimination of the enhanced compliance 

program requirements in Appendix B of the 2013 rule.632 One commenter requested that the 

agencies provide greater discretion to banking entities with significant trading assets and 

liabilities to tailor their compliance programs to the size and complexity of their activities and 

structure of their business.633 A few commenters opposed the elimination of Appendix B of the 

2013 rule.634 One asserted that firms have already made investments in their compliance 

programs, so there was no justification for the change.635 Another commenter argued that the 

 631 The enhanced minimum standards in Appendix B of the 2013 rule required that the firm’s 

compliance program: (1) be reasonably designed to identify, document, monitor, and report the 

trading and covered fund activities and investments of the banking entity; identify, monitor and 

promptly address the risks of these 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 rule; (2) establish and enforce appropriate limits on the 

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 rule; (3) 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; (4) 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 (5) facilitate supervision and examination by the agencies of the banking entity’s trading and 

covered fund activities and investments.

632 See, e.g., Insurance Coalition; Real Estate Associations; CREFC; Credit Suisse; JBA; FSF; 

and ABA.

633 See Credit Suisse.

634 See, e.g., Bean; Data Boiler; and AFR.

635 See Bean.
194

remaining controls are not sufficient to ensure compliance with the rule because they lack 

specificity.636 This commenter also asserted that merging the Volcker Rule requirements with 

the safety and soundness compliance framework would be problematic as the Volcker Rule 

considers market supply and demand dynamics while the safety and soundness compliance 

framework generally only considers risks.637 The concern was that a combined program might 

not adequately consider the activities restrictions of the Volcker Rule. 

The agencies are adopting the six-pillar compliance program requirements and retaining 

the covered fund documentation requirements for banking entities with significant trading assets 

and liabilities as proposed. The agencies continue to believe that these banking entities are 

engaged in activities at a scale that warrants the costs of establishing and maintaining the 

detailed and comprehensive compliance program elements described in §§ __.20(b) and __.20(e) 

of the 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. Based on experience with the six-pillar compliance program 

requirements under the 2013 rule, the agencies believe that such requirements are appropriate 

and effective for firms with significant trading assets and liabilities; these standards impose 

certain minimum standards, but permit the banking entity flexibility to reasonably design the 

program in light of the banking entity’s activities. The agencies also believe that the prescribed 

six-pillar compliance requirements are consistent with the standards banking entities use in their 

traditional risk management and compliance processes. 

 636 See AFR.

637 Id.
195

The agencies believe that banking entities should have discretion to tailor their 

compliance programs to the structure and activities of their organizations. The flexibility to 

build on compliance programs that already exist at banking entities, including internal 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 the final rule.

The agencies therefore believe that removal of the specific, enhanced minimum standards 

in Appendix B will afford a banking entity considerable flexibility to satisfy the elements of §

__.20 in a manner that it determines to be most appropriate given its existing compliance 

regimes, organizational structure, and activities. Allowing banking entities the flexibility to 

integrate Volcker Rule compliance requirements into existing compliance programs should 

increase the effectiveness of the § __.20 requirements by eliminating duplicative governance 

and oversight structures arising from the Appendix B requirement for a stand-alone compliance 

program. 

ii. CEO Attestation Requirement

The 2013 rule included a requirement in its Appendix B that a banking entity’s 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 § __.20 of the 2013 rule in a manner 

reasonably designed to achieve compliance with section 13 of the BHC Act and the 

implementing regulations. 
196

Under the proposal, Appendix B would have been eliminated, and a modified CEO 

attestation requirement would have applied to banking entities with significant trading assets and 

liabilities or moderate trading assets and liabilities. The agencies believed that, while the 

revisions to the compliance program requirements under the proposal generally would 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 believed that applying the CEO 

attestation requirement to banking entities with meaningful trading activities would ensure that 

the compliance programs established by these banking entities pursuant to § __.20(b) or § 

__.20(f)(2) of the proposal would be reasonably designed to achieve compliance with section 13 

of the BHC Act and the implementing regulations as proposed. The agencies proposed limiting 

the CEO attestation requirement to banking entities with moderate trading assets and liabilities or 

significant trading assets and liabilities because, under the proposal, banking entities with limited 

trading assets and liabilities would have been subject to a rebuttable presumption of compliance. 

Thus, the agencies did not believe it 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 § __.20 under the proposal. 

Further, the agencies proposed retaining the 2013 rule’s language concerning how the CEO 

attestation requirement applies to the U.S. operations of a foreign banking entity. This language 

states 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. 
197

Several commenters expressed support for the CEO attestation requirement and 

recommended that the agencies make no changes to the requirement or apply it to all banking 

entities.

638 Other commenters believed that the CEO attestation requirement should not apply to 

banking entities with moderate trading assets and liabilities,639 as requiring the development of 

costly and burdensome internal compliance efforts would not be consistent with the activities or 

risks of such firms.640 One commenter argued that the CEO attestation requirement duplicates 

existing quarterly reporting process,641 and another commenter asserted that imposing such a 

requirement for firms with moderate trading assets and liabilities would negate the tailoring the 

agencies proposed for those banking entities.642 One commenter urged the agencies to limit the 

application of the compliance program and reporting requirements to only the U.S. operations of 

foreign banking entities.643 Other requests for modification included streamlining the CEO 

attestation requirement,644 adding a knowledge qualifier,645 and limiting the scope to only U.S. 

operations.646 A few commenters requested that the CEO attestation be completely 

eliminated.647

 638 See, e.g., AFR; Merkley; Better Markets; and Data Boiler.

639 See, e.g., Capital One et al.; ABA; Arvest; BB&T; State Street; BPI; and IIB.

640 See Capital One et al.

641 See BOK.

642 See Capital One et al.

643 See IIB.

644 See, e.g., ABA and JBA.

645 See, e.g., ABA and FSF.

646 See JBA.

647 See BOK and Capital One et al.
198

After reviewing the comments, the agencies have decided to retain the CEO attestation 

requirement but only for banking entities with significant trading assets and liabilities. The 

agencies continue to believe that incorporating the CEO attestation requirement (which was 

previously in Appendix B of the 2013 rule) into § __.20(c) will 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.

However, the agencies have decided not to apply the CEO attestation requirement to 

banking entities without significant trading assets and liabilities. Such banking entities will still 

need to comply with section 13 of the BHC Act and the implementing regulations; however, they 

will not need to provide CEO attestations. This means that the CEO attestation requirement will 

not be expanded to cover banking entities that did not need to provide CEO attestations under the 

2013 rule.648 The agencies believe that requiring a CEO attestation from banking entities with 

limited or moderate trading assets and liabilities would result in additional costs and burdens that 

would not be commensurate with the type of activities or risks of these firms. 

b. Compliance Program Requirements for Banking Entities with 

Moderate Trading Assets and Liabilities 

The 2013 rule provided 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 rule (other than trading activities 

 648 The 2013 rule applied the CEO attestation requirement to all banking entities with total 

consolidated assets of $50 billion or more (or, in the case of a foreign banking entity, total U.S. 

assets of $50 billion or more). By applying the CEO attestation requirement to banking entities 

with moderate trading assets and liabilities, the proposal would have expanded its applicability to 

certain banking entities with less than $50 billion in total U.S. assets that were not subject to the 

requirement under the 2013 rule. 
199

permitted under § __.6(a) of the 2013 rule) may satisfy the compliance program requirements by 

including in its existing compliance policies and procedures appropriate 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.649

The agencies proposed extending the availability of this simplified compliance program 

to banking entities with moderate trading assets and liabilities. The agencies believed that 

streamlining the compliance program requirements for banking entities with moderate trading 

assets and liabilities would be appropriate because 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 §§ __.20(b) and (e) of the 

2013 rule. Such activities may be appropriately managed through an appropriately tailored 

simplified compliance program. The agencies noted that banking entities with moderate trading 

assets and liabilities would be able to incorporate their simplified compliance program into

existing compliance policies and procedures and tailor their compliance programs to the size and 

nature of their activities, consistent with the approach for banking entities with significant 

trading assets and liabilities. 

Other commenters expressed support for a tailored compliance program for banking 

entities with moderate trading assets and liabilities.650 The agencies are adopting the compliance 

program requirements, as proposed, for banking entities with moderate trading assets and 

liabilities, for the aforementioned reasons. Thus, a banking entity with moderate trading assets 

 649 2013 rule § __.20(f)(2).

650 See, e.g., BB&T and JBA.
200

and liabilities qualifies for the simplified compliance program under §__.20(f)(2) of the final 

rule.

c. Compliance Program Requirements for Banking Entities with 

Limited Trading Assets and Liabilities

Under the proposal, a banking entity with limited trading assets and liabilities would have 

been presumed to be in compliance with the rule. Banking entities with limited trading assets 

and liabilities would have had no obligation to demonstrate compliance with subpart B and 

subpart C of the implementing regulations on an ongoing basis, given the limited scale of their 

trading operations. The agencies believed, based on experience implementing and supervising 

compliance with the 2013 rule, that these banking entities generally engage in minimal trading 

and investment activities subject to section 13 of the BHC Act. Thus, the agencies believed that 

the limited trading assets and liabilities of the banking entities qualifying for the presumption of 

compliance would be unlikely to warrant the costs of establishing a compliance program under §

__.20 of the 2013 rule. 

Under the proposed approach, the agencies would not have expected a banking entity 

with limited trading assets and liabilities that qualified for the presumption of compliance to 

demonstrate compliance with the proposal on an ongoing basis in conjunction with the agencies’ 

normal supervisory and examination processes. However, the appropriate agency would have 

been able to exercise its authority to treat the banking entity as if it did not have limited trading 

assets and liabilities if, upon review of the banking entity’s activities, the relevant agency 

determined that the banking entity engaged in proprietary trading or covered fund activities that 

were otherwise prohibited under subpart B or subpart C. A banking entity would have been 
201

expected to remediate any impermissible activity upon being notified of such determination by 

the agency within a period of time deemed appropriate by the agency. 

In addition, irrespective of whether a banking entity had engaged in activities in violation 

of subpart B or C, the relevant agency would have retained 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 determined 

that the size or complexity of the banking entity’s trading or investment activities, or the risk of 

evasion, did not warrant a presumption of compliance.

One commenter expressed support for the rebuttable presumption of compliance for 

banking entities with limited trading assets and liabilities.651 Another commenter suggested 

completely exempting banking entities with limited trading assets and liabilities from section 13 

of the BHC Act.

652 One commenter requested that the evidence that an agency would require in 

response to its attempt to rebut a presumption should not be greater than what is required of the 

banking entity under the presumption.653 Another commenter recommended that the agencies 

treat inadvertent violations of the rule as supervisory matters and not as violations.654

The final rule adopts the compliance program requirements for banking entities with 

limited trading assets and liabilities as proposed. The agencies note that the removal of the 

standard compliance program requirements in § __.20 for banking entities with limited trading 

assets and liabilities does not relieve those banking entities of the obligation to comply with the 

prohibitions and other requirements of the permitted trading activity exemptions, to the extent 

 651 See B&F.

652 See JBA.

653 See SIFMA.

654 See ABA.
202

that the banking entity engages in such activities, including RENTD requirements for permitted 

underwriting and market making, under the final rule. The agencies believe the presumption of 

compliance for banking entities with limited trading assets and liabilities will allow flexibility for 

these banking entities to take appropriate actions, tailored to the individual activities in which the 

banking entities engage, to comply with the rule. Such actions may include, for example, 

integrating the requirements for permitted trading activities under the exemptions in § __.4, __.5, 

and __.6 into existing internal policies and procedures (to the extent the banking entity engages 

in such activities), or taking other steps to satisfy the criteria to engage in such activities under 

the final rule. Regarding one commenter’s proposal that the agencies completely exempt 

banking entities with limited trading activities, the agencies note that section 13 of the BHC Act 

does not give the agencies authority to completely exempt banking entities from the 

requirements of the Volcker Rule. 

d. Notice and Response Procedures

The proposed rule included notice and response procedures that an agency would follow 

when determining whether to treat a banking entity with limited trading assets and liabilities as if 

it did not have limited trading assets and liabilities.

655 The notice and response procedures 

required the relevant agency to provide a written explanation of its determination and allowed 

the banking entity the opportunity to respond to the agency with any matters that the banking 

entity would have the agency consider in reaching its determination. The response procedures 

would have required the banking entity to respond within 30 days unless the agency extended the 

time period for good cause or if the agency shortened the time period either with the consent of 

the banking entity or because the conditions or activities of the banking entity so required. 

 655 See proposed rule § __.20(g)(2)(ii). 
203

Failure to respond within the applicable timeframe would have constituted a waiver of objection 

to the agency’s determination. After the close of the response period, the agency would have 

decided, based on a review of the banking entity’s response and other information concerning the 

banking entity, whether to maintain the agency’s determination and would have notified the 

banking entity of its decision in writing. These notice and response procedures were similar, but 

not identical to, notice and response procedures found elsewhere in the proposed rule.656

One commenter suggested that there should be a consistent notice and response process 

regarding all presumptions in the final rule.657 The agencies agree and have modified the notice 

and response procedures in subpart D to apply more broadly to several types of determinations 

under the final rule, including determinations and rebuttals made under §§ __.3, __.4, and 

__.20.658 This change will provide consistency and enhance transparency with respect to the 

processes that an agency will follow for certain determinations throughout the final rule. 

E. Subpart E—Metrics: Appendix to Part [●]—Reporting and Recordkeeping

Requirements

Under the 2013 rule, a banking entity with substantial trading activity659 must furnish the 

following quantitative measurements for each of its trading desks engaged in covered trading 

activity, calculated in accordance with Appendix A:

 656 See proposed rule §§ __.3(c), __.3(g)(2), __.4(a)(8)(iv) __.4(b)(6)(iv).

657 See IIB.

658 See final rule § __.20(i).

659 Appendix A of the 2013 rule applies to U.S. banking entities with trading assets and 

liabilities the average gross sum of which equals or exceeds $10 billion on a worldwide 

consolidated basis over the previous four calendar quarters (excluding trading assets and 

liabilities involving obligations of or guaranteed by the United States or any agency of the 

United States), and to foreign banking entities with combined U.S. trading assets and liabilities 

the average gross sum of which equals or exceeds $10 billion over the previous four calendar 
204

• Risk and position limits and usage;

• Risk factor sensitivities;

• Value-at-risk and stressed VaR;

• Comprehensive profit and loss attribution;

• Inventory turnover;

• Inventory aging; and

• Customer-facing trade ratio.

The proposal explained that, based on the agencies’ evaluation of the effectiveness of the 

metrics data in monitoring covered trading activities for compliance with section 13 of the BHC 

Act and the associated reporting costs,660 the proposed rule would have amended Appendix A 

requirements to reduce compliance-related inefficiencies while allowing for the collection of 

data to permit the agencies to better monitor compliance with section 13 of the BHC Act. 661 

Specifically, the proposed rule would have made the following modifications to the reporting 

requirements in Appendix A:

• 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.

 

quarters (excluding trading assets and liabilities involving obligations of or guaranteed by the 

United States or any agency of the United States). 2013 rule § __.20(d)(1).

660 See 79 FR at 5772.

661 As previously noted in the section entitled “Enhanced Minimum Standards for Compliance 

Programs,” the Agencies are proposing to eliminate Appendix B of the 2013 rule. Current 

Appendix A is therefore re-designated as the “Appendix” in the final rule. 
205

• Replace Inventory Turnover with a new Positions metric, which measures the value 

of all securities and derivatives positions.

• Remove the requirement to separately report values that can be easily calculated from 

other reported quantitative measurements.

• 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.662

 662 The Instructions will be 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; neither 

Commission has approved nor disapproved them. The Instructions are not a rule, regulation, or 

statement of the SEC or the CFTC; and like all SEC or CFTC staff guidance, it has no legal force 

or effect, does not alter or amend applicable law, and creates no new or additional SEC or CFTC

obligations for any person. Consistent with changes elsewhere in the final rule and with the 

Federal banking agencies’ Interagency Statement Clarifying the Role of Supervisory Guidance 
206

• 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.663 

Several commenters objected to the proposed rule’s modification of the metrics. Some 

commenters suggested that the proposed amendments to metrics reporting were inappropriate in 

light of the lack of public disclosure of previously reported metrics information, and in some 

cases recommended that the agencies expand metrics reporting requirements.664 Other 

commenters recommended that the agencies simplify or eliminate the metrics.665 As described 

 

(Sept. 11, 2018; https://www.federalreserve.gov/supervisionreg/srletters/sr1805.htm, 

https://www.occ.gov/news-issuances/news-releases/2018/nr-ia-2018-97a.pdf, 

https://www.fdic.gov/news/news/financial/2018/fil18049.html), the agencies are removing 

references to guidance and expectations from the regulatory text of the metrics reporting 

requirements. 

663 The 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. 

664 See, e.g., AFR; Better Markets; Occupy the SEC; Public Citizen; and Volcker Alliance.

665 See, e.g., ABA; FSF; IIB; New England Council; and SIFMA.
207

in detail below, the final rule streamlines the reporting requirements in Appendix A of the 2013 

rule and adopts a limited set of the new requirements introduced in the proposal. Among other 

changes, the final rule entirely eliminates the stressed value-at-risk, risk factor sensitivities, and 

inventory aging. Taken together, the agencies estimate that the revised metrics in the final rule 

would result in a 67 percent reduction in the number of data items and approximately 94 percent 

reduction in the total volume of data, relative to the 2013 rule’s reporting requirement. The 

agencies believe the remaining metrics are generally useful to help firms demonstrate that their 

covered trading activities are conducted appropriately, and to enable the agencies to identify 

activities that potentially involve impermissible proprietary trading. Moreover, the agencies 

believe that these items do not pose a special calculation burden because firms generally already 

record these values in the regular course of business. The agencies expect that the changes in the 

final rule will enable banking entities to leverage calculations from their market risk capital 

programs to meet the requirements for the Volcker Rule quantitative measurements, which will 

reduce complexity and cost for banking entities, and improve the effectiveness of the final 

rule.

666 As discussed above, in order to give banking entities a sufficient amount of time to 

comply with the changes adopted, banking entities will not be required to comply with the final 

amendments until January 1, 2021 (although banking entities may voluntarily comply, in whole 

or in part, with the amendments adopted in this release prior to the compliance date, subject to 

the agencies’ completion of necessary technological changes). By providing an extended 

 666 The agencies anticipate the market risk capital calculations and the Volcker Rule quantitative 

measurements will align particularly closely when the banking agencies adopt a rule 

implementing the Basel Committee’s market risk capital standard in the United States. 

However, the agencies note that certain anticipated changes resulting from the Basel market risk 

capital standards may still result in a mismatch between metrics required under the market risk 

capital rule and the final rule. The agencies are aware of this potential issue and intend to 

address any such discrepancies at a future date.
208

compliance period, the final amendments also should facilitate firms in integrating these 

requirements into existing or planned compliance programs. 

1. Purpose

Paragraph I.c of Appendix A of the 2013 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 proposal would have 

expanded the qualifying language in paragraph I.c of Appendix A to apply to all of the 

information required to be reported pursuant to the appendix, rather than only to the quantitative 

measurements themselves. In addition, the proposed rule would have also removed paragraph 

I.d. in Appendix A of the 2013 rule, which provides that the agencies would review the metrics 

data and revise the metrics collection requirements based on that review. 

The agencies received no comments on these proposed changes. The final rule adopts the 

changes, as proposed. The agencies believe that the trading desk information and quantitative 

measurements identifying information, coupled with the quantitative measurements, should 

assist the agencies in monitoring compliance. This information will be used to monitor patterns 

and identify activity that may warrant further review. Additionally, the final rule removes 

paragraph I.d. Appendix A of the 2013 rule, as the agencies have conducted this preliminary 

evaluation of the effectiveness of the quantitative measurements collected to date and have 

adopted modifications based on that review.

2. Definitions 

The proposed rule would have clarified the definition of “covered trading activity” by 

adding 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 § __.3(d), 
209

__.6(c), __.6(d), or __.6(e) of the proposal.667 In addition, the proposed rule defined two 

additional terms for purposes of the appendix, “applicability” and “trading day,” that were not 

defined in the 2013 rule. The proposal defined “applicability” to clarify when certain metrics are 

required to be reported for specific trading desks and thus make several metrics applicable only 

to desks engaged in market making or underwriting. Finally, the proposal defined “trading day,” 

a term used throughout Appendix A of the 2013 rule,668 to mean a calendar day on which a 

trading desk is open for trading.

Commenters supported the proposal to define “applicability” in order to clarify that 

certain metrics are only applicable to desks engaged in market making or underwriting.669 One 

commenter suggested defining the scope of “covered trading activity” to align with activity 

covered under the Basel Committee’s revised standard for market risk capital.670 While the 

agencies received no comments on the proposed definition of “trading day” in the regulation, 

several comments expressed serious concerns with the proposed “trading day” definition in the 

2018 Instructions,671 specifically requiring banking entities to report metrics for trading days 

when U.S. markets are closed but non-U.S. locations may be open.672 These commenters argued 

that this would impose significant operational costs with no commensurate benefit to the 

 667 The proposed change would clarify that banking entities would have the discretion (but not 

the obligation) to report metrics with respect to a broader range of activities.

668 Appendix A of the 2013 rule provides that the calculation period for each quantitative 

measurement is one trading day, but does not define “trading day”. 

669 See, e.g., Credit Suisse; FSF; and JBA.

670 See JBA.

671 The definition in the Instructions require banking entities to calculate each metric for each 

calendar day on which a trading desk is open for trading, even if the desk is closed for trading in 

one jurisdiction (for example, due to a national holiday).

672 See, e.g., ABA; CCMR; FSF; and SIFMA.
210

agencies’ oversight ability. However, the Agencies feel the definition of trading day is 

appropriate because the potential for impermissible trading activity on a desk exists on any day 

when the desk is open for trading, regardless of which markets are open. The final rule retains 

the definition.

The agencies believe that the scope of “covered trading activity” in the final rule is 

appropriate, and note that, due to changes in the definition of trading account, the scope of 

“covered trading activity” will align more closely with the scope of activities covered under the 

Basel Committee’s market risk capital standards for certain banking entities. Therefore, the final 

rule adopts these definitions as proposed.

3. Reporting and Recordkeeping 

Paragraph III.a of Appendix A of the 2013 rule required banking entities subject to the 

appendix to furnish seven quantitative metrics for all trading desks engaged in trading activity 

conducted pursuant to § ___.4, §___.5, or §___.6(a) (i.e., permitted underwriting, market 

making, and risk-mitigating hedging activity and trading in certain government obligations).673

The proposal would have made several modifications to streamline the reporting 

requirements in paragraph III.a of Appendix A of the 2013 rule. Specifically, the proposal would 

have: (1) replaced the Inventory Turnover and Customer-Facing Trade Ratio metrics with the 

Positions and Transaction Volumes quantitative measurements, respectively; (2) limited the 

Inventory Aging metric to only apply to securities674 and changed the name of the quantitative 

 673 In addition, the 2013 rule permits banking entities to optionally include trading under § 

__.3(d), § __.6(c), § __.6(d), or § __.6(e).

674 Including derivatives or securities that also meet the 2013 rule’s definition of a derivative See

infra Part III.E.2.i.v (discussing the Securities Inventory Aging quantitative measurement). The 

definition of “security” and “derivative” are set forth in § __.2 of the 2013 rule. See 2013 rule §§ 

__.2 (h), (y).
211

measurement to the Securities Inventory Aging; (3) added the phrase “as applicable” to 

paragraph III.a in order to limit application of the Positions, Transaction Volumes, and Securities 

Inventory Aging quantitative measurements to only trading desks that rely on § __.4(a) or § 

__.4(b) to conduct underwriting activity or market making-related activity, respectively; and (4) 

inserted references in paragraph III.a to the new qualitative information requirements added to 

the appendix (i.e., Trading Desk Information, Quantitative Measurements Identifying 

Information, and Narrative Statement requirements).675

A number of commenters supported the proposed changes to remove or tailor certain of 

the metrics provided in Appendix A of the 2013 rule, but opposed the addition of new metrics 

reporting requirements (i.e., Trading Day definition, Trading Desk Information, Quantitative 

Measurements Identifying Information, Narrative Statement).676 These commenters argued that, 

contrary to the proposal’s objective to streamline compliance requirements, the new reporting 

requirements would significantly increase the overall compliance burden and impose substantial 

compliance costs on firms.677 Three commenters argued that the agencies did not provide 

reasoned cost benefit analysis to justify the inclusion of the new metrics.678 A few commenters 

recommended that the agencies should further streamline the current metrics to permit individual 

supervisors and banking entities to collaborate on determining which metrics are appropriate for 

 675 In addition, the proposed rule would have added 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 rule. Specifically, the proposal would have required the file 

identifying information to 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.

676 See, e.g., ABA; CCMR; Credit Suisse; FSF; and Goldman Sachs.

677 See, e.g., ABA; Credit Suisse; CCMR; and FSF.

678 See, e.g., CCMR; Public Citizen; and SIFMA.
212

that specific institution.679 One commenter expressed concern that the agencies intended for the 

newly added metrics to replace onsite supervision and review, as the new qualitative information 

requirements often duplicate the existing compliance program requirements.680

Other commenters opposed all of the proposed revisions to the metrics, with certain 

limited exceptions (e.g., limiting Inventory Aging to securities).681 Some of these commenters 

argued that the agencies should adopt an approach focused on further streamlining the metrics 

requirements included in Appendix A of the 2013 rule.

682 A few of these commenters argued 

that the proposed changes to the existing metrics would in effect create entirely new metrics and 

that the new metrics would not provide new information that cannot be obtained through the 

existing metrics.683 Other commenters supported only retaining the Comprehensive Profit and 

Loss Attribution and Risk Management metrics.684 Another commenter supported retaining the 

current requirements, as any revisions would necessitate changes to firms’ current systems and 

thus impose considerable operational burdens and costs.685 One commenter stressed the inability

of the general public to provide informed comment on the proposed changes as the agencies have 

not publically disclosed any data related to firms’ metrics submissions.686 Another commenter 

noted that disclosing firms’ metrics submissions on an aggregated and/or time-delayed basis 

 679 See, e.g., Goldman Sachs; JBA; and States Street (on leveraging current industry practices 

for FX).

680 See SIFMA.

681 See, e.g., Data Boiler; IIB; JBA; SIFMA; and State Street.

682 See, e.g., IIB; New England Council; SIFMA; and State Street.

683 See, e.g., IIB and SIFMA.

684 See, e.g., New England Council and State Street.

685 See JBA.

686 See Public Citizen.
213

would enable the general public to understand the impact of the Volcker Rule.687 In contrast, 

other commenters urged the agencies not to publicly disclose the metrics data because the data is 

confidential supervisory information that could be used by competitors and could create 

distortions in the capital markets.688 Another commenter recommended replacing the metrics 

with a utility platform that would automate and perform trade surveillance in real time.689 

As described in detail below, the final rule focuses on streamlining the 2013 rule’s 

reporting requirements and only adopts a limited set of the new qualitative requirements 

introduced in the proposal. The agencies believe the remaining metrics are generally useful tools 

to help both firms and supervisors identify activities that potentially involve impermissible 

proprietary trading. Moreover, the agencies believe that these items do not pose a special 

calculation burden because firms already record these values in the regular course of business. 

Finally, although the agencies are not including any changes related to public disclosure 

of the quantitative measurements in this final rule, the agencies will continue to consider whether 

some or all of the quantitative measurements should be publicly disclosed, taking into account 

the need to protect sensitive, confidential information, as well as restrictions on the agencies 

relating to the disclosure of sensitive, confidential business and supervisory information on a 

firm-specific basis.

4. Trading Desk Information

The proposed rule added a new paragraph III.b to Appendix A to require banking entities 

to report certain descriptive information for each trading desk engaged in covered trading 

 687 See AFR.

688 See, e.g., SIFMA and IIB.

689 See Data Boiler.
214

activity, including the trading desk name and identifier, the type of covered activity conducted by 

the desk, a brief description of the trading desk’s general strategy (i.e., the method for 

conducting authorized trading activities), the types of financial instruments purchased and sold 

by the trading desk, and the list of legal entities used to book trades including which were the 

main booking entities. The proposal also would have required firms to indicate for each trading 

desk whether each calendar date is a trading day or not a trading day and to specify the currency 

used by a trading desk as well as the conversion rate to U.S. dollars, if applicable. 

In general, most commenters opposed requiring banking entities to report any new 

information outside the scope of the 2013 rule requirements, including qualitative information 

for each trading desk.690 These commenters argued that the de minimis benefit to the agencies’ 

oversight ability did not justify the significant operational costs associated with the new 

requirements, in particular identifying the legal entities used as booking entities by the trading 

desk as well as the financial instruments and other products traded by the desk.691

After considering these comments, the final rule retains a modified version of the Trading 

Desk Information. The final rule eliminates the requirement for each trading desk to identify the 

financial instruments and other products traded by the desk. The final rule also replaces the 

requirement to identify the legal entities that serve as booking entities for each trading desk with 

the simpler requirement that the banking entity’s submission for each trading desk list: (1) each 

agency receiving the submission for the desk; and (2) the exemptions or exclusions under which 

the desk conducts trading activity. The exemption/exclusion identification is particularly 

necessary in light of the fact that some of the quantitative measurements identified below (i.e. the 

 690 See, e.g., ABA; Credit Suisse, CCMR; FSF; IIB; JBA; and SIFMA.

691 See, e.g., ABA; CCMR; and SIFMA.
215

customer-facing activity measurements) are only required for desks operating under the 

underwriting or market making exemptions. The list of the agencies that have received the 

submission for a desk should facilitate inter-agency coordination, as generally trading desks 

encompass multiple legal entities, for which more than one agency may be the primary federal 

regulator. The agencies believe that this approach appropriately balances the benefit to the 

agencies and the cost to firms from the new reporting obligations. 

5. Quantitative Measurements Identifying Information

The proposed rule added a new paragraph III.c. to Appendix A to require banking entities 

to prepare and provide five schedules: (i) Risk and Position Limits Information Schedule; (ii) 

Risk Factor Sensitivities Information Schedule; (iii) Risk Factor Attribution Information 

Schedule; (iv) Limit/Sensitivity Cross-Reference Schedule; and (v) Risk factor 

Sensitivity/Attribution Schedule. The proposed schedules would have provided descriptive 

information on the quantitative measurements on a collective basis for all relevant trading desks. 

The new proposed Schedules would have required banking entities to provide detailed 

information regarding each limit and risk factor sensitivity reported in quantitative measurements 

as well as on the attribution of existing position profit and loss to the risk factor reported in the 

quantitative measurements. In addition, the new Limit/Sensitivity Cross-Reference Schedule 

would have required banking entities 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.

Many commenters generally opposed requiring banking entities to report any new 

information outside the scope of the 2013 rule requirements, including quantitative 
216

measurements identifying information.692 One commenter argued that these new requirements 

impose undue costs on firms without providing any new supervisory benefit as they duplicate 

existing requirements in § __.20, which information the agencies can obtain through the normal 

supervisory and examination process.693 This commenter further noted that increasing the scope 

of the appendix submission may harm the agencies’ ability to effectively supervise Volcker 

compliance, by increasing the supervisory resources necessary to review the data at the detriment 

of performing normal supervision.

After considering these comments, the final rule retains a modified version of the 

Quantitative Measurements Identifying Information that eliminates the Risk Factor Sensitivities 

Information Schedule, the Limit/Sensitivity Cross-Reference Schedule and the Risk-Factor 

Sensitivity/Attribution Cross-Reference Schedule. Despite the potential benefit to the agencies 

from having a deeper understanding of the relationship between firms’ limits and the risk factor 

sensitivities, the agencies agree that the proposed requirements could significantly increase 

firms’ reporting burden in a way not commensurate with the potential benefits. The final rule 

retains the Risk Factor Attribution Information Schedule and a modified version of the Risk and 

Position Limits Information Schedule that includes identification of the corresponding risk factor 

attribution for certain limits (“Internal Limits Information Schedule”). While together these 

schedules add two new reporting elements relative to the 2013 Appendix A (i.e., a description of 

the limit/risk factor sensitivities and risk factor attribution for certain limits), the agencies 

generally expect firms to realize a net reduction in reporting burden from the elimination of the 

duplicative reporting requirements in the current framework. The 2013 rule requires firms report 

 692 See, e.g., ABA; CCMR; Credit Suisse; Data Boiler; JBA; and SIFMA.

693 See SIFMA.
217

internal limits, including but not limited to risk and position limits, and risk factor sensitivities

established for each trading desk on a daily basis. As in practice, firms often use the same limits 

and risk factors for multiple desks, the 2013 rule results in firms reporting the same limit on a 

daily basis for multiple desks. These two new schedules reduce reporting burden by allowing 

firms to submit a comprehensive list of all the internal limits and the risk factor sensitivities that 

account for a preponderance of the profit or loss for the trading desks. Additionally, the final 

rule eliminates the requirement to report Risk Factor Sensitivities for each trading desk on a 

daily basis. Based on the submissions received to date, the agencies expect this change alone 

will reduce the total volume of data submitted by more than half relative to the 2013 rule. 

6. Narrative Statement

The proposed rule would have added a new paragraph III.d. to require banking entities 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, or the 

trading desk structure (e.g., adding, terminating, or merging pre-existing desks) or strategies. In 

addition, in its Narrative Statement, a banking entity, if applicable, would have to explain its 

inability to report a particular quantitative measurement and to provide notice if a trading desk 

changes its approach to including or excluding products that are not financial instruments in its 

metrics. The proposed rule would have required that banking entities that do not have any 

information to report in a Narrative Statement to submit an electronic document stating that the 

firm does not have any information to report in a Narrative Statement.

Most commenters generally opposed requiring banking entities to report any new 

information outside the scope of the 2013 rule requirements, including the Narrative 
218

Statement.694 While recognizing that currently banking entities voluntarily provide additional 

information about their metrics submissions, one commenter argued that requiring the Narrative 

Statement would impose undue costs on banking entities, as the agencies can already obtain this 

information through the normal supervisory process.695 

After considering all comments received, the agencies are not adopting the narrative 

statement requirement in the final rule. Rather, the final rule retains the provision from the 2013 

rule’s reporting instructions that permits, but does not require, firms to provide a narrative 

statement describing any additional information they believe would be helpful to the agencies in 

identifying material events or changes. Narrative statements may permit the agencies to 

understand aspects of the metrics without going back to the banking entities to ask questions. 

While the agencies anticipate that many banking entities will continue to voluntarily provide 

clarifying information, the agencies agree that the compliance costs associated with requiring a 

separate document are not commensurate with the potential benefit to the agencies of receiving 

information in this format from banking entities that do not wish to provide it. 

7. Frequency and Method of Required Calculation and Reporting

The 2013 rule established a reporting schedule in § __.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 rule within 10 days of the end of each calendar month. The proposed 

rule would have extended this reporting schedule for firms with significant trading activities, as 

defined in the final rule, to be within 20 days of the end of each calendar month.696 

 694 See, e.g., ABA; CCMR; Credit Suisse; Data Boiler; JBA; and SIFMA.

695 See SIFMA.

696 See § __.20(d) of the proposal.
219

In general, commenters supported extending the reporting schedule to be within 20 days 

of the end of each calendar month.697 Two commenters suggested further extending this to 30 

days.698 Of these, one commenter recommended reducing the frequency from monthly to 

quarterly in order to better align the metrics reporting with other regulatory reporting regimes.699

Under the final rule, metrics filers must submit metrics on a quarterly basis. In addition, 

the final rule retains the reporting schedule of 30 days after the end of each quarter, consistent 

with the reporting schedule for quarterly filers under the 2013 rule. Supervisory experience has 

indicated that this will reduce the incidence of errors and improve the quality of the data in the 

metrics submissions.

Appendix A of the 2013 rule did not specify a format in which metrics should be 

reported. To clarify the formatting requirements for the data submissions and to help ensure the 

quality and consistency of data submissions across banking entities, the proposed rule would 

have required banking entities to report all the information contained within the proposed 

appendix in accordance with an XML Schema to be specified and published on the relevant 

agency’s website.700 

Two commenters opposed transitioning to XML format for reporting due to the costs of 

changing reporting software to switch formats.701 One commenter fully supported the use of 

 697 See, e.g., FSF and Goldman Sachs.

698 See, e.g., Credit Suisse and SIFMA.

699 See SIFMA.

700 To 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. 

701 See, e.g., Credit Suisse and JBA.
220

XML as a standardized format.702 Another commenter supported XML and estimated the cost of 

switching formats to be low compared to other costs involved in reporting.703 Finally, one 

commenter asserted that reporting in XML could be useful in certain cases but that it was not 

clear that requiring metrics reporting in XML would be useful. The commenter recommended 

deferring the decision to adopt the XML until after a final rule is adopted. The commenter stated 

that the decision of whether to adopt the XML Schema requirement should be subject to separate 

notice and comment.704

The final rule adopts the use of XML for reporting metrics, following the format 

specified in XML Schema to be posted on the relevant agency’s website. The agencies 

acknowledge that any changes to the metrics will impose some switching costs on banking 

entities. As a very common standard for data transmission, XML is expected to be a less costly 

format to employ than a bespoke format. Moreover, the XML Schema allows for clearer

specification, which should reduce miscommunication, errors, inconsistencies, and the need for 

data resubmissions. The agencies believe the benefits of standardization outweigh the one-time 

switching costs.

8. Recordkeeping

Under paragraph III.c. of Appendix A of the 2013 rule, a banking entity’s reported 

quantitative measurements are subject to the record retention requirements provided in Appendix

A. Under the proposed rule, this provision would have been moved to paragraph III.f. and 

expanded to include the new qualitative information requirements added to the appendix (i.e., 

 702 See Goldman Sachs.

703 See Data Boiler.

704 See SIFMA.
221

Trading Desk Information, Quantitative Measurements Identifying Information, and Narrative 

Statement requirements). The agencies received no comments on these proposed changes. The 

final rule’s recordkeeping requirement is being adopted largely as proposed.

705

9. Quantitative Measurements

Section IV of Appendix A of the 2013 rule sets forth the individual quantitative 

measurements required by the appendix. The proposed rule would have added an 

“Applicability” paragraph to each quantitative measurement to identify 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. The proposed rule also would have 

removed the “General Calculation Guidance” paragraphs in section IV of Appendix A of the 

2013 rule for each quantitative measurement, and provided such guidance in the Instructions.

As noted above, commenters generally supported the proposal to define “applicability” in 

order to clarify that certain metrics are only applicable to desks engaged in market making or 

underwriting.706 The agencies’ received no comments on providing the metrics calculation 

guidance in an Instructions document and removing this guidance from the appendix. The 

metrics are not intended to serve as a dispositive tool for identifying permissible or 

impermissible activities. Thus, the agencies believe that providing the metrics calculation 

guidance in the Instructions and not within the regulation is more appropriate.707 Therefore, the 

agencies are adopting these changes as proposed. 

a. Risk-Management Measurements

 705 The recordkeeping requirement in the final rule does not require that banking entities retain a 

copy of the Narrative Statement. 

706 See, e.g., Credit Suisse; FSF; and JBA.

707 See supra note 662. 
222

i. Internal Limits and Usage

Like the 2013 rule, the proposed rule would have applied the Risk and Position Limits 

and Usage metric to all trading desks engaged in covered trading activities. Additionally, the 

proposed rule would have removed references to Stressed Value-at-Risk (Stressed VaR) in the 

Risk and Position Limits and Usage metric and required banking entities to 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. 708

In general, most commenters supported eliminating requirements to establish limits on 

Stressed VaR.709 One commenter did not support this change, as any revisions would necessitate 

changes to firms’ current systems and thus impose considerable operational burdens and costs.710

Another commenter supported further requiring full reporting of upper and lower bounds of risk 

and position limits usage.711

The final rule largely adopts these changes as proposed. As noted above, the agencies 

believe requiring firms to submit one consolidated Internal 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, will alleviate inefficiencies 

associated with reporting redundant information and reduce electronic file submission sizes. The 

unique identification label should allow the agencies to efficiently obtain the descriptive 

 708 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.

709 See, e.g., FSF and Data Boiler.

710 See JBA.

711 See Data Boiler.
223

information regarding the limit that is separately reported in the Internal Limits Information 

Schedule.712 Recognizing that firms may establish internal limits other than risk and position 

limits (e.g., inventory aging limits), the final rule adopts an Internal Limits Information Schedule 

and daily Internal Limits and Usage quantitative metric.

As discussed in more detail below, the final rule removes the metrics for Risk Factor 

Sensitivities. Accordingly, the final rule also removes the cross reference between Risk and 

Position Limits and Risk Factor Sensitivities, and the cross-reference between Risk Factor 

Sensitivities and Profit and Loss Risk Factor Attributions. These cross-references would have 

provided an essential link between the limits on exposures to risk factors and the factors that are 

demonstrably important sources of revenue. In place of these two cross-references, the final rule 

adopts an identifier within the Internal Limits Information Schedule indicating the corresponding 

Risk Factor Attribution when a desk measures and imposes a limit on exposure to that risk 

factor. This identifier facilitates the agencies’ review of the Internal Limits metric and its 

relation to gains and losses on the positions measured by that metric. 

ii. Risk Factor Sensitivities 

Like the 2013 rule, the proposed rule would have applied the Risk Factor Sensitivities 

metric 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. 

 712 Such information includes the name of the limit, a description of the limit, the unit of 

measurement for the limit, the type of limit, and identification of the corresponding risk factor 

attribution in the particular case that the limit type is a limit on a risk factor sensitivity and profit 

and loss attribution to the same risk factor is reported;
224

As discussed above in Quantitative Measurements Identifying Information, to reduce 

firms’ reporting burden the final rule eliminates the Risk Factor Sensitivities quantitative 

measurement.

iii. Value-at-Risk and Stressed Value-at-Risk

The 2013 rule applies the Value-at-Risk and Stressed Value-at-Risk metric to all trading 

desks engaged in covered trading activities. The proposed rule would have modified the 

description of Stressed VaR to align its calculation with that of Value-at-Risk and clarified 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 

§ __.3(d)(2) of the proposal. The proposal would have also revised the definition of Value-atRisk to provide that Value-at-Risk 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.713

In general, a few commenters supported eliminating Stressed VaR, including for nonfinancial instrument hedging.714 One commenter did not support this change, as any revisions 

would necessitate changes to firms’ current systems and thus impose considerable operational 

burdens and costs.715 One commenter stated that Stressed VaR was not a helpful metric because 

it bears an attenuated relationship to proprietary trading.716

 713 Banking entities may base their calculations of Value-at-Risk on historical observations 

consistent with other applicable regulatory requirements relating to the calculation of Value-atRisk. See, e.g., 12 C.F.R. part 3 subpart F; 12 C.F.R. part 217 subpart F; 12 C.F.R. part 324 

subpart F.

714 See, e.g., FSF and Data Boiler.

715 See JBA.

716 See Goldman Sachs.
225

After considering the comments received, the agencies believe that eliminating the 

Stressed VaR metric altogether will reduce burden without affecting the ability of the agencies to 

monitor for prohibited proprietary trading. The agencies believe that the other metrics retained 

or adopted in the final rule provide appropriate data to monitor for prohibited proprietary trading. 

To avoid duplicative or unnecessary metrics, the final rule eliminates the Stressed VaR metric.

b. Source-of-Revenue Measurements

i. Comprehensive Profit and Loss Attribution

The 2013 rule requires banking entities to calculate and report volatility of 

comprehensive profit and loss. The proposed rule would have eliminated this requirement as the 

measurement can be calculated from the profit and loss amounts reported under the 

Comprehensive Profit and Loss Attribution metric. Additionally, the proposed rule would have 

required banking entities 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 proposed rule also would have required 

banking entities 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.717 

In general, commenters did not support requiring firms to attribute profit and loss to 

specific risk factors.718 One commenter expressed concern that this could disrupt firms’ current 

infrastructure projects to comply with the Basel Committee’s revised market risk capital 

standards, which also require specific alignment of risk factor attribution and risk factor 

 717 Such 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. 

718 See SIFMA.
226

sensitivity hierarchies.719 This commenter also noted the limited utility of this information for 

horizontal comparisons across firms as each banking organization defines these metrics at 

different levels of granularity. Two commenters supported eliminating the volatility calculation, 

as proposed.

720

After considering these comments, the final rule adopts these changes as proposed. Under 

the final rule, banking entities will no longer be required to report volatility for the 

Comprehensive Profit and Loss metric. Banking entities will be required to provide certain 

information regarding the factors that explain the preponderance of the profit or loss changes due 

to risk factor changes when sub-attributing comprehensive profit and loss from existing positions 

to specific and other factors. 

As in the 2013 rule and the proposal, the final rule requires trading desks to attribute 

profit and loss into: (i) profit and loss attributable to a trading desk’s existing positions, and (ii) 

profit and loss attributable to new positions. The final rule retains the category for residual profit 

and loss,721 but clarifies that this is a sub-category of profit and loss attributable to existing 

positions.

c. Customer-Facing Activity Metrics

i. Replacement of Inventory Turnover with Positions Metric

The 2013 rule required banking entities to calculate and report inventory turnover, or the 

turnover of a trading desk’s inventory, over a 30-day, 60-day, and 90-day reporting period. The 

proposed rule would have replaced the Inventory Turnover metric with the daily data underlying 

 719 See SIFMA.

720 See, e.g., Goldman Sachs and FSF.

721 As under the 2013 rule, significant unexplained profit and loss must be escalated for further 

investigation and analysis under the final rule.
227

that metric, rather than proposing specific calculation periods. The proposal would have 

replaced Inventory Turnover with the daily Positions quantitative measurement. As noted in the 

Supplemental Information to the proposed rule, positions information that is a component of the 

Inventory Turnover metric would be more useful to the agencies, and is already tracked by 

banking entities as a component of the Inventory Turnover metric. The proposal would have 

limited the scope of applicability of the Positions metric to trading desks that rely on § __.4(a) or 

§ __.4(b) to conduct underwriting activity or market making-related activity, respectively. As a 

result, a trading desk that did not rely on § __.4(a) or § __.4(b) would not have been subject to 

the proposed Positions metric.722 

The proposal would have also required banking entities subject to the appendix 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.723 Finally, the proposal also would have clarified that positions reported 

as “derivatives” need not be reported as “securities,” thereby clarifying the treatment of certain 

positions that may have met both definitions. This technical change would have addressed the 

possibility that a position could have been reported in both the “securities” and “derivatives” 

positions, and thus been double-counted.

 722 For example, a trading desk that relies solely on § __.5 to conduct risk-mitigating hedging 

activity would not have been subject to the Positions metric under the proposed rule.

723 Under the proposal, banking entities would have been required to report the effective 

notional value of derivatives receivables and derivatives payables for those derivatives whose 

stated notional amount is leveraged. 
228

A few commenters recommended that the agencies eliminate the Positions metric, but 

retain the inventory turnover metric.724 These commenters expressed concern that the new 

“Positions” metric would be, in effect, a “new” metric that would require reporting banking 

entities to modify their systems to generate as a standalone metric and noted that this metric 

could create “false positives” due to daily changes in inventory that may be driven by 

fluctuations in the expectation of customer demand. Other commenters recommended that the 

agencies eliminate inventory turnover metrics reporting requirements for derivatives, including 

foreign exchange derivatives.725 One commenter supported the positions metric, but 

recommended removing the requirement to report market values for derivative positions – as 

notional value measures are sufficient to assess the size of a trading desk’s derivative 

inventory.726 

The final rule adopts the “Positions” metric and eliminates the “Inventory Turnover” 

metric consistent with the proposal. The “Positions” metric is itself a necessary component firms 

already must calculate to generate the “Inventory Turnover” metric. Therefore, producing the 

“Positions” metric as a standalone figure would not require firms to generate additional data not 

produced internally today, but will result in a more effective metrics reporting framework. The 

agencies are aware that all changes to the metrics reporting requirements require changes to the 

underlying systems required to generate and report metrics to the agencies. However, the 

Positions metric will allow both the agencies and the firms themselves to analyze firms’ trading 

activities over different time horizons, as appropriate; the Inventory Turnover metric, by 

 724 See, e.g., GFMA and SIFMA.

725 See, e.g., GFMA; Goldman Sachs; and State Street.

726 See e.g., Credit Suisse.
229

contrast, relied on the same underlying positions data as the final rule requires to be reported, but 

aggregated it in a manner (with 30-day, 60-day, and 90-day rolling averages) that is more 

complicated than a direct reporting of positions metrics, and is less effective. The final rule 

differs from the proposal in that it eliminates the requirement to report the notional value of 

derivatives. Removing the requirement to report notional value of derivative positions will avoid 

potential complexity arising from using different calculation methods for determining the 

notional value for different types of derivatives. Additionally, as the definition of financial 

instrument in section __.3 lists securities, derivatives and futures as distinct types of financial 

instruments, the agencies are clarifying that futures positions should be reported as “derivatives,” 

and are not expected to be broken out separately. The agencies are making this technical change 

to avoid confusion as to whether or how to classify futures for this metric.727

ii. Transaction Volumes and the Customer-Facing Trade Ratio

Paragraph IV.c.3. of Appendix A of the 2013 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 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 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 § __.4(b) of 

the 2013 rule describing the permitted activity exemption for market making-related activities. 

 727 See final rule § __.3(c)(1) (defining “financial instrument” to mean (i) a security, including 

an option on a security; (ii) a derivative, including an option on a derivative; or (iii) a contract of 

sale of a commodity for future delivery, or option on a contract of sale of a commodity for future 

delivery).
230

This metric is required to be calculated on a daily basis for 30-day, 60-day, and 90-day 

calculation periods.

The proposed rule would have replaced the Customer-Facing Trade Ratio with a daily 

Transaction Volumes quantitative measurement that would allow the agencies to calculate 

customer-facing trade ratios over any period of time and to conduct more meaningful analysis of 

trading desks’ customer-facing activity.728 The proposed Transaction Volumes metric would 

measure the number and value729 of all securities and derivatives transactions730 conducted by a 

trading desk engaged in permitted underwriting activity or market making-related activity under 

the 2013 rule with 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.731 The proposed rule would have clarified that the term “customer” for purposes 

of this metric has the same meaning as “client, customer, and counterparty” in § __.4(a) for 

underwriting desks and in § __.4(b) for market-making desks. To reduce reporting 

 728 As noted in the proposal 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. 

729 The proposal defined value to mean gross market value with respect to securities, gross 

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

the derivative) for commodity derivatives, and gross notional value for all other derivatives.

730 As noted in the Positions metric preamble, in calculating the Transactions Volume 

quantitative metric, futures positions should be reported as “derivatives.”

731 The proposal noted that in order to avoid double-counting transactions, these four categories 

would be exclusive of each other (i.e., a transaction could only be reported in one category).
231

inefficiencies, the proposed rule would have only required trading desks engaged in underwriting 

or market making-related activity under § __.4(a) or § __.4(b) to calculate this quantitative 

measurement for each trading day. As with the Positions metric, the proposed rule would also 

have further reduced reporting volume by replacing the 30-day, 60-day, and 90-day calculation 

periods for each transaction with a single daily transaction value and count for each type. 

The proposed rule would have required 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. The proposed classification of securities and 

derivatives described above for Positions would have also applied to Transaction Volumes. 

A few commenters opposed the replacing the Customer-Facing Trade Ratio with the new 

Transactions Volume quantitative metric.732 These commenters argued that the proposed 

changes would effectively create an entirely new metric, in particular by requiring firms to 

classify inter-affiliate transactions within the prescribed categories. One commenter also 

asserted that distinguishing trades that occur across banking entities from those within a single 

banking entity would not provide any informational value to the agencies in monitoring 

compliance with section 13 of the BHC Act.

733 One commenter supported the proposal, but also 

recommended excluding inter-affiliate transactions.734

The final rule adopts the proposed change to add a category of counterparty for desk-todesk transactions within the same legal entity and transactions between affiliates (collectively, 

Internal Transactions). In order to connect the transactions metric with the other quantitate 

 732 See, e.g., IIB and SIFMA.

733 See SIFMA.

734 See, e.g., Credit Suisse.
232

measurements, for example risk, profit and loss, and positions, it is important for transactions 

metrics to include all transactions conducted by the desk, including: (i) desk-to-desk transfers 

within the same legal entity; (ii) transactions between affiliates; and (iii) transactions with nonaffiliated external counterparties. It is also important for supervisors to be able to distinguish 

Internal Transactions from transactions with external non-affiliated counterparties because, based 

on supervisory experience under the 2013 rule, firms report these transactions inconsistently 

depending on a desk’s purpose and business model.735 Considering the trading activities of a 

desk without Internal Transactions may not give a complete picture of the desk’s positions, risk 

exposure or trading strategies. To understand the activity of the desk the agencies need to 

observe its Internal Transactions.

Transactions between one trading desk and another trading desk in which the second desk 

books the position in the same banking entity as the first are not purchases or sales of financial 

instruments subject to the rule, including the prohibition on proprietary trading in § __.3. 

However, in practice many trading desks book positions into multiple affiliated banking entities

and also engage in desk-to-desk transactions within the same legal entity. Distinguishing 

Internal Transactions that move positions to new legal entities from desk-to-desk transactions 

that occur purely within the same legal entity would require an additional layer of recordkeeping. 

The agencies agree that the benefit of distinguishing trades across affiliated banking entities from 

 735 Internal Transactions are used for a number of reasons, including to transfer risk to a desk 

better equipped to manage the position’s risk; to allow a desk with better market access or 

specialized market knowledge to facilitate another desk better equipped to face customers; or to 

allocate funding costs via transfer pricing, in which case one desk treats other internal desks or 

affiliate desks in much the same way as external clients. Supervisory experience has shown that, 

depending on the purpose of the internal transaction, banking entities sometimes report these 

internal transactions as transactions with customers, sometimes as transactions with noncustomers, and sometimes do not report them at all. 
233

desk-to-desk transactions within the same legal entity does not justify the extra record-keeping 

costs. The final rule consolidates these two proposed categories into one category, transactions 

with trading desks and other organizational units where the transaction is booked into either the 

same banking entity or an affiliated banking entity.

d. Securities Inventory Aging

The 2013 rule requires all trading desks engaged in covered trading activities to report 

Inventory Aging metrics for their securities and derivative positions. The proposed rule would 

have only required trading desks that relied on § __.4(a) or § __.4(b) to conduct underwriting or 

market making-related activity to report Inventory Aging and limited the scope of this metric to 

only securities positions. 736 To reflect the revised scope, the proposed rule would have revised 

the name of this metric to be Securities Inventory Aging. Finally, the proposal would have 

required 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.

In general, commenters supported reducing the Inventory Aging metric, as inventory 

aging data is not readily available or particularly useful for derivative positions.737 After 

consideration of comments and in light of the general desire to reduce reporting burden, the 

 736 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 rule. See 2013 

rule §§ __.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).

737 See, e.g., Data Boiler; Credit Suisse; FSF; Goldman Sachs, GFMA; and State Street.
234

agencies believe that the Inventory Aging metric may be overly prescriptive as an indicator of 

compliance with the rule. Therefore, the final rule no longer requires the Inventory Aging metric 

for all desks and position types. For those desks where banking entities identify inventory aging 

as a meaningful control, the entities should report their internal limits on inventory aging under 

the Internal Limits and Usage metric and consequently “Inventory Aging” has been added as a 

potential type of limit under the Internal Limits Information Schedule.

V. Administrative Law Matters

A. Use of Plain Language

Section 722 of the Gramm-Leach-Bliley Act738 requires the OCC, Board, and FDIC 

(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 proposed rule in a 

simple and straightforward manner and did not receive any comments on plain language.

B. Paperwork Reduction Act

Certain provisions of the final 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 

final rule and determined that the final rule revises certain reporting and recordkeeping 

requirements that have been previously cleared under various OMB control numbers. The 

agencies did not receive any specific comments on the PRA. The agencies are extending for 

three years, with revision, these information collections. The information collection 

 738 Pub. L. 106-102, section 722, 113 Stat. 1338, 1471 (1999).
235

requirements contained in this final rule 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 final 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 CFTC-supervised institutions under a 

holding company. The OCC and the FDIC will take burden for banking entities that are not 

under a holding company.

Abstract

Section 13 to the BHC Act 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 riskmitigating hedging, among others. The 2013 rule implementing section 13 became effective on 

April 1, 2014. Section __.20(d) and Appendix A of the 2013 final rule require certain of the 

largest banking entities to report to the appropriate agency certain quantitative measurements.

Current Actions

This final rule contains requirements subject to the PRA and the changes relative to the 

2013 rule are discussed herein. The new and modified reporting requirements are found in 

sections __.4(c)(3)(i), __.20(d), __.20(i), and the Appendix. The new and modified 

recordkeeping requirements are found in sections, __.3(d)(3), __.4(c)(3)(i), __.5(c), __.20(b), 

__.20(c), __.20 (d), __.20(e), __.20(f), and the Appendix. The modified information collection 
236

requirements739 would implement section 13 of the BHC 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 __.4(c)(3)(i) requires a banking entity to make available to the agency upon 

request records regarding (1) any limit that is exceeded and (2) any temporary or permanent 

increase to any limit(s), in each case in the form and manner as directed by the primary financial 

regulatory agency. The agencies estimate that the average time per response would be 15 

minutes.

Section __.20(d) is modified by extending the reporting period for certain banking 

entities from within 10 days of the end of each calendar month to 30 days of the end of each 

calendar quarter. The threshold for reporting under section __.20(d) is modified from $10 billion 

or more in trading assets and liabilities to $20 billion or more in trading assets and liabilities. 

The metrics reporting changes to the Appendix would impact the reporting burden under section 

___.20(d). The agencies estimate that the current average hours per response will decrease by 14 

hours (decrease 40 hours for initial set-up).

Sections __.3(b)(4), __.4(c)(4), __.20(g)(2), and __.20(h) would implicate the notice and 

response procedures pursuant to section __.20(i) that an agency would follow when rebutting a 

 739 In an effort to provide transparency, the total cumulative burden for each agency is shown. 

In addition to the changes resulting from this final rule, the agencies are also applying a 

conforming methodology for calculating the burden estimates in order to be consistent across the 

agencies.
237

presumption or exercising a reservation of authority. The agencies estimate that the average 

hours per response would be 20 hours.

Recordkeeping Requirements

Section __.3(d)(3) would expand the scope of the recordkeeping to include 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 cross-currency swap. The agencies estimate that 

the current average hour per response will not change.

Section __.4(c)(3)(i) requires a banking entity to maintain records regarding (1) any limit 

that is exceeded and (2) any temporary or permanent increase to any limit(s), in each case in the 

form and manner as directed by the primary financial regulatory agency. The agencies estimate 

that the average time per response would be 15 minutes.

Section __.5(c) is 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 will 

decrease by 20 hours (decrease 10 hours for initial set-up).

Section __.20(b) is 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 will not change.

Section __.20(c) is modified by limiting the CEO attestation requirement to a banking 

entity that has significant trading assets and liabilities. The agencies estimate that the current 

average hours per response will decrease by 1,100 hours (decrease 3,300 hours for initial set-up).
238

Section __.20(d) is modified by extending the time period for reporting for certain 

banking entities from within 10 days of the end of each calendar month to 30 days of the end of 

each calendar quarter. The agencies estimate that the current average hours per response will 

decrease by 3 hours.

Section __.20(e) is modified by limiting the requirement to banking entities with 

significant trading assets and liabilities. The agencies estimate that the current average hours per 

response will not change.

Section __.20(f)(2) is modified by limiting the requirement to banking entities with 

moderate trading assets and liabilities. The agencies estimate that the current average hours per 

response will not change.

The Instructions for Preparing and Submitting Quantitative Measurement Information, 

Technical Specifications Guidance, and XML Schema will be available on each agency’s public 

website:

• OCC: http://www.occ.treas.gov/topics/capital-markets/financialmarkets/trading/volcker-rule-implementation/index-volcker-rule-implementation.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/DF_28_VolckerRule/in

dex.htm; and

• SEC: https://www.sec.gov/structureddata/dera_taxonomies.

Proposed Revision, With Extension, of the Following Information Collections

Estimated average hours per response:
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Reporting

Section __.4(c)(3)(i) – 0.25 hours for an average of 20 times per year.

Section __.12(e) – 20 hours (Initial set-up 50 hours) for an average of 10 times per year.

Section __.20(d) – 41 hours (Initial set-up 125 hours) quarterly.

Section __.20(i) – 20 hours.

Recordkeeping

Section __.3(d)(3) – 1 hour (Initial set-up 3 hours).

Section __.4(b)(3)(i)(A) – 2 hours quarterly.

Section __.4(c)(3)(i) – 0.25 hours for an average of 40 times per year.

Section __.5(c) – 80 hours (Initial setup 40 hours).

Section __.11(a)(2) – 10 hours.

Section __.20(b) – 265 hours (Initial set-up 795 hours).

Section __.20(c) – 100 hours (Initial set-up 300 hours).

Section __.20(d)– 10 hours.

Section __.20(e) – 200 hours.

Section __.20(f)(1) – 8 hours.

Section __.20(f)(2) – 40 hours (Initial set-up 100 hours).

Disclosure

Section __.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.
240

Frequency: Annual, quarterly, and event driven.

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: 39.

Proposed revisions estimated annual burden: -3,503 hours.

Estimated annual burden hours: 19,823 hours (3,482 hours for initial set-up and 16,341 hours

for ongoing).

Board

Title of Information Collection: Reporting, Recordkeeping, and Disclosure Requirements 

Associated with Regulation VV.

Frequency: Annual, quarterly, and event driven.

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,
241

• 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 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: 255.

Proposed revisions estimated annual burden: -169,466 hours.

Estimated annual burden hours: 31,044 hours (4,035 hours for initial set-up and 27,009 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, quarterly, and event driven.
242

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: 13.

Proposed revisions estimated annual burden: -15,172 hours.

Estimated annual burden hours: 3,115 hours (1,656 hours for initial set-up and 1,459 hours for 

ongoing).

C. Regulatory Flexibility Act Analysis

OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA), requires an agency, 

in connection with a final rule, to prepare a Final Regulatory Flexibility Analysis describing the 

impact of the rule on small entities (defined by the SBA for purposes of the RFA to include 

commercial banks and savings institutions with total assets of $600 million or less and trust 

companies with total assets of $41.5 million or less) or to certify that the rule will not have a 

significant economic impact on a substantial number of small entities.

The OCC currently supervises approximately 782 small entities.740 Under the 

EGRRCPA, banking entities with total consolidated assets of $10 billion or less generally are not 

“banking entities” within the scope of Section 13 of the BHCA if their trading assets and trading 

 740 The 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 $600

million and $41.5 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 the OCC should classify an OCC-supervised institution a small entity. The OCC used 

December 31, 2018, 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.
243

liabilities do not exceed 5 percent of their total consolidated assets. Thus, the final rule will not 

impact any OCC-supervised small entities. Therefore, the OCC certifies that the final rule will 

not have a significant impact on a substantial number of OCC-supervised small entities.

Board: The RFA requires an agency to either provide a regulatory flexibility analysis 

with a rule or certify that the rule 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.741 Except as 

otherwise specified below, the size standard to be considered a small business for banking 

entities subject to the proposal is $600 million or less in consolidated assets.742

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. No comments were received related to the Board’s initial 

RFA analysis, which was published with the proposal.

As discussed in the Supplementary Information, the agencies are revising the 2013 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 rule. The agencies are explicitly authorized under 

section 13(b)(2) of the BHC Act to adopt rules implementing section 13.743

 741 U.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.

742 See 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). 

743 12 U.S.C. 1851(b)(2).
244

The Board’s rule generally applies to state-chartered banks that are members of the 

Federal Reserve System, bank holding companies, foreign banking organizations, and nonbank 

financial companies supervised by the Board (collectively, Board-regulated entities). However, 

EGRRCPA, which was enacted on May 24, 2018, amended section 13 of the BHC Act and 

modified the scope of the definition of banking entity by amending the term “insured depository 

institution” to exclude certain community banks.744 The Board is not aware of any Boardregulated entities that meet the SBA’s definition of “small entity” that are subject to section 13 of 

the BHC Act and the rule following the enactment of EGRRCPA. Furthermore, to the extent 

that any Board-regulated entities that meet the definition of “small entity” are or become subject 

to section 13 of the BHC Act and the rule, the Board does not expect the total number of such 

entities to be substantial. Accordingly, the Board’s rule is not expected to have a significant 

economic impact on a substantial number of small entities. 

The Board has not identified any federal statutes or regulations that would duplicate, 

overlap, or conflict with the proposed revisions, and the Board is not aware of any significant 

alternatives to the rule that would reduce the economic impact on Board-regulated small entities.

FDIC: 

(a) Regulatory Flexibility Analysis

The RFA generally requires an agency, in connection with a final rule, to prepare and 

make available for public comment a final regulatory flexibility analysis that describes the 

 744 Under EGRRCPA, a community bank and its affiliates are generally excluded from the 

definition of banking entity, and thus section 13 of the BHC Act, if the bank and all companies 

that control the bank have total consolidated assets equal to $10 billion or less and trading assets 

and liabilities equal to 5 percent or less of total consolidated assets.
245

impact of a rule on small entities.745 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 $600 million.746 Generally, the FDIC considers a 

significant effect to be a quantified effect in excess of 5 percent of total annual salaries and 

benefits per institution, or 2.5 percent of total noninterest expenses. The FDIC believes that 

effects in excess of these thresholds typically represent significant effects for FDIC-supervised 

institutions. As discussed further below, the FDIC certifies that this final rule will not have a 

significant economic impact on a substantial number of FDIC-supervised small entities. 

(b) Reasons for and Policy Objectives of the Final Rule

The agencies are issuing this final rule to amend the 2013 rule in order to provide 

banking entities with additional clarity and certainty about what activities are prohibited and seek 

to improve the efficacy of the regulations where possible. The agencies acknowledge that many 

banking entities have found certain aspects of the 2013 rule to be complex or difficult to apply in 

practice. This final rule amends the 2013 rule to make its requirements more efficient. 

(c) Description of the Rule

First, the FDIC is amending its regulations to tailor the application of the final rule based 

on the size and scope of a banking entity’s trading activities. In particular, the FDIC aims to 

 745 5 U.S.C. 601 et seq.

746 The SBA defines a small banking organization as having $600 million or less in assets, 

where an organization's “assets are determined by averaging the assets reported on its four 

quarterly financial statements for the preceding year.” See 13 CFR 121.201 (as amended by 84 

FR 34261, effective August 19, 2019). In its determination, the “SBA counts the receipts, 

employees, or other measure of size of the concern whose size is at issue and all of its domestic 

and foreign affiliates.” See 13 CFR 121.103. Following these regulations, the FDIC uses a 

covered entity’s affiliated and acquired assets, averaged over the preceding four quarters, to 

determine whether the covered entity is “small” for the purposes of RFA.
246

further reduce compliance obligations for firms that do not have large trading operations and 

therefore reduce costs and uncertainty faced by firms in complying with the final rule, relative to 

their amount of trading activity. In addition to tailoring the application of the final rule, the 

FDIC is also streamlining and clarifying for all banking entities certain definitions and 

requirements related to the proprietary trading prohibition and limitations on covered fund 

activities and investments. Finally, the FDIC is reducing reporting, recordkeeping, and 

compliance program requirements for all banking entities and expanding tailoring to make the 

scale of compliance activity required by the rule commensurate with a banking entity’s size and 

level of trading activity.

(d) Other Statutes and Federal Rules

On May 24, 2018, EGRRCPA 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.

The FDIC has not otherwise identified any likely duplication, overlap, and/or potential 

conflict between this final rule and any other federal rule. 

(e) Small Entities Affected

The FDIC supervises 3,465 depository institutions,747 of which, 2,705 are defined as 

small banking organizations according to the RFA.748 Almost all FDIC-supervised small 

banking entities are exempt from the requirements of section 13 of the BHC Act, pursuant to 

EGRRCPA, and hence the final rule does not affect them.

 747 Categories of FDIC-supervised depository institutions are set forth in 12 U.S.C. 1813(q)(2).

748 FDIC Call Report, March 31, 2019.
247

Only one FDIC-supervised small banking entity is not exempt from the requirements of 

section 13 of the BHC Act under EGRRCPA because it has trading assets and liabilities greater 

than five percent of total consolidated assets. This bank has trading activity at levels that would 

place it in the final rule’s limited trading assets and liabilities compliance category, and it thus 

could benefit from the final rule which contains a rebuttable presumption of compliance for such 

banking entities. The FDIC estimates that banks with limited trading will save, on average, 

$115,233 from the reduced burden of this rule. This amount is far less than 5 percent of total 

salaries and 2.5 percent of total non-interest expenses for this one institution.

Consequently, the FDIC does not believe that this rule will have a significant economic 

impact on a substantial number of small entities.

(f) Certification Statement

Section 13 of the BHC Act, as amended by EGRRCPA, exempts all but one of the 2,705 

FDIC-supervised small banking entities from compliance with section 13 of the BHC Act. 

Therefore, the FDIC certifies that this final rule will not have a significant economic impact on a 

substantial number of FDIC-supervised small banking entities.

CFTC: Pursuant to 5 U.S.C. 605(b), the CFTC hereby certifies that the amendments to 

the 2013 final rule will not 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 revising 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, the Agencies are simplifying and tailoring the rule to allow banking entities to more 
248

efficiently provide financial services in a manner that is consistent with the requirements of 

section 13 of the BHC Act.

The revisions will generally apply to banking entities, including certain CFTC-registered 

entities. These entities include bank-affiliated CFTC-registered swap dealers, futures 

commission merchants, commodity trading advisors and commodity pool operators.

749 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.750 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.751

In the context of the 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 

 749 The 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 revisions. See 2013 final rule (CFTC), 79 FR 

5808 at 5813 (Jan. 31, 2014).

750 See 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); and Registration of Swap Dealers and Major Swap Participants, 77 

FR 2613, 2620 (Jan. 19, 2012) (swap dealers and major swap participants).

751 See Policy Statement and Establishment of Definitions of ‘‘Small Entities’’ for Purposes of 

the Regulatory Flexibility Act, 47 FR 18618, 18620 (Apr. 30, 1982).
249

those commodity trading advisors that are affiliated with banks that are within the scope of the 

Volcker Rule, which the CFTC expects are larger businesses.752 

The CFTC requested that commenters address whether any CFTC registrants covered by 

the proposed revisions to the 2013 final rule are small entities for purposes of the RFA. The 

CFTC did not receive any public comments on this or any other aspect of the RFA as it relates to 

the rule.

Because the CFTC believes there are not a substantial number of commodity trading 

advisors within the scope of the Volcker Rule 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 revisions to the 2013 final rule will not have a 

significant economic impact on a substantial number of small entities for which the CFTC is the 

primary financial regulatory agency.

SEC: In the proposal, the SEC certified that, pursuant to 5 U.S.C. 605(b), the proposal 

would not, if adopted, have a significant economic impact on a substantial number of small 

entities. Although the SEC solicited written comments regarding this certification, no 

commenters responded to this request.

As discussed in the Supplementary Information, the Agencies are adopting revisions to 

the 2013 rule that are intended to provide banking entities with clarity about what activities are 

prohibited and improve supervision and implementation of section 13 of the BHC Act. 

 752 In this regard, the CFTC notes that the agencies recently revised the 2013 final rule in order 

to be consistent with statutory amendments made by EGRRCPA to section 13 of the BHC Act. 

The general result of one of these statutory revisions was to exclude community banks and their 

affiliates and subsidiaries from the scope of the Volcker Rule. See 84 FR 35008. The CFTC 

believes this exclusion lessens the likelihood that any commodity trading advisors that remain 

within the scope of the Volcker Rule are small entities. 
250

The revisions the agencies are adopting today will generally apply to banking entities, 

including certain SEC-registered entities.753 These entities include SEC-registered brokerdealers, investment advisers, security-based swap dealers, and major security-based swap 

participants that are affiliates or subsidiaries of an insured depository institution.754 Based on 

information in filings submitted by these entities, the SEC believes that there are no banking 

entity registered investment advisers,755 broker-dealers,756 security-based swap dealers, or major 

security-based swap participants that are small entities for purposes of the RFA.757 For this 

 753 The SEC’s Economic Analysis, below, discusses the economic effects of the final 

amendments. See SEC Economic Analysis, supra Part V.F. 

754 See 2013 rule §_.2(c) (definition of banking entity); 2013 rule §_.2(r) as amended (definition 

of insured depository institution).

755 For 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.

756 For 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). 

757 Based on SEC analysis of Form ADV data, the SEC believes that there are not a substantial 

number of registered investment advisers affected by the proposal that qualify as small entities 

under RFA. Based on SEC analysis of broker-dealer FOCUS filings and NIC relationship data, 

the SEC believes that there are no SEC-registered broker-dealers affected by the proposal that 

qualify as small entities under RFA. With respect to security-based swap dealers and major 

security-based swap participants, based on feedback from market participants and information 

about the security-based swap markets, the Commission believes that the types of entities that 

would engage in more than a de minimis amount of dealing activity involving security-based 
251

reason, the SEC certifies that the rule, as adopted, will not have a significant economic impact on 

a substantial number of small entities.

D. Riegle Community Development and Regulatory Improvement Act.

Section 302(a) of the Riegle Community Development and Regulatory Improvement Act 

of 1994 (RCDRIA)758 requires that each Federal banking agency, in determining the effective 

date and administrative compliance requirements for new regulations that impose additional 

reporting, disclosure, or other requirements on insured depository institutions, consider, 

consistent with principles of safety and soundness and the public interest, any administrative 

burdens that such regulations would place on depository institutions, including small depository 

institutions, and customers of depository institutions, as well as the benefits of such regulations. 

The agencies have considered comment on these matters in other parts of this Supplementary 

Information.

In addition, under section 302(b) of the RCDRIA, new regulations that impose additional 

reporting, disclosures, or other new requirements on insured depository institutions generally 

must take effect on the first day of a calendar quarter that begins on or after the date on which the 

regulations are published in final form.759 Therefore, the effective date is January 1, 2020, the 

first day of the calendar quarter.760

 

swaps—which generally would be large financial institutions—would not be “small entities” for 

purposes of the RFA. See Regulation SBSR—Reporting and Dissemination of Security-Based 

Swap Information, 81 FR 53546, 53553 (Aug. 12, 2016).

758 12 U.S.C. § 4802(a).

759 12 U.S.C. § 4802(b).

760 Additionally, the Administrative Procedure Act generally requires that the effective date of a 

rule be no less than 30 days after publication in the Federal Register. 5 U.S.C. 553(d)(1). The 

effective date, January 1, 2020, will be more than 30 days after publication in the Federal 

Register.
252

E. OCC Unfunded Mandates Reform Act Determination

The OCC has analyzed the rule under the factors set forth in the Unfunded Mandates 

Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this analysis, the OCC considered 

whether the 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 for inflation). The cost estimate for the final rule is approximately $4.1 

million in the first year. Therefore, the OCC finds that the final rule does not trigger the UMRA 

cost threshold. Accordingly, the OCC has not prepared the written statement described in 

section 202 of the UMRA.

F. SEC Economic Analysis

1. Broad Economic Considerations

a. Scope

As discussed above, section 13 of the Bank Holding Company (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 a hedge fund or private 

equity fund (covered funds), subject to certain exemptions. Section 13(h)(1) of the BHC Act 

defines the term “banking entity” to include (i) any insured depository institution (as defined by 

statute), (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 such an entity.761 In addition, as discussed above, the 

Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), enacted on 

May 24, 2018, amended section 13 of the BHC Act to exclude from the definition of “insured 

 761 See 12 U.S.C. 1851(h)(1).
253

depository institution” any institution 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.762 

Certain SEC-regulated entities, such as broker-dealers, 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.763 This economic 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 final rule on SEC registrants, in their capacity 

as such, the functioning and efficiency of the securities markets, investor protection, and capital 

formation. SEC registrants affected by the final rule include SEC-registered broker-dealers, 

 762 These and other aspects of the regulatory baseline against which the SEC is assessing the 

economic effects of the final rule on SEC banking entities are discussed in the economic 

baseline. On July 22, 2019, the agencies adopted a final rule amending the definition of “insured 

depository institution” in a manner consistent with EGRRCPA.

763 Throughout 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). 

Compliance with SBSD registration requirements is not yet required and there are currently no 

registered SBSDs. However, the SEC has previously estimated that as many as 50 entities may 

potentially register as SBSDs and that as many as 16 of these entities may already be SECregistered broker-dealers. See Capital, Margin, and Segregation Requirements for SecurityBased Swap Dealers and Major Security-Based Swap Participants and Capital and Segregation

Requirements for Broker-Dealers, Exchange Act Release No. 86175 (June 21, 2019), 84 FR at 

43872 (Aug. 22, 2019), (henceforth “Capital, Margin, and Segregation Adopting Release”).

For the purposes of this economic analysis, the term “dealer” generally refers to SEC-registered 

broker-dealers and SBSDs. 
254

SBSDs, and RIAs. Thus, the below analysis does not consider broker-dealers, SBSDs, and 

investment advisers that are not banking entities, or banking entities that are not SEC registrants, 

in either case for purposes of section 13 of the BHC Act, beyond the potential spillover effects 

on these entities and effects on efficiency, competition, investor protection, and capital formation

in securities markets. Other sections of this Supplementary Information discuss the effects of the 

final rule on banking entities not overseen by the SEC for purposes of section 13 of the BHC 

Act. 

In the proposal, the SEC solicited comment on all aspects of the costs and benefits 

associated with the proposed amendments for SEC registrants, including any spillover effects the 

proposed amendments may have on efficiency, competition, and capital formation in securities 

markets. The SEC has considered these comments, as discussed in greater detail in the sections 

that follow.

b. Economic Effects and Justification

As stated in the proposal, 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. 

In the proposal, the SEC recognized a number of effects of the 2013 rule.764 The SEC 

continues to recognize that distinguishing between permissible and prohibited activities may be 

complex and costly for some firms,765 which may impede the conduct of permissible 

activities.766 The SEC continues to believe that the 2013 rule may have resulted in a complex 

 764 See 83 FR at 33520-33552.

765 See, e.g., 83 FR at 33521.

766 See, e.g., 83 FR at 33532.
255

and costly compliance regime that is unduly restrictive and burdensome for some banking 

entities, particularly smaller firms that do not qualify for the simplified compliance regime.767 

Since the 2013 rule became effective, new estimates regarding compliance burdens and new 

information about the various effects of the 2013 rule have become available.768 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 reporting and 

other compliance burdens.769 

As discussed below, a number of commenters have indicated that the proposed 

amendments would have altered the scope of permissible activities and compliance requirements 

of the 2013 rule in a way that significantly affects the economic costs and benefits of the 2013 

rule. In addition, commenters offered a variety of views on the baseline economic effects, which 

include section 13 of the BHC Act, the 2013 rule, sections 203 and 204 of EGRRCPA and 

conforming amendments, and current practices of banking entities aimed at compliance with 

these regulations.770 As part of the proposal’s economic baseline, the SEC discussed the effects 

of the agencies’ 2013 rule.771 The economic baseline section below discusses these effects in 

greater detail. 

The final rule includes amendments that impact the scope of permitted activities for all or 

a subset of banking entities (e.g., trading account definition, underwriting and market making, 

 767 Id.

768 See, e.g., 83 FR at 33522.

769 Id.

770 See, e.g., Occupy the SEC; Better Markets; SIFMA and Center for American 

Entrepreneurship.

771 See 83 FR at 33520-33521.
256

and trading and investing activities by foreign banking entities), and amendments that simplify, 

tailor, or eliminate the application of certain aspects of the 2013 rule intended to reduce 

compliance and reporting burdens while preserving and, in some cases, enhancing the 

effectiveness of the 2013 rule. Many of the final amendments seek to provide greater clarity and 

certainty about which activities are permitted under the 2013 rule, which may increase the ability 

and willingness of banking entities to engage in permitted activities, and to promote the effective 

allocation of compliance resources. 

Broadly, the SEC believes that a greater ability and willingness to engage in permitted 

activities would benefit the parties to those transactions and capital markets as a whole. Reduced 

compliance costs may translate into increased willingness of banking entities to engage in 

activities that facilitate risk-sharing and capital formation, such as underwriting securities and 

making markets. Accordingly, the rule may also benefit clients, customers, and counterparties in 

the form of an increased ability to transact with banking entities. 

The SEC continues to recognize that some of these changes may also, in certain 

circumstances, increase activities involving risk exposure or increase the incidence of conflicts 

of interest among some market participants. The returns and risks from the activities of banking 

entities may flow through to their investors. In general, to the extent that the final rule increases 

or decreases the scope of permissible activities, the final rule may dampen or magnify some of 

the economic tensions inherent in this rulemaking. As discussed above, various aspects of the 

final rule are designed to ensure that the prudential objectives of the rule are not diminished. 

Moreover, amendments adopted as part of the final rule that redefine the scope of entities subject 

to certain provisions of the 2013 rule may have an effect on competition, allocative efficiency, 

and capital formation. Where the final rule reduces burdens on some groups of market 
257

participants (e.g., on banking entities without significant trading assets and liabilities and certain 

foreign banking entities), the final rule is expected to increase competition and trading activity in 

related market segments.

Other amendments to the 2013 rule reduce compliance program, reporting, and 

documentation requirements for some banking entities. The SEC believes that these 

amendments may reduce the compliance burdens of SEC-regulated banking entities, which may 

enhance competition, trading activity, and capital formation. The SEC recognizes that these 

amendments may alter the mix of tools available for regulatory oversight and supervision. 

However, the SEC believes that the final rule as a whole is unlikely to reduce the efficacy of the 

agencies’ regulatory oversight.772 Further, under the final rule, banking entities (other than 

banking entities with limited trading assets and liabilities for which the presumption of 

compliance has not been rebutted) are still required to develop and provide for the continued 

administration of a compliance program that is reasonably designed to ensure and monitor 

compliance with the prohibitions and restrictions set forth in section 13 of the BHC Act. Finally, 

the final rule does not change the scope of entities subject to the statutory obligations and 

prohibitions of section 13 of the BHC Act.

c. Analytical Approach

The SEC’s economic analysis is informed by research on the effects of section 13 of the 

BHC Act and the 2013 rule and on related incentives conflicts, by comments received by the 

agencies from a variety of interested parties, and by the agencies’ experience administering the 

2013 rule since its adoption. Throughout this economic analysis, the SEC discusses how 

 772 See, e.g., sections IV.B.2 and IV.D.1.
258

different market participants may respond to various aspects of the final rule and considers the 

potential effects of the final rule on activities by banking entities that involve risk, on their 

willingness and ability to engage in client-facilitation activities, and on competition, market 

quality, and capital formation, as informed, among other things, by research and comment letters. 

The SEC’s analysis also recognizes that the overall risk exposure of banking entities may arise 

out of a combination of activities, including proprietary trading, market making, and traditional 

banking, as well as the volume and structure of hedging and other risk-mitigating activities. As 

discussed further below, the SEC recognizes the complex baseline effects of section 13 of the 

BHC Act, as amended by sections 203 and 204 of EGRRCPA, and implementing rules, on 

overall levels and structure of banking entity risk exposures. 

The SEC also considered the investor protection implications of the final rule. Broadly, 

the SEC notes that market liquidity can be important to investors as it may enable investors to exit 

(in a timely manner and at an acceptable price) from their positions in instruments, products, and 

portfolios. At the same time, excessive risk exposures of banking entities can adversely affect markets 

and, therefore, investors. 

The final rule tailors, removes, or alters the scope of various requirements in the 2013 

rule and adds certain new requirements. Since section 13 of the BHC Act and the 2013 rule 

combined a number of different requirements, and, as discussed above, the type and level of risk 

exposure of a banking entity is the result of a combination of activities,773 it is difficult to 

attribute the observed effects to a specific provision or set of requirements. In addition, analysis 

of the effects of the implementation of the 2013 rule is confounded by macroeconomic factors, 

 773 See, e.g., 79 FR 5541.
259

other policy interventions, and post-crisis changes to market participants’ risk aversion and 

return expectations. Because of the extended timeline of implementation of section 13 of the 

BHC Act and the overlap of the 2013 rule period with other post-crisis changes affecting the 

same group or certain sub-groups of SEC registrants, the SEC cannot rely on typical quantitative 

methods that might otherwise enable causal attribution and quantification of the effects of 

section 13 of the BHC Act and the 2013 rule on measures of capital formation, liquidity, 

competition, and informational or allocative efficiency. Moreover, empirical measures of capital 

formation or liquidity do not reflect issuance and transaction activity that does not occur as a 

result of the 2013 rule. Accordingly, it is difficult to quantify the primary issuance and 

secondary market liquidity that would have been observed following the financial crisis absent 

various provisions of Section 13 of the BHC Act and the 2013 final rule. 

Importantly, 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 enactment of Section 13 of the BHC Act and the implementation of the 2013 rule. For 

example, the role of dealers in intermediating trading activity has changed in important ways, 

including the following: in recent years, on both an absolute and relative basis bank-dealers 

generally committed less capital to intermediation activities while nonbanking dealers generally 

committed more; the volume and profitability of certain trading activities after the financial crisis 

may have decreased for bank-dealers while it may have increased for other intermediaries, 

including nonbanking entities that provide intraday liquidity using sophisticated electronic 

trading algorithms and high speed access to data and trading venues; and the introduction of 
260

alternative credit markets may have contributed to liquidity fragmentation across markets while 

potentially increasing access to capital.774

Where possible, this analysis attempts to quantify the costs and benefits expected to result 

from the final rule. 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 rule’s prohibitions that are being amended here, such as 

potential benefits for resilience during a crisis, are less readily observable under strong economic 

conditions and cannot be isolated from the effects of other post-crisis regulatory efforts intended 

to enhance resilience. Lastly, because of overlapping implementation periods of various postcrisis regulations affecting the same group or certain sub-groups of SEC registrants, the long 

implementation timeline of the 2013 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 individual amendments to the 2013 rule adopted here. 

In some instances, the SEC lacks the information or data necessary to provide reasonable 

estimates for the economic effects of the final rule. For example, the SEC lacks information and 

data, and commenters have not provided such information or data, to allow a quantification of 

(1) the volume of trading activity that does not occur because of uncertainty about how to 

demonstrate that underwriting or market making activities satisfy the reasonably expected nearterm demand (RENTD) requirement; (2) the extent to which internal limits may capture expected 

 774 See SEC. & EXCH. COMM’N, ACCESS TO CAPITAL AND MARKET LIQUIDITY, (2017) 

[hereinafter SEC Report 2017]. 
261

customer demand; (3) 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; (4) 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; and (5) the extent of the overall risk reduction (if any) caused by the 2013 

rule. Where the SEC cannot quantify the relevant economic effects, the SEC discusses them in 

qualitative terms.

2. Baseline

The baseline against which the SEC is assessing the economic effects of the final rule 

includes the legal and regulatory framework as it exists at the time of this release and current 

practices aimed at compliance with these regulations.

a. Regulation

The regulatory baseline includes section 13 of the BHC Act, as amended by EGRRCPA, 

and the 2013 rule, as amended by the agencies’ amendments conforming to EGRRCPA. Further, 

the baseline accounts for the fact that since the adoption of the 2013 rule, the staffs of the 

agencies have provided FAQ responses to questions about the 2013 rule.775 In addition, the 

federal banking agencies released a 2019 policy statement with respect to foreign excluded 

funds.776

 775 See https://www.sec.gov/divisions/marketreg/faq-volcker-rule-section13.htm, originally 

published on June 10, 2014, and most recently updated on March 4, 2016.

776 See Statement regarding Treatment of Certain Foreign Funds under the Rules Implementing 

Section 13 of the Bank Holding Company Act (July 17, 2019), available at

https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20190717a1.pdf. This 
262

The subsections below discuss in greater detail the legal and regulatory baseline 

applicable to entities that are registered with the SEC and that the SEC oversees for purposes of 

section 13 of the BHC Act. In particular, the SEC discusses the exemptions for permissible 

underwriting and market making-related activities, risk-mitigating hedging, and foreign trading; 

requirements and exemptions related to covered funds; compliance and metrics reporting 

requirements; and sections of EGRRCPA and conforming amendments that exempt certain 

banking entities from section 13 of the BHC Act and the 2013 rule.

i. The 2013 Rule

(1) Definition of the Trading Account

The scope of prohibited proprietary trading activity is determined by the definition of 

“trading account” and related exclusions.777 As discussed in detail in section IV.B.1.a, the 2013 

rule’s definition of trading account includes three prongs: the short-term intent prong, the 

market risk capital rule prong, and the dealer prong. In addition, the 2013 rule includes a 

rebuttable presumption, under which a purchase (or sale) of a financial instrument is presumed to 

be 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 financial 

instrument within 60 days of the purchase (or sale). 

The 2013 rule provides several exclusions from the definition of proprietary trading in 

section § __.3(d). In particular, under certain conditions, the 2013 rule excludes from the 

definition of proprietary trading any purchases or sales that arise under a repurchase or reverse 

 

policy statement continued the position of the Federal banking agencies that was released on July 

21, 2017, and the position that the agencies expressed in the proposal. See 83 FR 33444.

777 This aspect of the baseline is discussed in section V.F.3.b.
263

repurchase agreement or under a transaction in which the banking entity lends or borrows a 

security temporarily, any purchase or sale of a security for the purpose of liquidity management 

in accordance with a documented liquidity management plan,778 any purchase or sale by a 

banking entity that is a derivatives clearing organization or a clearing agency in connection with 

clearing financial instruments, any excluded clearing activities, any purchase or sale that satisfies 

an existing delivery obligation or an obligation in connection with a judicial, administrative, selfregulatory organization, or arbitration proceeding, any purchase or sale by a banking entity that 

is acting solely as agent, broker, or custodian, any purchase or sale through a deferred 

compensation, stock-bonus, profit-sharing, or pension plan, and any purchase or sale in the 

ordinary course of collecting a debt previously contracted in good faith.

In addition, section § __.3(e)(13) of the 2013 rule defines “trading desk” 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, and applies certain requirements 

at the “trading desk”-level of organization.779 

(2) Exemption for Underwriting and Market MakingRelated Activity

Section 13(d)(1)(B) of the BHC Act contains an exemption from the prohibition on 

proprietary trading for underwriting and market making-related activities. Under the 2013 rule, 

all banking entities with covered activities must satisfy several requirements with respect to their 

underwriting activities to qualify for the exemption for underwriting activities, discussed in 

 778 This aspect of the baseline is discussed in section IV.B.1.b.i.

779 See 2013 rule §§ __.4, __.5, App. A., App. B; final rule §§ __.4, __.5, App. A.
264

detail in section IV.B.2.a above.

780 In addition, under the current baseline, all banking entities 

with covered activities must satisfy six requirements with respect to their market making-related 

activities to qualify for the exemption for market making-related activities, as discussed in 

section IV.B.2.a.

781 

The SEC also notes 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.782 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 requirement may affect the volume and cost of 

interdealer trading.

(3) Exemption for Risk-Mitigating Hedging

Under the baseline, certain risk-mitigating hedging activities may be exempt from the 

restriction on proprietary trading under the risk-mitigating hedging exemption. To make use of 

this exemption, the 2013 rule requires all banking entities to comply with a comprehensive and 

multi-faceted set of requirements, including (1) the establishment, implementation, and 

maintenance of an internal compliance program; (2) satisfaction of various criteria for hedging 

 780 See 2013 rule § __.4 (a).

781 See 2013 rule § __.4 (b).

782 See 2013 rule § __.4 (b)(3)(i).
265

activities; and (3) the existence of compensation arrangements for persons performing riskmitigating hedging activities that are designed not to reward or incentivize prohibited proprietary 

trading. In addition, certain activities under the exemption for risk-mitigating hedging are 

subject to documentation requirements.783

Specifically, the 2013 rule requires that a banking entity seeking to rely on the exemption 

for risk-mitigating hedging must establish, implement, maintain, and enforce an internal 

compliance program that includes 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 must also provide for internal 

controls and ongoing monitoring, management, and authorization procedures, including relevant 

escalation procedures. In addition, the 2013 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 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 

 783 See 2013 rule § __.5.
266

reduction or mitigation can be demonstrated without correlation.784 In the proposal, the SEC 

referenced market participants’ estimate 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.785

To qualify for the exemption for risk-mitigating hedging, 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.786 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. 

Finally, the 2013 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 desk’s written 

 784 See 79 FR 5631.

785 See 83 FR at 33534 citing to note 18 regarding Notice Seeking Public Input on the Volcker 

Rule (August 2017), available at https://www.occ.gov/news-issuances/news-releases/2017/nrocc-2017-89a.pdf. Corresponding comment letters are available at 

https://www.regulations.gov/docketBrowser?rpp=25&so=DESC&sb=commentDueDate&po=0&

dct=PS&D=OCC-2017-0014. Letter from BOK Financial can be accessed directly at 

https://www.regulations.gov/document?D=OCC-2017-0014-0016. 

786 See 2013 rule § __.5(b)(2)(ii).
267

policies and procedures; or (3) established to hedge aggregate positions across two or more 

trading desks. 787 The documentation must include the specific identifiable risks being hedged, 

the specific risk-mitigating 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.788

(4) Exemption for Foreign Trading

Under the 2013 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 

proprietary trading prohibitions and related compliance requirements unless the transaction 

meets five criteria.789 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 

 787 See 2013 rule § __.5(c)(1).

788 See 2013 rule § __.5(c)(3). See also 2013 rule § __.20(b)(6).

789 See 2013 rule § __.6(e).
268

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.790

(5) Covered Funds

The 2013 rule generally 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 of 1940 and then 

excludes specific types of entities from the definition. As described above, the 2013 rule 

provides for market making and hedging exemptions to the prohibition on proprietary trading. 

However, the 2013 rule places additional 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 § 

__.11(c)(2) of the 2013 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 

 790 See 2013 rule § __.6(e)(3).
269

investment limits in § __.12 of the 2013 rule and is subject to the capital deduction provided in § 

__.12(d) of the 2013 rule.791 Additionally, a banking entity’s aggregate investment in all 

covered funds is limited to 3% of a banking entity’s tier 1 capital, and banking entities must 

include all ownership interests in covered funds acquired or retained in connection with 

underwriting and market making-related activities for purposes of this calculation.792 Moreover, 

under the 2013 rule, the exemption for risk-mitigating hedging activities related to covered funds 

is available only for transactions that mitigate risks associated with the compensation of a 

banking entity employee or an affiliate that provides advisory or other services to the covered 

fund.793 

Under the 2013 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 of 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. 

Under the 2013 rule, 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 risk-mitigating hedging transaction related to an ownership interest, is not 

 791 See 2013 rule § __.12(a)(2)(ii); see also § __.11(c)(2).

792 See 2013 rule § __.12(a)(2)(iii); see also § __.11(c)(3).

793 See 2013 rule § __.13(a).
270

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 have 

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.794

(6) Compliance Program

For compliance purposes, the 2013 rule differentiates banking entities on the basis of 

certain thresholds, including the amount of the banking entity’s consolidated trading assets and 

liabilities and total consolidated assets. 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 subject to reporting requirements of Appendix 

A under the 2013 rule. Banking entities that have $50 billion or more in total consolidated assets 

as of the previous calendar year end and banking entities with over $10 billion in consolidated 

trading assets and liabilities are subject to the requirement to adopt an enhanced compliance 

program pursuant to Appendix B of the 2013 rule. Additionally, banking entities that engage in 

covered activities and that have total consolidated assets of $10 billion or less as reported on 

December 31 of the previous 2 calendar years qualify for the simplified compliance regime.

 794 See Responses to Frequently Asked Questions Regarding the Commission's Rule under 

Section 13 of the Bank Holding Company Act, June 10, 2014, updated March 4, 2016, available 

at https://www.sec.gov/divisions/marketreg/faq-volcker-rule-section13.htm. 
271

The 2013 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. 

As noted in the preamble to the 2013 rule, 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 

compliance regime under the 2013 rule is progressively more stringent with the size of covered 

activities and/or balance sheet of banking entities.

Under the 2013 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.795 

Under the 2013 rule, banking entities that qualify for the simplified compliance program 

(banking entities that have total consolidated assets of less than $10 billion) are able to 

incorporate compliance with the 2013 rule into their regular compliance policies and procedures 

by reference, adjusting as appropriate given the entities’ activities, size, scope, and 

complexity.796

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 

 795 See 2013 rule § __.20(a).

796 See 2013 rule § __.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.
272

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.797

In addition, under the 2013 rule, banking entities with covered activities that do not 

qualify as those with modest activity (banking entities that have total consolidated assets in 

excess of $10 billion) and that are either subject to the reporting requirements of Appendix A or 

have more than $50 billion in total consolidated total assets as of the previous calendar year end 

are required to comply with the enhanced minimum standards for compliance as specified in 

Appendix B of the 2013 rule.798 

Appendix B requires the compliance program of the banking entities that are subject to it 

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 rule; (3) subject the compliance program to periodic 

independent review and testing and ensure the entity’s internal audit, compliance, and internal 

 797 See 2013 rule § __.20(b).

798 See 2013 rule § __.20(c) and Appendix B.
273

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 rule, any banking entity that has more than $10 billion in 

total consolidated assets as reported in the previous 2 calendar years is required to maintain 

additional records related 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 SEC-regulated business development company, a written plan 

documenting the banking entity’s determination that the seeding vehicle will become a registered 

investment company or SEC-regulated 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 SECregulated business development company within the time period specified.799

(7) Metrics

Under Appendix A of the 2013 rule, banking entities with 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 four previous quarters, as measured by the last day of each of the 

 799 See 2013 rule § __.20(e).
274

four prior calendar quarters— equals or exceeds $10 billion to meet requirements concerning 

recording and reporting certain measurements for each trading desk engaged in covered trading 

activity.800 Banking entities subject to Appendix A 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) Customer-Facing Trade Ratio.

The metrics reporting requirements are intended to assist banking entities, the SEC, and 

other regulators 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 highrisk 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 

 800 See 2013 rule § __.20(d) and Appendix A.
275

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.801 

 Under the 2013 rule, banking entities with significant trading assets and liabilities 

(Group A entities) and with moderate trading assets and liabilities (Group B 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 and Group B 

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.802 

 801 See 2013 rule § __.20 and Appendix A.

802 See 2013 rule § __.20(d)(3).
276

ii. EGRRCPA and Conforming Amendments

In accordance with section 203 of EGRRCPA,803 the agencies amended the definition of 

“insured depository institution” in § __.2(r) of the 2013 rule to exclude an institution if it, and 

every entity that controls it, has both (1) $10 billion or less in total consolidated assets and (2) 

total consolidated trading assets and liabilities that are 5% or less of its total consolidated assets. 

The agencies also amended the 2013 rule to reflect the changes made by section 204 of 

EGRRCPA. That provision modified section 13 of the BHC Act to permit, in certain 

circumstances, bank-affiliated investment advisers to share their name with the hedge funds or 

private equity funds they organize and offer. 

As discussed elsewhere,804 certain SEC-regulated entities, such as dealers and RIAs, fell 

under the definition of “banking entity” for the purposes of section 13 of the BHC Act before the 

enactment of EGRRCPA and qualified for the final amendments implementing sections 203 and 

204 of EGRRCPA.805 Therefore, the economic baseline against which the SEC is assessing the 

 803 Specifically, section 203 of EGRRCPA provides that the term “insured depository 

institution,” for purposes of the definition of “banking entity” in section 13(h)(1) of the BHC Act 

(12 U.S.C. 1851(h)(1)), does not include an insured depository institution 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. 

804 See EGRRCPA Conforming Amendments Adopting Release, 84 FR at 35008.

805 The SEC continues to believe that all bank-affiliated entities that may register with the SEC 

as security-based swap dealers and major security-based swap participants were unaffected by 

section 203 of EGRRCPA or the conforming amendments because of the size of their balance 

sheets and the amount of trading activity of their affiliated banking entities. The SEC’s analysis 

was based on DTCC Derivatives Repository Limited Trade Information Warehouse (TIW) data 

on single-name credit-default swaps. 
277

final rule incorporates the economic effects of sections 203 and 204 of EGRRCPA, as analyzed 

in the agencies’ release adopting the conforming amendments.806

b. Response to Commenters Regarding Economic Baseline and Effects of 

Section 13 of the BHC Act and the 2013 Rule

In the proposal, the SEC described the baseline effects of the 2013 rule807 and recognized 

that amendments that increase or decrease the scope of permissible activities may magnify or 

attenuate the baseline economic effects of the 2013 rule.808 The SEC also noted that 

amendments that decrease (or increase) compliance program and reporting obligations could 

alter the economic effects 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, the SEC noted that the proposed amendments may enhance trading liquidity 

and capital formation and that some of the proposed changes need not reduce the efficacy of the 

regulation or the agencies’ regulatory oversight.809

A number of commenters, however, have indicated that the proposed amendments would 

have changed the scope of permissible activities and the compliance regime in the 2013 rule in a 

manner that significantly alters the costs and benefits of that rule and offered a variety of 

assessments of the baseline economic effects of section 13 of the BHC Act and the 2013 rule.810 

In response to those comments, this section expands the discussion of the baseline and 

 806 See EGRRCPA Conforming Amendments Adopting Release, 84 FR at 35008.

807 See 83 FR at 33520-33521.

808 See 83 FR at 33521.

809 Id.

810 See, e.g., Occupy the SEC, Better Markets, SIFMA, Center for American Entrepreneurship.
278

supplements the analysis in the proposal with a discussion of the comments received by the 

agencies and, in response to comments, recent research on that topic. In the 2013 rule, the 

agencies sought to increase the safety and soundness of banking entities and to promote financial 

stability, 811 and to reduce conflicts of interest between banking entities and their customers, 

clients, and counterparties,812 while preserving the provision of valuable client-oriented 

services813 and mitigating unnecessary compliance burdens and related competitive effects.814 

Accordingly, the sections that follow address the SEC’s understanding of the baseline effects of 

section 13 of the BHC Act and the 2013 rule on (a) risk exposures, (b) conflicts of interest 

between banking entities and their customers and counterparties, (c) client-oriented financial 

services and market quality, and (d) compliance burdens and competition. 

The SEC’s analysis of these various effects reflects comments received, academic 

research, and the SEC’s experience overseeing registered entities for purposes of section 13 of 

the BHC Act. Importantly, research studies cited below are limited to their specific settings and 

are subject to various methodological and measurement limitations, as discussed in the sections 

that follow. Moreover, as described below, some studies empirically examine the relevant 

effects around the implementation of the 2013 rule, while others focus on the anticipatory 

response of market participants around the enactment of section 13 of the BHC Act and prior to 

the effective date of the 2013 rule. As a result, the SEC recognizes that these findings may have 

limited generalizability and may or may not extend to various groups of SEC registrants. 

 811 See, e.g., 79 FR at 5666, 79 FR at 5574, 79 FR at 5541.

812 See, e.g., 79 FR at 5659. 

813 See, e.g., 79 FR at 5541.

814 See, e.g., 79 FR at 5541, 79 FR at 5584, 79 FR at 5616, 79 FR at 5671, 79 FR at 5673, 79 FR 

at 5675, 79 FR at 5713.
279

As discussed below, some research suggests that section 13 of the BHC Act and the 2013 

rule may have reduced risk exposures of banking entities related to trading, but may not have 

reduced the overall exposure to risk of some banking entities. Other research suggests that the 

2013 rule may have partly mitigated certain conflicts of interest between banking entities and 

clients in a limited set of banking entity-client relationships. Moreover, some research suggests 

that that the 2013 rule imposed large compliance costs that may have disproportionately affected 

smaller banking entities and may have decreased the willingness and ability of banking entities 

to engage in certain client facilitation activities. 

In addition, commenters suggested that the agencies must consider the effects of the 2013 

rule and proposed amendments in light of the overall effects of new requirements on banking 

entities, including Basel III, regulations of systemically important financial institutions, the 

SEC’s money market reform, and the liquidity coverage ratio.815 Where relevant, the analysis 

that follows discusses the direct effects of section 13 of the BHC Act, the 2013 rule, sections 203 

and 204 of EGRRCPA and conforming amendments, and the final rule, as well as how they may 

interact with the effects of other related financial regulations.

i. Risk Exposure

As discussed in the proposal, in implementing section 13 of the BHC Act, the agencies 

sought to increase the safety and soundness of banking entities and to promote financial stability, 

among other things.816 The regulatory regime created by the 2013 rule was intended to enhance 

 815 See CCMC; Oonagh McDonald; JBA; Occupy the SEC and Systemic Risk Council.

816 See, e.g., 79 FR at 5666, 79 FR at 5574, 79 FR at 5541, 79 FR at 5659. See also Senators 

Merkley et al.
280

regulatory oversight and compliance with the substantive prohibitions in section 13 of the BHC 

Act.817 

In response to the proposal, some commenters indicated that the benefits from the 

statutory prohibition in section 13 of the BHC Act and implementing rules on proprietary trading 

include reduced banking profits resulting from proprietary trading and corresponding reductions 

in the costs associated with bailouts;818 prudent risk management that makes job-creating 

functions of banks more viable;819 greater financial stability;820 dampened bubbles in products 

such as synthetic collateralized debt obligations,821 and reduced highly risky bank trading 

activities and hedge fund and private equity investments that can threaten financial stability.822 

Other commenters stated that proprietary trading was not the cause of the 2007-2008 financial 

crisis and that almost every financial crisis in history has been driven by classic extensions of 

credit;823 that rather than reducing systemic risk, section 13 of the BHC Act and the 

implementing rules harm the healthy functioning of the financial services industry;824 and that 

section 13 of the BHC Act and the implementing rules are no longer necessary given Basel III 

 817 See, e.g., 83 FR at 33520.

818 See, e.g., Occupy the SEC.

819 Id.

820 See, e.g., Better Markets and NAFCU. 

821 See, e.g., Volcker Alliance. 

822 See, e.g., CAP.

823 See, e.g., American Action Forum.

824 See, e.g., American Action Forum and CAP.
281

capital requirements, stress testing, and liquidity coverage ratio rules that promote short-term 

resilience of bank risk profiles.825

In response to the comments discussed above, the SEC has analyzed relevant academic 

research on these issues. Most existing qualitative analysis and quantitative research on moral 

hazard,826 incentives to increase risk exposures that arise out of deposit insurance827 and implicit 

bailout guarantees,828 and systemic risk implications of proprietary trading do not explicitly 

analyze the effects of section 13 of the BHC Act or of the 2013 rule.829 

Several recent academic studies examined the baseline effects of section 13 of the BHC 

Act and implementing regulations on activities by banking entities that involve market risk. As 

discussed in detail below, this research suggests that, although section 13 of the BHC Act and the 

2013 rule may have reduced risk exposure related to trading, it is not clear that the 2013 rule 

 825 See Oonagh McDonald. See also infra note 849.

826 A classic definition of moral hazard is “the loss exposure of an insurer (the FDIC) that results 

from the character or circumstances of the insured” (here, the banking entity). See ANTHONY

SAUNDERS & MARCIA CORNETT, FINANCIAL INSTITUTIONS MANAGEMENT: A RISK 

MANAGEMENT APPROACH, 573 (8th ed. 2014) p. 573. 

827 Saunders and Cornett (2014) discusses how deposit insurance reduces the risks of depositors 

or other liability holders engaging in a run on a banking entity and the related costs of a banking 

entity’s failure. However, if the risk of bank failure is not adequately priced in the insurance 

premium paid by the banking entity, deposit insurance can create incentives to engage in more 

risky activities. Moreover, even absent deposit insurance, the limited liability of a banking 

entity’s shareholders still creates incentives to risk shift at the expense of depositors, 

bondholders, and other fixed claimants. See Saunders and Cornett (2014), ch. 19.

828 Deposit insurance and implicit bailout guarantees may give rise to risk taking incentives that 

are not specific to proprietary trading. In other words, even in the absence of proprietary trading, 

both deposit insurance and implicit bailout guarantees may create incentives for banking entities 

to increase risk exposures from permissible activities such as lending, underwriting, and market 

making. Thus, a prohibition of proprietary trading need not by itself reduce moral hazard or 

overall risk exposures of banking entities if banking entities increase risk exposures from other 

activities during the same time. 

829 For a literature review, see, e.g., Sylvain, Benoit et al., Where the Risks Lie: A Survey on 

Systemic Risk, 21 REV. FIN. 109 (2017). See also 83 FR 33533 note 350. 
282

reduced the overall risk of individual banking entities and potentially of banking entities as a

whole. 

For example, one study830 compares changes in equity returns and CDS spreads of 93 

U.S. listed banks affected by post-crisis financial reforms and of those that were not. 

Specifically, the study finds that news concerning the potential enactment of substantive 

prohibitions in section 13 of the BHC Act831 led to a rise in credit default swap (CDS) spreads 

(by as much as 17-18 basis points) and to a decrease in equity prices (statistically significant in 

most specifications). The paper interprets the results as an indication that the proprietary trading 

prohibition reduced bank profitability because of the spinoffs of profitable trading and swap 

desks. In an additional analysis, the paper finds that these effects were more significant for 

investment banks, for banks that are more likely to be systemically important,832 and for banks 

that are closer to default. Notably, the paper does not examine changes in specific types of risky 

activities, so it is possible that the observed effects may have occurred for reasons unrelated to 

the proprietary trading prohibitions.833 While the paper concludes that the reforms reduced bail-

 830 See Alexander Schäfer et al., Financial Sector Reform after the Subprime Crisis: Has 

Anything Happened?, 20 REV. FIN. 77 (2016). 

831 Specifically, the paper performs an event study around January 21, 2010, when President 

Obama announced support for Volcker Rule-type restrictions on proprietary trading by banking 

entities. See Remarks by the President on Financial Reform, Office of the Press Secretary, The 

White House, January 21, 2010, available at https://obamawhitehouse.archives.gov/the-pressoffice/remarks-president-financial-reform, last accessed 6/27/2019. 

832 Specifically, the paper measured systemic importance on the basis of the Financial Stability 

Board’s list of 29 global systemically important financial institutions published on November 4, 

2011. See Financial Stability Board Identifies 29 Global SIFIs and Announces Agreed Policy 

Measures, Mondaq, November 4, 2011, last accessed 7/9/2013.

833 Another study by Gropp et al. (2011) finds that government guarantees can increase risktaking incentives in competitor, but not in protected, banks. See Reint Gropp et al., Competition, 

Risk-Shifting, and Public Bailout Policies, 24 REV. FIN. STUD. 2084 (2011).
283

out expectations, the rise in CDS spreads and the decrease in equity prices are also consistent 

with the interpretation that market participants reacted to the event as a change increasing the 

risk to banking entities, for instance because of the expected shift to risk taking through lending 

or reduced hedging of lending activities with trading activities. For instance, a shift away from

trading activity and toward more illiquid and potentially less diversified lending or trading 

activities may have increased banking entities’ exposure to liquidity and counterparty risks, and 

this risk may have been priced in higher CDS spreads of banking entities. 

In contrast, another paper834 examines the cumulative market reaction to 15 events 

related to section 13 of the BHC Act using a sample of 784 listed banks and seeks to distinguish 

the events from announcements surrounding Orderly Liquidation Authority events. The paper 

finds significant negative cumulative abnormal equity returns (-11.97%) for targeted banks,835

consistent with targeted banks losing out on profitable opportunities, and positive cumulative 

abnormal returns (7.1%) for non-targeted banks. Similarly, the paper estimates that targeted 

banks experienced a 0.021% increase in CDS spreads, consistent with the changes making 

targeted banks riskier, whereas non-targeted banks experienced a decline in CDS spreads of -

0.049%. In addition, banks with a higher measure of systemic risk (marginal expected shortfall), 

higher illiquidity (Amihud (2002)836 measure and the bid-ask spread), and worse reporting 

quality (abnormal loan loss provisions) experienced more negative market reactions to events 

surrounding section 13 of the BHC Act and the 2013 rule. On aggregate, the paper finds that 

 834 See Fayez Elayan et al., The Impact of the Volcker Rule on Targeted Banks, Systemic Risk, 

Liquidity, and Financial Reporting Quality, 96 J. ECON. & BUS. 69 (2018).

835 The paper defines targeted banks as banks that issued or had exposure to mortgage-backed 

securities or other securitized products or had other asset write-downs reported in news sources.

836 See Amihud Yakov, Illiquidity and Stock Returns: Cross-section and Time Series Effects, 5 J. 

FIN MARKETS 31 (2002).
284

equity returns rose and CDS spreads declined for sample banks, and concludes that the rule 

targeted larger institutions and enhanced the relative position of smaller banks. 

Four factors limit the interpretation of this paper’s results. First, the validity of inference 

from event studies is affected by the presence of confounding events on announcement days. 

While a study of a greater number of event days may provide a more complete picture of market 

responses to even minor announcements concerning the reform of interest, it increases the 

likelihood of confounding events occurring on event days, ceteris paribus. Second, the 

proprietary trading prohibitions scoped in all, not just a subset of, banking entities, while the 

paper hypothesizes differential effects of the proprietary trading prohibition on targeted and nontargeted banks. As a result, the measurement of targeted banks may simply be capturing prior 

performance of an institution during times of severe stress or the likelihood of an institution 

being affected by other regulatory restrictions or sanctions and not necessarily the degree of 

exposure to the proprietary trading prohibition. Third, since the management of bank balance 

sheets and risk exposures can take several quarters, narrow event windows may reflect market 

participants’ expectations but may not be informative about ex-post changes in risky bank 

activities in response to the event.837 Finally, all but one event considered in this study relate to 

the substantive prohibitions in section 13 of the BHC Act (and not the agencies’ implementing 

rules), and all of the events examined in this study precede the adoption of the 2013 rule. 

A recent paper uses regulatory data on net trading profits reported by bank holding 

companies to the Federal Reserve under the Market Risk Capital Rule and examines the risk-

 837 For example, see the below discussion of a study by Keppo and Korte (2018) examining 

changes in bank risk taking over a 10 quarter period and finding that banks did not decrease risktaking.
285

taking of U.S. banks via trading books before and after the 2013 rule.838 The paper finds that, 

prior to 2014, U.S. banks had significant exposures to equity risk factors through their trading 

books, but that such trading exposures declined after the implementing regulations. The paper 

also finds that, in response to the 2013 rule, the trading desks of U.S. banks have decreased their 

exposures to interest rate risk but not to credit risk. Consistent with bank reliance on certain 

exemptions with respect to commodities, foreign exchange, and currency trading, U.S. banks 

also continue to be exposed to currency risk. Importantly, post-2013 rule credit and dollar risk 

exposures are far less significant in magnitude compared to pre-2013 rule exposure to equity risk 

factors. The paper concludes that the ban on proprietary trading was effective in curtailing large 

exposures. These results seem to suggest that holding companies significantly reduced their 

exposure to risk from trading activities. 

Four considerations limit the interpretation of these results. First, the paper’s tests focus 

on data aggregated to the weekly frequency, and it is not clear if the results would continue to 

hold using daily, monthly, or quarterly frequencies. For example, the results appear inconsistent 

with other research analyzing FR Y-9C data on trends in quarterly trading positions and trading 

revenues, which does not find significant changes in equity profits and losses after the 2013 

rule.839 Second, anticipatory compliance and confounding regulatory and macroeconomic events 

 838 See Antonio Falato et al., “Banks as Regulated Traders," FINANCE FIN. & ECON. DISCUSSION

SERIES 2019-005, WASHINGTON: BOARD OF GOVERNORS OF THE FED. RESERVE SYSTEM

(2019), available at https://doi.org/10.17016/FEDS.2019.005, last accessed 5/20/2019.

839 See Begenau, 2019, Discussion of “Banks as Regulated Traders,” NBER CF Spring meeting, 

April 12, available at 

https://begenau.people.stanford.edu/sites/g/files/sbiybj1926/f/nber_cfspring2019_begenau_disc.p

df, last accessed 07/15/2019. See also Juliane Begenau et al., Banks’ Risk Exposures, (Nat’l 
286

(unaccounted for in the paper) complicate definitive causal inference. Third, the paper does not 

examine the possibility that, since higher risk is generally compensated with higher expected 

returns,840 banking entities may have offset risk reductions in their trading books by shifting risk 

into illiquid banking books. Fourth, the paper also does not test changes in the total amount of 

risk on bank balance sheets before and after the relevant regulatory shocks or consider the effects 

of the implementing regulations on the overall risk of U.S. banking entities. 

Another study empirically examines the effects of the substantive prohibitions of section 

13 of the BHC Act on the returns and overall risk of publicly traded U.S. bank holding 

companies before and after the third quarter of 2010.841 Consistent with the papers discussed 

above, this paper finds that most affected bank holding companies, i.e. those with the largest 

trading books before 2010, reduced trading books relative to total assets by 2.34% more than 

other bank holding companies. However, this result is generally consistent with mean reversion 

in trading activity by banks that may have suffered the greatest trading losses during the crisis. 

In addition, the paper does not directly distinguish between proprietary trading and client 

facilitation trading or hedging trading. Although the paper finds a decline in trading activity and 

 

Bureau of Econ. Research, Working Paper No. 21334, 2015) available at

http://www.nber.org/papers/w21334, last accessed 07/15/2019. 

840 This effect is commonly known as the “risk-return tradeoff”: if an investor is willing to take 

on risk, there is a reward of higher expected returns. See ZVI BODIE ET AL., INVESTMENTS, G-11 

(9th ed. 2011). 

841 See Jussi Keppo & Josef Korte, Risk Targeting and Policy Illusions – Evidence from the 

Announcement of the Volcker Rule, 64 MGMT. SCI. 215 (2018). Also cited as an example of 

“pathbreaking work assessing the many costs and benefits of the Rule” in Robert J. Jackson Jr., 

“Proposed Amendments to the Volcker Rule,” Securities and Exchange Commission, June 5, 

2018, note 21 available at https://www.sec.gov/news/public-statement/jackson-statementproposed-amendments-volcker-rule.
287

a general decline in overall bank risk (measured by the z-score),

842 the paper does not find a 

pronounced effect on most affected bank holding companies; in fact, some of the results suggest 

that most affected banks became riskier than less affected banks. The paper finds that the 

channel for this effect on overall risk is an increase in asset return volatility of affected bank 

holding companies. In addition, the paper finds no significant differences in the volatility of 

bank stock prices and liquidity ratios of affected and unaffected entities. The paper concludes 

that the risk taking incentives of banking entities have not changed and that affected banks have 

been able to maintain their levels of risk taking by becoming less likely to use remaining trading 

assets to hedge banking book returns.843 The SEC notes that the sample period of the paper ends 

prior to the full effective date of the 2013 final rule, which may partly limit the interpretation of 

these results. 

 842 The z-score is one of the most popular multiple discriminant analysis models of bankruptcy, 

originally developed by Altman (1968) and updated frequently since. Multiple discriminant 

analysis consists of identifying a linear combination of accounting measures that provides the 

best fit for the observed default and non-default outcomes in a particular sample of firms. The 

variables that enter into the z-score include: the ratio of working capital to total assets; retained 

earnings to total assets; earnings before interest and taxes to total assets; market value of equity 

to total liabilities; and net sales to total assets. While the weights on these components of the zscore are periodically recalibrated using more recent samples, all components enter with a

positive sign, such that an increase in each of the variables decreases the probability of 

bankruptcy. See PHILLIPPE JORION, GARP FINANCIAL RISK MANAGER HANDBOOK: FRM

PART I / PART II, 475 (2011).

843 In another context, Keppo and Korte (2018) also find that, after the passage of the GrammLeach-Bliley Act that repealed the Glass-Steagall Act, the overall risk (measured by the z-score) 

of affected banks relative to unaffected banks did not change. In that context, the paper finds 

that affected banks did significantly increase their trading risk and decrease the risk of their 

banking book.
288

Another recent paper844 uses structural methods to isolate and estimate the effects of the 

limitation of bank proprietary trading in section 13 of the BHC Act on the probability of bank 

defaults, earnings, and the value of their equity. Using a model calibrated to the data from a 

sample of 34 of the most affected U.S. banks, this paper finds that banks—and particularly banks 

most affected by section 13 of the BHC Act—may have become riskier after the statutory 

change. In the model, the key mechanism behind this effect is the banks’ ability to respond to 

shocks: since the rule leads to a reduction in the size of the trading book and increases the 

relative weight of an illiquid banking book, banks face greater difficulties scaling down the bank 

book when faced with negative earnings shocks after the rule. The model assumes no 

implementation costs, as the costs were sunk when the statutory prohibition came into effect and 

yields an estimate of between -0.72% and 56.72% increase in average bank default probability 

after the law. This estimate range may suggest that the overall risk of some banks may have 

increased, in some cases, after the law. In the model, banks for which a small trading book is 

optimal, banks with a profitable and low-risk bank book, and banks that take more risk through 

leverage, do not experience this rise in the default risk after the proprietary trading prohibition. 

Because the banking book is more profitable and volatile than the trading book for most affected 

banks, the paper actually estimates no significant decrease and, in some cases, an increase in 

banks’ expected earnings and earnings volatility (a range of -0.04% to 0.73% depending on 

 844 See Sohhyun Chung et al., The Impact of Volcker Rule on Bank Profits and Default 

Probabilities, (SSRN Working Paper, Feb. 27, 2019), available at

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2167773, last accessed 4/23/2019

Also cited in Robert J. Jackson Jr., “Proposed Amendments to the Volcker Rule,” Securities and 

Exchange Commission, June 5, 2018, note 22 available at https://www.sec.gov/news/publicstatement/jackson-statement-proposed-amendments-volcker-rule.
289

calibration).845 An important caveat for the interpretation of these results is the sensitivity of the 

estimates to modeling assumptions, the limited sample used in model calibration, and the 

extremely broad range of estimates of an increase in average bank default probability after the 

law. 

Finally, a recent paper846 identified three potential channels behind the effects of section 

13 of the BHC Act and the 2013 rule on risky activities of bank holding companies: (i) risks 

from proprietary trading activity itself, (ii) risk from a lack of diversification of bank revenue 

(trading and non-trading revenue), and (iii) risk from similarity among banks. The paper 

measures overall risk with the z-score (as well as volatility in returns, revenues, and returns on 

assets) and systemic risk with marginal expected shortfall (average stock return of each bank 

holding company during bottom 5th percentile shocks to 1-year market returns; it also measures 

marginal expected shortfall for the financial industry, and tail beta)847 and documents two main 

results. First, an index of bank revenue diversification reduces measures of bank and systemic 

risk, while similarity across banks increases systemic risk, and trading activity increases both. 

Second, the 2013 rule reduced risks from trading activity of affected banks, reduced the 

diversification of bank revenue of affected banks, and increased similarity across banks. 

 845 The estimate of -0.04% was obtained using parameters for “median hedge fund banks,” 

calculated as the median of the 34 sample banks, for which the drift and volatility of the trading 

earnings were estimated from Credit Suisse Long/Short Equity Hedge Fund Index data for 2000 

through the beginning of 2010. The estimate of 0.73% was obtained using drift and trading 

earnings volatility for an asset-weighted mean of sample banks.

846 See Christina Bui and Talis Putnins, The Intended and Unintended Effects of the Volcker 

Rule, (Aug. 31, 2018) (working paper), available at

http://fmaconferences.org/SanDiego/Papers/Volcker_SubmissionFMA.pdf, last accessed 

4/23/2019.

847 Acharya et al. (2017) finds that a bank’s impact on systemic expected shortfall is affected by 

its marginal expected shortfall and leverage. See Viral Acharya et al., Measuring Systemic Risk, 

30 REV. FIN. STUD. 2 (2017). 
290

The interpretation of these results may be limited because of respective methodologies, 

measurement, identifying assumptions, and residual confounding, as well as the general 

limitations noted at the outset. However, these results are broadly consistent with other research 

that finds that banking entities can respond to regulations by risk shifting within an asset class 

while remaining in compliance848 and that the implementation of other financial reforms can 

create effects inconsistent with the regulators’ intentions.849

Some commenters indicated that restricting pay practices of banking entities may 

effectively reduce proprietary trading cross-subsidized by taxpayers and accordingly lower the 

risks of banking entities.850 While the final rule does not amend existing requirements or impose 

new requirements related to compensation practices of banking entities, the SEC notes two 

incentive effects relevant for the consideration of these issues. First, as discussed above, 

proprietary trading is one of many activities through which a banking entity can take risk. Both 

deposit insurance and implicit government bailout guarantees incentivize risk taking that is not 

 848 See Ran Duchin and Denis Sosyura, Safer Ratios, Riskier Portfolios: Banks’ Response to 

Government Aid, 113 J. FIN. ECON. 1 (2014).

849 For example, Sundaresan and Xiao (2019) show that the interaction of liquidity requirements 

of Basel III and the money market fund reform may have increased the reliance of private 

financial institutions on liquidity provided by Federal Home Loan Banks that enjoy an implicit 

government guarantee. The paper concludes that the rules increased the role of a governmentsponsored enterprise in the aggregate liquidity transformation and the reliance of private 

institutions on public liquidity backstops. In another context, Baghai et al. (2019) finds that 

following the money market fund reforms, safer funds exited the industry, the remaining funds 

increased their portfolio risk, and issuers with lower credit risk experienced a reduced access to 

money market funding. See Suresh Sundaresan and Kairong Xiao, Unintended Consequences of 

Post-Crisis Liquidity Regulation (Aug. 9, 2019) (working paper) last accessed 8/29/2019. See 

also Ramin Baghai et al., Liability Structure and Risk-Taking: Evidence from the Money Market 

Fund Industry, (Aug. 18, 2019) (working paper) last accessed 8/29/2019. 

850 See, e.g., CAP and Public Citizen, citing Robert J. Jackson Jr., “Proposed Amendments to the 

Volcker Rule,” Securities and Exchange Commission, June 5, 2018, available at 

https://www.sec.gov/news/public-statement/jackson-statement-proposed-amendments-volckerrule on potential effects of pay practices on proprietary trading.
291

specific to proprietary trading. Even in the absence of proprietary trading, deposit insurance and 

implicit bailout guarantees may lead banking entities to take greater risks through lending and 

permitted underwriting and market making, among other things. As a result, a prohibition on 

proprietary trading need not by itself reduce the overall risk of banking entities if banking 

entities increase risk through other activities during the same time. 

Second, the incentives to take on greater risks described above are those of both a 

banking entity’s shareholders who are residual claimants on the banking entity’s assets and 

management. Under limited liability, all shareholders enjoy a limited downside (at worst, 

shareholders stand to lose their investment) and an unlimited upside if the firm performs well 

(the value of shareholders’ equity depends on the value of the assets net of the value of fixed 

claims, such as claims of debtholders, depositors, and employees).851 Thus, the incentives of 

banking entities to take on greater risks discussed above may persist so long as any restrictions 

on pay practices leave the incentives of a banking entity’s management and employees even 

partly aligned with those of shareholders. 

ii. Conflicts of Interest

As discussed in the proposal, in implementing section 13 of the BHC Act, the agencies 

also sought to reduce conflicts of interest between banking entities and their customers.852 Some 

commenters indicated that bank trading activities and interests in hedge funds and private equity 

 851 See, e.g., JONATHAN BERK & PETER DEMARZO, CORPORATE FINANCE, 552-53 (3rd ed. 

2014), discussing how leverage can (1) incentivize shareholders to shift from lower-risk to 

higher-risk assets (the “asset substitution” problem); and (2) induce shareholders to undertake 

negative net present value, but sufficiently risky projects (the “over-investment” problem). See 

also Michael Jensen and William Meckling, Theory of the Firm: Managerial Behavior, Agency 

Costs and Ownership Structure, 3 J. FIN. ECON. 305 (1976).

852 See, e.g., 79 FR at 5659. 
292

funds resulted in significant conflicts of interest between banks and their customers.853 One 

commenter also indicated that the agencies should amend the provisions concerning material 

conflicts of interest by permitting banking entities to rely on information barriers under certain 

circumstances.854 

In response to these comments, the SEC reviewed relevant research on conflicts of 

interest between banking entities and their customers. As discussed below, related research 

generally examines trading of banking entities in stocks, bonds, or options of their advisory and 

underwriting clients. While the findings are somewhat mixed and limited to their specific 

empirical settings, this research is consistent with the presence of such conflicts in certain groups 

of merger and acquisition (M&A) deals. In addition, one study finds that a narrow type of 

conflicts of interest between banking entities and their clients may have decreased after the 

implementation of the 2013 rule.

Specifically, a recent study855 examines both the presence of conflicts of interest between 

advisor banks and their customers based on banks’ options holdings, and changes in such trading 

activity around the implementation of the Volcker Rule. The paper documents three main 

results. First, the paper finds that merger advisors tend to increase their holdings in call options 

relative to put options in merger targets during the quarter before the announcement. Second, 

merger advisors are significantly more likely to increase put option holdings in the acquirer 

 853 See, e.g., CAP.

854 See SIFMA.

855 See Michelle Lowry et al., Informed Trading By Advisor Banks: Evidence from Options 

Holdings, 32 REV. FIN. STUD 605 (2018).
293

firm.856 In combination with the literature’s general finding of average negative announcement 

returns in acquirer firms and positive announcement returns in target firms, the paper argues that 

these results are suggestive of informed trading by advisor banks on client firms. Third, within 

the subsample of affected deals (deals in which one or more advisor banks ceased proprietary 

trading operations around the enactment of section 13 of the BHC Act) after 2011, the paper 

finds that advisors did not increase their net call option holdings on target firms before merger 

announcements. The paper concludes that, in this narrow setting, the Volcker Rule may have 

decreased banks’ options trading on client information. Importantly, the paper finds that some of 

this bank activity was replaced by hedge fund activity: specifically, hedge funds increased their 

informed trading in options of M&A client firms around the same time in the same subsample of 

deals. 

The SEC is also aware of a broader body of research that empirically tests the existence 

and magnitude of conflicts of interest between banks and their customers in the context of 

advising and underwriting relationships and that does not directly empirically test the effects of 

section 13 of the BHC Act or the 2013 rule on the presence or magnitude of such conflicts. One 

article in the legal literature857 empirically measures the profitability of trading by banks that 

have advisory clients and are subject to reporting requirements as temporary insiders. They 

document that such trading by banks in the stocks of advisory clients is profitable (with an 

 856 To the degree that some advisor banks may have an underlying (long) risk exposure to 

acquirer firms’ equity, buying put options is also consistent with risk-mitigating hedging. 

857 See Sureyya Avci et al., Eliminating Conflicts of Interests in Banks: The Significance of the 

Volcker Rule, 35 YALE J. REG. 343 (2017). Also cited in Robert J. Jackson Jr., “Proposed 

Amendments to the Volcker Rule,” Securities and Exchange Commission, June 5, 2018, note 20, 

available at https://www.sec.gov/news/public-statement/jackson-statement-proposedamendments-volcker-rule.
294

estimated average 25% return on their trades), that the trading centers around adverse events, and 

that the elimination of Glass-Steagall restrictions in 2002 was associated with more frequent and 

more profitable trading. However, the paper does not empirically test the effects of section 13 

of the BHC Act or of the 2013 rule.

Finance research on this type of conflict of interest between banks and their customers 

finds mixed effects. One of the earlier papers858 examines trading in M&A target firms by the 

advisor banks of bidders and links advisor pre-announcement stakes in target firms with the 

probability of deal success and with the target premium. They document positive returns of this 

trading strategy and conclude that advisors acquire positions in deals of their advisory clients, as 

well as influence deal outcomes. Since such advisor behavior benefits the bidder, the authors 

recognize that they cannot rule out the alternative explanation that the bidder’s board retains the 

advisor with strong incentives for deal completion. Outside of the M&A context, other work859

explores the trading activity of IPO underwriters and finds that lead underwriter trades in IPO 

firms are associated with subsequent IPO abnormal returns. 

Another study860 focuses on bond trading and uses a sample covering 1994 through 2006 

to examine the trading of bond dealers affiliated with M&A advisory banks with insurance 

companies. The study finds weak evidence that when affiliated dealers are one side of a bond 

transaction, they earn higher bond returns than unaffiliated dealers, and that affiliated dealers sell 

more of the bonds that may lose value ahead of bad news than unaffiliated dealers. The paper 

 858 See Andriy Bodnaruk et al., Investment Banks as Insiders and the Market for Corporate 

Control, 22 REV. FIN. STUD. 4989 (2009).

859 See Yao-Min Chiang et al., The Information Advantage of Underwriters in IPOs, MGMT. SCI. 

(forthcoming 2019).

860 See Semi Kedia and Xing Zhou, Informed Trading Around Acquisitions: Evidence From 

Corporate Bonds, 18 J. FIN. MKT. 182 (2014). 
295

observes only a subset of such dealer trades with insurance companies and is unable to evaluate 

whether affiliated dealers are net buyers or sellers of affected bonds before bad news. The study 

concludes that there is weak and suggestive evidence that transfer of information within financial 

institutions is one of the potential information sources before public announcements. 

Similarly, another paper861 finds no evidence of information leakage because of 

investment bank M&A advisory, underwriting, or lending relationships from 1997 through 2002. 

Specifically, the paper finds no evidence that investment bank clients buy shares in takeover 

targets in advised deals. Similarly, bank clients with previous underwriter or lending 

relationships do not trade or earn abnormal returns before earnings announcements. The paper 

also examines market making imbalances and investment returns by connected brokerage houses 

and finds that they do not trade profitably ahead of earnings announcements by their IPO, SEO, 

M&A client, or borrower firms. The paper concludes that neither brokerage houses nor their 

clients trade on inside information available to the brokerage because of their market making or 

advising roles. 

The SEC continues to note that the above studies are limited to their specific empirical 

settings and, as can be seen above, different empirical design, measurement, and identification 

approaches limit inference in each of the papers discussed above. Moreover, the SEC continues 

to note that the scope of this economic analysis is limited to SEC registrants, investors in 

securities markets, and the functioning of securities markets. While the research discussed above 

does not focus specifically on banking entities that are SEC registrants, some of the incentive 

 861 See John M. Griffin et al., Examining the Dark Side of Financial Markets: Do Institutions 

Trade on Information from Investment Bank Connections, 25 J. FIN. ECON. 2155 (2012).
296

effects and conflicts of interest discussed above may extend to banking entities overseen by the 

SEC.

iii. Client-Oriented Services and Market Quality

In the 2013 rule, the agencies recognized that client-oriented 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.862

In the proposal, the agencies stated that compliance with the conditions of the 

underwriting and market making exemptions under the 2013 rule, such as RENTD, 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.863 Since forecasting future customer demand involves uncertainty, particularly in 

less liquid and more volatile instruments and products, banking entity affiliated dealers 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 transactions864 with 

customers, which, along with reducing profits, may reduce the volume of transactions intermediated 

by banking entities.865 

 862 See, e.g., 79 FR at 5541, 79 FR at 5546, 79 FR at 5561. 

863 See, e.g., 83 FR at 33532.

864 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.

865 See, e.g., 83 FR at 33532.
297

Moreover, consistent with the views of some commenters,866 the SEC believes that, as a 

baseline matter, the 2013 rule creates significant uncertainty among market participants 

regarding their ability to rely on the risk-mitigating hedging exemption. For example, there may 

be considerable uncertainty regarding whether a potential hedging activity will continue to 

demonstrably reduce or significantly mitigate an identifiable risk after it is implemented.867 

Unforeseeable changes in market conditions and other factors could reduce or eliminate the 

intended risk-mitigating effect 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.868 According to commenters, uncertainty and 

compliance burdens related to the risk-mitigating hedging exemption are leading to less timely, 

less flexible, and less efficient hedging.869

The SEC continues to recognize that SEC-regulated entities routinely engage in both 

static and dynamic hedging at the portfolio (not the transaction) level and monitor and reevaluate 

on an ongoing basis aggregate portfolio risk exposures, rather than the risk exposure of 

individual transactions.870 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).871 As a baseline matter, 

the SEC notes that the 2013 rule permits dynamic hedging. However, the 2013 rule requires the 

 866 See, e.g., ABA.

867 See, e.g., 83 FR at 33465.

868 Id.

869 See, e.g., JBA and SIFMA.

870 See, e.g., 83 FR at 33535.

871 Id.
298

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 permitting a banking entity to provide documentation for the hedging decisions 

regarding a portfolio as a whole. 

The agencies have received a number of comments concerning the baseline effects of 

section 13 of the BHC Act and the 2013 rule on client facilitation activities, hedging, and market 

quality. The agencies received comments that the 2013 rule maintains the depth and liquidity of 

U.S. capital markets and that market liquidity remains within historical norms;872 that there is no 

clear evidence that the 2013 rule has affected liquidity at a level that should cause concern;873

and that liquidity may signal a bubble and should not be a key or even a major metric in 

assessing the effects of reforms.874 Other commenters stated that the 2013 rule has imperiled 

valuable market making and risk-mitigating hedging and reduced market liquidity; 875 that the 

prescriptive nature of the 2013 rule has raised costs of providing liquidity, which has been passed 

along to investors and may have exacerbated dislocations,876 and that less liquid capital markets 

have made it difficult for derivative end-users to raise capital in times of stress.877 

The role of dealers in market making and client facilitation may be more significant in 

dealer markets, such as derivative and corporate bond markets. The SEC has elsewhere 

discussed several key changes in liquidity in bond markets and security-based swaps after the 

 872 See, e.g., NAFCU and CAP.

873 See, e.g., AFR and Occupy the SEC.

874 See, e.g., Public Citizen.

875 See, e.g., SIFMA and American Action Forum.

876 See, e.g., FSF and SIFMA.

877 See, e.g., Coalition for Derivative End Users.
299

financial crisis. For example, the SEC found that, in corporate bond markets, although estimated 

average transaction costs have decreased, trading activity has become more concentrated in less 

complex bonds and bonds with large issue sizes; that transaction costs have increased for some 

subgroups of corporate bonds; and that dealers have, in aggregate, reduced their capital 

commitment since its 2007 peak, consistent with the claim that the Volcker Rule and other 

reforms potentially reduced the liquidity provision in corporate bonds.

878 The SEC recognizes 

difficulties in causal attribution of the various provisions of section 13 of the BHC Act and the 

2013 rule and notes that some studies do not find significant structural breaks associated with 

post-crisis financial regulations in several measures of market liquidity.879 However, the SEC 

continues to be informed by both comments discussed above and a body of research drawing 

causal inference concerning the adverse effects of section 13 of the BHC Act and the 2013 rule 

on dealer provision of liquidity and on the risk of market dislocations in times of stress.880

Importantly, the 2013 rule included a large number of requirements and provisions, and 

aspects of the 2013 rule most likely to affect banking entities’ client facilitation activity (such as 

the RENTD requirement for the underwriting and market making exemptions) are not 

quantifiable or subject to public or regulatory reporting. As a result, existing research primarily 

seeks to document trends in various aspects of market liquidity in general and the effects of 

 878 See SEC Report 2017, supra note 774, for a detailed data analysis and literature survey.

879 See, e.g., Francesco Trebbi and Kairong Xiao, 2018, Regulation and Market Liquidity, 6 

MGMT. SCI. 1949 (2019). The generalizability of the paper’s result is limited by the sample 

period, which ends in December 2014 and before the full implementation of the 2013 rule. For 

more methodological limitations of this paper, such as heuristic choices of parameters, and 

crucial assumptions, as well as other issues, see SEC Report 2017, supra note 774, at 118-119. 

See also Tobias Adrian et al., Liquidity, Leverage, and Regulation 10 Years After the Global 

Financial Crisis, 10 ANN. REV. FIN. ECON. 1 (2018). 

880 Id. See also 83 FR at 33520-33522, 33532-33533. 
300

section 13 of the BHC Act and the 2013 rule on dimensions of market liquidity in particular. 

However, the most likely channels for the below effects of section 13 of the BHC Act and the 

2013 rule on client facilitation activities are the requirements for the exemptions (such as 

RENTD) and uncertainty around the ability to rely on exemptions for client facilitation activities.

As discussed below, several studies show significant declines in various measures of 

liquidity after the financial crisis and post-crisis reforms, including a recent study that ties the 

effects to the underwriting exemption of the 2013 rule. In addition, some research that 

reconciles the deterioration in dealer liquidity provision with improvements in price-based 

measures of liquidity attributes those effects to the reduced willingness of dealers to provide 

liquidity on a principal basis after implementation of the 2013 rule. Further, existing research 

suggests that the 2013 rule resulted in reduced liquidity during times of stress, with an increase 

in liquidity provision by dealers unaffiliated with banks failing to fully offset the reduction in 

liquidity provision by bank-affiliated dealers. Moreover, some research suggests that post-crisis 

financial reforms led to persistent deviations from no-arbitrage conditions across markets, with 

the effect driven by banking entities and levered nonbanking entities that rely on systemically 

important banking entities for funding liquidity. Finally, new evidence indicates that post-crisis 

financial regulations may also be having effects on the co-movement in liquidity metrics across 

markets. Though the research discussed below is unable to attribute observed trends to specific 

provisions of the 2013 rule, these findings are largely consistent with the claim that the 2013 rule 

had adverse effects on certain aspects of client facilitation activity by banking entities, as 

discussed below. 
301

A number of studies documented declines in several dimensions of liquidity after the 

financial crisis and post-crisis reforms. For example, one study881 finds that the willingness of 

dealers to commit capital overnight, turnover, the frequency of block trades, and average trade 

size have all declined after the financial crisis. Importantly, the paper finds that the shift away 

from market-makers absorbing customer imbalances and toward agency trading was most acute 

when banks were required to comply with the proprietary trading prohibition. Further, the paper

finds that these declines in dealer provision of liquidity stem from bank-affiliated dealers. The 

paper concludes that post-crisis banking regulations, including the 2013 rule, contributed to the 

reductions in turnover, trade size, frequency of block trades, and the willingness of dealers to 

commit capital.

Another paper882 examines the cost of immediacy in corporate bonds, using index 

exclusions as a setting in which uninformed traders exogenously demand immediacy. The paper 

finds that the cost of immediacy has more than doubled and that dealers revert back to target 

inventory far more quickly after the 2007-2008 financial crisis. The paper finds that this postcrisis dealer behavior is most severe for bank dealers and concludes that such changes are 

consistent with the effects of the Volcker Rule. 

Research on changes in liquidity around the post-crisis reforms, including the 2013 rule, 

presents two seemingly contradictory results: on the one hand, price-based measures of liquidity 

(such as the bid-ask spread) have improved; on the other hand, measures of dealer liquidity 

 881 See Hendrik Bessembinder et al., Capital Commitment and Illiquidity in Corporate Bonds, 73 

J. FIN. 1615 (2018). For a more detailed discussion of the paper’s limitations and caveats, see

SEC Report 2017, supra note 774, at 101-104 

882 See Jens Dick-Nielsen and Marco Rossi, The Cost of Immediacy for Corporate Bonds, 32 

REV. FIN. STUD 1 (2019). For a more detailed discussion, see SEC Report 2017, supra note 

774 , at 112-13. 
302

supply have significantly worsened.883 A few studies seek to reconcile these two effects. One 

paper884 focuses on dealers’ willingness to provide liquidity in certain types of bonds out of 

inventory. The paper finds that, when transacting in riskier and less liquid bonds, dealers are 

significantly more likely to offset trades on the same day instead of committing capital 

overnight. Specifically, the paper documents that dealers offset approximately 75% of trades in 

the lowest-rated, least-actively-traded bonds, but only 55% of trades in the highest-credit-quality, 

most-actively-traded bonds. In addition, liquidity provision out of inventory involves risk to the 

dealer—a risk that is priced in higher transaction costs. As a result, a decline in transaction costs 

in observed trades may be a reflection of the decline in dealers’ willingness to take certain 

groups of bonds into inventory.

Another study885 finds that, after the post-crisis banking regulations, including the 2013 

rule, customer provision of liquidity has increased and, as a result, the paper posits that bid-ask 

spread measures will necessarily underestimate the cost of dealer liquidity provision. The paper 

estimates that, for a subset of large liquidity demanding customer trades in which dealers provide 

liquidity from their inventory, customers pay between 35% and 65% higher spreads after the 

crisis than before the crisis.886 The paper concludes that a large portion of liquidity provision has 

 883 See, e.g., SEC Report 2017, supra note 774, at 100-105. 

884 See Michael Goldstein and Edith Hotchkiss, Providing Liquidity in an Illiquid Market: Dealer 

Behavior in U.S. Corporate Bonds, J. FIN. ECON. (2019) (in press) (accepted manuscript). See 

also, e.g., SEC Report 2017, supra note 774, at 106-107. 

885 See Jaewon Choi and Yesol Huh, Customer Liquidity Provision: Implications for Corporate 

Bond Transaction Costs, (Aug. 1, 2019) (working paper), last accessed 8/27/2019). For a more 

detailed discussion, see, e.g., SEC Report 2017, supra note 774, at 117. 

886 In contrast, Bessembinder et al. (2016) focuses on dealer-to-customer principal trades and 

finds the average transaction cost, particularly for small trades (less than $100,000) and large 

trades (over $1,000,000), is lowest in the pre-crisis and regulation periods. As the SEC stated 
303

moved from dealers to large asset managers and that the effect is consistent with the effects of 

tighter banking regulations.

A recent paper887 focuses on the effects of the underwriting exemption of the 2013 rule 

on trading by affected dealers. Specifically, the paper examines changes in the trading and 

liquidity of newly issued bonds that affected dealers have underwritten relative to bonds that the 

dealers have not underwritten around the implementation and conformance of the 2013 rule. 

This empirical design accounts for potentially confounding dealer effects (as dealers trade in 

bonds that they both underwrite and bonds that they do not) and bond effects (as both 

underwriters and non-underwriters trade in a given bond), and isolates the effects of the 

underwriting exemption in the 2013 rule from the effects of other bank regulations during the 

implementation period of the 2013 rule. The paper estimates that dealer markups have increased 

by between 42 and 43 basis points for fast roundtrip trades (15 minutes or less) after April 2014, 

but finds that the effect is transitional and disappears after August of 2015. However, the paper 

estimates that the adverse effects on dealer markups for slower roundtrip trades of between 15 

minutes and 1 day—trades that involve dealers absorbing trades into inventory—are both 

economically significant and persist past the implementation period (a range of 27-43 bps 

increase between April 2014 and July 2015, and a range of 18-35 basis point effect after July 

 

elsewhere, the difference between these two results may stem from different proxies for 

transaction costs and the measurement of principal trading activity.

887 See Meraj Allahrakha et al., The Effects of the Volcker Rule on Corporate Bond Trading: 

Evidence from the Underwriting Exemption (Off. of Fin. Research Working Paper 19-02, 2019) 

available at https://www.financialresearch.gov/working-papers/files/OFRwp-19-02_the-effectsof-the-volcker-rule-on-corporate-bond-trading.pdf, last accessed 8/9/2019. 
304

2015).888 To rule out the selection explanation (that dealers post-2013 rule simply pre-arrange 

more trades so the non-prearranged trades become costlier), the paper tests changes in shortterm, non-inventory trades. The paper finds an increase in such trades around the effective date 

of the 2013 rule, but no differences when conditioning on dealer underwriting activity, and 

concludes that endogenous selection of time in inventory cannot explain the above results. 

Moreover, the paper finds that nonbanking dealers enjoy a significant increase in market share 

after the conformance period, while bank-affiliated dealers lose market share. Finally, the paper 

concludes that the 2013 rule increased dealer trading risk on short round-trip trades (15 minutes 

or less), estimating that the standard deviation of covered dealers’ markups on corporate bonds 

has risen by between 0.09 and 0.1. 

These results are subject to three primary caveats. First, the paper relies on a relatively 

narrow measure of risk (the standard deviation of dealer profits at the bond-month level). Unlike 

other research discussed in this section, the paper does not examine changes in the overall 

volume of trading activity, measures of downside risk at the individual banking entity level, or 

commonality of risk exposures among affected and unaffected dealers. Second, some of the 

paper’s tests are affected by small sample sizes, limiting inference related to transitional and 

permanent effects of the 2013 rule in certain trades (including the 15 minute – 1 day subsample 

and the 60-90 day subsample). Third, the paper recognizes that these results are specific to 

 888 The paper also finds an increase of between 8% and 14% in dealer markups on trades around 

the 60-day cutoff for the rebuttable presumption in the 2013 rule. The paper acknowledges that 

this result could be consistent with dealers conducting profitable proprietary trades and holding 

positions past the 60-day rebuttable presumption window but is cautious in interpreting the result 

given the methodological limitations of its empirical design and very small sample size that does 

not allow conclusive inference.
305

dealer provision of liquidity in the corporate bond market, and may not extend to trading by 

affected firms in other asset classes.

Other research helps inform the SEC’s understanding of the effects of section 13 of the 

BHC Act and the 2013 rule on liquidity in times of stress. Specifically, there is growing 

evidence that liquidity provision in times of stress may be adversely affected by post-crisis 

reforms in general and the Volcker Rule in particular. Two studies directly test the effects of the 

Volcker Rule on market making by dealers in times of stress. One of the papers889 examines 

liquidity during corporate bond downgrades that result in selling by certain institutions. The 

paper suggests that dealers affected by the Volcker Rule decreased market making in newly 

downgraded bonds, and that unaffected dealers have not fully offset this decline. Moreover, the 

paper rules out the alternative explanation that these changes are attributable to other financial 

reforms, finding that the same effects are present for dealers affected by the Volcker Rule but not 

constrained by Basel III and Comprehensive Capital Analysis and Review (CCAR) regulations. 

The paper isolates the effect in a relatively small sample of bonds experiencing relatively large 

stress events (under normal aggregate conditions). This methodological design reflects the 

common tradeoff between a narrower empirical setting that enables causal inference, and a larger 

sample that is less amenable to causal interpretations.890

 889 See Jack Bao et al., The Volcker Rule and Corporate Bond Market Making in Times of Stress, 

130 J. FIN. ECON. 95 (2018).

890 For a fulsome discussion of this and other issues and limitations, see SEC Report 2017, supra

note 774, at 109-11. 
306

A related study891 compares liquidity during times of stress before and after the crisis, 

and defines times of stress on the basis of extreme increases in market-wide volatility (measured 

by the VIX index), bond yield drops, and credit rating downgrades from investment grade to 

speculative grade. While the study does not find that price-based liquidity measures decreased 

around idiosyncratic shocks, the study does find that the price impact of large trades surrounding 

market-wide shocks has increased after the post-crisis financial reforms relative to the pre-crisis 

period.892 

A recent report by the International Organization of Securities Commissions (IOSCO)’s 

Committee on Emerging Risks examined changes in bond market liquidity focusing on stressed 

conditions.893 The report notes that the most significant effect of post-crisis financial reforms 

and reduction in dealer risk appetite is the decline in the capacity of dealers to intermediate 

transactions on a principal basis, combined with a drastic increase in the size of the market. The 

report concludes that such effects mean the lack of liquidity in times of stress is likely to be more 

acute than in past episodes of stressed conditions. 

One of the important results identified in this literature is the finding that nonbank dealers 

may step in but may not fully offset the decline in the liquidity provision of bank dealers caused 

 891 See Mike Anderson & René Stulz, Is Post-Crisis Bond Liquidity Lower? (Dice Ctr. Working 

Paper 2017–09, 2017) last accessed 6/ 3/2019.

892 Consistent with these results, Goldstein and Hotchkiss (2019) finds that on days with large 

VIX increases, dealers tend to offset trades more quickly even for highly rated bonds that they 

normally would take into inventory. For a more detailed discussion, see SEC Report 2017, supra

note 774, at 114-15. 

893 See OICU-IOSCO, 2019, Liquidity in Corporate Bond Markets Under Stressed Conditions, 

FR079/2019, May. Available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD634.pdf, 

last accessed 7/1/2019.
307

by section 13 of the BHC Act and the 2013 rule.894 New research suggests that the fundamental 

mechanism behind this result may be the effect of other post-crisis regulations on the ability of 

bank dealers to provide funding liquidity to nonbank intermediaries.895 Specifically, the paper 

examines the interplay between post-crisis bank regulations, including the Volcker Rule, the 

supplementary leverage ratio, the liquidity coverage ratio, and the net stable funding ratio, and 

their effects on the ability of nonbank intermediaries to arbitrage away mispricing. The paper 

finds that the profitability of classic arbitrage trades (on-the-run/off-the-run, Treasury-interest 

swap, CDS-bond basis, and single name-index CDS arbitrage trades) is significantly lower under 

the supplementary leverage ratio, liquidity coverage ratio, and net stable funding ratio 

components of Basel III compared with Basel II. In addition, using a differences-in-differences 

estimation, the paper finds that levered hedge funds relying on prime brokers that are identified 

in the paper as globally systemically important banks experience lower abnormal returns and a 

decline in assets under management. The paper concludes that the effects of post-crisis 

regulations affect not only bank intermediation but also the ability of private funds to rely on 

banks for funding liquidity supporting arbitrage strategies. The paper notes that the 

supplementary leverage ratio and the net stable funding ratio disincentivize low margin activities 

and a reliance on short-term funding, such as repo, and that the liquidity coverage ratio 

incentivizes holdings of more liquid securities. The paper concludes that Basel III is the 

 894 As discussed above, when examining informed trading of advisor banks in options on the 

stocks of client firms, Lowry et al. (2018) finds that informed trading by hedge funds increases 

simultaneously with a decrease in informed trading by banks around the enactment of section 13 

of the BHC Act. See Michelle Lowry et al., Informed Trading By Advisor Banks: Evidence from 

Options Holdings, 32 REV. FIN. STUD 605 (2018). 

895 See Boyarchenko, Eisenbach, Gupta, Shachar, and Van Tassel, 2018, “Bank Intermediated 

Arbitrage,” Federal Reserve Bank of New York Staff Report No. 858, last accessed 6/3/2019.
308

regulation with the biggest effect on the profitability of trades exploiting arbitrage 

opportunities.896 

Post-crisis regulations may also be having effects on the co-movement897 in liquidity 

metrics across markets. A recent paper898 exploring this issue posits two channels for this 

increased co-movement in liquidity. First, liquidity supply is capital intensive, and absorbing 

trades into inventory in one risky asset class may use up the capital capacity of a dealer to 

provide liquidity in other assets. Basel III and liquidity requirements for banks may aggravate 

this effect. Second, bank dealers may face uncertainty about their ability to rely on the market 

making exemption in the 2013 rule, as the distinctions between prohibited proprietary trading 

and permissible market making may often be unclear. As discussed above, prior studies suggest 

that the 2013 rule may have reduced the inventory capacity of bank dealers. Empirically, the 

paper documents that co-movement among measures of illiquidity of stock, bond, and CDS 

markets has risen significantly after the 2007-2008 financial crisis, particularly during the 

regulatory implementation period. For example, the regulatory period is characterized by a 

much larger fraction of firms exhibiting positive pairwise correlations between measures of 

 896 These findings are also consistent with another paper that finds an exogenous increase in the 

leverage ratio constraint in the UK to have reduced repo market liquidity—an effect especially 

pronounced in transactions between dealers and small customers. See Antonis Kotidis and 

Neeltje Horen, Repo Market Functioning: The Role of Capital Regulation (2018) (working 

paper) last accessed June 3, 2019. 

897 Co-movement in two variables generally refers to a positive correlation of changes in the two 

variables over time. For example, co-movement in returns refers to a pattern of positive 

correlation in returns among different securities or asset classes. Similarly, co-movement in 

liquidity metrics suggests a positive correlation of changes in liquidity metrics. See, e.g., 

Nicholas Barberis et al., Co-movement, 75 J. FIN. ECON. 283 (2005). 

898 See Xinjie Wang et al., Do Post-Crisis Regulations Affect Market Liquidity? Evidence from 

the Co-Movement of Stock, Bond, and CDS Illiquidity (2018) (working paper) last accessed 

6/3/2019 
309

illiquidity. The paper concludes that the 2013 rule and the tightening of capital and liquidity 

regulations reduced the inventory capacity of market makers, resulting in higher co-movement in 

liquidity across various financial markets. Importantly, the paper argues that these results are not 

consistent with increased electronic trading as that would have resulted in a reduced reliance on 

market makers and an increased reliance on customers, which should have reduced (instead of 

increased) co-movement in liquidity across markets.

With respect to liquidity in the dealer-centric, single-name CDS market, the SEC 

elsewhere found that, while dealer-customer activity and various trading activity metrics have 

generally remained stable, interdealer trading, trade sizes, number of quotes, and quoted spreads 

for certain illiquid borrowers have worsened since 2010.899 In addition, a recent paper900 seeks 

to tie financial reforms to trends in liquidity in the single-name CDS markets. Specifically, the 

paper finds that the sample period (2010 through 2016) saw a decline in interdealer trading, a 

decrease in net dealer inventories, and a decline in customer transaction volume. In addition, 

bid-ask spreads in later years are more heavily dependent on individual dealer inventories rather 

than aggregate inventories of all dealers. Notably, the paper does not estimate the optimal 

volume of trading activity. Overall, the paper concludes that increased costs of market making 

have affected liquidity provision in the single-name CDS market. 

While these studies are necessarily limited in scope, methodology, and measurement, 

their results may indicate that section 13 of the BHC Act and the 2013 rule may have reduced 

 899 See SEC Report 2017, supra note 774. 

900 See Mark Paddrik and Stathis Tompaidis, Market Making Costs and Liquidity: Evidence from 

CDS Markets (Off. of Fin. Research Working Paper 19-01, 2019) available at 

https://www.financialresearch.gov/working-papers/files/OFRwp-19-01_Market-Making-Costsand-Liquidity-Evidence-from-CDS-Markets.pdf, last accessed 7/5/2019.
310

dealer provision of liquidity, particularly in times of stress.901 There is little empirical evidence 

concerning whether customers will continue to provide liquidity in times of severe market stress, 

possibly since such empirical settings are scarce in the post-crisis period. One recent paper 

builds a theoretical model902 that suggests that constraints on dealer balance sheets may benefit 

customers and reduce transaction costs as they can induce dealers to invest in technology 

designed to match customers to each other. However, this model does not explicitly examine 

dealer behavior in times of stress. In addition, the results rely on strong modeling assumptions. 

The model assumes that only bank dealers are able to develop technology to match customers 

and assumes away the role of an inter-dealer market or competition among dealers in the 

interdealer market. If these assumptions are violated, it is unclear whether the results will 

continue to hold. For example, if nonbank dealers (as well as bank dealers) can develop 

customer matching technology, constraining dealer balance sheets may not be necessary for the 

development of technology matching customers to other customers or the disintermediation of 

trading, with its resulting welfare improvements. Similarly, in the presence of an interdealer 

market, constraining dealer balance sheets may benefit customers by facilitating customer-tocustomer trading but may also reduce the ability of dealers to demand liquidity from other 

dealers. 

Moreover, as discussed above, existing research suggests that non-dealer institutions may 

be constrained in their ability to secure funding from prime brokers that are affected by postcrisis regulations, limiting the ability of non-dealers to arbitrage away mispricings. It is even 

 901 See, e.g., supra notes 881, 887, 889, and 891.

902 See Gideon Saar et al., From Market Making to Matchmaking: Does Bank Regulation Harm 

Market Liquidity? (May 22, 2019) (working paper) last accessed June 3, 2019.
311

less clear whether customers would be willing and able to secure funding liquidity and stand on 

the buy side of customer sells during severe market stress across asset markets.

Finally, the agencies also received comment that end-users are increasingly finding that 

their bank counterparties have reduced short-term lending and repo activity, while other endusers are experiencing higher discounts to posted collateral as a result of the 2013 rule.903 The 

SEC is informed by research on the effects of the constraints dealers face as a result of post-crisis 

regulations and liquidity provision.904 One particular study on this issue905 finds that dealer 

balance sheet constraints have broad market-wide effects on bond liquidity beyond the liquidity 

of bonds with a particular credit rating, sector, or issue size. The paper finds that, prior to the 

crisis, bonds were more liquid when they were traded by more levered dealers, dealers with 

higher return on assets and lower vulnerability (measured by conditional value-at-risk),906

dealers with lower risk-weighted assets, and dealers with relatively low reliance on repo. 

However, during the rule implementation period (post-2014) these results have reversed, and 

bonds are more liquid when they are traded by less-levered dealers, dealers with lower return on 

assets, dealers with higher risk-weighted assets, and dealers with more reliance on repo funding. 

Finally, unlike the pre-crisis period, during the rule implementation period (post-2014), dealers 

with more reliance on repo funding, with higher trading revenues, with larger maturity 

 903 See Coalition for Derivatives End Users.

904 For a more general model of the links between repo market frictions and liquidity in 

underlying cash markets see, e.g., Yesol Huh and Sebastian Infante, Bond Market Intermediation 

and the Role of Repo (Oct. 22, 2018) (working paper) last accessed 6/3/2019. 

905 See Tobias Adrian et al., Dealer Balance Sheets and Bond Liquidity Provision, 89 J. 

MONETARY ECON. 92 (2017). 

See also SEC Report 2017, supra note 774, at 115-16. 

906 See Tobias Adrian and Markus Brunnermeier, CoVar, 106 AM. ECON. REV. 1705 (2016). 
312

mismatches, with higher measures of vulnerability, and with fewer assets held as loans are less 

likely to accommodate customer order flow and are more likely to access the interdealer market 

instead. Though these results do not speak to dealer behavior in times of stress, they are based 

on a substantially larger sample compared with the discussed above work showing liquidity 

declines in times of stress. Overall, while the paper does not delineate the effects of the Volcker 

Rule from other post-crisis regulations (such as the supplemental leverage ratio), the paper’s 

findings indicate that tightening of dealer balance sheet constraints due to the package of postcrisis financial regulations may adversely affect the ability of affected dealers to intermediate 

customer trading in bond markets. 

The SEC also recognizes that the effects of the 2013 rule on the ability and willingness of 

banks to engage in repo activity may be compounded by other post-crisis reforms. For example, 

one study907 focuses on the effects of the liquidity coverage ratio, exploiting cross-country 

differences in the implementation of the rule. The paper finds that, as a result of the liquidity 

coverage ratio, U.S. dealers reduced their reliance on repo in funding high-quality liquid assets

by more, and increased the maturity of lower-quality-collateral repos by more, than did foreign 

dealers. 

Importantly, reduced ability and willingness to engage in repo activity are likely to have 

downstream effects on customers and market quality. For example, a paper908 recently showed 

that dealers’ ability to rely on repos to finance bond inventory has an effect on bid-ask spreads 

and bond transaction costs; that dealers with less access to funding liquidity are less likely to 

 907 See Marco Macchiavelli and Luke Pettit, Liquidity Regulation and Financial Intermediaries

(Jul. 29, 2019) (working paper) last accessed 8/29/2019.

908 See Marco Macchiavelli and Xing Zhou, Funding Liquidity and Market Liquidity: The 

Broker-Dealer Perspective (Jul. 17, 2019) (working paper) last accessed 8/29/2019. 
313

provide liquidity on a principal basis and are more likely to trade on an agency basis instead; and 

that funding liquidity has causal effects on bond market liquidity. 

As discussed above, corporate bond dealers, particularly bank-affiliated dealers, may 

have, on aggregate, reduced their capital commitment post-crisis—a result that is consistent with 

a reduction in liquidity provision in corporate bonds because of the 2013 rule. In addition, the 

2013 rule may have resulted in many corporate bond dealers shifting from trading in a principal 

capacity to agency trading. Moreover, corporate bond dealers may decrease liquidity provision 

during certain times of stress in general (e.g., during a financial crisis)909 and after the 2013 rule

in particular, as discussed above. Nonbank dealers and non-dealer intermediaries may not have 

fully offset the shortfall in liquidity provision, partly because of their reliance on funding from 

financial institutions affected by post-crisis financial reforms. 

The SEC recognizes that the effects of the 2013 rule on the activities of banking entities 

and conflicts of interest may flow through to SEC-registered dealers and investment advisers 

affiliated with banks and bank holding companies directly (if banks and holding companies 

transact through their dealer affiliates) and indirectly (e.g., through effects on capital 

requirements, profitability, compliance systems, and policies and procedures), and may have an 

effect on securities markets. As discussed in the proposal,910 the presence and magnitude of 

 909 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 Marco Di Maggio et al., The Value of 

Trading Relationships in Turbulent Times, 124 J. FIN. ECON. 266 (2017). See also Jaewon Choi 

and Or Shachar, Did Liquidity Providers Become Liquidity Seekers? (Oct., 2013), New York Fed 

Staff Report No. 650.

910 See 83 FR at 33534.
314

spillover effects across different types of financial institutions vary over time and may be more 

significant in times of stress.911

iv. Compliance Burdens, Profitability, and Competitive Effects

In the proposal, the SEC recognized that the scope and breadth of the compliance 

obligations impose costs on banking entities, which may be particularly important for smaller 

entities.912 The SEC noted commenters’ estimates 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 rule, which need to be monitored and updated on an ongoing basis, 

and that some banking entities may spend, on average, more than 10,000 hours on training each 

year. In terms of ongoing costs, in the proposal the SEC noted a market participant’s estimate 

that 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 rule. 

In connection with the proposal, the agencies have received a number of comments on 

the compliance burdens of the 2013 rule. Some commenters presented trends in bank 

profitability, trading revenue, and loan growth, arguing that the proposed amendments are 

unnecessary.913 Others indicated that the Volcker Rule may reduce bank profits due to the 

 911 See, e.g., Monica Billio et al., Econometric Measures of Connectedness and Systemic Risk in 

the Finance and Insurance Sectors, 104 J. FIN. ECON. 535 (2012). See also Zeno Adams et al., 

Spillover Effects Among Financial Institutions: A State-Dependent Sensitivity Value at Risk 

Approach (SDSVar), 49 J. FIN. & QUANTITATIVE ANALYSIS 575 (2014). See also Adrian and 

Brunnermeier (2016) supra note 906.

912 See, e.g., 83 FR at 33550.

913 See, e.g., Volcker Alliance and AFR.
315

elimination of proprietary trading but that lost profits are not costs but intended regulatory effects 

of section 13 of the BHC Act.914 

In response to those comments, the SEC continues to note that the scope of this economic 

analysis is limited to SEC registrants, and securities markets and their participants. Importantly, 

trends in profitability are not informative of the direct causal effect on profitability or compliance 

burdens of section 13 of the BHC Act or of the 2013 rule, since there is no data about the amount 

of revenue or compliance burdens that would have occurred in the absence of the 2013 rule. 

Moreover, the agencies have received a number of comments pointing to large and significant 

burdens of section 13 of the BHC Act and various components of the agencies’ 2013 rule. For 

example, one commenter estimated that proprietary trading requirements related to RENTD 

involved annual costs of as much as about $513 million; that the metrics-related policies and 

procedures requirements involved initial burdens of approximately $41.5 million; that total 

compliance expenditures of affected entities (including with respect to covered funds) totaled 

between $402 million and $541 million; and that covered funds requirements involved a cost of 

between $152 million and $690 million.915 Another commenter estimated that, for at least one 

banking entity, sorting counterparties into customers and non-customers for the purposes of 

calculating RENTD requires dozens of employees spending thousands of hours in initial and 

ongoing burdens.916 Another commenter stated that simplifying covered funds requirements 

would eliminate thousands of unnecessary hours in compliance burdens related to activities that 

 914 See, e.g., Occupy the SEC.

915 See Data Boiler, citing its own analysis as well as SIA Partners Briefing Note, July 2015, 

“Volcker Implementation,” available at http://en.finance.siapartners.com/sites/default/files/post/sia_partners_-

_briefing_note_volcker_coveredfunds_blog_version.pdf, last accessed 6/4/2019.

916 See CCMC.
316

do not raise the concerns intended to be addressed by section 13 of the BHC Act.917 One trade 

organization indicated that duplicative examinations drastically increase burdens on registrants, 

estimating that in 2016 members of the organization spent in aggregate over 50,000 hours 

responding to inquiries and examinations related to section 13 of the BHC Act.918 

Moreover, the SEC notes that risk-averse market participants are compensated for 

bearing greater systematic919 risks with higher expected returns.920 If capital markets have a high 

degree of efficiency and arbitrage opportunities are generally scarce, greater profitability may 

simply be indicative of greater risks taken on by banking entities. Setting aside the challenges of 

causal inference discussed above, trends in bank profitability may reflect not only compliance 

burdens of the 2013 rule, but also the effects of the 2013 rule on banking entity risk exposures 

from permissible activities. That is, banking entities may have become more willing to take risk 

through engaging in activities permitted by the 2013 rule. For more discussion of the existing 

evidence on the effects of the 2013 rule on the activities of banking entities, see the preceding 

sections of the economic baseline.

The agencies also received a number of comments concerning the need to tailor 

regulations to banking entities on the basis of risk profile in order to balance the intended 

regulatory goals with compliance burdens and competitive effects. Specifically, a number of 

commenters supported tailoring the 2013 rule to more effectively accomplish the underlying 

 917 See SFIG.

918 See SIFMA.

919 The term “systematic risk” generally refers to the variability of returns due to macroeconomic 

factors that affect all risky assets and, thus, cannot be eliminated by diversification. See FRANK

REILLY & KEITH BROWN, INVESTMENT ANALYSIS & PORTFOLIO MANAGEMENT, 1025 (9th ed. 

2009). See also Bodie, supra note 840, at G-12. 

920 See supra note 840.
317

goals of section 13 of the BHC Act, reduce unnecessary compliance burdens, particularly on 

smaller and mid-sized banking entities and entities with small trading books, and more 

effectively allocate supervisory resources to prudential goals.921

The SEC continues to believe that the compliance regime under the 2013 rule and related 

burdens reduce the profitability of permissible activities by bank-affiliated dealers and 

investment advisers and may be passed along to customers or clients in the form of reduced 

provision of services or higher service costs.922 Moreover, the SEC continues to believe that the 

extensive compliance program under the 2013 rule detracts resources of some banking entities 

and their compliance departments and supervisors from other compliance matters, risk 

management, and supervision. Finally, the SEC continues to believe that prescriptive 

compliance requirements may not optimally reflect the organizational structures, governance 

mechanisms, or risk management practices of complex, innovative, and global banking entities. 

In the sections that follow the SEC discusses rule provisions of the 2013 rule, how each 

amendment in the final rule changes the economic effects of the regulatory requirements, and the 

anticipated costs and benefits of the amendments.

c. Affected Participants

The SEC-regulated entities directly affected by the final rule include broker-dealers, 

security-based swap dealers, and investment advisers.

i. Broker-Dealers923

 921 See, e.g., IIB; CCMC; CREFC; CCMR; Covington; Capital One et al. and Credit Suisse.

922 See 83 FR at 33550.

923 These estimates differ from the estimates in the proposal and in the EGRRCPA Conforming 

Amendments Adopting Release, as these estimates rely on more recent data and information 
318

Under the 2013 rule, some of the largest SEC-regulated broker-dealers are banking 

entities because they are affiliated with banks or bank holding companies. Table 1 reports the 

number, total assets, and holdings of broker-dealers by the broker-dealer’s bank affiliation. 

While the 199 bank-affiliated broker-dealers subject to the 2013 rule (affected brokerdealers) are greatly outnumbered by the 3,595 broker-dealers that are either bank broker-dealers 

exempt under section 203 of EGRRCPA or nonbank broker-dealers, the affected broker-dealers 

dominate other broker-dealers in terms of total assets (72.7% of total broker-dealer assets) and 

aggregate holdings (66.5% of total broker-dealer holdings). 

 

about both U.S. and global trading assets and liabilities of bank holding companies. This 

analysis is based on data from Reporting Form FR Y-9C for domestic holding companies on a 

consolidated basis and Report of Condition and Income for banks regulated by the Board, FDIC, 

and OCC for the most recent available four-quarter average, as well as data from S&P Market 

Intelligence LLC on the estimated amount of global trading activity of U.S. and non-U.S. bank 

holding companies. Broker-dealer bank affiliations were obtained from the Federal Financial 

Institutions Examination Council’s (FFIEC) National Information Center (NIC). Broker-dealer 

assets and holdings were obtained from FOCUS Report data for Q4 2018. 
319

Table 1. Broker-dealer count, assets, and holdings by affiliation.

Broker-dealer bank affiliation # Total assets, 

$mln924

Holdings,

$mln925

Holdings 

(altern.), 

$mln926

Bank broker-dealers affected by 

the final rule927 199 3,142,780 761,532 567,387 

All other broker-dealers928 3,595 1,179,805 382,451 225,675

Total 3,794 4,322,586 1,143,983 793,062

Some of the amendments to the 2013 rule that the agencies are adopting differentiate 

banking entities on the basis of their consolidated trading assets and liabilities.929 Table 2 reports 

affected broker-dealer counts, assets, and holdings by consolidated trading assets and liabilities 

of the (top-level) parent firm. The SEC estimates that 163 broker-dealer affiliates of firms with 

less than $20 billion in consolidated trading assets and liabilities account for 20.4% of bankaffiliated broker-dealer assets and 17.8% of holdings (or 7% using the alternative measure of 

holdings).930 

 924 Broker-dealer total assets are based on FOCUS report data for “Total Assets.” 

925 Broker-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.

926 This alternative measure excludes U.S. and Canadian government obligations and spot 

commodities.

927 This category includes all bank-affiliated broker-dealers except those exempted by section 

203 of EGRRCPA. 

928 This category includes both bank affiliated broker-dealers subject to section 203 of 

EGRRCPA and broker-dealers that are not affiliated with banks or holding companies. 

929 See, e.g., 2013 rule § __.20(d)(1).

930 See supra note 926.
320

Table 2. Broker-dealer counts, assets, and holdings by consolidated trading assets and 

liabilities of the banking entity.931

Consolidated

trading 

assets and 

liabilities932

# 

Total

assets, 

$mln

%

Holdings,

$mln

%

Holdings

(altern.),

$mln

%

≥50bln 28 2,152,225 68 555,787 73 510,325 90

20bln-50bln 8 349,716 11 70,054 9 17,611 3

10bln-20bln 9 198,895 6 49,797 7 13,301 2

5bln-10bln 24 261,622 8 55,316 7 14,295 3

1bln-5bln 33 66,583 2 18,319 2 4,998 1

≤1bln 97 113,740 4 12,259 2 6,857 1

Total 199 3,142,780 100 761,532 100 567,387 100

ii. Security-Based Swap Dealers

The final rule 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 security-

 931 This analysis excludes SEC-registered broker-dealers subject to section 203 of EGRRCPA.

932 Consolidated trading assets and liabilities are estimated using information reported in form 

FR Y-9C data and from S&P Market Intelligence LLC on the estimated amount of global trading 

activity provided for U.S. and non-U.S. firms. These estimates exclude from the definition of 

consolidated trading assets and liabilities government, agency, and GSE securities. U.S. trading 

assets and liabilities are calculated on the basis of the most recent four-quarter average, except 

for foreign firms without an intermediate holding company, for which the amount of trading 

activity for the nonbank and edge subsidiaries does not exclude securities of governmentsponsored enterprises. For top-tier bank holding companies, top-tier independent depositary 

institutions, and foreign parents with U.S. activity, Ginnie Mae securities are included in the 

calculation of trading assets and liabilities because of data limitations. (It is not possible to 

exclude Ginnie Mae securities without also excluding Fannie Mae and Freddie Mac securities.) 
321

based swap dealers and that as many as 16 of these entities may already be SEC-registered 

broker-dealers.933 Similarly, the SEC previously estimated that between 0 and 5 entities may 

register as Major Security-Based Swap Participants (MSBSPs).934 On the basis of the analysis of 

TIW transaction and positions data on single-name credit-default swaps, the SEC believes that 

all entities that may register with the SEC as SBSDs are bank-affiliated firms, including those 

that are SEC-registered broker-dealers. Therefore, the SEC estimates that, in addition to the 

bank-affiliated 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 these 

amendments. Similarly, on the basis of the analysis of TIW data, the SEC estimates that none of 

the entities that may register with the SEC as MSBSPs are affected by the final rule. 

Importantly, compliance with capital and other substantive requirements for SBSDs 

under Title VII of the Dodd-Frank Act is not yet required.935 The SEC recognizes 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 broker-dealers and that may become SECregistered entities affected by the final rule. Quantitative cost estimates are provided separately 

for affected broker-dealers and potential SBSDs.

 933 See Capital, Margin, Segregation Adopting Release, 84 FR at 43960. 

934 Id.

935 Id.
322

iii. Private Funds and Private Fund Advisers936

This section focuses on RIAs advising private funds. Using Form ADV data, Table 3 

reports the number of RIAs advising private funds by fund types, 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 bank-affiliated 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. 

Bank-affiliated RIAs advise a total of 4,316 private funds with approximately $2 trillion 

in gross assets. Per Form ADV data, bank-affiliated RIAs’ gross private fund assets under 

management are concentrated in hedge funds and private equity funds. On the basis of this data, 

bank-affiliated RIAs advise 929 hedge funds with approximately $668 billion in gross assets and 

1,420 private equity funds with approximately $395 billion in assets. While bank-affiliated RIAs 

are subject to all of section 13’s restrictions, because RIAs do not typically engage in proprietary 

trading, the SEC continues to believe that they will not be affected by the final rule as it relates to 

proprietary trading. 

 936 These estimates are calculated from Form ADV data as of March 31, 2019. An investment 

adviser is defined as a “private fund adviser” if it indicates that it is an adviser to any private 

fund on Form ADV Item 7.B. An investment adviser is defined as a “bank-affiliated 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. 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 bank-affiliated RIAs. 
323

Table 3. SEC-registered investment advisers advising private funds, by fund type.937

Fund type All RIA Bank-affiliated RIA

Hedge Funds 2,656 154

Private Equity Funds 1,644 98

Real Estate Funds 526 52

Securitized Asset Funds 220 45

Liquidity Funds 46 16

Venture Capital Funds 193 8

Other Private Funds 1,066 146

Total Private Fund Advisers 4,756 296

Table 4. The number and gross assets of private funds advised by SEC-registered 

investment advisers.938

Fund type

Number of private funds Gross assets, $bln

All RIA Bank-affiliated RIA All RIA Bank-affiliated RIA

Hedge Funds 10,431 929 7,160 668

Private Equity Funds 14,775 1,420 3,446 395

Real Estate Funds 3,472 320 646 100

Securitized Asset Funds 1,814 358 661 129

Liquidity Funds 83 30 297 195

 937 This 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.

938 Gross assets include uncalled capital commitments on Form ADV.
324

Venture Capital Funds 1,201 43 136 3

Other Private Funds 4,460 1,217 1,396 474

Total Private Funds 36,230 4,316 13,741 1,964 

In addition, for an additional period of 2 years until July 21, 2021, the banking 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.939

iv. Registered Investment Companies

The potential that a registered investment company (RIC) or a business development 

company (BDC) would be treated as a banking entity where the fund’s sponsor is a banking 

entity and holds 25% or more of the RIC or BDC’s voting securities after a seeding period also 

forms part of the baseline. On the basis of Commission filings and public data, the SEC 

estimates that, as of year-end 2018, there were approximately 15,700 RICs940 and 104 BDCs. 

Although RICs and BDCs are generally not banking entities themselves subject to the 2013 rule, 

they may be indirectly affected by the 2013 rule and the final rule, for example, if their sponsors 

or advisers are banking entities. For instance, bank-affiliated RIAs or their affiliates may reduce 

 939 See “Statement regarding Treatment of Certain Foreign Funds under the Rules Implementing 

Section 13 of the Bank Holding Company Act,” July 19, 2019, available at 

https://www.occ.gov/news-issuances/news-releases/2019/nr-ia-2019-79a.pdf, last accessed July 

19, 2019.

940 This estimate includes open-end companies, exchange-traded funds, closed-end funds, and 

non-insurance unit investment trusts and does not include fund of funds. The inclusion of fund 

of funds increases this estimate to approximately 17,200.
325

their level of investment in the funds they advise, or potentially close those funds, to avoid those 

funds becoming banking entities themselves. 

v. Entities Reporting Metrics to the SEC941

The regulatory reporting requirements of the 2013 rule with respect to bank-affiliated 

broker-dealers, SBSDs, and RIAs are described in section V.F.2.a above. As discussed below, 

the final rule increases the threshold for entities subject to metrics reporting from the $10 billion 

under the 2013 rule to $20 billion in trading assets and liabilities. Moreover, the final 

amendments that link the trading desk definition to the market risk capital rule have an effect on 

the volume of reporting to the SEC and corresponding burdens. 

The agencies have received a number of comments opposing the proposed amendments 

to metrics reporting and challenging the agencies’ assessment of the proposed amendments.942 

For example, one commenter indicated that the SEC's assessment of the overall streamlining 

effects of the amendments to metrics reporting and recordkeeping will not be supported by a fullfledged cost-benefit analysis.943 Another commenter stated that the proposal presented no 

analysis showing that the benefits of eliminating some metrics outweigh the costs of imposing 

new metrics.944 A number of commenters indicated that the agencies should not adopt any of the 

proposed amendments to metrics reporting as they would result in a significant net increase in 

 941 The estimates in this section are based on Appendix A information provided by reporters to 

the SEC under the 2013 rule at the holding company level for April 2018 through March 2019, 

based on the most complete filing for each reporting period. Appendix A records for a particular 

trading desk are reported to the SEC if a trading desk books activity into the SEC registrant.

942 See, e.g., ABA; Credit Suisse; CCMR; FSF, Public Citizen and SIFMA.

943 See SIFMA Annex C.

944 See CCMR.
326

metrics data.945 One commenter estimated that the proposed requirements would require its 

member institutions to report hundreds of thousands of additional data points each month.946 

One commenter indicated that the extended reporting timeframe for metrics submission is 

insufficient and frequent resubmissions are likely to persist.947 In response to these comments 

and to enable a quantification of the economic effects of the metrics amendments on the volume 

and timeliness of metrics reporting, the SEC is updating the economic baseline with summary 

information about the current volume and resubmission statistics by different groups of 

Appendix A filers.

Table 5. Volume of Metrics Records Submitted to the SEC, by Trading Assets and 

Liabilities. 948

Trading Assets & 

Liabilities

# of 

Reporters

Records 

Submitted

>50bln 8 40,771,825

20bln-50bln 4 7,357,794

<20bln 6 10,440,677

Total 18 58,570,296

Table 6. Trading Desks Reporting Metrics to the SEC, by Trading Assets and Liabilities.

Trading Assets & Liabilities

Average # 

of Desks

Average # of 

Records Per 

Average # of 

Records

 945 See, e.g., CCMC and FSF. 

946 See FSF.

947 See SIFMA Annex C.

948 For the purposes of this analysis, each record is one line of the matrix reported to the SEC, 

with the value filled out by the reporting entity, on a monthly basis, for all its related trading 

desks. The total number of records also includes the header, body, and footer. Each submission 

is the full data matrix reported by the reporting entity to the SEC for any specific reporting 

month.
327

Submission per Desk

>50bln 56 450,921 7,588

20bln-50bln 43 195,010 5,172

<20bln 38 216,433 7,093

Table 7. Time Delays and Resubmissions of Metrics Records Submitted to the SEC.

Panel A. Resubmissions of Initial Records

Trading 

Assets & 

Liabilities

Total # of Submitted

Records

% of Records 

Not Resubmitted

% of 

Records 

Resubmitted 

Once

% of Records 

Resubmitted 

Twice

>50bln 40,785,033 34 56 10

20bln50bln 6,908,332 61 39 0

<20bln 10,441,265 96 4 0

Panel B. Delayed Submission of Initial Records

Trading 

Assets & 

Liabilities

Total 

Records Submitted 

Late (Initial 

Submission)

% of Late Initial 

Submissions 

Average Delay 

in Initial 

Submissions 

(Days, Simple 

Average)

Average Delay 

in Initial 

Submissions 

(Days, 

Weighted By 

Record Count)

>50bln 4,771,713 12 2 2

20bln-50bln 4,020,778 58 32 32

<20bln 10,437,647 99.97 46 42

The SEC notes two important caveats relevant for the interpretation of these statistics. 

First, direct attribution of specific trading activity by a trading desk to an SEC registrant or group 

of registrants is not feasible, since the trading desk may book transactions into multiple legal 

entities, including both those registered with the SEC as well as those that are not registered. As 

a result, the scope of activity reported in this section is likely to overestimate the records and 
328

reporting by legal entities registered with the SEC. Second, the SEC does not receive reporting 

from trading desks that do not transact on behalf of SEC-registered entities. Therefore, these 

estimates may significantly underestimate the overall volume of metrics reporting by all banking 

entities (including those that are not registered with the SEC) related to the 2013 rule.

3. Economic Effects

a. Treatment of Entities Based on the Size of Trading Assets and 

Liabilities

As proposed, the agencies are adopting a categorization of banking entities into three 

groups on the basis of the size of their trading activity. Under the final rule, banking entities 

with significant trading assets and liabilities (Group A entities) are required to comply with a 

streamlined but comprehensive version of the 2013 rule’s compliance program requirements, as 

discussed below. Banking entities with moderate trading assets and liabilities (Group B entities)

are subject to reduced requirements and an even more tailored approach in light of their smaller 

trading activities. The burdens are further reduced for banking entities with limited trading 

assets and liabilities (Group C entities), for which the amendments establish a presumption of 

compliance, which can be rebutted by the agencies. The sections that follow discuss the 

economic effects of each of the amendments on these groups of entities. 

i. Costs and Benefits

First, 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 attributable to trading activities permitted pursuant to § __.6(a)(1) 

and (2) of subpart B) 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 
329

exceeds $20 billion.949 This $20 billion threshold is higher than the threshold that the agencies 

proposed in the proposal. Accordingly, more banking entities may qualify as Group B entities 

rather than Group A entities (as compared to those that would have qualified under the 

proposal’s lower threshold), which will reduce compliance burdens for more banking entities 

relative to the proposal.950 The agencies received comments that a higher than the proposed $10 

billion trading assets and liabilities threshold would provide Group B banking entities that are 

near or approaching $10 billion threshold with flexibility to have moderate growth over time and 

to manage their business without triggering the more stringent compliance requirements imposed 

on Group A banking entities.951 In addition, some commenters stated that potential fluctuations 

resulting from customer-driven trades, quarter-end activity, and market and foreign exchange 

volatility may cause banking entities that are near or approaching the $10 billion threshold to 

exceed this threshold.952 The SEC recognizes that fluctuations in customer demand or market 

events may cause these banking entities to exceed the $10 billion threshold temporarily or 

permanently, which could trigger a more enhanced compliance regime and expose these banking 

entities to higher compliance costs.953 Thus, a $20 billion threshold accounts for such 

 949 With 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 

applies according to the trading assets and liabilities of the combined U.S. operations of the toptier foreign banking organization (including all subsidiaries, affiliates, branches, and agencies of 

the foreign banking organization operating, located, or organized in the United States). 

950 The final rule defines banking entities with moderate trading assets and liabilities as those that 

are neither banking entities with significant trading assets and liabilities nor banking entities with 

limited trading assets and liabilities.

951 See, e.g., Capital One et al.; ABA; BPI; and Custody Banks.

952 See, e.g., Custody Banks and BPI.

953 See supra note 123.
330

fluctuations and provides banking entities that are near or approaching $10 billion in trading 

assets and liabilities with more certainty regarding their compliance burdens. 

Some commenters stated that changing the threshold from $10 to $20 billion would have 

minimal effect on the number of banking entities that would remain categorized as having 

significant trading assets and liabilities.954 The SEC estimates that there are 66 broker-dealers 

with approximately 16% of all broker-dealer holdings (or 6% based on the alternative measure) 

that would qualify as Group B entities with the adopted $20 billion threshold – compared to 57 

broker-dealers with between 9% and 4% of all broker-dealer holdings that would have qualified 

under the proposed threshold value. Thus, relative to the proposal, 15 additional broker-dealers 

will experience the cost reduction because of reduced compliance burdens. 

Second, as in the proposal, the agencies are defining a banking entity with limited 

trading assets and liabilities as a banking entity that has, together with its affiliates and 

subsidiaries on a consolidated basis, trading assets and liabilities (excluding trading assets and 

liabilities attributable to trading activities permitted pursuant to § __.6(a)(1) and (2) of subpart B) 

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. However, in 

the proposal, the agencies proposed this threshold to be calculated on the worldwide consolidated 

basis for both foreign and domestic registrants. Unlike in the proposal, with respect to a banking 

entity that is a foreign banking organization or a subsidiary of a foreign banking organization, 

this threshold will be applied on the basis of the combined U.S. operations of the top-tier foreign 

 954 See, e.g., ABA; Custody Banks; New England Council; Capital One et al.; SIFMA; State 

Street and BPI.
331

banking organization (including all subsidiaries, affiliates, branches, and agencies of the foreign 

banking organization operating, located, or organized in the United States). 

The SEC continues to recognize that the 2013 rule may have resulted in significant 

compliance burdens for banking entities that do not have significant U.S. operations, even 

though such entities may not pose substantial risks to the U.S. financial system because of their 

limited presence in the U.S. The SEC estimates that the adopted definition of limited trading 

assets and liabilities will allow 97 broker-dealers to reduce compliance costs related to the 2013 

rule as a result of the final rule’s presumption of compliance. In contrast, if the final rule 

adopted the proposed calculation of limited trading assets and liabilities, some foreign brokerdealers would not qualify as those affiliated with entities with limited trading assets and 

liabilities, even though the entities these broker-dealers are affiliated with may have very limited 

activity in the U.S. 

Third, in the final rule the calculation of thresholds for limited and significant trading 

assets and liabilities will exclude—in addition to the proposed exclusion of trading assets and 

liabilities involving obligations of, or guaranteed by, the United States, or any agency of the 

United States—trading assets and liabilities involving obligations, participations, or other 

instruments of, or issued or guaranteed by, government-sponsored enterprises listed in § 

__.6(a)(2). Some commenters stated that the calculation of trading assets and liabilities should 

exclude financial instruments that are not regulated under the 2013 rule.955 The SEC recognizes 

that inclusion of trading assets and liabilities involving obligations of, participations by, or other 

instruments of, or issued or guaranteed by, government-sponsored enterprises in the calculation 

 955 See, e.g., KeyCorp; BMO and Capital One et al.
332

of trading assets and liabilities may inadvertently scope in entities whose trading assets and 

liabilities primarily consist of financial instruments that are excluded from the prohibition on 

proprietary trading under the 2013 rule.

956 Accordingly, the final rule will better align the 

application of the tiered compliance regime with trading activities that are subject to the 

proprietary trading prohibitions. The SEC estimates that the exclusion of the aforementioned 

trading assets and liabilities from the calculation of the $1 billion and $20 billion thresholds will 

not change the assignment of banking entities into the tiered compliance groups.

The SEC continues to believe that the primary effect of these amendments for SEC 

registrants is the reduced compliance burdens, as discussed in more detail in later sections. To 

the extent that the compliance costs are currently passed along to customers and counterparties, 

some of the cost reductions for these entities associated with the final rule 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 risk-sharing. 

The SEC notes that, from above, Group B and Group C broker-dealers currently account 

for approximately 7% to 18% of total bank broker-dealer holdings and that, 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 Group A entities’ trading 

activities addressed in the 2013 rule. In addition, the SEC continues to 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 final rule by increasing their trading assets and liabilities 

while still remaining under the $20 billion or $1 billion threshold, as applicable. Increases in 

 956 See § __.6(a)(2).
333

aggregate risk exposure 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 the riskiness of their activities and the degree to which their 

trading activity would be correlated, the implications of this effect for aggregate risk and capital 

market activity are unclear. 

The shifts in risk exposure 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 

exposures could promote secondary market trading activity and capital formation in primary 

markets and increase access to capital for issuers, benefitting issuers and investors. On the other 

hand, Group B and Group C firms may be incentivized to increase their risk exposures, resulting 

in more aggregate risk in the banking sector, greater market fragility, and exacerbated conflicts 

of interest between banking entities and their customers. This may ultimately adversely affect 

issuers and investors. However, the SEC continues to recognize that the amendments are 

focused on tailoring the compliance regime based on the amount of trading activity engaged in 

by each banking entity, and all banking entities would still be subject to the statutory prohibitions 

related to such activities. Thus, the potential risk of increased market fragility and the severity of 

conflicts of interest effects is mitigated. 

In response to the final rule, it is possible that 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 $20 

billion and $1 billion trading assets and liabilities thresholds to enjoy reduced hedging 

compliance and documentation requirements and a less costly compliance and reporting regime 
334

described in sections V.F.3.c, V.F.3.d, V.F.3.g, and V.F.3.h. The extent to which banking 

entities may seek to manage down their trading books will depend on a number of factors, such 

as 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. The SEC anticipates that the incentives to manage the trading book under the $20 

billion or $1 billion threshold, as applicable, may be strongest for those holding companies that 

are near or 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, if the 

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 rule 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, in the proposal, the SEC cited one commenter’s estimate 

that the funding cost for an average non-financial firm may have increased by as much as $30 

million after the 2013 rule’s implementation.957 At the same time, and as discussed in section 

V.F.2, the SEC continues to recognize that the 2013 rule may have yielded important qualitative 

benefits, such as reducing certain types of risks in the financial system and mitigating potential 

 957 See 83 FR at 33526.
335

incentive conflicts that could be posed by certain types of proprietary trading by dealers, as well 

as enhancing oversight and supervision. 

On one hand, as a result of the 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 near to the $20 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 amendments. 

As a result, the amendments may result in greater competition between Group B and Group A 

entities around the $20 billion threshold, and similarly, between Group B and Group C entities

around the $1 billion threshold, to the extent that Group C and Group B entities will increase 

their trading activity without reaching the $1 and $20 billion thresholds respectively. On the 

other hand, to the extent that the risk exposure of Group B and Group C entities increases 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. 

In addition, the adopted methods for the calculation of limited and significant trading 

assets and liabilities may result in lower compliance costs for foreign banking entities relative to 

the domestic banking entities, increasing the competitive advantage of foreign Group B and C 

entities. 

As in the proposal, the SEC recognizes that cost savings to Group B and Group C entities 

related to the compliance requirements and requirements described in sections V.F.3.g and 

V.F.3.h may be partially or fully passed along to clients and counterparties. To the extent that 
336

hedging documentation and compliance requirements for Group B and Group C entities are 

currently resulting in a reduced willingness to make markets or underwrite securities, the 

amendments may facilitate trading activity and risk-sharing, as well as capital formation and 

reduced costs of access to capital. Again, the SEC notes that the amendments do not eliminate 

statutory prohibitions under section 13 of the BHC but create a simplified compliance regime for 

banking entities that do not have significant trading assets and liabilities. Thus, the statutory 

prohibitions on proprietary trading and covered funds activities will continue to apply to all 

affected entities, including Group B and Group C entities.

iii. Alternatives

Alternative approaches were considered. For example, the 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 compliance 

requirements and requirements described in sections V.F.3.g and V.F.3.h by changing the 

number and size of affected broker-dealers. For instance, using the proposed $10 billion 

threshold or a lower threshold, such as $5 billion, in the definition of significant trading assets 

and liabilities would scope a larger number of entities into Group A, as compared to the final 

rule’s $20 billion threshold, thereby subjecting a larger share of the dealer and investment 

adviser industries to six-pillar compliance obligations. However, the SEC continues to recognize

that trading activity is heavily concentrated in the right tail of the distribution and that using a 

lower threshold would not significantly increase the volume of trading assets and liabilities 
337

scoped into the Group A regime.958 For example, Table 2 shows that 57 bank-affiliated brokerdealers that have between $1 and $10 billion in consolidated trading assets and liabilities and are 

subject to section 13 of the BHC Act account for only approximately 10% of bank-affiliated 

broker-dealer assets and between approximately 4% and 9% of holdings. In addition, 33 brokerdealer affiliates of firms that have between $1 and $5 billion in consolidated trading assets and 

liabilities and are subject to section 13 of the BHC Act account for only approximately 2% of 

bank-affiliated broker-dealer assets and between approximately 1% and 2% of holdings.959 At 

the same time, with a lower threshold, more banking entities would face higher compliance 

burdens and related costs. Therefore, as discussed in section IV.A.1.b, the agencies decided 

against this alternative.

A different threshold for the definition of banking entities with limited trading assets and 

liabilities was also considered. As pointed out by some commenters, a higher threshold, such as 

$5 billion, would allow small and mid-size banking entities to have moderate growth over time 

without triggering more costly compliance requirements.960 As shown in Table 2, 33 more 

broker-dealers would qualify for presumed compliance under this alternative. However, as 

discussed in section IV.A.1.b, the agencies continue to believe that banking entities with $1 

billion or less in trading assets and liabilities differ from banking entities with between $1 and $5 

billion in trading assets and liabilities in their business models and risk exposures, and that a $1 

 958 Some commenters supported this view. See, e.g., Capital One et al.

959 In addition, one commenter stated that firms with $20 billion or more in trading assets and 

liabilities represented approximately 94.80% of total reported U.S. trading assets and liabilities 

and firms with $5 billion or less in trading assets and liabilities represented approximately 1.32% 

of total reported U.S. trading assets and liabilities. See BPI.

960 See, e.g., ABA.
338

billion threshold appropriately accounts for the risks posed by Group B and Group C entities; 

therefore, the agencies are not adopting this alternative.

An alternative of splitting banking entities into only two groups according to their trading 

assets and liabilities—those with significant trading assets and liabilities and those without, i.e. 

joining the limited and moderate trading assets and liabilities groups was also considered.961 

This alternative could have reduced compliance burdens for Group B entities if the threshold was 

set at $20 billion. But, if the threshold for this alternative would have been set at $1 billion, the 

compliance burdens for Group B entities would have been higher than their compliance costs 

under the final rule. As shown in Table 2, Group B broker-dealers represent approximately 16% 

of total assets of bank-affiliated broker-dealers and approximately 16% of their holdings, while 

Group C broker-dealers account for only 4% of total assets of bank-affiliated broker-dealers and 

2% of their holdings. The SEC continues to believe that Groups B and C differ in their business 

models (e.g., level of trading activity) and the risks posed to the U.S. financial system. For these 

reasons, the agencies decided not to adopt this alternative.

A percentage-based threshold for determining whether a banking entity has significant 

trading assets and liabilities was also considered. For example, the amendment could have relied 

exclusively on a 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 could have benefited from lower compliance costs 

 961 This alternative approach was also suggested by some commenters. See, e.g., Capital One et 

al.
339

and a streamlined regime for Group B entities. In addition, as pointed out by a commenter, this 

alternative could address risk for individual banking entities since it would base the threshold on 

the materiality of trading activity to the entity’s business.962 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 could have been scoped into the Group B regime if they also had a 

sufficiently large amount of total consolidated assets, while entities with significantly smaller 

trading books could be categorized as Group A entities if they had fewer assets overall. Thus, 

the SEC believes that this alternative would not have appropriately accounted for the size of 

banking entities’ trading activity.

In addition, a threshold based on total assets could have been adopted. It is possible that 

losses on small trading portfolios can be amplified through their effect on non-trading assets held 

by a banking entity. 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.963 However, such threshold may not be as meaningful as a threshold based on trading 

assets and liabilities when applied in the context of section 13 of the BHC Act. A threshold 

based on total assets would scope in entities merely on the basis of their balance sheet size, even 

though they may have little or no trading activity of the type that section 13 of the BHC Act is 

intended to address. Therefore, the agencies decided against this alternative.

 962 See, e.g., KeyCorp.

963 Some commenters supported this view. See, e.g., Data Boiler.
340

Thresholds based on the level of total revenues from permitted trading activities could 

have been adopted. 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 that focus their business the most on 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 into the regulatory regime during normal times may be scoped out during a 

time of market stress because of 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 requirements of the 2013 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 $20 billion 

in consolidated trading assets and liabilities but that are operated separately and independently 

and are not consolidated with the parent company 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 $20 billion. As shown in Table 8 below, the 

SEC estimates that there are 17 broker-dealers that have holdings of less than $20 billion and are 

affiliated with bank holding companies that have trading assets and liabilities in excess of $20 

billion. The SEC does not have data on how many of these 17 broker-dealers are operated 

separately and independently and are not consolidated with affiliated entities with significant 

trading assets and liabilities. However, the SEC notes that, at a maximum, this alternative could 

decrease the scope of application of the Group A regime for 17 broker-dealers. 
341

Table 8. Broker-dealer assets and holdings, by gross trading assets and liabilities threshold 

of affiliated banking entities.

Type of broker-dealer # Total assets,

$mln

Holdings,

$mln

Holdings

(altern.), $mln

Holdings ≥$20bln and affiliated with firms 

with gross trading assets and liabilities 

≥$20bln

19 2,225,989 594,513 $514,360 

Holdings <$20bln and affiliated with firms 

with gross trading assets and liabilities 

≥$20bln

17 275,951 31,328 $13,576 

Affiliated with firms with gross trading 

assets and liabilities <$20bln964 163 640,840 135,691 $39,451 

Total 199 3,142,780 761,532 $567,387 

Some commenters indicated that this alternative may be beneficial for banking entities.965

The SEC recognizes that 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 more trading activities by entities affiliated with firms 

that have gross trading assets and liabilities in excess of $20 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 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 the organizational 

 964 This category excludes SEC-registered broker-dealers 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 assets and liabilities 

data was not available.

965 See, e.g., JBA.
342

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 interaffiliate hedging and risk mitigation practices. 

Some commenters suggested that periodic adjustment to thresholds to account for 

inflation should be adopted.966 This alternative would account for changing market conditions in 

the absence of any changes in a banking entity’s business and level of trading activities. In an 

environment with a moderate level of inflation, Group B and Group C banking entities that are 

situated just below the thresholds may reduce their level of activity to avoid triggering a more 

costly compliance regime. However, the agencies do not believe that the additional complexity 

associated with inflation-indexing the thresholds in the final rule is necessary in light of the other 

changes to the thresholds and calculation methodologies described above. Therefore, the 

agencies decided against this alternative.

b. Proprietary Trading

Under section 13 of the BHC act and the 2013 rule, proprietary trading is defined as 

engaging as principal for the “trading account” of a banking entity.967 Thus, the definition of the 

trading account determines the trading activity that falls within the scope of the statutory 

prohibitions and the compliance regime in the 2013 rule associated with such activity. The 

definition of trading account in the 2013 rule has three prongs, including the dealer prong. The 

final amendments introduce certain changes to the definition of trading account; however, these 

 966 See, e.g., BPI and Capital One et al.

967 See 2013 rule § __.3(b).
343

amendments do not remove or modify the dealer prong. In addition, the amendments introduce 

new exclusions from the trading account and a new definition of the trading desk.

i. Trading Account 

(1) Costs and Benefits

Under the final rule, the definition of “trading account” continues to include purchases 

and sales of financial instruments by banking entities engaged in the business of a dealer, swap 

dealer, or security-based swap dealer outside of the United States, to the extent these instruments 

are purchased or sold in connection with the activities of such business.

968 Thus, the SEC 

expects that most (if not substantially all) trading activity by SEC- regulated dealers that are 

banking entities will continue to be captured by the dealer prong of a banking entity, 

notwithstanding any of the changes made to the definition of the trading account. 

Some commenters pointed out that not all of dealers’ trading activity is conducted in a 

dealer capacity.969 The SEC recognizes the possibility that some dealers engage in transaction 

activity that, by itself, would not trigger a dealer registration requirement.970 Under the baseline, 

such activity may be scoped into the “trading account” definition by the short-term prong or the 

market risk capital prong. Thus, as discussed below, the SEC believes that only a small subset of 

 968 See 2013 rule § __.3(b)(1)(iii).

969 See, e.g., SIFMA and BPI.

970 See 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.”).
344

trading activity by dealers may be affected by the changes to the definition of the trading 

account. 

The agencies are adopting three changes to the definition of the trading account. First, 

the applicability of the short-term prong and the market risk capital prong is changed under the 

final rule. In particular, for dealers that are subject to the market risk capital prong, trading 

activity outside of the dealer prong will be scoped into the trading account only if it is a covered 

position for the purposes of the market risk capital rule. That is, if the activity is not captured by 

the dealer prong or the market risk capital prong, it would be scoped out from the definition of 

the trading account under the final rule. This is in contrast to the 2013 rule, under which, for 

banking entities that are subject to the market risk capital prong, trading activity that is not 

captured by the dealer prong or the market risk capital prong could still be captured by the shortterm prong. 971 Thus, under the 2013 rule, bank dealers that are subject to the market risk capital 

prong have to apply three prongs: the dealer prong, the market risk capital prong, and the shortterm prong. Under the final rule, these same entities will apply only two prongs: the dealer 

prong and the market-risk capital prong. To the extent that dealers subject to the market risk 

capital prong have trading activities that are not captured by the dealer prong currently 

experience organizational inefficiencies or duplicative costs as a result of being subject to both 

short-term and market risk capital prongs, this amendment may benefit such dealers by 

decreasing their compliance costs, as discussed in section V.F.3.g, and decreasing the regulatory 

complexity, consequently increasing operational efficiency. The SEC expects that these benefits 

 971 As noted in section IV.B.1.a.iii, the scope of activities captured by the short-term intent prong 

substantially overlaps with the scope of activities captured by the market risk capital prong.
345

are likely to be greater for banking entities that are not subject to the dealer prong, although, as 

noted above, the SEC does not analyze those potential benefits here.

In addition, to the extent that the definition of trading account in the 2013 rule involves 

position-by-position analysis of financial instruments which may be costly, and to the extent that 

the costs of such analysis discourage dealers that are subject to the market risk capital prong 

from conducting activities that could be scoped in by the short-term intent prong, this 

amendment may promote trading activities that would not be captured by the dealer prong or the 

market risk capital prong. On the one hand, such trading activities may allow dealers that are 

subject to the market risk capital rule to manage their business more efficiently. On the other 

hand, to the extent that, under the final rule, trading activity that is not captured by either the 

dealer prong or the market risk capital prong would have been captured by the short-term intent 

prong, and to the extent that this activity exposes dealers to additional risks, this amendment may 

increase risk exposure of dealers that are subject to the market risk capital rule. The SEC does 

not have information about the amount of trading activity of SEC-registered broker-dealers that 

is not captured by the dealer prong or the market risk capital prong and about the prevalence of 

the current application of the market risk capital prong and the short-term prong under the 2013 

rule. As shown in Table 9 below, the SEC estimates that there are 100 broker-dealers that in 

aggregate hold between 98% and 99% of holdings by broker-dealers affected by the final rule 

that are subject to the market risk capital rule and may be affected by this amendment. The SEC 

continues to believe that the largest share of dealers’ trading activity will continue to be captured 

by the dealer prong. Thus, the SEC expects that the effects of this amendment on SEC-regulated 

dealers will be modest.
346

Table 9. Market Risk Capital Rule Application.

Market Risk Capital Rule 

Application

# of BrokerDealersTotal assets, 

$mln Holdings

Holdings 

(altern.)

Subject to the market risk 

capital rule

100 3,002,834 749,867 562,515 

Not subject to the market risk 

capital rule

99 139,946 11,665 4,872 

Total 199 3,142,780 761,532 567,387 

The second change to the definition of trading account affects banking entities that are 

not subject to the market risk capital rule and cannot apply the market risk capital prong under 

the 2013 rule. Under the final rule, these entities will be able to elect to apply the market risk 

capital prong instead of the short-term prong to determine the scope of the banking entity’s 

trading account. This amendment will affect those dealers that have trading activity that is not 

captured by the dealer prong and instead captured by the short-term prong. To the extent that the 

market risk capital prong is less costly to comply with, relative to the short-term prong, this 

amendment may benefit dealers that are not subject to the market risk capital rule and have 

trading activity that is not captured by the dealer prong by providing them with flexibility to 

apply the prong that is more cost-effective. This amendment may particularly benefit foreign 

banking entities that are not subject to the market risk capital rule but are applying a different 

market risk framework, to the extent that this framework is similar to the market risk capital rule. 

To the extent that foreign dealers with frameworks similar to the framework of the market risk 

capital rule are currently experiencing inefficiencies because they cannot apply the market risk 

capital prong of the trading account definition, this amendment may reduce the compliance costs 

of these dealers. The SEC estimates that, at most, 99 broker-dealers that are not subject to the 
347

market risk capital rule may be affected by this amendment, to the extent that they have trading 

activity that is captured by the short-term prong under the 2013 rule. However, the SEC 

continues to believe that the largest share of dealers’ trading activity will continue to be captured 

by the dealer prong. Thus, the SEC expects that the effects of this amendment for dealers will be 

modest.

The third amendment to the trading account definition will eliminate the 60-day 

rebuttable presumption in the short-term prong and instead establish a new rebuttable 

presumption that financial instruments held for 60 days or more are not within the short-term 

prong. Many commenters supported the proposed rule’s elimination of the 60-day rebuttable 

presumption,972 and some commenters suggested that the agencies should presume, for banking 

entities not subject to the market risk capital rule, that financial instruments held for longer than 

60 days, or that have an original maturity or remaining maturity upon acquisition, of fewer than 

60 days to their stated maturities, are not for the banking entity’s trading account.973 As 

recognized in section IV.B.1.a.iv, the agencies have found that the rebuttable presumption has 

captured many activities that should not be included in the definition of proprietary trading. In 

addition, as stated by some commenters, the presumption may be difficult to rebut.974 Therefore, 

the SEC believes that the reversal of the presumption in the 2013 rule would reduce the 

compliance burdens for dealers that conduct trading activity that is not otherwise captured by the 

dealer prong or the market risk capital prong. To the extent that the compliance burdens related 

to the rebuttable presumption of the 2013 rule limit dealers’ ability to conduct customer-

 972 See, e.g., State Street; Chatham; BPI; FSF; CCMR and CFA.

973 See, e.g., ABA; Arvest; BPI; SIFMA and IIB.

974 See, e.g., State Street; Chatham; BPI; FSF; CCMR and CFA.
348

accommodating transactions or liquidity management activities, the cost reductions of the 

amendment may flow through to customers and counterparties and increase operational 

efficiency of dealers. The SEC estimates that this amendment may affect 99 broker-dealers—the 

broker-dealers that are not subject to the market risk capital rule—which on aggregate have 1.5% 

of broker-dealer holdings. However, the SEC expects that the largest share of dealing activity 

subject to SEC oversight will continue to be captured by the dealer prong. Thus, the SEC 

expects that the effects of this amendment for dealers will be modest.

(2) Efficiency, Competition, and Capital Formation

To the extent that the compliance related to the rebuttable presumption of the 2013 rule

limits dealers’ ability to conduct customer-accommodating transactions, or liquidity management 

or risk management activities that are covered by the short-term prong, the amendments to the 

definition of trading account may facilitate such activities, which could, in turn, promote capital 

formation. In addition, to the degree that the amendments to the trading account may provide 

banking entities with more flexibility to underwrite, market make, and hedge, and to the extent 

these activities facilitate capital formation, these amendments may improve allocative efficiency. 

To the extent that the amendments to the short-term prong reduce compliance costs and to the 

extent that the short-term prong primarily applies to smaller dealers (i.e., those not covered by 

the market risk capital prong), the amendments to the trading account definition may improve the 

competitive position of smaller dealers. However, the SEC notes that the largest share of dealing 

activity subject to SEC oversight is already captured by the dealer prong; and, therefore, the 

above economic effects of the amendments to the definition of the trading account on SECregulated entities, including the effects on efficiency, competition, and capital formation, may be 

de minimis.
349

(3) Alternatives

As an alternative to the short-term prong, the agencies proposed replacing the short-term 

prong in the 2013 rule with an accounting prong that would have included within the definition 

of “trading account” any account used by a banking entity to purchase or sell one or more 

financial instruments that are recorded at fair value on a recurring basis under applicable 

accounting standards.975 As the agencies noted when they proposed this alternative, the 

accounting prong was designed to provide more certainty and clarity about which financial 

instruments should be included in the trading account due to the fact that banking entities should 

know which positions are recorded at fair value on their balance sheets.976 In addition, as 

pointed out by some commenters,977 this alternative could deter noncompliance and facilitate the 

agencies’ supervision. However, a large number of commenters stated that the proposed 

accounting prong would inadvertently scope in activities that are not 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. For example, some commenters pointed out that longer term positions, such 

as available-for-sale debt securities,978 certain long-term investments,979 static hedging of long 

term investments,980 traditional asset-liability management activities,981 derivative transactions 

 975 See proposed rule § __.3(b)(3); 83 FR at 33447-48.

976 See id.

977 See, e.g., Better Markets.

978 See, e.g., BPI and SIFMA.

979 See, e.g., Capital One et al.; BPI; SIFMA; and CCMR.

980 See, e.g., BPI and ISDA.

981 See, e.g., KeyCorp; BPI; Capital One et al.; FSF and Goldman Sachs.
350

entered into for any purpose and duration,982 long-term holdings of commercial mortgage-backed 

securities;983 would be scoped in under this alternative. Although some of these instruments are 

held for less than 60 days and may fall under the short-term prong of the trading account under 

the 2013 rule, these instruments, in general, are not held for trading purposes, i.e., they are not 

held principally for the purpose of selling in the near term; rather, the majority of the 

aforementioned instruments are held for investment.984 Since this alternative would include all 

instruments reported at fair value, regardless of the purpose with which these instruments are 

bought or sold and regardless of the period during which these instruments are held (short-term 

or long-term), the scope of the trading account would be significantly greater under this 

alternative than the scope of the trading account in the 2013 rule. Given that many of the 

instruments that would be captured by the accounting prong are not held principally for the 

purpose of selling in the near term, the agencies are not adopting this alternative. The SEC also 

notes that if this alternative had been adopted, the effect on SEC-regulated dealers would have 

been limited because the majority of dealer trading activity falls under the dealer prong.

The agencies also proposed, but are not adopting, including a reservation of authority 

allowing for a 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. 

 982 See e.g., ISDA and BPI.

983 See MBA.

984 See, e.g., FASB defines available-for-sale securities as investments that are not classified as 

trading securities nor as held-to-maturity securities and states that cash flows from these 

investments should be classified as cash flows from investing activities. See “Statement of 

Financial Accounting Standards No. 115”, FASB.
351

While the SEC continues to recognize that the use of objective factors to define proprietary 

trading is intended to provide bright lines that simplify compliance, the SEC also recognizes that 

this approach may, in some circumstances, produce results that are either underinclusive or 

overinclusive with respect to the definition of proprietary trading. The SEC continues to believe 

that the reservation of authority may add uncertainty for banking entities about whether a 

particular transaction could be deemed as a proprietary trade by the regulatory agency, which 

may affect the banking entity’s decision to engage in transactions that are not included in the 

definition of the trading account under the 2013 rule. As discussed in the proposal, notice and 

response procedures related to the reservation of authority provision would cost as much as 

$19,877 for SEC-registered broker-dealers, and $5,006 for entities that may choose to register 

with the SEC as SBSDs.985

The agencies proposed but are not adopting the revision of the market risk capital prong 

to apply to the activities of FBOs to take into account the different market risk frameworks FBOs 

may have in their home countries.986 This alternative may better align foreign banking entities’ 

compliance with the 2013 rule and compliance with market risk regulations of their home 

counties, increasing organizational efficiency and potentially decreasing compliance costs for 

such banking entities. However, as suggested by some commenters, under this alternative, 

positions that are not held for short-term trading would be captured in some foreign market risk 

capital frameworks.987 Therefore, the agencies decided against this alternative and instead are 

 985 See 83 FR 33432.

986 See proposed rule § __. 3(b)(1)(ii); 83 FR at 33447.

987 See, e.g., IIB.
352

adopting a more flexible approach, under which foreign banking entities would be able to apply 

the market risk capital prong if they choose to do so.988

As an alternative, the agencies could have modified the 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, bank-affiliated dealers would be able to amass large trading positions at the nearterm 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 the risk exposure of bank-affiliated dealers. 

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. The SEC also notes 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 

 988 See section IV.B.1.a.v.
353

thresholds to exempt non-near-term proprietary trading and so could introduce additional 

uncertainty and increase the compliance burdens on SEC-regulated banking entities.

As another alternative, the agencies could have categorically excluded financial 

instruments of dealers purchased in a non-dealing capacity, such as financial instruments 

purchased for long-term investment purposes. Some commenters pointed out that it is not 

always clear whether such instruments are scoped in the dealer prong and that banking entities 

may engage in costly and time-consuming position-by-position analysis to confirm that a longterm investment is captured in the trading account.989 As discussed in section IV.B.1.a.vi, the 

agencies continue to believe that only the activities that are done in connection with activities 

that would require the banking entity to be licensed or registered are covered by the dealer prong. 

For example, if a banking entity purchases or sells a financial instrument in connection with 

activities that do not require registration as a dealer, this activity would not be covered by the 

dealer prong. However, this activity could still be included in the trading account under the 

short-term prong or the market risk capital prong, as applicable.990

ii. Exclusions from Proprietary Trading

The agencies are adopting the proposed expansion of the liquidity management 

exclusion, as well as an exclusion for trading errors and subsequent correcting transactions, 

certain matched derivative transactions, certain trades related to hedging mortgage servicing 

rights or mortgage servicing assets, and transactions in instruments not included in the definition 

of trading asset or trading liability under the applicable reporting form for a banking entity. 

 989 See, e.g., SIFMA and BPI.

990 See 79 FR 5549.
354

(1) Costs and Benefits

Exclusion for Liquidity Management Activities

The agencies are adopting the proposed expansion of the liquidity management exclusion 

substantially as proposed, but with a modification to permit the use of non-deliverable crosscurrency swaps. Thus, liquidity management exclusion would apply not only to securities, but 

also to foreign exchange forwards and foreign exchange swaps (each as defined in the 

Commodity Exchange Act), and to cross-currency swaps (both physically- and cash-settled) that 

are traded for the purpose of liquidity management in accordance with a documented liquidity 

management plan. On the one hand, under this amendment, SEC-regulated banking entities 

would face lower burdens and enjoy greater flexibility in currency-risk management as part of 

their overall liquidity management plans. In the proposal, the SEC recognized that the liquidity 

management exclusion in the 2013 rule may be narrow and that the trading account definition 

may scope in routine asset-liability management and commercial-banking related activities. In 

their response to the proposal, some commenters supported that view and stated that the 2013 

rule may be restricting liquidity-risk management by banking entities.991 Therefore, the SEC 

continues to believe that, to the degree that these effects constrain activities of dealers, this 

amendment could facilitate more efficient risk management, greater secondary market activity, 

and more capital formation in primary markets. 

Some commenters indicated that this amendment may make it easier to trade in currency 

markets for speculative purposes under the guise of legitimate liquidity management.992 The 

 991 See, e.g., ISDA; Goldman Sachs and SIFMA.

992 See Volcker Alliance and Data Boiler. 
355

SEC continues to recognize that this liquidity-management amendment may 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 rule, which may increase 

the risk exposures of banking entities and reduce the effectiveness of regulatory oversight. 

However, the SEC continues to believe that the conditions maintained in the exemption, 

including the requirement to conduct liquidity management in accordance with a documented 

liquidity management plan, will limit these adverse effects. 

Exclusion for Error Trades

The agencies are also adopting an exclusion for trading errors and subsequent correcting 

transactions from the definition of proprietary trading. The 2013 rule excludes from the 

proprietary trading prohibition certain excluded clearing activities by banking entities that are 

members of clearing agencies, derivatives clearing organizations, or designated financial market 

utilities. Specifically, such excluded 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.993 Accordingly, the exclusion for error 

trades under the 2013 rule is applicable only to clearing members with respect to cleared 

customer transactions.994

This amendment primarily benefits 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 

 993 See 2013 rule §__.3(e)(7). 

994 Id.
356

not cleared, since under the 2013 rule error trades of these dealers are not considered excluded 

clearing activity. Table 10 reports information about broker-dealer count, assets, and holdings, 

by affiliation and clearing type. 

Table 10. Broker-dealer assets and holdings, by clearing status.995

Broker-dealers subject to 

section 13 of the BHC Act # 

Total assets, 

$mln

Holdings,

$mln

Holdings (altern.), 

$mln

Clear or carry (or both) 76 3,101,936 755,975 562,649

Other 123 40,844 5,557 4,738

Total 199 3,142,780 761,532 567,387

Since correcting error trades is not conducted for the purpose of profiting from short-term 

price movements, as also pointed out by some commenters,996 this amendment is likely to 

facilitate valuable customer-facing activities and promote effective risk management by dealers. 

As discussed in section IV.B.1.b.ii, the agencies continue to believe that banking entities 

generally should monitor and manage their error trade account because doing so would help 

prevent personnel from using these accounts for proprietary trading. Some commenters stated 

that banking entities could still make profits while relying on the error trade exclusion. 997 To the 

 995 Broker-dealers clearing or carrying customer accounts (or both) 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. This analysis excludes SEC-registered 

broker-dealers 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 assets and liabilities data was not available.

996 See, e.g., BPI; FSF and BB&T.

997 See, e.g., Data Boiler; CAP and Public Citizen.
357

degree that this may happen, banking entities could become incentivized to use error trade 

exclusion to conduct proprietary trading. However, some commenters noted that bona fide trade 

error activity is separately managed and classified as an operational loss when there is a loss 

event or a near miss when error activity results in a gain.998 The SEC agrees with the 

commenters’ view and believes that existing requirements and operational risk management 

practices would be sufficient to deter participants from using the error trade exclusion to 

obfuscate impermissible proprietary trades.

Exclusion for Customer-Driven Swaps and Customer-Driven SecurityBased Swaps 

In addition, the agencies are adopting an exclusion for transactions in which banking 

entities contemporaneously enter into a customer-driven swap or security-based swap and a 

matched swap or security-based swap if (i) the banking entity retains no more than minimal price 

risk; and (ii) the banking entity is not a registered dealer, swap dealer, or security-based swap 

dealer. The SEC continues to recognize that loan-related swaps and customer accommodation 

back-to-back derivatives facilitate lending transactions as a customer service and are not 

designed to profit from speculative price movements.999 Some commenters indicated that such 

customer accommodation loan-related swaps transactions may reduce the risk of banking entities 

and borrowers, and encourage the extension of credit,1000 commonly for smaller and mediumsize banking entities that engage in trading in connection with loans and other extensions of 

 998 See, e.g., ABA; BB&T; BPI and Capital One et al.

999 Commenters agreed with this view. See, e.g., Covington; Credit Suisse; SIFMA; Chatham 

and ABA.
358

customer credit.1001 Some commenters stated that this amendment increases the scope of 

permissible trading activity.1002 The SEC notes that under the final rule this exclusion is not 

available to banking entities that are subject to the market risk or the dealer prong, reducing such 

risks. Therefore, the SEC believes that the effects of this amendment discussed above on SECregulated entities would be de minimis. 

Exclusion for Hedges of Mortgage Servicing Rights or Mortgage 

Servicing Assets 

The agencies are adopting an exclusion for transactions involving any purchase or sale of 

one or more financial instrument that the banking entity uses to hedge mortgage servicing rights 

or mortgage servicing assets in accordance with a documented hedging strategy. This 

amendment will provide more clarity to banking entities that are subject to the short-term prong 

that intangibles, including servicing assets, are not included in the definition of proprietary 

trading. Because under the market risk capital prong, intangibles, including servicing assets, are 

explicitly excluded from the definition of “covered position,” the exclusion will provide 

additional certainty to dealers that do not apply the market risk capital prong. To the extent that 

dealers that do not apply the market risk capital prong currently experience uncertainty as to 

whether the aforementioned financial instruments are included in the trading account and to the 

extent that this uncertainty impedes transactions involving these types of financial instruments, 

the amendment may facilitate permitted trading activity in these financial instruments. In 

 
359

addition, to the extent that these exclusions facilitate more efficient risk management, dealers 

that are not subject to the market risk capital rule may benefit from this amendment. 1003 

Exclusion for Financial Instruments that Are Not Trading Assets or 

Trading Liabilities

In addition to the above exclusions, the agencies are adopting an exclusion for purchases 

or sales of financial instruments that do not meet the definition of trading assets or trading 

liabilities under the applicable reporting form for a banking entity as of January 1, 2020. Similar 

to the exclusion for hedges of mortgage servicing rights or assets, this exclusion is intended to 

clarify the scope of the prohibition on proprietary trading and to provide parity between banking 

entities that apply the market risk capital prong and banking entities that apply the short-term 

intent prong by scoping out of the rule positions that would not be captured by the market risk 

capital prong. In addition, this amendment will exclude financial instruments purchased by a

dealer in its dealing capacity that are not trading assets or liabilities. Therefore, the SEC believes 

that this amendment will benefit dealers, to the extent that the 2013 rule’s dealer prong is 

overinclusive because it scopes in financial instruments acquired in dealer capacity, regardless of 

their purpose (i.e. both for trading and non-trading purposes). To the extent that this aspect of 

the 2013 rule leads to inefficiencies or increases costs at the dealer level, the SEC expects that 

the final rule will promote dealers’ organizational efficiency by narrowing the scope of the dealer 

prong to financial instruments that are considered trading assets and liabilities.

To the extent that some financial instruments that are not trading assets or liabilities are 

currently scoped-into the rule by the short-term prong due to the fact that they are held for less 

 1003 The SEC estimates that there are 99 SEC-registered broker-dealers that are not subject to the 

market risk capital rule, which on aggregate hold approximately 1.5% of broker-dealer holdings. 
360

than 60 days, this amendment may decrease the scope of the trading account. For example, some 

fair value financial instruments that are not trading assets or liabilities, such as available-for-sale 

securities or derivatives not reported as trading, may be held for less than 60 days and therefore 

be presumed to be for the trading account under the 2013 rule. However, under the 2013 rule,

banking entities could rebut this presumption by demonstrating that such instruments are not 

purchased or sold principally for the purpose of selling in the near term.1004 In addition, the SEC 

notes that dealers, in general, hold primarily trading assets and trading liabilities due to the 

nature of their business. The SEC does not have data or information about what fraction of 

dealers’ financial instruments that are not defined as trading assets or liabilities under the 

applicable banking agency reporting forms is currently being scoped-into the trading account by 

the short-term prong in the 2013 rule. This is because only non-trading fair value instruments 

held for fewer than 60 days are likely to be scoped into the trading account via the short-term 

prong under the 2013 rule, rather than all such financial instruments, and the data disaggregated 

by maturity of non-trading fair value instruments is not available. However, the SEC reiterates 

that only a small subset of trading activity by dealers may be affected by this exclusion, as 

majority of financial instruments purchased or sold by dealers are trading assets and liabilities. 

For this reason and the reasons discussed above, the SEC expects that this amendment will not 

substantially affect the scope of the trading account for banking entities that are dealers.

 1004 As discussed above, the final rule eliminates the 60-day rebuttable presumption in the shortterm prong and instead establishes a new rebuttable presumption that financial instruments held 

for 60 days or more are not within the short-term prong.
361

(2) Efficiency, Competition, and Capital Formation

To the degree that the 2013 rule may be restricting liquidity-risk management by banking 

entities, and to the extent that this affects their trading activity, the liquidity management 

amendment could facilitate more efficient risk management, greater secondary market activity, 

and more capital formation in primary markets. Similarly, to the extent that corrections for 

bona-fide errors and exclusions for customer-driven swaps and customer-driven security-based 

swaps and transactions related to mortgage servicing rights facilitate customer-driven 

transactions and increase banking entities’ willingness to conduct such transactions, these 

exclusions could facilitate more efficient risk management and promote capital formation and 

secondary market activity. In addition, to the degree that the exclusions from proprietary trading 

may provide banking entities with more flexibility to manage risks, and to the extent these 

activities facilitate capital formation, these amendments may improve allocative efficiency. 

To the extent that these amendments may increase the ability of dealers that are banking 

entities to hedge risks related to customer transactions, the competitive position of dealers that 

are banking entities may improve relative to nonbanking dealers. In addition, to the extent that 

these amendments reduce compliance costs of dealers that are banking entities and to the extent 

that these compliance costs are currently passed onto customers and counterparties, the reduction 

in costs related to the exclusions from proprietary trading may result in more competitive prices 

set by dealers that are banking entities, improving their competitive position further.

(3) Alternatives

The agencies could have taken the approach of expanding the liquidity management 

exclusion to exclude additional trading activities. For example, the agencies could exclude 
362

transactions in other derivatives, such as derivatives related to government securities, derivatives 

on foreign sovereign debt,1005 instruments that qualify for certain treatment under the liquidity 

coverage ratio or section 165 of the Dodd-Frank Act, or transactions executed by SEC-registered 

dealers on behalf of their asset management customers.1006

The 2013 rule exempts all trading in domestic government obligations and trading in 

foreign government obligations under certain conditions; however, derivatives referencing such 

obligations that are intended to manage risks—including derivatives portfolios that can replicate 

the payoffs and risks of such government obligations—are not excluded from the trading 

account. Therefore, existing requirements reduce the flexibility of banking entities to engage in 

asset-liability management and result in a different treatment of two groups of financial 

instruments that have similar risks and payoffs. 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. The SEC recognizes, 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 

 1005 Some commenters indicated that all derivatives should be excluded in the liquidity 

management exclusion. See, e.g., FSF; Capital One et al.; IIB and JBA.

1006 See, e.g., Capital One et al. and ABA. 
363

banking entities to increase their exposure to counterparty, interest rate, and liquidity risk. For 

the reasons discussed in section IV.B.1.i, the agencies decided not to expand the liquidity 

management exclusion further. 

The agencies also considered mandating the use of a separately-managed trade error 

account for the purposes of this amendment. This alternative could deter banking entities from 

using the error trade exclusion to obfuscate impermissible proprietary trades. However, as 

indicated by the commenters, this approach may result in duplicative systems and additional 

compliance costs.1007 The agencies agree with these commenters and, therefore, are not adopting 

this alternative.

iii. Trading Desk Definition

The final rule adopts a multi-factor definition of the trading desk that is substantially 

similar to the definition included in the request for comment in the proposal, except that the 

reference to incentive compensation has been removed from the first prong. The definition of 

trading desk includes a new second prong that aligns the definition with the market risk capital 

rule. Specifically, for a banking entity that is subject to the market risk capital rule, the trading 

desk established for purposes of the market risk capital rule must be the same unit of 

organization that is established as a trading desk for purposes of the regulations implementing 

section 13 of the BHC Act.

 1007 See, e.g., ABA; Credit Suisse; JBA and SIFMA.
364

(1) Costs and Benefits

The SEC continues to recognize that the definition of trading desk is an important 

component of the implementation of the 2013 rule in that certain requirements, such as those 

applicable to the underwriting and market making exemptions, and the metrics-reporting 

requirements, apply at the trading desk level of organization. Under the 2013 rule, 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 entity or an affiliate thereof. Some 

commenters asserted that the smallest discrete unit language of the 2013 rule was subjective, 

ambiguous, or could be interpreted in different ways.1008 Thus, the SEC continues to believe that 

SEC-regulated banking entities may currently experience substantial compliance costs related to 

the trading desk designation for the purposes of compliance with section 13 of the BHC Act. 

Accordingly, the SEC believes that the adopted definition of the trading desk may provide more 

certainty to SEC-regulated banking entities regarding trading desk designations and will reduce 

their compliance burdens, as the multi-factor definition better aligns with other operational, 

management, and compliance purposes,

1009 which typically depend on the type of trading 

activity, asset class, product line offered, and individual banking entity’s structure. Among the 

metrics submissions from 18 entities received by the SEC, the SEC estimates that the average 

number of desks reported per entity is approximately 51.1010 To the extent that the trading desk 

designations under the final rule will be less granular than those under the 2013 rule, and to the

 1008 See, e.g., ABA and CCMC.

1009 This was also supported by commenters. See, e.g., ABA; JBA; FSF; Goldman; ISDA; 

SIFMA and CCMC.

1010 See section V.0.
365

extent that establishing a large number of desks is more costly, this amendment will reduce 

compliance costs for dealers that are banking entities.

As seen in Table 9, the SEC estimates that 100 broker-dealers with between 98% and 

99% of holdings are currently subject to the market risk capital rule and would be able to align 

their trading desks for the purposes of the Volcker Rule and the market risk capital rule. The 

SEC continues to believe that such alignment will reduce organizational complexity, 

consequently reducing compliance burdens for these banking entities.

1011 The SEC also 

estimates that 99 broker-dealers are not currently subject to the market risk capital rule—these 

broker-dealers will be able to establish trading desks on the basis of the multi-factor definition. 

To the extent that the current operational, management, or compliance structure of these entities 

may not perfectly align with the adopted multi-factor definition of the trading desk, these entities 

may experience one-time setup costs related to the reorganization of trading activity in order to 

satisfy the multi-factor definition. The SEC does not have information or data about the costs of 

this reorganization. However, the SEC believes that these reorganization costs will be offset by 

a reduction in ongoing compliance costs, which will be reduced as a result of the amended 

definition of the trading desk for dealers that are not subject to the market risk capital rule, to the 

extent that the trading desk designations under the final rule will be less granular than those 

under the 2013 rule and will better align with criteria used to establish trading desks for 

operational and management purposes.

 1011 See id.
366

(2) Efficiency, Competition, and Capital Formation

To the extent that the reduction in compliance costs stemming from this amendment 

facilitates permitted trading activity by banking entities, capital formation may increase. To the 

extent that the reduced compliance costs stemming from this amendment flow through to 

customers and counterparties, bank-affiliated dealers may become more competitive with 

nonbanking dealers. The amendment to the definition of the trading desk does not change the 

information available to market participants, and the SEC does not believe that these 

amendments are likely to have an effect on informational efficiency. To the degree that this 

amendment facilitates capital formation, allocative efficiency may improve.

(3) Alternatives

The agencies could have adopted an amendment that would allow trading desks to be set 

completely at the discretion of banking entities.1012 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. However, 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 risk exposures of banking 

 1012 This alternative was also suggested by a commenter. See JBA.
367

entities and the conflicts of interest that the prohibitions of section 13 of the BHC Act aimed to 

address.1013 The SEC does not have data on operating and compliance costs that arise because of 

the fragmentation of trading activity by SEC-regulated banking entities, or data on their 

organizational complexity, and the extent of variation therein. For the reasons discussed in 

section IV.B.1.c, the agencies are not adopting this definition.

c. Permitted Underwriting and Market Making

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. Moreover, as discussed above, 

market liquidity can be important to investors as it may enable investors to exit (in a timely manner 

and at an acceptable price) from their positions in instruments, products, and portfolios. At the 

same time, excessive risk exposure by banking entities can, of course, adversely affect markets and, 

therefore, investors.

Under the final rule, banking entities with covered activities are presumed compliant with 

the RENTD requirements of the exemption for underwriting and market making-related 

activities if the banking entity establishes and implements, maintains, and enforces certain 

internal limits that are designed not to exceed RENTD, taking into account the liquidity, 

maturity, and depth of the market for the relevant type of security or financial instrument. These 

internal limits are subject to supervisory review and oversight on an ongoing basis. 

 1013 See, e.g., Volcker Alliance.
368

For Group A entities, these limits are required to be established either within the entity’s 

internal compliance program or under the presumption of compliance within the exemptions for 

permitted underwriting and market making related activities. Under the final rule, Group B 

entities are not required to establish a separate compliance program for underwriting and market 

making requirements, including the internal limits for RENTD. However, in order to be 

presumed compliant with the RENTD requirements under the exemptions for underwriting and 

market making-related activities, banking entities are required to establish and enforce limits 

designed not to exceed RENTD, as well as authorization procedures for limit breaches and 

increases for each trading desk as described below. 

With respect to limit increases and breaches, banking entities are required to maintain and 

make available upon request records regarding any limit that is exceeded and any temporary or 

permanent increase to any limit. Unlike the proposal, the final rule does not include the 

requirement of prompt reporting of breaches or limit increases but requires that banking entities 

keep and provide such records to the agencies upon request. However, consistent with the 

requirements under the 2013 rule, the final rule includes certain requirements for the continued 

availability of the presumption of compliance in the event of limit increases or breaches. 

Specifically, the presumption of compliance will continue to remain available in the event of a 

breach or limit increase only if (i) the banking entity takes prompt action to bring the trading 

desk into compliance; and (ii) establishes and complies with a set of written authorization 

procedures, including escalation procedures that require review and approval of any trade that 

exceeds a trading desk’s limits, demonstrable analysis of the basis for any temporary or 

permanent increase to a trading desk’s limits, and independent review of such demonstrable 

analysis and approval. 
369

i. Costs and Benefits

This section discusses the expected benefits of the final rule and how regulatory oversight 

of internal limits may reduce such benefits; potential costs related to deterioration of risk 

management practices and increased risk exposures of banking entities, including with respect to 

the removal of the demonstrability requirement; aspects of the final rule and baseline that 

mitigate these costs; and factors likely to affect the overall balance of these economic effects.

The primary expected benefits of the final rule are threefold. First, the agencies have 

received comments that the 2013 rule has created significant costs and uncertainty about some 

banking entities’ ability to rely on the exemption for underwriting and market making-related 

activities,1014 and the economic baseline discusses existing research on the baseline effects of the 

2013 rule on market quality, trading, and client facilitation activities. The SEC believes that the 

final rule may provide SEC- regulated banking entities with beneficial flexibility and certainty in 

conducting permissible underwriting and market making-related activities. Second, consistent 

with commenter views,1015 the SEC recognizes that banking entities may already routinely 

establish and monitor internally set risk and position limits for purposes of meeting capital 

requirements and internal risk management. Thus, to the degree that some banking entities 

already establish limits that meet the requirements under the final rule, the presumption allows 

the reliance on internal limits in accordance with a banking entity’s risk management function 

that may already be used to meet other regulatory requirements. Therefore, the amendment may 

prevent unnecessary duplication of risk-management compliance procedures for the purposes of 

complying with multiple regulations and may reduce compliance costs for SEC-regulated 

 1014 See, e.g., ABA; Credit Suisse; State Street and BB&T.

1015 See JBA.
370

banking entities. Third, 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,1016 the amendments may increase banking entities’ profits and the 

volume of dealer underwriting and market making activity. The SEC notes that the returns and 

risks arising from banking entity activity may flow through to investors and that investors in 

securities markets may benefit from market liquidity as it enables exit from investment positions. 

Since the 2013 rule requires oversight of internal limits and authorization policies and 

procedures related to internal limit increases or breaches, this aspect of the final rule is unlikely 

to result in new compliance burdens for SEC registrants. In addition, the SEC has received 

comment that some banking entities may already have escalation and recordkeeping procedures 

when limits are breached or changed.1017 The SEC continues to believe that agency oversight of 

internal limits for the purposes of compliance with the final rule may help support the benefits 

and costs of the substantive prohibitions of section 13 of the BHC Act. The agencies have also 

received comment that the amendments may allow the agencies to challenge the limit approval 

and exception process but not the nexus between RENTD and limits.1018 As discussed above, 

sections___.4(c)(1)(i)-(ii) of the final rule require that such limits must be designed not to exceed 

RENTD. 

In the proposal, the SEC noted that some entities may be able to maintain positions that 

are larger than RENTD and increase risk exposures arising out of trading activities, thus 

reducing the economic effects of section 13 of the BHC Act and the 2013 rule. The agencies 

 1016 See section V.F.2.

1017 See JBA.

1018 See, e.g., Better Markets.
371

have received comment that limits may be designed to exceed RENTD and banking entities may 

frequently exceed limits and that introducing the presumption may lead to a deterioration of risk 

management practices and increase risk taking by banking entity dealers.1019 However, as 

discussed above, under the final rule internal limits need to be tied to RENTD, such that if the 

banking entity complies with the limits it will not maintain positions that are larger than RENTD. 

The SEC also notes that breaches and changes to internal limits may reflect banking entities’ 

close monitoring of market conditions and tailoring such limits, valuable for both internal risk 

management and supervision and oversight over banking entities. The agencies have received 

comment that some banking entities may change the way they set internal limits in response to 

the final rule, for instance, by selecting higher initial limits to avoid breaches or increases for the 

purposes of section 13 of the BHC Act.1020 The SEC recognizes these possible effects from 

entities changing their internal limit setting practices and notes that this effect may reduce the 

value of closely tailored and dynamically adjusted internal limits for internal oversight and 

agency supervision. Moreover, the SEC notes that this effect may lead some banking entities to 

take on greater trading risks. Nevertheless, to satisfy the presumption of compliance, such 

trading activity must conducted within risk and position limits designed not to exceed RENTD, 

and thus be consistent with section 13(d)(1)(B) of the BHC Act. The SEC also notes that the 

final rule contains recordkeeping obligations concerning any exceeded limits or temporary or 

permanent increases to limits, which may facilitate agency oversight but impose new burdens on 

banking entities. As discussed in section V.B, this aspect of the final rule may increase initial 

 1019 See, e.g., Volcker Alliance; Better Markets; NAFCU and Public Citizen.

1020 See, e.g., Capital One et al.; Better Markets; and State Street.
372

burdens1021 by $8,8701022 for SEC-registered banking entities and ongoing burdens for SECregistered broker-dealers by approximately $227,278 per year and for SBSDs by approximately 

$38,831 per year. 1023

The final rule also eliminates the requirements of the market making exemption related to 

the demonstrable analysis of historical customer demand, current inventory of financial 

instruments, and market and other factors concerning financial instruments in which the trading 

desk makes a market, including though block trades. Some commenters indicated that this 

aspect of the amendments gives banking entities greater discretion to establish higher risk and 

inventory limits in excess of RENTD1024 and that banking entities should be required to 

demonstrate the analysis behind their RENTD forecasts and compare ex-ante forecasts with expost realizations.1025 However, the agencies also received comment that RENTD can 

significantly deviate from historically observed levels, particularly in times of severe market 

stress, and internal limits designed to not to exceed RENTD may be based on current or forward 

looking customer inquiries, anticipated volatility shocks, and other forward looking information 

 1021 For the purposes of the burden estimates in this release, the SEC is assuming the cost of $423 

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, multiplied by 5.35 to account 

for bonuses, firm size, employee benefits, and overhead, and adjusted for inflation as of June 

2019. 

1022 Initial reporting and recordkeeping burdens: 0.5 hours x 0.18 dealer weight x [199 brokerdealers + 34 SBSDs not already registered as broker-dealers] x Attorney at $423 per hour = 

$8,870.

1023 Ongoing burdens for broker-dealers: [10 hours recordkeeping + 5 hours reporting] x 0.18 

dealer weight x 199 x Attorney at $423 per hour = $227,278.

Ongoing burdens for SBSDs: [10 hours recordkeeping + 5 hours reporting] x 0.18 dealer weight 

x 34 SBSDs not already registered as broker-dealers x Attorney at $423 per hour = $38,831.

1024 See Volcker Alliance.

1025 See Data Boiler.
373

about market conditions and the evolving risks of a particular desk.1026 The SEC also notes that, 

under the final rule, the presumption of compliance requires risk and position limits to be 

designed not to exceed RENTD and that the agencies may rebut the presumption as discussed 

above. 

Four key aspects of the final rule are aimed at mitigating these risks and costs. First, the 

internal limits, including any changes to limits, used to establish the presumption of compliance 

are subject to rebuttal procedures discussed above, and the final rule requires that the internal 

limits are designed not to exceed RENTD and take into account the liquidity, maturity, and depth 

of the market for the relevant type of security or financial instrument. Second, the presumption 

of compliance is conditional on the banking entity’s prompt action to bring the trading desk into 

compliance if a limit is exceeded. Third, banking entities are required to establish and comply 

with a robust set of internal policies and procedures, requiring review of limits, demonstrable 

analysis of a basis for any limit increase, and independent review of such analysis and approval. 

Fourth, the economic effects of the presumption of compliance interact with the effects of the 

amended trading desk definition, which the SEC believes will allow the agencies to better 

oversee trading activity across a given banking entity’s trading desks and across groups of 

banking entities to determine whether the internal limits are appropriately designed not to exceed 

RENTD. 

The SEC also notes that the final rule tailors compliance obligations of banking entities 

for purposes of the exemptions for underwriting and market making-related activities. The 

economic effects of the final amendments related to compliance are discussed in section V.F.3.g. 

 1026 See, e.g., FSF.
374

The SEC continues to believe that the overall economic effect of these amendments will 

depend on how banking entities choose to comply with the substantive prohibitions in section 13 

of the BHC Act and the 2013 rule as amended. Specifically, banking entities are likely to weigh 

the unmet demand for and profitability of client facilitation activity against the potential costs of 

establishing and maintaining appropriate internal limits.1027 The SEC does not have data on the 

volume of trading activity that does not occur because of the costs associated with complying 

with the RENTD requirement or data on the profitability of such trading activity for SECregulated banking entities. The SEC is not aware of any such data, and commenters did not 

provide data enabling such quantification.1028

ii. Efficiency, Competition, and Capital Formation

The SEC believes that the final rule may reduce the costs of relying on the exemptions 

for underwriting and market making-related activities, 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-à-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 (OTC) derivatives 

markets. While it is difficult to establish causality, corporate bond dealers, particularly bankaffiliated dealers, have, on aggregate, significantly reduced their capital commitment post-

 1027 See, e.g., 83 FR at 33532.

1028 The SEC observes that, as shown in Table 1, broker-dealers affected by the final rule have 

total assets of approximately $3.14 trillion and holdings of approximately $761.53 billion. If the 

final amendments increase affected broker-dealer holdings by even 0.01%, the economic impact 

of the final rule may exceed $100 million.
375

crisis.1029 Corporate bond dealers are increasingly shifting from trading in a principal capacity to 

agency trading. 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 rule), such effects may point to a reduced supply of 

liquidity by dealers. Moreover, corporate bond dealers decrease liquidity provision in times of 

stress after the 2013 rule.1030 In dealer-centric single-name 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.1031

Because of the methodological challenges described earlier in this analysis, the SEC 

cannot quantify potential effects of the 2013 rule in general—and the RENTD, underwriting, and 

market making provisions of the 2013 rule in particular—on capital formation and market 

liquidity. The SEC also recognizes, as discussed above, 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 exemptions for market making-related activity and riskmitigating hedging, dealers currently limit their market making and hedging activity in certain 

products, the final rule may facilitate market making. Because secondary market liquidity can 

affect the willingness to invest in primary markets, and access to liquidity in these markets can 

 1029 See, e.g., FRB’s “Staff Q2 2017 Report on Corporate Bond Market Liquidity.” See also 

section V.F.2 above.

1030 See section V.F.2. above.

1031 For a literature review and data, see SEC Report 2017, supra note 774. 
376

enable market participants to mitigate undesirable risk exposures, the amendments may increase 

trading activity and capital formation in some segments of the market. 

While section 13 of the BHC Act and the 2013 rule, as amended, prohibit banking 

entities from engaging in proprietary trading, some trading desks may attempt to use certain 

elements of the final RENTD amendments to circumvent those restrictions, which may reduce 

the economic effects of the 2013 rule outlined in the economic baseline. However, under the 

final rule, internal limits and policies and procedures regarding breaches and limit increases and 

other aspects of banking entities’ compliance with section 13 of the BHC Act remain subject to 

the full scope of agency oversight and supervision, and the presumption of compliance is 

rebuttable. 

The SEC continues to recognize that proprietary trading by banking entities may increase 

the risk exposures of banking entities, may give rise to economic inefficiency because of 

implicitly subsidized risk exposures of banking entities, and may increase market fragility and 

conflicts of interest between banking entities and their customers.1032 However, the SEC also 

recognizes the comments and research discussed above concerning the unintended effects of the 

2013 rule on valuable underwriting and market making activities, and the nuanced effects of 

section 13 of the BHC Act and the 2013 rule on the overall volume and structure of banking 

entity risk exposures. 

The SEC continues to believe that, where the final rule increases the scope of permissible 

activities or decreases the risk of detection of proprietary trading, its effect on informational 

efficiency stems from a balance of two effects.1033 On the one hand, where proprietary trading 

 1032 See 83 FR at 33533.

1033 See 83 FR at 33534.
377

strategies are based on superior analysis and prediction models, their enhanced ability to trade on 

such information may make securities markets more informationally efficient. While such 

proprietary trading strategies can be executed by dealers that are not affiliated with banking 

entities and therefore 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, and if such conflicts are 

recognized by other market participants, proprietary trading may make other market participants 

less willing to transact with banks or participate in securities markets, potentially reducing 

informational efficiency. 

iii. Alternatives: Prompt Notice, Thresholds

The agencies could have adopted a prompt notice requirement for limit breaches and 

limit changes, such as internal limit increases, for all or a subgroup of banking entities. Prompt 

notification of breaches and changes to internal limits under the alternative may provide more 

immediate information to agencies about limit breaches and changes supporting oversight.1034 

The agencies have received comment that such prompt notice may be especially beneficial for 

the oversight of smaller and mid-size banking entities with less sophisticated internal controls 

that may be more susceptible to risks from rogue trading.1035 

 1034 See, e.g., Data Boiler.

1035 See, e.g., CFA.
378

However, consistent with the views of a number of commenters, 1036 the SEC believes 

that the prompt notice requirement would have imposed considerable costs on registrants. Such 

information may duplicate metrics reporting for Group A entities and other information provided 

to the agencies in the ordinary course of prudential supervision.1037 Further, such costs would 

likely be most significant for Group B and Group C entities that do not engage in significant 

trading activity and which may face more difficulties absorbing reporting costs,1038 as well as for 

non-U.S. banking entities with large non-U.S. operations.1039 In addition, internal limit increases 

or breaches may reflect changes in market conditions and not changes in a banking entity 

strategy or risk tolerance, and smaller and mid-size banks may currently be setting internal limits 

considerably below RENTD.1040 Finally, to the degree that market participants may interpret the 

prompt reporting requirement as an enhanced regulatory focus on the number of times an entity 

has breached RENTD, traders may become less willing to request limit increases to 

accommodate customer demand; 1041 alternatively, entities may set higher internal limits to avoid 

breaches or increases.1042 

The final rule balances these considerations by imposing recordkeeping requirements that 

enable the agencies to access books and records concerning internal limit increases and breaches 

 1036 See, e.g., ABA; Committee on Capital Markets; Credit Suisse; GFMA; FSF; JBA and 

BB&T.

1037 See, e.g., FSF; SIFMA; ABA; CREFC; GFMA; Goldman Sachs; Real Estate Associations 

and ISDA.

1038 See, e.g., Capital One et al.

1039 See, e.g., JBA and IIB.

1040 See BOK.

1041 See, e.g., CCMC.

1042 See, e.g., Capital One et al.; Better Markets; MBA and State Street.
379

in the course of other supervision, inspections, and examinations; require prompt action to bring 

the trading desk back in compliance in the event of a breach; and impose requirements 

concerning policies and procedures for escalation, for demonstrable analysis of the basis for 

internal limit increases, and for independent review for such analysis and approval. 

The agencies could have also adopted the internal limit approach, but with more or less 

flexibility provided to banking entities in setting internal limits. For example, the agencies could 

have specified that a desk’s internal limits can reflect risk appetite, risk capacity, and business 

strategy, so long as that desk holds itself out as a market maker; the agencies could have also 

permitted limits based on absolute value of profit and loss (in the case of an underwriting 

desk).1043 The agencies could have also adopted an approach under which the internal limits 

necessary for the presumption of compliance are developed in collaboration with onsite 

supervisors or prudential examiners.1044 The agencies could have also adopted an approach 

under which all or Group B and Group C banking entities would be able to rely on the 

presumption of compliance if their internal limits were appropriate to the activities of the desk 

subject to other existing bank regulations, supervisory review, and oversight by the appropriate 

agency.1045 Finally, the agencies could have adopted an approach under which the presumption 

of compliance is available for activity-based internal limits, such as those based on notional size 

and inventory turnover.1046 Alternatives that would provide banking entities with greater 

flexibility in setting internal limits would bolster the ability of market makers and underwriters to 

 1043 See JBA. 

1044 See, e.g., FSF and SIFMA.

1045 See Capital One et al.

1046 See BB&T.
380

proactively adjust their risk exposures to changing market conditions and potentially 

accommodate a greater volume of customer demand. At the same time, such alternatives may 

also allow banking entities to engage in a greater degree of trading activity while relying on the 

presumption of compliance. 

Similarly, one commenter suggested an approach that more prescriptively specifies how 

banking entities should set and adjust internal limits and what factors they should consider.1047 

Another commenter stated that such a one-size-fits all approach ignores differences in the 

business models of banking entities and desks. 1048 The SEC believes that, while this alternative 

may decrease the trading activity of banking entities, it would not appropriately tailor the 2013 

rule to the differences in organization, operation, and risks of various banking entities and their 

trading desks; may hamper client facilitation activity when market conditions are in flux; and 

may have the unintended effect of banking entities delegating certain risk management functions 

to the agencies. As discussed above, the final rule specifies that internal limits must be designed 

not to exceed RENTD and that internal limits of banking entities are subject to ongoing 

regulatory oversight by the agencies.

The agencies could have adopted 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 in the final rule), but applied a different threshold for 

underwriting compliance, such as on the basis of the volume or profitability of past underwriting 

activity. This alternative would have tailored the compliance requirements for SEC-regulated 

 1047 See Better Markets.

1048 See Committee on Capital Markets.
381

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 

limits with respect to underwriting activity during times of economic stress when covered trading 

activity related to underwriting may pose the highest risk of loss. The alternative may also limit 

banking entities in their ability to engage in underwriting during economic weakness when 

economic activity and capital formation are in decline.

One commenter suggested that the agencies interpret the underwriting exemption broadly 

to accommodate any activity that assists persons or entities in accessing the capital markets or 

raising capital, as well as any activities done in connection with a capital raise.1049 Under such 

an approach, an underwriter’s hedging of unsold, contingent, or forward underwriting allotments 

would be permissible under the underwriting exemption. To the degree that banking entities are 

unable to engage in such activities in reliance on the hedging or other exemptions under the 2013 

rule, this alternative may increase the ability of some banking entities to hedge some of the risks 

related to underwriting and their willingness to engage in underwriting activity. Moreover, a 

broad underwriting exemption would eliminate the need to categorize the underwritten 

instruments, which may be difficult to do in some foreign markets with respect to loans, repos, 

securities loans, financial instruments, or derivatives. At the same time, the SEC believes that 

banking entities may currently be able to engage in hedging related to underwriting activity 

under the rule, such as in reliance on the hedging exemption. 

d. Permitted Risk-Mitigating Hedging

 1049 See, e.g., ISDA.
382

i. Costs and Benefits

As discussed in the proposal,1050 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 important role that this 

activity can play as part of a banking entity’s overall operations, the agencies are adopting a 

number of changes that streamline and clarify the 2013 rule’s exemption for risk-mitigating 

hedging activities to reduce unnecessary compliance burdens and uncertainty some banking 

entities face concerning their ability to rely on the hedging exemption. 

First, the final rule simplifies the requirements of the risk-mitigating hedging exemption 

for banking entities that do not have significant trading assets and liabilities. The amendment 

removes the requirement to have a specific risk-mitigating hedging compliance program, as well 

as the documentation requirements and certain hedging activity requirements for such entities. 

As a result, these banking entities are subject to the following requirements: (1) the hedging 

activity, 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 (2) the hedging 

activity is subject, as appropriate, to ongoing recalibration by the banking entity to ensure that 

the hedging activity satisfies these requirements and is not prohibited proprietary trading.

 1050 See, e.g., 83 FR at 33535.
383

As discussed in the proposal,1051 banking entities without significant trading assets and 

liabilities may be less likely to engage in large or complicated trading activities and hedging 

strategies. The agencies have received comment supporting such reduced compliance 

requirements for banking entities that do not have significant trading assets and liabilities.

1052 

One commenter stated that reduced compliance requirements for risk-mitigating hedging by 

Group B and Group C banking entities would not affect the safety and soundness of banking 

entities or financial stability and pointed to the importance of robust monitoring and banking 

entity risk management in the context of risk-mitigating hedging.1053 Another commenter 

opposed this aspect of the amendments and stated that, absent proprietary trading intent, ensuring 

that hedging does not increase banking entities’ risks at inception of the hedge and that trading 

personnel are not compensated for doing so is not complex.1054

The SEC continues to believe that compliance with the 2013 rule, including compliance 

with the requirements of §___.5(b)(2), imposes disproportionate costs on banking entities 

without significant trading assets and liabilities.1055 The SEC continues to note that, as 

quantified in the economic baseline, Group B and Group C broker-dealers represent a very small 

fraction of total assets and holdings in the broker-dealer industry. In addition, fixed compliance 

costs represent disproportionately greater burdens for smaller entities as they may face greater 

difficulty absorbing such costs into revenue. Importantly, the final rule does not waive the 

substantive proprietary trading prohibitions in section 13 of the BHC Act for any banking entity, 

 1051 See, e.g., 83 FR at 33536.

1052 See, e.g., Credit Suisse and BB&T.

1053 See BB&T.

1054 See Better Markets.

1055 See, e.g., 83 FR at 33536.
384

including for any Group B or Group C banking entity. Instead, the SEC continues to believe that 

the amendment reduces the costs of relying on the hedging exemption and, thus, the costs of 

engaging in hedging activities for Group B and Group C entities. 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. 

Second, the final rule reduces documentation requirements for Group A entities. In 

particular, the final rule removes the documentation requirements for some risk-mitigating 

hedging activity. More specifically, the activity is not subject to the documentation requirement 

if (1) the financial instrument used for hedging 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, 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 agencies received comment that this and other final amendments to the riskmitigating hedging exemption may lead banking entities to engage in less planning, 

documentation, and testing in their hedging activities, may reduce the effectiveness of agency 

oversight, and may weaken the proprietary trading prohibitions of the 2013 rule.1056 Other 

commenters supported the revisions, but stated that enhanced documentation requirements for 

the hedging exemption, as a whole, are unnecessary given the robust compliance framework 

 1056 See, e.g., Better Markets; Data Boiler and Bean.
385

under the 2013 rule and amendments, and supported the complete elimination of the 

documentation requirements for all banking entities.1057

Consistent with the views of some commenters,1058 the economic effects with respect to 

internal limits for the purposes of hedging with pre-approved instruments may be similar to the 

effects of internal limits for the purposes the underwriting and market making exemptions 

discussed above. The SEC recognizes that the economic effects of this aspect of the final rule 

depend on the prevalence of hedging activities in each registrant, their organizational structure, 

business model, and complexity of risk exposures. However, the SEC continues to believe 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 programs to their 

specific organizational structure and existing policies and procedures.1059 At the same time, the 

SEC believes that the remaining documentation requirements for Group A entities being adopted 

will facilitate effective internal risk management and agency oversight. 

Third, the final rule eliminates 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 is also 

removed from the requirement to continually review, monitor, and manage the banking entity’s 

existing hedging activity. Banking entities will continue to be subject to the requirement that the 

risk-mitigating hedging activity be designed to reduce or otherwise significantly mitigate one or 

 1057 See, e.g., ABA; FSF; CREFC; BPI and SIFMA.

1058 See, e.g., Credit Suisse.

1059 See, e.g., 83 FR at 33536.
386

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.

Consistent with the views of a number of commenters,1060 the SEC believes that the 

removal of the demonstrability requirement may benefit banking entity dealers, as it decreases 

uncertainty about the ability to rely on the risk-mitigating hedging exemption and may reduce the 

compliance costs of engaging in permitted hedging activities. The SEC continues to recognize 

that some SEC- regulated banking entities may respond to this aspect of the final rule by 

accumulating positions that increase the banking entity’s risk exposure through adjustments (or 

lack thereof) to otherwise permissible hedging portfolios.1061 The SEC also recognizes concerns 

raised by commenters that some banking entities may forecast changes in correlations and 

construct hedging portfolios such that they leave the entity exposed to directional market 

movements.1062 The SEC continues to recognize that this may result in increased risks from the 

trading activity of some banking entities.1063 However, the final rule’s requirement concerning 

ongoing recalibration may mitigate these adverse effects. In addition, as discussed in greater 

detail in the economic baseline, the SEC recognizes that trading activity is only one form of 

activity conducted by banking entities that can increase risk exposure, and that market, credit, 

and liquidity risks of the banking book as well as the degree to which banking book risks are 

 1060 See, e.g., ABA; Credit Suisse and SIFMA.

1061 See 83 FR at 33535. See also, e.g., Better Markets; Bean; Data Boiler and CFA.

1062 See, e.g., Public Citizen.

1063 See, e.g., 83 FR at 33536.
387

hedged by tradeable assets all contribute to the overall risk of a banking entity or group of 

banking entities. As a result, the SEC recognizes that, to the degree that some banking entities 

may respond to the final rule by increasing risk exposures arising out of trading activity, these 

effects may be partly offset by changes in the risks these banking entities take in the normal 

course of their banking activity or more complete hedging of their banking and trading risks 

through trading portfolios. Moreover, the SEC believes that this aspect of the final rules may not 

only benefit banking entities by alleviating compliance burdens related to risk management, but 

may also benefit clients and counterparties by enabling greater trading activity and liquidity 

provision by dealers that are banking entities. Furthermore, the SEC reiterates that the returns 

and risks arising from the activity of banking entities may flow through to banking entity’s 

investors and that investors in securities markets may benefit from greater liquidity as it enables 

exit from investment positions. 

Finally, the final rule removes the requirement to perform the correlation analysis. The 

SEC continues to 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.1064 The agencies received comment that permitting 

additional time to provide correlation analysis would better address time-related challenges;1065

that requiring statistical tests of randomness to the observed returns on the hedged positions may 

serve to duly constrain hedging;1066 and that there should be no regulation-related delays when 

 1064 See 83 FR at 33535. See also, e.g., ABA; Credit Suisse; JBA; SIFMA and CREFC.

1065 See, e.g., Better Markets.

1066 Id.
388

hedging if banking entities rely on documented and stable risk relationships.1067 The SEC notes 

that time costs are only one of the issues in the correlation requirement and that banking entities 

may not be able to rely on documented and stable risk relationships in quickly evolving market 

conditions. Although 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, the SEC continues to recognize that correlation analysis may not be an effective tool 

for such evaluation in other instances. For example, correlations across assets and asset classes 

evolve over time and may exhibit jumps at times of idiosyncratic or systematic stress. In such 

circumstances, historical correlations among the returns on assets or asset classes may not be 

representative of the way in which they will affect portfolio risk going forward. Moreover, the 

SEC notes that asset return correlations may not be informative when financial instruments are 

traded infrequently, if the prices used to construct asset returns are non-binding indicative quotes 

(and not actual execution prices). 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.1068 These costs and delays may be most acute in 

times of market stress and during spikes in volatility, during which customers and other dealers 

may demand greater liquidity. The SEC continues to believe that the removal of the correlation 

analysis requirement may provide dealers with greater flexibility in selecting and executing riskmitigating hedging activities.1069 

 1067 Id.

1068 See, e.g., SIFMA.

1069 See, e.g., 83 FR at 33535.
389

The SEC received comments that the elimination of the correlation analysis may impede 

supervisory review, enable some banking entities to disguise proprietary trades as hedges, or 

result in permissible over- or under-hedging due to changes in asset correlations over time.1070 

Other commenters indicated that correlation analysis is highly automated and forces banking 

entities to be more purposeful in hedging activities.1071 The SEC recognizes these concerns and 

continues to recognize that the removal of the correlation analysis requirement involves the 

tensions of the effects discussed above.1072 The SEC continues to recognize that, to the extent 

that some banking entities may respond to this aspect of the final rule by engaging in more 

trading activities that leave them exposed to directional market movements while relying on the 

risk-mitigating hedging exemption, this aspect of the final rule may increase risk taking and 

conflicts of interest between banking entities and their customers. However, the SEC believes 

that the final rule’s requirement concerning ongoing recalibration by the banking entity to ensure 

that the hedging activity satisfies the requirements above and is not prohibited proprietary 

trading may mitigate these concerns. In addition, similar to the discussion above, the SEC 

continues to recognize that changes in the overall risk of banking entities reflect both changes in 

the risk of trading activities and their banking activities. Importantly, the SEC continues to 

believe that the requirement to engage in correlation analysis may have slowed the timing of 

hedging activities by some banking entities and may not be beneficial for prudent risk 

management or practical under some circumstances. Moreover, the SEC continues to believe 

that potential increases in permitted risk-mitigating hedging may benefit clients, customers, and 

 1070 See, e.g., AFR; Bean; NAFCU; Public Citizen; Volcker Alliance; Better Markets and 

Systemic Risk Council.

1071 See, e.g., AFR and Data Boiler.

1072 See 83 FR at 33536.
390

counterparties by increasing trading activity and capital formation by banking entities, 

particularly in times of market stress and during spikes in volatility. Finally, under the final rule, 

banking entities remain subject to the full scope of agency oversight over trading activities in 

reliance on the hedging exemption. 

As discussed above, the SEC estimates burden reductions, per firm, as a result of the final 

rule. The final amendments to § __.5(c) may result in ongoing cost savings for SEC-registered 

broker-dealers1073 estimated at $1,295,903.1074 Additionally, the final rule will result in lower 

ongoing costs for potential SBSD registrants relative to the costs that they would incur under the 

2013 rule’s regime if they were to choose to register with the SEC – this cost reduction is 

estimated to reach up to $51,775.1075 However, the SEC recognizes that compliance with SBSD 

registration requirements is not yet required and that there are currently no registered SBSDs.

ii. Efficiency, Competition, and Capital Formation

 1073 The SEC continues to believe that the burden reduction for SEC-regulated entities will be a 

fraction of the burden reduction for the holding company as a whole. In the proposal, the SEC 

attributed 18% of the reductions in holding company (parent) burdens to the dealer affiliates, on 

the basis of the average weight of broker-dealer assets in holding company assets. The SEC 

received no comment on this estimate and continues to rely on this figure in estimates of 

compliance burden reductions for SEC registrants. However, the SEC recognizes that 

compliance burdens may be borne disproportionately by dealer affiliates because of their role in 

trading for the holding company. As a result, some dealers may currently be bearing a larger 

fraction of holding company compliance burdens related to section 13 of the BHC Act. To this 

extent, the estimates of compliance burden savings may underestimate the magnitude of the 

benefits enjoyed by SEC registrants under the final amendments.

1074 Ongoing recordkeeping burden reduction for broker-dealers: (100 hours per firm x 0.18 

weight x (Attorney at $423 per hour) x 199 firms) – (80 hours per firm x 0.18 weight x (Attorney 

at $423 per hour) x 36 firms affiliated with Group A entities) = $1,515,186 – $219,283 = 

$1,295,903.

1075 Recordkeeping burden reduction for entities that may register as SBSDs: (100-80) hours per 

firm x 0.18 weight x (Attorney at $423 per hour) x 34 SBSDs not already registered as brokerdealers = $51,775. This estimate assumes all SBSDs are Group A entities and will still be 

subject to these ongoing recordkeeping obligations.
391

The primary efficiency, competition, and capital formation effects of the risk-mitigating 

hedging amendments stem from competition and capital formation. The final hedging 

amendments provide greater relief with respect to the requirements of the exemption for hedging 

activity to Group B and Group C entities relative to Group A entities. Since the fixed costs of 

relying on such exemptions may be more significant for entities with smaller trading books, the 

final hedging amendments may permit Group B entities just below the $20 billion threshold to 

more effectively compete with Group A entities just above the threshold.

The final hedging amendments may also influence 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 SEC-regulated entities to commit capital and take on underlying 

risk exposures. Because the final rule may 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. 

These amendments to risk-mitigating hedging do not change the amount or type of 

information available to market participants, and the SEC does not believe that the final rule is 

likely to have an effect on informational efficiency. To the degree that these amendments may 

enable some banking entities to more easily rely on the hedging exemption, and to the extent that 

hedging supports extension of credit and other capital formation, these amendments may 

somewhat improve allocative efficiency.

iii. Alternatives
392

The agencies could have adopted an approach that would exclude from the proprietary 

trading prohibition or allow all or a subset of banking entities (such as Group B and Group C 

entities) to rely on the presumption of compliance with respect to hedging activity accounted for 

under hedge accounting principles.1076 The agencies could have also adopted an approach 

excluding trading activity of non-U.S. banking entities accounted for under hedge accounting 

rules in their home jurisdictions.1077 The SEC believes that such alternatives would effectively 

replace the compliance and documentation obligations for permitted risk-mitigating hedging in 

the 2013 rule as amended in this final rule with the compliance obligations necessary for an 

entity to qualify for hedge accounting treatment. For example, banking entities must generally 

document the hedge relationship, including hedge objectives, risks being hedged, hedged item 

and the financial instrument used in the hedge, demonstrate that the hedge is highly effective, 

and recognize any ineffectiveness in profits and losses.1078 As a result, some commenters1079

indicated that such approaches may reduce compliance duplication and further reduce 

uncertainty regarding the ability of some banking entities to rely on the risk-mitigating hedging 

exemption with respect to certain hedging transactions. 

However, the SEC also recognizes commenter concerns that the compliance and 

effectiveness testing for the purposes of hedge accounting are designed for the purposes of 

transparent and informative financial statements and are not designed to distinguish between 

prohibited proprietary trading and permissible risk-mitigating hedging for the purposes of section 

 1076 See, e.g., Capital One et al., JBA, ABA and KeyCorp.

1077 See JBA.

1078 See FASB, Derivatives and Hedging (Topic 815) (Aug. 2017). See also International 

Financial Reporting Standard (“IFRS”) 9 (Financial Instruments). See also Capital One et al.

1079 See Capital One et al. and JBA.
393

13 of the BHC Act.1080 Moreover, international accounting standards may not involve the same 

level of compliance, documentation, and effectiveness testing as either the U.S. hedge 

accounting standards or the compliance program for the hedging exemption of the 2013 rule. As 

a result, the SEC continues to believe that the final rule implements the purposes of section 13 of 

the BHC Act while reducing compliance burdens on most affected registrants. 

As another alternative, the agencies could have adopted an approach, under which 

compliance with the risk-mitigating hedging exemption is applied on the basis of analysis of the 

trading desk’s activities as a whole and not on a trade-by-trade basis.1081 In a related vein, the 

agencies could have adopted an approach that allows portfolio hedging that is not 

contemporaneous with the inception of the position being hedged and that does not occur at the 

desk to which the risk is booked, so long as the hedging exposure remains within permitted 

internal limits applicable to each desk and to the banking entity as a whole.1082 The SEC 

believes that such alternatives would have the effect of enabling firm-wide macro hedges of a 

banking entity’s risk exposures by centralized risk management desks, which may involve fewer 

transaction costs and reduce the burden of demonstrating compliance with the hedging 

exemption for each trade. However, such an approach may make it more difficult for the 

agencies and banking entities to oversee compliance with the hedging exemption and distinguish 

between transactions reasonably designed at their inception to hedge specific risks and 

impermissible proprietary trades intended to profit from asset mispricing or directional changes 

in the value of assets or asset classes. 

 1080 See, e.g., Data Boiler.

1081 See, e.g., Credit Suisse and CCMC.

1082 Id.
394

As discussed above, the agencies could have also eliminated all enhanced documentation 

requirements for Group A banking entities and all other conditions of the hedging exemption not 

expressly required by the statute.1083 The SEC believes that, relative to the final rule, such an 

alternative would further reduce compliance burdens on Group A banking entities and 

uncertainty regarding their ability to rely on the hedging exemption and may increase the volume 

of risk-mitigating hedging by Group A banking entities. However, the elimination of enhanced 

documentation requirements as a whole and other conditions of the exemption may also reduce 

the effectiveness of internal risk management and agency oversight of Group A entities and may 

result in increased trading activity by Group A entities in reliance on the hedging exemption. 

This risk may be particularly acute given the size and complexity of trading activity of Group A 

entities and their role in the dealer industry and in the U.S. financial system as a whole. 

The agencies could have adopted an explicit exclusion from the proprietary trading 

prohibition for hedges of corporate debt issuances. Specifically, the agencies have received 

comment that financial institutions may routinely hedge debt securities issued for corporate 

purposes with interest rate swaps, which fall into the trading account under the 60-day rebuttable 

presumption of the 2013 rule.

1084 As discussed above, the final rule modifies the short-term 

prong of the trading account definition, reducing the likelihood that such activity would fall in to 

the trading account and require the reliance on the hedging exemption. As a result, the SEC 

believes that the final rule may enable valuable and routine hedging of corporate debt issued by 

banking entities subject to the short-term prong without the costs of complying with the riskmitigating hedging exemption.

 1083 See, e.g., ABA; FSF; CREFC; BPI and SIFMA.

1084 See KeyCorp.
395

e. Exemption for Foreign Trading

i. Costs and Benefits

Foreign banking entities seeking to rely on the exemption for trading outside of the 

United States under the 2013 rule face a complex set of compliance requirements that may result 

in significant burdens and implementation inefficiencies, which may have reduced cross-border 

trading activity and liquidity between U.S. and non-U.S. entities.1085 In particular, agencies have 

received comment from some market participants that compliance with the financing prong may 

be difficult for some non-U.S. banking entities because of the fungibility of some forms of 

financing.1086 In addition, the SEC continues to recognize that satisfying the U.S 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.1087 The final 

rule removes the financing and counterparty prongs. 

Under the final rule, financing for a transaction relying on the foreign trading exemption 

can be provided by U.S. branches or affiliates of foreign banking entities, including U.S. 

branches or affiliates that are SEC-registered dealers. Foreign banking entities may benefit from 

the final rule because of the greater flexibility afforded to how they are permitted to finance their 

transaction activity in reliance on the foreign trading exemption. The agencies have also 

received comment supporting the focus of the exemption on the location of the principal risk and 

the location in which decision making behind the trading occurs.1088 At the same time, the 

 1085 See, e.g., JBA; HSBC; ABA; ISDA; Credit Suisse; Committee on Capital Markets and IIB.

1086 See, e.g., EBF (citing 83 FR at 33468-69).

1087 See, e.g., 83 FR at 33537.

1088 See, e.g., ABA; ISDA; Credit Suisse; Committee on Capital Markets and IIB.
396

agencies have received comment that the proposed amendments to the exemption may increase 

the vulnerability of the U.S. financial system to proprietary trading losses of foreign banking 

entities.1089 However, for the reasons noted below, the SEC does not believe that the 

amendments will, on balance, increase vulnerability in the manner described by commenters. 

Specifically, the SEC continues to recognize that some of the economic exposure and risks of 

proprietary trading by foreign banking entities may flow not just to the foreign banking entities, 

but to U.S.-located entities financing the transactions, e.g., through margin loans.1090 However, 

potential adverse effects on vulnerability may be mitigated by two primary factors. First, the 

SEC notes that the final rule retains the condition that any purchases or sales by a foreign 

banking entity, including any hedging trades, are not accounted for as principal directly or on a 

consolidated basis by any U.S. branch or affiliate of the foreign banking entity. Thus, under the 

final rule, the principal risk of proprietary trading by non-U.S. banking entities will remain 

outside of the United States. Moreover, U.S. banking entities providing financing to their 

foreign banking entity affiliates are likely to be separately subject to a full range of capital, 

margin, and other obligations unrelated to section 13 of the BHC Act, which may reduce risks to 

the U.S. branches and affiliates of foreign banking entities. The SEC believes that the focus on 

where the principal risk and decision making behind the trading resides tailors the application of 

the 2013 rule with respect to foreign banks’ non-U.S. operations by reducing compliance 

burdens and uncertainties of foreign banking entities in their trading activity.1091

 1089 See, e.g., Bean; NAFCU; Better Markets; Merkley and Data Boiler.

1090 Id.

1091 In addition, the agencies confirmed in this Supplementary Information that the foreign 

trading exemption does not preclude a foreign banking entity from engaging a non-affiliated U.S.

investment adviser as long as the actions and decisions of the banking entity as principal occur 

outside of the United States. To the extent that foreign banking entities were restricting 
397

In addition, the final rule removes the counterparty prong and its corresponding clearing 

and anonymous exchange and personnel requirements. As a result, the final rule makes it easier 

for foreign banking entities to transact with or through U.S. counterparties. To the extent that 

foreign banking entities are currently bearing1092 and 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 final rule may reduce transaction costs for U.S. counterparties 

and may increase the volume of trading activity between U.S. counterparties and foreign banking 

entities.1093 

The SEC recognizes that this aspect of the final rule may adversely affect the current 

competitive standing of U.S. banking entities insofar as foreign banking entities will have greater 

ability to engage in proprietary trading activities with U.S. counterparties.1094 However, the 

removal of the counterparty prong in the final rule maintains a comparable treatment of the U.S. 

operations of U.S. and non-U.S. banking entities with respect to the transactions that are booked 

in the U.S., as neither U.S. nor non-U.S. banking entities are able to rely on the foreign trading 

exemption for such activity.1095 The agencies have also received comment that the elimination 

of clearing and exchange requirements may enable U.S. intermediaries to compete for business 

in OTC financial products with foreign banking entity counterparties, and that the amendments 

may foster trading activity between foreign affiliates and branches of U.S. banking entities and 

 

engagement of non-affiliated U.S. investment advisers due to uncertainty about the 2013 rule, 

non-affiliated U.S. investment advisers may become better able to compete for the foreign 

banking entity’s investment mandates.

1092 See, e.g., HSBC.

1093 See, e.g., JBA.

1094 See, e.g., FSF.

1095 See, e.g., IIB.
398

foreign banking entities without the constraints under the counterparty prong on the involvement 

of their U.S. personnel.1096

When a foreign banking entity engages in proprietary trading through a U.S. dealer, such 

trades expose the counterparty to risks related to the transaction, though 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, the SEC continues to emphasize that 

concerns about moral hazard and the volume of risk-taking by foreign banking entities may be 

less relevant for U.S. markets for two reasons.1097 First, foreign banking entities are less likely to 

be beneficiaries of U.S. deposit insurance and implicit bailout guarantees. Second, foreign 

banking entities are likely subject to foreign securities and prudential regulations that address 

these concerns. 

In addition, as proposed, the final rule replaces references to personnel arranging, 

negotiating, and executing trades with references to relevant personnel. This change is 

consistent with the views of some commenters, who stated that the current arrange, negotiate, or 

execute test is burdensome and may restrain trading activity outside of the U.S.1098 Specifically, 

the availability of the foreign trading exemption is amended to be conditioned on the banking 

entity engaging as a principal (including relevant personnel) not being located in the U.S. or 

organized under U.S. laws. As discussed elsewhere in this Supplementary Information, the 

agencies are modifying the rule such that relevant personnel for the purposes of the foreign 

trading exemption are limited to personnel engaged in the banking entity’s decision in the 

 1096 Id.

1097 See, e.g., 83 FR at 33537. See also JBA.

1098 See, e.g., EBF; HSBC and IIB.
399

purchase or sale as principal. The SEC believes that the location of the personnel engaged in the 

banking entity’s decision in the purchase or sale is a meaningful trigger for the application of 

section 13 of the BHC Act and implementing rules. Specifically, the SEC has considered how 

narrowing the personnel requirement may increase risk exposure of banking entities from trading 

activity and conflicts of interest between banking entities and their clients on the one hand and 

may enhance market quality and availability of trading counterparties on the other hand. In 

addition, as part of the baseline for analysis, the conditions for the foreign trading exemption in 

the 2013 rule include both requirements concerning relevant personnel that makes the decision to 

purchase or sell as principal and requirements concerning personnel involved in arranging, 

negotiating, and executing trades. As a result, under the 2013 rule foreign banking entities have 

to determine whether a particular employee meets both the requirements related to relevant 

personnel and related to personnel arranging, negotiating, and executing purchases and sales. 

This aspect of the final rule eliminates the need for a foreign banking entity to separately 

establish that a given employee meets both sets of requirements, reducing inefficiencies 

associated with foreign banking entities relying on the foreign trading exemption from the 

proprietary trading prohibition. 

ii. Efficiency, Competition, and Capital Formation

The final rule likely expands the scope of trading activity by foreign banking entities that 

may qualify for the foreign trading exemption. As a result, the amendments may reduce the 

costs, benefits, and effects on efficiency and capital formation of the 2013 rule discussed in the 

economic baseline, and may increase competition between U.S. and foreign banking entities. 

The final rule reflects consideration of the potentially inefficient restructuring of activities 

undertaken by foreign banking entities after the 2013 rule came into effect and the loss of access 
400

of U.S. market participants to foreign banking entity counterparties, on the one hand,1099 and, 

advancement of the objectives of section 13 of the BHC Act, on the other hand. 

Allowing foreign banking entities to be financed by U.S.-dealer affiliates and to transact 

with U.S. counterparties on an OTC basis (i.e., off-exchange) and without clearing the trades, 

may reduce costs of non-U.S. banking entities’ trading activity under the foreign trading 

exemption, including 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 OTC trading with U.S. counterparties. To that 

extent, the final rule may provide 1) incentives for foreign banking entities that currently receive 

financing from non-U.S. affiliates or other sources to move financing to U.S. dealer affiliates, 

and 2) incentives for foreign banking entities that currently do not transact with or through U.S. 

counterparties (or transact with or through U.S. counterparties only in transactions that are 

promptly cleared) to transact with or through U.S. counterparties (or transact with or through 

U.S. counterparties outside of promptly cleared transactions). As a result, the number of banking 

entities engaging in trading activities 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. 

The final rule may increase market entry, as it will decrease the need for foreign banking 

entities to rely on a narrower set of unaffiliated market intermediaries in order to conduct trading 

 1099 In the Proposing Release, the SEC noted that, according to one market participant, 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 83 FR at 33537. 
401

activity under the foreign trading exemption in compliance with the 2013 rule. Additionally, the 

final rule 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. 

Consistent with the views of commenters,1100 the SEC continues to recognize that the 

final rule may also affect competition among banking entities.1101 The statute may introduce 

competitive disparities between U.S. and foreign banking entities. Under the final rule, foreign 

banking entities may enjoy a greater degree of flexibility in financing proprietary trading and 

transacting with or through U.S. counterparties relative to the baseline. At the same time, U.S. 

banking entities are not able to engage in proprietary trading and are subject to the substantive 

prohibitions of section 13 of the BHC Act. One commenter indicated that non-U.S. banking 

entities will continue to bear operational burdens because of the legal entity requirements.1102 To 

the degree that the final requirements regarding the location of the principal risk and relevant 

personnel are still burdensome and constraining foreign banking entities in their reliance on the 

foreign trading exemption, this may partly dampen the above competitive effect. 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, U.S. 

entities would have to conduct the majority of their business outside of the United States to 

become eligible for the exemption, reducing potential effects of their activities on U.S. markets. 

 1100 See, e.g., Bean; Data Boiler; FSF and Better Markets.

1101 See 83 FR at 33538.

1102 See, e.g., JBA.
402

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. The 

SEC also notes that, as referenced above, the final rule preserves equal competitive treatment of 

the U.S. operations of both U.S. and non-U.S. banking entities that will remain unable to rely on 

the foreign trading exemption and will remain subject to section 13 of the BHC Act.1103

To the extent that foreign banking entities currently engage in cleared transactions with 

or through U.S. counterparties because of the existing counterparty prong but would have chosen 

not to do so otherwise, the final rule may reduce the amount of cleared transactions. This may 

reduce opportunities for risk-sharing among market participants and increase idiosyncratic 

counterparty risk born by U.S. and foreign counterparties.

At the same time, the final rule 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 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 for liquidity and risk-sharing 

may be most concentrated in those asset classes and market segments where activity is most 

constrained by the requirements in the 2013 rule.

iii. Alternatives

 1103 See, e.g., IIB. 
403

The agencies could have amended the foreign trading exemption to remove all conditions 

for the exemption, including the engaging as principal and decision-making requirements, except 

for the booking requirement.1104 Relative to the final rule, the SEC believes that such an 

alternative approach would further lower the compliance burdens of non-U.S. banking entities 

relying on the foreign trading exemption and may foster more trading activity by U.S. affiliates 

of non-U.S. banking entities. For example, the agencies have received comment that the 

engaging as principal and decision-making requirements have led Japanese firms to downsize 

their U.S. affiliates and that the decision-making requirement is operationally difficult for 

Japanese banks executing trades in U.S. markets because of time zone differences. 1105 To the 

degree that this alternative encourages more activity of non-U.S. banking entities in the United 

States, U.S. counterparties may benefit from greater availability and choice of banking entity 

counterparties. However, the alternative would place U.S. banking entities at a greater 

competitive disadvantage relative to the final rule, because it would result in more flexibility for 

the U.S. operations of non-U.S. banking entities to engage in trading activities relative to the 

U.S. operations of U.S. banking entities. 

In addition, the agencies have received comment suggesting an exclusion of non-U.S. 

banking entities with limited U.S. assets and operations from the scope of section 13 of the BHC 

Act.1106 The SEC notes that nothing in the final rule changes or waives ongoing statutory 

obligations of banking entities. However, to the degree that reliance on the foreign trading 

exemption is burdensome and prevents non-U.S. entities from trading in the United States, the 

 1104 See, e.g., JBA.

1105 Id.

1106 See IIB.
404

final rule may reduce compliance burdens related to the 2013 rule by introducing the 

presumption of compliance for Group C banking entities. As discussed above, the Group C 

threshold of $1 billion applies to the trading assets and liabilities 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). As a result, under the final rule, non-U.S. banking entities that have limited 

trading assets and liabilities in the United States will be able to avail themselves of the rebuttable 

presumption of compliance and will no longer be required to bear the fixed costs and burdens of 

demonstrating compliance with section 13 of the BHC Act and the 2013 rule. 

f. Covered Funds

The agencies are adopting amendments to § __.11 and § __.13, as proposed.

i. Costs and Benefits

First, the final rule removes the requirement in § __.11(c)(3) of the 2013 rule that a 

banking entity include, for purposes of the aggregate fund limit and capital deduction, the value 

of any ownership interests of a third-party covered fund (i.e., a covered fund that the banking 

entity does not advise or organize and offer pursuant to § __.11 of the 2013 rule) acquired or 

retained in accordance with the underwriting or market making exemptions in § __.4. In 

addition, the final rule removes the guarantee language in § __.11(c)(2) of the 2013 rule which 

requires a banking entity to include, for purposes of the aggregate fund limit and capital 

deduction, the value of any ownership interests of a covered fund, the obligations or performance 

of which is directly or indirectly guaranteed, assumed, or insured by the banking entity. 
405

The final amendments aim to more closely align the requirements for engaging in 

underwriting or market making-related activities with respect to ownership interests in covered 

funds with the requirements for engaging in these activities with respect to other financial 

instruments. The SEC agrees with a number of commenters1107 and continues to believe that the 

2013 rule imposed requirements on dealers’ transactions in ownership interests in covered funds 

that may limit the ability of dealers to underwrite and make markets in ownership interests in 

covered funds, even if dealers are able to underwrite and make markets in the underlying 

securities owned by covered funds or in securities that are otherwise similar to ownership 

interests in covered funds. The SEC continues to believe that, as also articulated by a number of 

commenters,1108 the final amendments provide banking entities with greater flexibility in 

underwriting and market making ownership interests in covered funds.

In addition, the SEC continues to recognize that the 2013 rule’s restrictions on 

underwriting and market making-related activities involving ownership interests in covered 

funds impose costs on banking entities, as also discussed by a number of commenters.1109 Under 

the final rule, banking entities are able to engage in potentially profitable market making and 

underwriting in ownership interests in covered funds that they do not advise or organize or offer 

without the value of any ownership interests of the covered fund acquired or retained in 

connection with underwriting or market making-related activities becoming subject to aggregate 

limits and capital deduction. Some commenters noted that this amendment would facilitate 

 1107 See, e.g., SIFMA.

1108 See, e.g., SIFMA and ISDA.

1109 See, e.g., BPI; IIB; SIFMA; ABA and Goldman Sachs.
406

capital-raising activities of covered funds,1110 increase liquidity, and generally benefit the 

marketplace.1111 The SEC agrees with these commenters and continues to believe that SECregulated banking entities will benefit from this amendment to the extent that they engage in 

underwriting and market making activities involving ownership interests in covered funds, or to 

the extent that they restricted or eliminated such activities as a result of the requirements in the 

2013 rule. These benefits may also, at least partially, flow to funds and investors in those 

covered funds. In addition, as some commenters pointed out,1112 banking entities may become 

more willing and able to underwrite and make markets in ownership interests in covered funds. 

Some commenters indicated that these amendments would greatly increase banking 

entities’ exposure to interests in covered funds, which would entail additional risks.1113 For 

example, the removal of the guarantee language in § __.11(c)(2) would allow dealers to have 

arrangements such as a put option on the ownership interest in the covered fund, which could 

expose the banking entity to additional risk. The SEC continues to recognize that ownership 

interests in covered funds expose banking entities to the risks related to covered funds. The SEC 

agrees with the commenters that 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.1114 However, the SEC also continues to 

recognize that the risks of market making or underwriting of ownership interests in covered 

 1110 See SIFMA.

1111 See ISDA.

1112 See, e.g., BPI.

1113 See, e.g., Volcker Alliance; AFR and Bean.

1114 See, e.g., AFR and Data Boiler.
407

funds are substantively similar to the risks of market making or underwriting of otherwise 

comparable financial instruments, the activity which is expressly permitted by section 13 of the 

BHC Act. Therefore, the same general tensions discussed in section V.F.3.c of this 

Supplementary Information between potential benefits for capital formation and liquidity and 

potential costs related to banking entity risk exposures and market fragility apply to banking 

entities’ underwriting and market making activities involving ownership interests in covered 

funds and other types of securities.

Second, the final rule amends section § __.13(a) of the 2013 rule to expand the scope of 

permissible risk-mitigating hedging activities involving ownership interests in covered funds, 

and to remove the demonstrability requirement of the risk-mitigating hedging exemption for 

covered funds activities, in each case as proposed.1115 Under the final rule, in addition to being 

able to acquire or retain an ownership interest in a covered fund as a risk-mitigating hedge with 

respect to certain employee compensation agreements as permitted under the 2013 rule, the 

banking entity will be able to acquire or retain an ownership interest in a covered fund 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. Some commenters stated 

that acquiring or retaining ownership interests in covered funds as a hedge when acting as 

intermediary on behalf of a customer accommodates client facilitation and related risk 

management activities.1116 The SEC agrees with those commenters and continues to recognize 

that the 2013 rule’s restrictions on risk-mitigating hedging activities with respect to ownership 

interests in covered funds limit banking entities’ ability to hedge the risks of fund-linked

 1115 The effects of removal of demonstrability requirement are discussed in section V.F.3.c.

1116 See, e.g., BPI and FSF.
408

derivatives through ownership interests in the covered funds referenced by those derivatives. In 

addition, in the proposal the SEC recognized that, as a result of the approach in the 2013 rule, 

banking entities may not be able to participate in offering certain customer facilitating products 

related to covered funds.1117 The final rule is likely to benefit banking entities and their 

customers, as well as bank-affiliated advisers of covered funds, as the final rule increases the 

ability of banking entities to facilitate customer-facing transactions while hedging banking 

entities’ own risk exposure.1118 As a result, this amendment may increase banking entity 

intermediation and provide customers with more efficient access to the risks and returns of 

covered funds. To the degree that banking entities’ acquisition or retention of ownership 

interests in covered funds to hedge customer-facing transactions may facilitate banking entities’ 

engagement in customer-facing transactions, customers of banking entities may benefit from 

greater availability of financial instruments providing exposure to covered funds and related 

intermediation. Banking entities’ ability to hedge customer-facing transactions through the 

acquisition or retention of ownership interests in covered funds may be particularly valuable as 

private capital plays an increasingly important role in U.S. capital markets and firm financing.

The SEC recognizes that, under certain circumstances, an increased ability of banking 

entities to acquire or retain ownership interests in covered funds in connection with riskmitigating hedging activities may result in banking entities’ exposure to greater risk.1119 Some 

commenters supported this view.

1120 The SEC continues to recognize that banking entities’ 

 1117 See 83 FR at 33547-33549.

1118 This was also supported by commenters. See, e.g., BPI; Forum; ISDA and SIFMA.

1119 79 FR at 5737.

1120 See, e.g., AFR and Volcker Alliance.
409

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 of hedging). However, the SEC also continues to 

recognize that 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. Commenters also 

recognized this.1121 The SEC continues to note that, under the final rule, risk-mitigating hedging 

transactions involving covered funds must be conducted consistent with the other requirements 

of the 2013 rule, including the requirements with respect to risk-mitigating hedging transactions. 

For example, such transactions must be made in accordance with the banking entity’s written 

policies, procedures, and internal controls; not give rise, at the inception of the hedge, to any 

significant new or additional risk that is not itself hedged contemporaneously with the riskmitigating hedging requirements; and be subject to continuing review, monitoring, and 

management by the banking entity. Therefore, the SEC continues to believe that hedging and 

customer facilitation in ownership interests in covered funds does not necessarily pose a greater 

risk to banking entities than hedging or customer facilitation in similar financial instruments that 

is permissible under the 2013 rule. 

Third, the final rule amends section § __.13(b)(4) of the 2013 rule to remove the 

financing prong of the foreign fund exemption and formally incorporates existing staff guidance 

 1121 See, e.g., SIFMA; Forum and ISDA.
410

regarding the marketing of ownership interests in foreign funds to U.S. residents into section § 

__.13(b)(3). 1122 Under the final rule, a foreign banking entity is able to acquire or retain 

ownership interests in and sponsor covered funds with financing for the banking entity’s 

ownership or sponsorship provided, directly or indirectly, by branches or affiliates of the banking 

entity, including SEC-regulated dealers, that are located in the United States or organized under 

the laws of the United States or any state. 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 of the United States in section V.F.3.e 

of this Supplementary Information.1123 

In light of commenters’ responses,1124 the SEC continues to believe that foreign banking 

entities may benefit from the final rule and enjoy greater flexibility in financing their covered 

fund activity. In addition, allowing foreign banking entities to obtain financing of covered fund 

 1122 The SEC understands that, as a practical matter, market participants have adjusted their 

activity in light of the FAQs regarding the marketing restriction. See supra note 59, FAQ 13. 

Hence, the SEC continues to believe that the economic effects of the amendment to incorporate 

existing staff guidance are likely to be de minimis, and the SEC focuses this discussion on the 

removal of the financing prong.

1123 In addition, the agencies confirmed in this Supplementary Information that the foreign fund 

exemption (1) permits the U.S. personnel and operations of a foreign banking entity to act as an 

investment adviser to a covered fund in certain circumstances and (2) does not preclude a foreign 

banking entity from engaging a non-affiliated U.S. investment adviser as long as the actions and 

decisions of the banking entity as principal occur outside of the United States. To the extent that 

foreign banking entities were restricting (1) hiring of U.S. personnel to provide investment 

advice and recommend investment selections to the manager or general partner of a covered fund 

relying on the foreign fund exemption, or (2) engagement of non-affiliated U.S. investment 

advisers due to uncertainty about the 2013 rule, foreign banking entities may be more likely to 

hire U.S. personnel to provide such services, and non-affiliated U.S. investment advisers may 

become better able to compete for the foreign banking entity’s investment mandates.

1124 Several commenters supported removing the financing prong from the foreign fund 

exemption. See, e.g., BPI; EBF; IIB; JBA and New England Council.
411

transactions from U.S.-dealer affiliates may reduce costs to foreign banking entities as the 

amendment may decrease their need to rely on foreign dealer affiliates solely for the purposes of 

avoiding the compliance costs and prohibitions of the 2013 rule. This may increase the 

operational efficiency of covered fund activity by foreign banking entities outside the United 

States. 

Other commenters indicated that elimination of the financing prong could result in a U.S. 

branch or affiliate that extends financing to bear some risks.1125 The SEC agrees with the 

commenters and continues to recognize that 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 SEC also continues to note that the final rule retains the 

2013 rule’s requirement that the investment or sponsorship, including any related hedging, is not 

accounted for as principal by any U.S. branch or affiliate.1126 The SEC continues to believe that 

concerns about the size of U.S. banking entity risk exposures are less relevant when the covered 

fund activity is conducted by, and the risk consolidates to, foreign banking entities. Moreover, 

as noted above, U.S. banking entities providing financing to their foreign banking entity affiliates 

are likely to be separately subject to a full range of capital, margin, and other obligations 

unrelated to section 13 of the BHC Act, which may further mitigate risks to the U.S. branches 

and affiliates of foreign banking entities.

ii. Efficiency, Competition, and Capital Formation

 1125 See, e.g., Better Markets and CAP.

1126 Some commenters supported this view. See, e.g., EBF and BPI.
412

As discussed above, the SEC believes that the final rule’s amendments to the covered 

fund provisions in subpart C provide banking entities with greater flexibility in underwriting, 

market making, and hedging ownership interests in covered funds. To the extent that the 2013 

rule’s restrictions on underwriting and market making with interests in covered funds limit fund 

formation, the final rule may reduce long-term compliance costs and, as a result, increase capital 

formation. In addition, to the extent that banking entities experience a reduction in compliance 

costs and an increased ability to accommodate clients and perform risk management activities, 

the willingness of SEC-regulated entities to commit capital and take on underlying risk 

exposures may increase, which may enhance capital formation. 

The final rule may affect competition between foreign and domestic entities, as foreign 

banking entities may benefit from the final rule and enjoy greater flexibility in financing their 

covered fund activity. To the extent that costs of compliance with the “financing prong” of the 

2013 rule’s foreign fund exemption may represent barriers to entry for foreign banking entities’ 

covered fund activities, the final rule may increase foreign banking entities’ operational 

efficiency and promote their sponsorship and financing of covered funds.

The final rule’s amendments to § __.11 and § __.13 do not change the information 

available to market participants, and the SEC does not believe that these amendments are likely 

to have an effect on informational efficiency. To the degree that these amendments may provide 

banking entities with more flexibility to underwrite, make markets in, and hedge ownership 

interests in covered funds, and to the extent these activities facilitate capital formation, these 

amendments may improve allocative efficiency.

iii. Alternatives
413

The agencies considered alternatives that would scope out from calculation of the perfund limit, aggregate fund limit, and capital deduction for banking entities all ownership interests 

acquired or retained by banking entities in connection with other underwriting and market 

making. For example, the agencies considered excluding the value of ownership interests 

acquired or retained in connection with underwriting or market making-related activities with 

respect to covered funds offered or organized by the banking entity from the calculation of the 

per-fund and aggregate limits and capital deductions.1127 If the agencies had adopted this 

alternative, this would have provided dealers a level of flexibility in underwriting and making 

markets in ownership interests in covered funds that is more similar to the level of flexibility for 

dealers in conducting these activities with respect to all other types of financial instruments, 

including the underlying financial instruments owned by the same covered funds. 

Compliance with the 2013 rule for covered funds imposes costs on banking entities. To 

the extent that, under the baseline, such costs prevent banking entities that are dealers from 

making markets in or underwriting certain financial instruments, this alternative would enable 

them to engage in potentially profitable market making in and underwriting ownership interests 

in covered funds. The benefits of this alternative may also flow through to funds, investors, and 

customers as banking entities may become more willing and able to underwrite and make 

markets in 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 

 1127 Some commenters supported this alternative. See, e.g., ISDA.
414

to engage in market making and underwriting activities with respect to covered funds under this 

alternative may have increased market quality for covered funds that are traded.

The SEC also continues to recognize that transactions in covered funds—including 

transactions with customers, and holdings of ownership interests in covered funds related to 

underwriting and market making—necessarily involve the risk of losses. However, the risks of 

market making or underwriting by banking entities of financial instruments held by the covered 

fund, or financial instruments or securities that are otherwise similar to covered funds, are 

substantively similar. Therefore, the same tensions among the economic effects discussed in 

section V.F.3.c of this Supplementary Information between potential benefits to capital 

formation and liquidity and potential costs related to bank risk exposures 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 tensions of the 

economic effects discussed above. Therefore, the SEC continues to believe that this alternative 

would simply involve a more consistent treatment of financial instruments and interests in 

covered funds as it pertains to underwriting and market making. However, as discussed above in 

section V.F.1 of this Supplementary Information, some of the effects of the 2013 rule’s 

provisions are difficult to evaluate outside of economic downturns, and the SEC is unable to 

measure the amount of capital formation or liquidity in covered funds or investments of the 

covered funds that does not occur because of the existing treatment of underwriting and market 

making activities by banking entities involving covered funds. 

g. Compliance Program 
415

The SEC continues to recognize that the scope and breadth of the compliance obligations 

under the 2013 rule impose significant costs on banking entities, which may be particularly 

burdensome for smaller entities. For example, in the proposal, the SEC cited a market 

participants’ estimate that some banking entities have added as many as 2,500 pages, per 

institution, of policies, procedures, mandates, and controls (which need to be monitored and 

updated on an ongoing basis)1128 for purposes of compliance with the 2013 rule, and that some 

banking entities may spend, on average, more than 10,000 hours on training each year.1129 The 

SEC also cited a market participants’ estimate that 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 rule.1130 

The compliance regime of the 2013 rule and related burdens may reduce the profitability

of covered activities by dealers and investment advisers that are 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 SEC recognizes that the extensive compliance program under the 

2013 rule may detract resources of banking entities and their compliance departments and 

supervisors from other 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 

 1128 See 83 FR 33432. 

1129 Id.

1130 Id.
416

banking entities. However, the SEC agrees with commenters1131 that compliance programs are 

important to support the safety and soundness of the U.S. financial markets.

i. Costs and Benefits

The final rule is expected to lower compliance burdens in two ways. First, the SEC 

continues to believe that the amendments would increase flexibility in complying with the final 

rule for banking entities without significant trading assets and liabilities, reducing compliance 

costs for these entities. Second, the adopted amendments would streamline the compliance 

program for banking entities with significant trading assets and liabilities. The SEC continues to 

believe that, to the extent that the requirements in the 2013 rule are duplicative and that 

maintaining compliance systems to comply with both the general and an enhanced compliance 

program requirements is inefficient, banking entities with significant trading assets and liabilities 

may benefit from the amendments. The specific final amendments are discussed below.

For Group C entities, the agencies are adopting presumed compliance with proprietary 

trading and covered fund prohibitions. Some commenters noted that the presumed compliance 

standard proposed for Group C entities may benefit entities with very low levels of trading 

activity.1132 In light of the commenters’ responses, the SEC continues to believe that the 

presumption of compliance will provide Group C entities with additional compliance flexibility. 

The SEC estimates that approximately 97 broker-dealers that hold 3.6% of assets held by brokerdealers subject to the final rule would be able to avail themselves of the rebuttable presumption 

of compliance and would not have to apply the final rule’s compliance program requirements. 

 1131 See, e.g., AFR and Bean.

1132 See, e.g., B&F Capital Markets Inc.
417

Out of these 97 broker-dealers, 28 are subject to the enhanced requirements under the 2013 rule, 

51 are subject to the standard compliance requirements under the 2013 rule, and 18 qualify for 

the simplified compliance regime under the 2013 rule. As discussed in section V.B, the agencies 

estimate recordkeeping or reporting burden reductions related to presumed compliance with the 

final rule are as high as $1,648,812.1133

Some commenters expressed concern that Group C entities may experience uncertainty 

because of the absence of specific guidance about what events would trigger an agency to rebut 

the presumption of compliance,1134 and, as a result, incur compliance costs related to establishing 

internal systems and controls in anticipation of potential rebuttal of the presumption.1135 To the 

extent that some Group C entities experience this uncertainty and costs, they may not fully enjoy 

the benefits of presumed compliance. One commenter estimated that smaller banking entities 

would likely incur an additional one-time cost of $50,000 - $100,000 in consulting or legal 

advice fees.1136 Using this estimate, the total initial cost related to consulting or legal advice fees 

for Group C broker-dealers may range between $873,000 and $1,746,000.1137 

 1133 See section V.B. Ongoing cost reduction for broker-dealers: (40 hours per firm x 18 brokerdealers + 265 hours per firm x 79 broker-dealers) x 0.18 dealer weight x (Attorney at $423 per 

hour) = $1,648,812. 

1134 See, e.g., Chatham; ABA and SIFMA.

1135 See, e.g., Covington; Chatham; EBF; JBA and Data Boiler.

1136 See Data Boiler.

1137 Initial set-up burden increase for broker-dealers: 97 broker-dealers x 0.18 dealer weight x 

$100,000 = $1,746,000. Using the lower bound: 97 broker-dealers x 0.18 dealer weight x 

$50,000 = $873,000.
418

Some commenters opposed the presumption of compliance.1138 The SEC continues to 

recognize that the presumption of compliance for Group C entities may increase the risks of noncompliance with the statute. However, the SEC also continues to note that the amendments do 

not waive the proprietary trading and covered fund prohibitions of section 13 of the BHC Act for 

such entities. 

For Group B entities, the agencies are adopting the simplified compliance program as 

proposed. Some commenters expressed support for this approach for Group B entities.1139 In 

the proposal, the SEC recognized that existing compliance program requirements may burden 

entities that engage in little covered trading activity but have larger total assets.1140 The SEC 

continues to recognize that this amendment may reduce costs for banking entities that have more 

than $10 billion in total assets but do not have significant trading assets and liabilities, as these 

banking entities do not qualify for the simplified compliance program under the 2013 rule. As 

shown in Table 2, the SEC estimates that 66 broker-dealers would qualify for the simplified 

compliance regime under the final rule. As discussed in section V.B, the agencies estimate 

recordkeeping or reporting burden reductions related to the simplified compliance program for 

Group B broker-dealers to be $1,130,679 for registered broker-dealers and up to $582,471 for 

entities that may choose to register as SBSDs.1141 

 1138 See, e.g., Occupy the SEC and Data Boiler.

1139 See, e.g., CFA and JBA.

1140 See 83 FR 33432.

1141 Cost reduction for broker-dealers: 225 hours per firm x 0.18 dealer weight x 66 brokerdealers x (Attorney at $423 per hour) = $1,130,679. 

Cost reductions for entities that may register as SBSDs may be as high as 225 hours per firm x 

0.18 dealer weight x 34 SBSDs x (Attorney at $423 per hour) = $582,471. The estimate for 
419

The agencies are amending covered fund recordkeeping requirements to apply to Group 

A entities only, rather than to banking entities with over $10 billion in total assets. The SEC 

believes 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 final amendment 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.1142 The SEC continues to note that entities with moderate trading 

assets and liabilities would still be required to comply with all the covered fund provisions and 

that the proposal simply eliminates recordkeeping for the purposes of demonstrating compliance. 

However, in general, the SEC believes that SEC oversight of dealers and investment advisers of 

covered funds should not be adversely affected, as the remaining compliance requirements will 

be sufficient to monitor compliance with the statute. As discussed in section V.B, the agencies 

estimate recordkeeping or reporting burden reductions related to the covered fund recordkeeping 

 

SBSDs assumes that 34 SBSDs not already registered as broker-dealers would be Group B 

entities and so may overestimate the cost savings.

1142 As discussed in section V.F.2.c, RIAs do not typically engage in proprietary trading, and the 

SEC continues to believe that they will not be affected by the final rule as it relates to proprietary 

trading. In addition, the SEC does not have the information necessary to quantify the 

compliance program costs at the RIA level of a BHC. Thus, the SEC does not allocate cost 

savings from monetized PRA burdens to bank-affiliated RIAs from the proposed Appendix B 

amendments. To the degree that some bank-affiliated RIAs may be extending compliance 

resources and systems independent of the affiliated holding company and other affiliates and 

subsidiaries, this approach may be underestimating the cost savings from the final rule.
420

requirements to be $2,208,060 for registered broker-dealers and up to $517,752 for entities that 

may choose to register as SBSDs.1143

The agencies are also adopting the removal of the requirements in Appendix B of the 

2013 rule as proposed, with an exception for the CEO attestation. The removal of Appendix B 

requirements will affect all banking entities that have trading assets and liabilities above $10 

billion, as well as banking entities that have total consolidated assets of $50 billion or more. 

Some commenters expressed general support for this amendment.1144 In addition, some 

commenters indicated 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.1145 Further, in the proposal the SEC cited a market participants’ 

estimate that some banking entities have established as many as 500 controls related to Appendix 

B obligations, some of which may be duplicating other policies and procedures designed as part 

of prudential safety and soundness.1146 In light of these comments, the SEC continues to believe 

that compliance with Appendix B may impose significant costs on SEC-regulated banking 

entities and that removal of the Appendix B requirements may significantly reduce the number 

and complexity of the compliance requirements to which such entities are subject. The SEC 

 1143 Cost reduction for broker-dealers: 200 hours per firm x 0.18 dealer weight x 145 brokerdealers x (Attorney at $423 per hour) = $2,208,060. 

Cost reductions for entities that may register as SBSDs may be as high as 200 hours per firm x 

0.18 dealer weight x 34 SBSDs x (Attorney at $423 per hour) = $517,752. The estimate for 

SBSDs assumes that all 34 SBSDs not already registered as broker-dealers would be Group B 

entities and so may overestimate the cost savings.

1144 See, e.g., Insurance Coalition; Real Estate Associations; CREFC; Credit Suisse; JBA; FSF 

and ABA.

1145 See, e.g., Credit Suisse; CREFC; SIFMA and Capital One et al.

1146 See 83 FR at 33551. 
421

estimates that there are 122 broker-dealers that may experience reduced compliance costs as a 

result of this amendment, among which 28 are Group C entities, 58 are Group B entities and 36 

are Group A entities. As discussed in section V.B, the removal of Appendix B requirements will 

result in ongoing annual cost savings estimated as $10,217,988 for registered broker-dealers and 

up to $2,847,636 for entities that may choose to register as SBSDs.1147 

Some commenters opposed the removal of Appendix B, arguing that, given the size of 

affected holding companies, the 2013 rule’s stringent compliance regime may help reduce 

compliance risks related to the substantive prohibitions of section 13 of the BHC Act and the 

2013 rule.1148 However, the SEC notes that, under the final rule, both Group A and Group B 

entities will be required to establish and maintain a compliance program under § __.20. 

Finally, the agencies are adopting the amendment to require CEO attestation for Group A 

entities only.1149 In the proposal, the SEC recognized that the CEO attestation process is costly 

and cited market participants’ estimates 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 

 1147 Cost reduction for broker-dealers: 1,100 hours per firm x 0.18 dealer weight x 122 brokerdealers x (Attorney at $423 per hour) = $10,217,988. 

Cost reductions for entities that may register as SBSDs may be as high as 1,100 hours per firm x 

0.18 dealer weight x 34 SBSDs x (Attorney at $423 per hour) = $ 2,847,636. The estimate for 

SBSDs assumes that all 34 SBSDs not already registered as broker-dealers would be subject to 

Appendix B requirements and so may overestimate the cost savings.

1148 See, e.g., AFR and Bean.

1149 As a baseline matter, under the 2013 rule, the CEO is 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 rule.
422

time dedicated towards the compliance program by as much as 10%.1150 In addition, as indicated 

by some commenters, the CEO attestation requirement requires banking entities to undertake 

costly internal compliance efforts that are not consistent with the activities or risks of such 

firms.1151 Therefore, the SEC believes that the amendments to the application of the CEO 

attestation requirement will benefit SEC-regulated banking entities and their holding companies 

that do not have significant trading assets and liabilities but are subject to the CEO requirement 

under the 2013 rule.

The SEC continues to note that, under the 2013 rule, SEC- regulated banking entities 

have flexibility to comply with the attestation requirement either at the SEC-registrant or at the 

holding-company level. In 2019, the SEC received a total of 55 attestations that cover 

compliance for 2018, including 14 attestations directly from SEC registrants, none of which are 

Group A entities. Therefore, the SEC expects that, under the final rule, these registrants would 

no longer be providing CEO attestations. The SEC estimates that there are 122 broker-dealers 

that are subsidiaries or affiliates of bank holding companies that are required to comply with the 

CEO attestation requirement under the 2013 rule. The SEC estimates that under the final rule 

this number will decrease to 36 Group A broker-dealers. Therefore, the amendment may result 

in annual cost savings from $654,804 to $774,000 for broker-dealers and up to between 

$258,876 and $306,000 for entities that may choose to register as SBSDs.1152 

 1150 See 83 FR at 33551. 

1151 See, e.g., Capital One, et al.

1152 Cost reduction for broker-dealers: 100 hours per firm x 0.18 dealer weight x 86 brokerdealers x (Attorney at $423 per hour) = $654,804. Alternatively, using the CEO hourly rate, cost 

reduction for broker-dealers is: 100 hours per firm x 78 broker-dealers x 0.18 dealer weight x 

(CEO at $500 per hour) = $774,000. 
423

The agencies are also adopting notice and response procedures related to sections 

__.3(b)(4), __.4(c)(4), __.20(g)(2), and __.20(h) of the final rule. As a result, all broker-dealers 

and entities that may potentially register as SBSDs may experience increases in initial reporting 

set-up costs. As discussed in section V.B, the agencies estimate the initial set-up reporting 

burden increase related to the notice and response procedures to be $303,037 for registered 

broker-dealers and up to $51,775 for entities that may choose to register as SBSDs.1153 In 

addition, as discussed in section V.B, the agencies may exercise a reservation of authority and 

seek to rebut the presumption in section __.3(b)(4) in accordance with the notice and response 

procedures in section .__20(i) of the final rule, involving a burden of up to 20 hours per entity 

per response. In such cases, an SEC- regulated banking entity may incur a cost of up to $1,523 

(=20 hours per response x 0.18 dealer weight x Attorney at $423 per hour) per response. The 

SEC is unable to estimate how many entities may bear such costs since this figure will depend on 

how SEC- regulated banking entities may choose to comply with the final rule. 

ii. Efficiency, Competition, and Capital Formation

Under the final amendments, both Group A and Group B entities will benefit from 

reduced compliance program requirements and Group C entities will be presumed compliant 

 

Cost reduction for entities that may register as SBSDs may be as high as: 100 hours per firm x 

0.18 dealer weight x 34 SBSDs x (Attorney at $423 per hour) = $258,876. Alternatively, using 

the CEO hourly rate, cost reduction for broker-dealers is: 100 hours per firm x 34 SBSDs x 0.18 

dealer weight x (CEO at $500 per hour) = $306,000. The SEC assumes that all entities that may 

register as SBSDs would be subject to the CEO attestation requirement, and so may overestimate 

the cost savings. 

1153 Initial set-up reporting burden increase for broker-dealers: 20 hours per firm x 0.18 dealer 

weight x 199 broker-dealers x (Attorney at $423 per hour) = $303,037. 

Initial set-up reporting burden increase for entities that may register as SBSDs may be as high as: 

20 hours per firm x 0.18 dealer weight x 34 SBSDs x (Attorney at $423 per hour) = $51,775. 
424

with prohibitions of subparts B and C of the final rule. To the extent that compliance program 

requirements for Group B entities are less costly, Group A entities close to the $20 billion 

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 final rule may incentivize Group B entities close to the $1 billion 

threshold to rebalance their trading book in order to 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 the risks to the financial system. The SEC notes 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 $20 billion 

and $1 billion thresholds. Therefore, this competition effect may be particularly significant for 

Group A entities that are close to the $20 billion threshold and for Group B entities that are close 

to the $1 billion threshold. 

Since the compliance requirements do not affect the scope of information available to 

investors, the SEC does 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. 

iii. Alternatives

As an alternative, the agencies could have applied the CEO attestation requirement to 

both Group A and Group B entities. Under this alternative, some banking entities would have 

become subject to the CEO attestation requirement for the first time, as noted by some 
425

commenters.1154 As discussed above and noted by commenters,1155 the SEC continues to 

recognize that Group B entities pose lower risks to the financial system that may not necessarily 

justify a costly and stringent compliance regime that requires CEO attestation. 

As other alternatives, the agencies could have required CEO attestations for Group A 

entities only if they have over $50 billion in total assets; removed the CEO attestation 

requirement; or allowed other senior officers, such as the chief compliance officer (CCO), to 

provide the requisite attestation for some or all affected banking entities. As discussed above, 

the SEC recognized in the proposal that the CEO attestation process is costly and that some 

market participants estimated that some banking entities may spend more than 1,700 hours on 

the CEO attestation process and that eliminating this requirement may reduce time dedicated 

toward the compliance program by as much as 10%.1156 Under the aforementioned alternatives, 

more SEC-regulated banking entities would generally experience larger cost reductions. 

However, as discussed in section IV.D.1, the agencies continue to believe that incorporating the 

CEO attestation requirement into § __.20(c) for Group A banking entities will 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 final rule. 

As an alternative, the agencies could have included a knowledge qualifier for CEO 

attestation. Since CEOs of banking entities do not necessarily know every single policy, 

 1154 See, e.g., IIB.

1155 See, e.g., Capital One et al.; BB&T; ABA; Arvest; State Street and IIB.

1156 See 83 FR at 33551. 
426

procedure, process, and control, as pointed out by some commenters,1157 they may rely on 

multiple layers of sub-attestations within a banking entity. 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. Under this alternative, such effects stemming from 

risk aversion would be mitigated. However, the attestation may also serve as a disciplining 

mechanism and incentivize compliance. In addition, as one commenter stated, CEOs of 

publically traded banking entities regularly attest that their company's annual and quarterly 

reports are accurate and complete and that internal controls have been established and 

maintained.1158 The SEC also notes that the covered activities of larger and more complex 

banking entities with higher volumes of trading activity may involve risk exposures with a larger 

potential for systemic risk and conflicts of interest.

The agencies also recognize that CEO attestation may be costly for banking entities 

affiliated with foreign banking organizations. For example, the SEC noted in the proposal that 

one foreign firm reported that it organized and managed a global controls sub-certification 

process that takes 6 months to complete and involves over 400 staff (including over 260 outside 

of the United States) in order for the CEO to sign and deliver the annual attestation.1159 As an 

alternative, the agencies could have proposed exempting banking entities affiliated with a foreign 

banking organization from the CEO attestation requirement. Under the 2013 rule, the 

requirement covers only the U.S. operations of a foreign banking entity and not its foreign 

operations. Similar to the analysis of the final amendment to trading outside of the United 

 1157 See, e.g., FSF; BPI and SIFMA. 

1158 See, e.g., BOK.

1159 See 83 FR at 33552. 
427

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.

h. Metrics 

i. Costs and Benefits

In the proposal, the SEC discussed the compliance burdens related to the metrics 

reporting and recordkeeping requirements under the 2013 rule. For example, the SEC reported 

that a market participant estimated that the average cost of collecting and filing metrics subject to 

the reporting requirements may be as high as $2 million per year per participant, and that market 

participants may submit an average of over 5 million data points in each filing.1160 The SEC also 

reported an estimate from a market participant incurring approximately $3 million in costs 

associated with the buildout of new IT infrastructure and system enhancements and estimated 

that this IT infrastructure will require at least $250,000 in maintenance and operating costs yearto-year.1161 In addition, the SEC noted that the same firm estimated costs related to compliance 

consultants assisting with the construction of the 2013 rule compliance regime at $3 million.1162 

 1160 See 83 FR at 33539.

1161 Id.

1162 To 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 rule, the SEC cannot estimate the firm’s all-in metrics reporting costs.
428

The SEC continues to believe that the metrics reporting and recordkeeping requirements 

of the 2013 rule may involve large compliance costs.1163 The agencies have received comment 

that the proposed amendments do not streamline metrics reporting and recordkeeping 

requirements but impose costly new requirements.1164 Moreover, the agencies received 

comment that the new qualitative information requirements, such as the trading desk 

information, are unlikely to enhance review by regulators.1165 In addition, the agencies received 

comment that even where underlying data is already collected by reporters in the regular course 

of business and for regulatory compliance, reporters will still incur costs of determining how best 

to compile and standardize the information.1166

As discussed below, the SEC continues to recognize that some aspects of the final rule 

may impose new requirements on reporters. Moreover, the SEC continues to emphasize that 

quantitative metrics do not clearly identify impermissible proprietary trading, but, rather, inform 

general agency oversight and supervision. As discussed further below, in response to the 

comments received, the SEC has revised its estimates of the compliance costs of various 

amendments and burden savings from metrics amendments as a whole. Importantly, the final 

metrics amendments include changes from the proposed approach—changes that both reduce the 

scope of new requirements and eliminate other existing quantitative metrics, such as risk factor 

sensitivities. For example, as discussed in section IV.E, the agencies estimate that the final rule 

 1163 See, e.g., 83 FR at 33538.

1164 See, e.g., CCMC; JBA; Committee on Capital Markets; SIFMA Annex C and IIB.

1165 See SIFMA.

1166 Id.
429

may significantly reduce both the number of reported data items (by approximately 67%) and the 

overall volume of submissions (by approximately 94%) relative to baseline. 

Overall, the SEC believes that the final rule reduces the costs of metrics requirements for 

reporters, eliminating certain metrics on the basis of regulatory experience with the data and 

provides 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. These effects are discussed with respect to each final 

amendment in the sections that follow. 

The SEC considered how to assess the costs of the final rule for SEC-regulated banking 

entities. The metrics costs are generally estimated at the holding company level for each 

reporter.1167 The SEC allocates these costs to the affiliated SEC-regulated banking entity.1168 

The SEC believes that estimating the cost savings of the final rule at the individual registrant 

level would be inconsistent with the SEC’s understanding of how these entities are complying 

with the metrics reporting requirements of the 2013 rule. The SEC continues to believe that 

SEC-regulated banking entities within the same corporate group will collaborate with one 

another to comply with the final rule, to take advantage of efficiencies of scale. Further, the SEC 

 1167 The SEC currently receives metrics from 18 entities, including 2 reporters that are below $10 

billion in trading assets and liabilities. Since voluntary reporters are not constrained by the 

requirements of the amendment, they are not reflected in the SEC’s cost estimates. In addition, 

the SEC believes that the additional systems costs estimated here will be incurred at the holding 

company level and scope in the trading activity of all SEC-registered banking entity affiliates. 

1168 See supra note 1073.
430

continues to note that individual SEC-regulated 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 as a result of the final rule. 

The discussion that follows addresses the effects of the final rule on the reporting and 

recordkeeping burdens and other compliance costs for banking entities, the effects of the 

elimination and streamlining of certain metrics, the effects of extended time to report, and 

amendments related to the XML format.

(1) Reporting and Recordkeeping Burden for SECRegulated Banking Entities

The changes in reporting and recordkeeping burdens as a result of the final rule stem 

from four key groups of changes to the metrics reporting regime. First, the final rule requires 

metrics reporting for Group A entities only. Under the 2013 rule, banking entities with 

consolidated trading assets and liabilities above $10 billion are required to record and report 

certain quantitative measurements for each trading desk engaged in covered trading.1169 Under 

the amended rules, entities with $20 billion or more in trading assets and liabilities would be 

required to furnish metrics. The SEC estimates that three metrics reporters that have affiliated 

broker-dealers required to submit metrics to the SEC under the 2013 rule will no longer be 

required to report metrics under the final rule. 

 1169 See 2013 rule § __.20(d) and Appendix A.
431

Second, as discussed above, the agencies are narrowing the scope of many of the 2013 

rule’s metrics requirements or eliminating them as a whole. For example, the agencies are 

eliminating the Inventory Aging metric, the Stress Value-at-Risk (VaR) metric, and the Risk 

Factor Sensitivities metric. As discussed above, the agencies estimate that the final rule 

eliminates approximately 67% of data items by number and 94% of data by volume. The 

reduction in the volume of data required to be compiled, reviewed, and transmitted to the 

agencies is expected to decrease the volume of data that needs to be produced, manipulated, and 

submitted to the agencies for purposes of compliance with the 2013 rule. 

Third, the amendment to the trading account definition may change the scope of desks 

required to report metrics. Specifically, some trading desks, such as some asset and liability 

management desks, under the 2013 rule, may be required to report metrics solely due to activity 

that falls within the 60-day rebuttable presumption. Because of the nature of their activity, such 

trading desks may face greater burdens of producing metrics that are routine for other trading 

desks. The elimination of the 60-day rebuttable presumption may eliminate the need for such 

desks to report metrics, removing related burdens. 

Fourth, the agencies are adopting an amendment to require metrics reporting by all 

reporters on a quarterly basis within 30 days of the end of each calendar quarter. Under the 2013 

rule, banking entities that report metrics and 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, under the 2013 rule, banking entities with total trading assets and 

liabilities equal to or above $50 billion are required to report metrics more frequently—each 
432

month within 10 days of the end of that month.1170 As discussed further below, because 

processes enabling reporting under tight deadlines may generally be costlier, the SEC anticipates 

that the amended reporting requirements may reduce compliance costs for entities that are 

subject to the 2013 rule’s metrics requirements and have more than $50 billion in trading assets 

and liabilities and may result in fewer resubmissions by such filers. 

In the proposal, the SEC stated that reporters may incur systems-related costs of 

approximately $120,000 to $130,000, estimated at the level of the reporter. The agencies have 

received comment that the SEC’s estimates of the costs of the metrics amendments are a 

significant underestimate, since reporters will need to revise all of their metrics reporting systems 

and embark on a new round of systems integration with multiple agencies independently.1171 

The commenter indicated that the exercise is not dissimilar from the initial implementation of the 

2013 rule’s metrics.1172 Another commenter supported retaining requirements of the 2013 rule,

since any metrics amendments would require modifications to measurement tools, involving 

burdens, testing time, and outsourcing costs of development staff.1173

The SEC agrees that compliance with the final rule will involve one-time costs to 

transition systems and compliance architecture to the metrics amendments for Group A entities, 

including the new requirements related to granular Transaction Volumes and Positions metrics, 

Comprehensive Profit and Loss Attribution, Trading Desk and Quantitative Measurements 

Identifying Information, and the elimination of reporting of other metrics (such as Inventory 

 1170 See 2013 rule § __.20(d)(3).

1171 See SIFMA.

1172 Id.

1173 See, e.g., JBA.
433

Turnover, Customer-Facing Trade Ratio, Risk Factor Sensitivities, and Stress VaR). The SEC 

notes that its analysis is specific to SEC registrants, and the estimates represent only a fraction of 

the compliance costs of holding companies allocated to affiliated SEC- regulated banking 

entities. Moreover, the SEC anticipates considerable variation in one-time system transition 

costs among reporters, depending on the size and complexity of their existing trading activity, 

the number of trading desks per reporter for the purposes of metrics reporting, the way in which 

reporters may organize reporting and compliance obligations for the purposes of, for instance, 

the market risk capital rule, and the complexity of their current systems. However, if 

transitioning reporting systems to meet the requirements of the final rule impose one-time costs 

and IT burdens comparable with those of the metrics requirements of the 2013 rule,1174 the 

compliance costs related to the 2013 rule can be used to estimate potential one-time switching 

costs for some banking entities. In the proposal, the SEC reported an estimate from a market 

participant incurring approximately $3 million in costs associated with the buildout of new IT 

infrastructure and system enhancements.1175 Using this estimate, the one-time costs related to 

transitioning metrics reporting to comply with the requirements of the final rule may be as high 

as $540,0001176 for SEC- regulated dealers affiliated with a single Group A metrics reporter and 

as high as $6,480,0001177 for all SEC- regulated entities affiliated with all reporters.

 1174 See SIFMA.

1175 Id.

1176 $3 million x 0.18 x 1 reporter = $540,000.

1177 $540,000 x 12 reporters = $6,480,000.
434

However, as discussed earlier in this section, the SEC believes that the final metrics 

amendments may reduce reporting and recordkeeping burdens.1178 The SEC estimates that the 

amendments may decrease ongoing annual reporting and recordkeeping cost by $463,921.1179 

These figures reflect the estimated burden reductions net of any new systems costs imposed by 

the final rule. 

(2) Elimination, Replacement, and Streamlining of Certain 

Metrics

As discussed above, the final rule includes a number of amendments eliminating, 

replacing, and streamlining metrics reporting. For example, the final rule eliminates the 

Inventory Aging, Stress VaR, and Risk Factor Sensitivities metrics, as well as replaces the 

Inventory Turnover with the Positions metric and the Customer Facing Trade Ratio with the 

Transaction Volumes metric. As discussed above, both the Transaction Volumes metric and the 

 1178 In the proposal, the SEC estimated the effect on SEC-registered broker-dealers and entities 

that may register as SBS dealers by scaling per-reporter estimates by 0.18 and multiplying by the 

number of broker-dealers or SBSDs affiliated with reporters in an affected category. This 

approach assumes that reporters with multiple dealers may allocate metrics compliance costs 

savings to each dealer. The SEC now more conservatively allocates compliance cost savings to 

multiple dealers affiliated with a reporter as one dealer entity. This approach also avoids 

assuming that entities that may register as SBSDs that are not broker-dealers are affiliated with 

reporters with over $50 billion in trading assets and liabilities (TAL) and is consistent with how 

the SEC allocates systems costs related to metrics amendments. 

1179 Ongoing reporting cost reduction for SEC entities: [(55 hours per report x 12 reports per year 

x 9 reporters with over $50 billion) + (55 hours per report x 4 reports per year x 9 reporters with 

under $50 billion) – (41 hours per report x 4 reports per year x 12 reporters with TAL above $20 

billion)] x 0.18 dealer weight x (Attorney at $423 per hour) = $453,185. 

Ongoing recordkeeping cost reduction for SEC entities: [(16 hours per firm x 9 reporters with 

over $50 billion + 13 hours per firm x 9 reporters with <$50 billion) – (10 hours per firm x 12 

reporters with >$20 billion TAL)] x 0.18 x (Attorney at $423 per hour) = $10,736.

Total ongoing cost reduction: $453,185 reporting + $10,736 recordkeeping = $463,921.
435

Positions metric will be required only by desks involved in underwriting or market makingrelated activity. The SEC continues to believe that the key balancing of economic effects from 

metrics reporting is between compliance burdens (which may be particularly significant for 

smaller entities) and the amount and usefulness of information provided for regulatory oversight 

of the 2013 rule, as well as for general supervision and oversight. As estimated above, the 

limitation of certain metrics to desks engaged in covered trading activities, elimination of the 

above metrics, and removal of the Stress VaR limit requirements is expected to reduce burdens 

related to reporting and recordkeeping for Group A entities. Although metrics do not allow the 

SEC to clearly identify proprietary trading from permitted market making, risk-mitigating 

hedging, or underwriting activity, certain metrics may provide additional information that is 

useful for regulatory oversight. 

Replacement of Inventory Turnover with Positions and Customer-Facing 

Trade Ratio with Transaction Volumes 

The final rule replaces the Inventory Turnover metric with the Market Value of Positions 

quantitative measurement and replaces the Customer-Facing Trade Ratio metric with the 

Transaction Volumes quantitative measurement. The Inventory Turnover and Customer-Facing 

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 Positions and Transaction Volumes metrics are expected to provide information 

about risk exposure and trading activity at a more granular level. Specifically, the final 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-, 
436

60-, and 90-day calculation periods. By providing more granular data, the Positions metric, in 

conjunction with the Transaction Volumes metric, is expected to provide the SEC with the 

flexibility to calculate inventory turnover ratios and customer-facing trade ratios over any period 

of time, including a single trading day, allowing the use of the calculation method the SEC finds 

most effective for purposes of regulatory oversight. 

Moreover, the new Positions and Transaction Volumes metrics will distinguish between 

securities and derivatives positions, unlike the Inventory Turnover and Customer-Facing Trade 

Ratio metrics. These metrics would require a banking entity to separately report the value of 

securities positions and the value of derivatives positions. While the 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 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 providing less 

meaningful information than was intended by the 2013 rule. 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 final rule would also streamline valuation method 

requirements for different product types. The removal of the notional value of derivative 

positions in the Positions metric avoids complexities related to mixing various calculation 

methods for notional value for different derivatives. For example, using delta-adjusted notional 

for options, bond equivalents for interest rate derivatives, commodity price adjusted values for 
437

commodity derivatives, and gross notional for other derivatives increases complexity and 

reduces comparability. Moreover, certain valuation methodologies required by the 2013 rule’s 

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, the 

2013 rule’s requirements result in information being aggregated and furnished to the SEC in noncomparable units. At the same time, the final rule retains gross notional value of derivatives as 

part of the Transactions Volumes Metric. The SEC believes that changing market values of 

positions as well as the volume of derivative contracts in terms of notional are important 

measures of risk useful for ongoing agency oversight. Therefore, this aspect of the final rule 

may further enhance the usability of the information provided in the Positions metric. 

Moreover, the valuation methods required under the final rule are intended to be more 

consistent with the agencies’ 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 relative 

to the costs of reporting requirements under the 2013 rule. While a banking entity may incur 

one-time costs in modifying how it values certain positions for purposes of metrics reporting, the 

SEC does 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 final rule. However, the SEC recognizes that some metrics 

reporters may incur such costs, and they are reflected in the estimate of the one-time metrics 

switching costs of up to $540,000 for SEC-registered dealers affiliated with a single Group A 

metrics reporter in section V.F.3.h.i above.
438

The agencies have received a number of comments on the proposed replacement of the 

Inventory Turnover metric with the Positions metric and of the Customer-Facing Trade Ratio 

metric with the Transaction Volumes metrics. With respect to the replacement of Inventory 

Turnover with Positions, commenters indicated that the Positions metric will involve costly 

modifications to existing infrastructure and re-scoping of products.1180 In addition, commenters 

indicated that Positions metric will provide few valuable insights regarding each desk’s overall 

risk profile and that the granularity will result in false positives.1181 Commenters also opposed 

the replacement of the Customer-Facing Trade Ratio with the Transactions Volume metric, 

arguing that it would create a new metric, require firms to classify inter-affiliate transactions, 

increase transition and system update costs, and fail to provide the agencies with valuable 

information enhancing oversight for the purposes of section 13 of the BHC Act.1182

The SEC continues to believe that requiring banking entities to provide more granular 

data in the Positions and Transaction Volumes metrics will not significantly alter the costs 

associated with the 2013 rule’s Inventory Turnover and Customer-Facing Trade Ratio 

metrics.1183 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. The SEC expects that banking entities already keep records of these 

data and have systems in place that collect these data. Moreover, in response to commenter 

concerns regarding the extra recordkeeping costs related to distinguishing trades across affiliated 

 1180 See, e.g., SIFMA and GFMA.

1181 Id.

1182 See IIB; SIFMA and JBA.

1183 See, e.g., 83 FR at 33541.
439

banking entities from trades within a single banking entity, the final rule adds a category of 

counterparty for internal transactions that consolidates the two proposed categories (transactions 

across affiliated banking entities from trades within a single banking entity) into one category 

(transactions with trading desks and other organizational units). This additional category of 

information may 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 remains cognizant of the costs of the amendments on reporters. In the proposal 

the SEC anticipated that reporting more granular information in the Positions and Transaction 

Volumes metrics may result in costs of $24,480.1184 The SEC revises the estimate to $17,280 to 

reflect updated information about the number of reporters with affiliated SEC-registered dealers 

affected by the metrics amendments.1185 In addition, in the proposal, the SEC estimated that 

modifying the 2013 rule’s requirements of the Customer-Facing Trade Ratio to require SECregulated 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 for all reporters.1186 The SEC now revises this estimate to $15,120 to reflect updated 

 1184 In the Proposing Release, the SEC anticipated 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 x 17 reporters x 0.18 SEC-registered banking entity 

weight) = $24,480.

1185 $8,000 x 12 reporters x 0.18 SEC-registered banking entity weight = $17,280.

1186 In that Release, the SEC estimated that the additional costs associated with categorizing 

transactions under the Transaction Volumes metric will be $7,000 per reporter. ($7,000 x 17 

reporters x 0.18 SEC-registered banking entity weight) = $21,420.
440

information about the number of reporters with affiliated SEC-registered dealers affected by the

metrics amendments.1187 

Importantly, the Positions and Transaction Volumes metrics requirements as amended 

may reduce costs compared to the reporting requirements under the 2013 rule 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 

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 final rule 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. These burden 

reductions are captured in the estimates of reporting and recordkeeping burden reductions in 

section V.F.3.h.i. 

Risk Factor Sensitivities, Inventory Aging, and Stress VaR

The final rule eliminates the Risk Factor Sensitivities, Inventory Aging, and Stress VaR 

metrics of the 2013 rule. As estimated in section V.F.3.h.i, the SEC expects that the metrics 

amendments, including the elimination of these quantitative metrics requirements, will reduce 

burdens related to reporting and recordkeeping for Group A entities without adversely affecting 

the SEC’s ability to oversee banking entities for purposes of section 13 of the BHC Act. 

The final rule removes the requirement to report Risk Factor Sensitivities metrics, which 

is expected to reduce burdens related to data manipulation. The SEC understands that reporters 

 1187 $7,000 x 12 reporters x 0.18 SEC-registered banking entity weight = $15,120.
441

may routinely calculate Risk Factor Sensitivities as part of their risk systems. However, the SEC 

understands that reporters have to routinely summarize large volumes of highly disaggregated 

Risk Factor Sensitivities from the risk systems for purposes of compliance with the 2013 rule. 

As discussed in section IV.E.5, the agencies estimate that the removal of Risk Factor 

Sensitivities may reduce the total volume of data submitted by reporters by more than half. 

In addition, the SEC recognizes that one size may not fit all with respect to risk factors. 

Specifically, different risk factors at various levels of granularity may be relevant for different 

banking entities, and the Risk Factor Sensitivities may not adequately capture structural 

differences among the types of risk managed by trading desks in some banking entities.1188 The 

SEC also notes that banking entities may already provide information about risk factor 

sensitivities as part of market risk reporting.1189 As discussed in section IV.E.9.a.i above, the 

final rule may reduce redundancy in metrics reporting since banking entities would be required 

to submit one consolidated Internal Limits Information Schedule for the covered trading activity 

of the entire entity. 

The elimination of the Inventory Aging metric in the final rule recognizes the limitations 

of this metric for SEC’s oversight for purposes of section 13 of the BHC Act, the information in 

the newly required Positions metric, as well as the fact that the notions of inventory and 

inventory aging are not meaningful indicators of the scale and risk of derivative positions.1190 

 1188 See SIFMA.

1189 Id.

1190 For example, the value of derivatives fluctuates with the price of an underlying asset and the 

notional amount of the contract, and derivative contracts are routinely amended and terminated 

prior to expiry. See also, e.g., GFMA, State Street, Data Boiler.
442

The SEC continues to believe that this amendment does not reduce the benefits of metrics 

reporting, as inventory aging does not enable a clear identification of prohibited proprietary 

trading or exempt market making, risk-mitigating hedging, or underwriting activities. 

The elimination of the Stress VaR metric is expected to reduce burdens related to 

reporting and recordkeeping for Group A entities, contributing to the estimates of burden 

reductions in section V.F.3.h.i. The SEC recognizes one commenter’s concerns that banking 

entities may currently face computational challenges, including those related to the determination 

of the stressed period and dynamic recalibration and that multinational holding companies may 

use different stress periods for subsidiaries in different jurisdictions.1191 As discussed above, 

under the final rule, banking entities would still be required to submit one consolidated Internal 

Limits Information Schedule for the covered trading activity of the entire entity. The SEC 

understands that many banking entities do not routinely set Stress VaR limits at the trading desk 

level but compute Stress VaR at the entity level. Thus, as discussed above, the final rule may 

alleviate the need for redundant computations and submissions of Stress VaR at the desk level 

and may reduce the size of electronic submissions. Importantly, the SEC continues to note that 

eliminating the Stress VaR metric is unlikely to reduce the benefits of metrics reporting, as Stress 

VaR does not enable the SEC to distinguish between prohibited proprietary trading and 

permissible market making, risk-mitigating hedging, or underwriting activities of a trading 

desk.1192

 1191 See, e.g., Data Boiler.

1192 See, e.g., Goldman Sachs; FSF and Data Boiler.
443

Comprehensive Profit and Loss Attribution

The final rule makes two main changes to the Source-of-Revenue Measurements. First, 

the final rule eliminates the requirement that banking entities calculate and report the volatility of 

comprehensive profit and loss. Since the volatility of profit and loss can be calculated from 

other items being reported by the banking entities, the SEC does not believe that this aspect of 

the final rule would adversely affect the information available for the oversight of entities for the 

purposes of section 13 of the BHC Act. 

Second, the final rule requires banking entities to provide a complete attribution of their 

profit and loss and, for one or more factors that explain the preponderance of the profit or loss 

changes due to risk factor changes, banking entities are required to report a unique identification 

label for the factor and the profit or loss due to the factor change. The SEC recognizes that the 

Risk Factor Attribution Information Schedule and the new unique identification label reporting 

requirement may impose additional burdens on reporters. As discussed in section IV.E, the 

agencies generally expect that the final rule may enable banking entities to leverage compliance 

with market risk capital programs to meet the final metrics requirements, which may reduce 

complexity and cost for banking entities and improve the effectiveness of the final rule. The 

SEC also notes that the final rule also includes an amendment to the trading desk definition, 

allowing reporters to use the same trading desk and risk factor attribution and risk factor 

sensitivity hierarchies. At the same time, profit and loss attribution and the identification label 

may enhance the ability of regulators to connect risk factors that explain a preponderance of the 

profit or loss changes due to risk factors with a separate Risk Factor Attribution Information 

Schedule. Thus, these amendments may help enhance the agencies’ understanding of the 

structure of reporters’ activity and the nature of their revenue sources.
444

(3) Trading Desk Information, Quantitative Measurements 

Identifying Information, and Narrative Statement 

As recognized in Appendix A of the 2013 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.1193 Thus, the additional 

qualitative information the agencies would collect in the Trading Desk Information and 

Quantitative Measurements Identifying Information provision may facilitate SEC review and 

analysis of covered trading activities and reported metrics. For instance, the 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. Having access to such 

information may allow the agencies to consider the specifics of each trading desk’s activities 

during the reporting period, which may facilitate regulatory oversight. 

In addition, under the final rule, banking entities may choose 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 may include any information the banking entity views as 

relevant for assessing the information reported, such as further description of calculation 

methods used. The Narrative Statement may 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. 

 1193 See 79 FR 5798.
445

The SEC has received comments opposing the inclusion of additional descriptive

information about metrics, including the Trading Desk Information, Narrative Statement, and 

Quantitative Measurements Identifying Information, as part of amended metrics reporting 

requirements.1194 Specifically, a number of commenters indicated that there are few benefits of 

such qualitative information for the agencies’ ability to oversee registrants for purposes of 

section 13 of the BHC Act. 1195 In addition, some commenters stated that the requirements are 

costly and burdensome as they vastly expand the scope of information requested.1196 With 

respect to the Narrative Statement, one commenter recognized that banking entities currently 

provide such additional information voluntarily but indicated that the requirement would impose 

costs on banking entities that are unnecessary given that the agencies may be able to obtain this 

information through other supervision.1197 Another commenter indicated that the proposed 

amendments significantly expanded the scope of the Narrative Statement requirement relative to 

current voluntary submissions, and that the Narrative Statement may provide little value to the 

agencies when assessing data submissions for purposes of compliance with the 2013 rule.1198

As discussed above, the SEC continues to believe that the Trading Desk Information and 

Quantitative Measurements Identifying Information may enhance the efficiency of data review 

by regulators. Three aspects of the final rule address the cost concerns of commenters regarding 

the proposed Trading Desk, Narrative Statement, and Quantitative Measurements Identifying 

 1194 See, e.g., Credit Suisse; JBA and SIFMA.

1195 See ABA; CCMR; SIFMA and Credit Suisse.

1196 See, e.g., Credit Suisse and CCMR.

1197 See SIFMA.

1198 See Credit Suisse.
446

Information amendments discussed above. First, the final rule would not require reporters to 

identify the legal entity used as a booking entity by the trading desk, but instead would require 

the reporting of a list of agencies receiving the submission of the trading desk and the 

exemptions or exclusions under which the desk conducts trading activity. Second, the final rule 

would not require reporters to identify products traded by the desk. Third, under the final rule, 

the submission of the Narrative Statement would be optional for reporters. The SEC believes 

that these aspects of the qualitative information amendments would mitigate any new burdens 

related to these requirements while facilitating oversight by the agencies. 

However, the SEC recognizes that several proposed schedules in quantitative 

measurements identifying information may create reporting burdens. As discussed in section 

IV.E, the final rule does not require reporting of the risk factor sensitivities information schedule, 

the limit/sensitivity cross-reference schedule, and the risk-factor sensitivity/attribution crossreference schedule. However, the final rules would require reporting of Risk Factor Attribution 

Information Schedules and Internal Limits Information Schedules that includes identification of 

the corresponding risk factor attribution for certain limits, imposing two new schedule 

requirements relative to the regulatory baseline under the 2013 rule. However, as discussed 

above, some reporters may currently use the same limits and risk factors for multiple desks, 

resulting in duplicative reporting of daily limits by multiple desks for a given reporter. To the 

extent that these reporters may choose to use the two new schedules to submit a comprehensive 

list of risk and position limits and risk-factor sensitivities, these schedules may reduce 

duplicative reporting burdens. The agencies have also received comment that the agencies have 

alternative tools for monitoring banking entity risk (such as the CCAR process) and that the risk 

factor attribution schedule does not adequately capture differences between risks managed by 
447

different trading desks of a banking entity.1199 The SEC believes that the descriptions of the 

Internal Limits Information Schedule and Risk Factor Attribution Information Schedule for 

certain limits may inform oversight of SEC- regulated banking entities affiliated with reporters 

with respect to their compliance with the requirements of the final rule.

Moreover, the SEC continues to note that all the SEC-regulated entities that currently 

report metrics are also currently providing certain elements of the Trading Desk Information to 

the SEC. The SEC continues to believe that 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 more of a manual process involving a written description 

of pertinent issues. However, all but one SEC reporter already provides a narrative with every 

submission. 

In the proposal, the SEC estimated that the proposed Narrative Statement requirement is 

expected to result in ongoing personnel and monitoring costs of only $1,980.1200 The agencies 

have received comment that this estimate of ongoing costs is a significant underestimate, since 

reporters will need to revise all of their metrics reporting systems and embark on a new round of 

systems integration with multiple agencies independently.1201 The commenter indicated that the 

 1199 See, e.g., SIFMA.

1200 The SEC estimates that costs associated with the proposed Narrative Statement will be 

$11,000 per affiliated group of SEC-regulated banking entities. ($11,000 x 1 reporter x 0.18) = 

$1,980.

1201 See SIFMA.
448

exercise is not dissimilar from the initial implementation of the 2013 rule’s metrics.1202 Another 

commenter supported retaining requirements of the 2013 rule since any metrics amendments 

would require modifications to measurement tools, involving burdens, testing time, and 

outsourcing costs of development staff.1203

The SEC agrees that the final rule will involve one-time costs to transition their systems 

and transition their compliance architecture to the amended metrics requirements for Group A 

entities, which are incorporated in the agencies’ estimates in section V.B and in the SEC’s 

analysis in section V.F.3.h.i. The SEC notes that its analysis is specific to SEC regulated 

banking entities and the estimates only represent a fraction of the compliance costs of holding 

companies allocated to affiliated SEC- regulated banking entities. The SEC also notes that the 

$1,980 estimate in the proposal was specific to the Narrative Statement requirement for one 

reporter, rather than the totality of the burdens imposed on registrants from new metrics 

requirements; and, under the final rule, the submission of the Narrative Statement is optional. 

Moreover, the SEC anticipates considerable variation in one-time system transition costs among 

reporters, depending on the size and complexity of their existing trading activity, the number of 

trading desks per reporter for the purposes of metrics reporting, the way in which reporters may 

organize reporting and compliance obligations for the purposes of, for instance, the market risk 

capital rule, and the complexity of their current systems. 

However, recognizing the above comments concerning systems changes that all reporters 

may have to make for the purposes of reporting of qualitative information, the SEC now 

 1202 Id.

1203 See, e.g., JBA.
449

estimates that the combined one-time systems costs related to the submission of new qualitative 

information (including Trading Desk Information, Quantitative Measurements Identifying 

Information, and the optional Narrative Statement) may be as high as $22,500 for SEC-registered 

entities affiliated with a single Group A metrics reporter1204 and $270,000 for all SEC-registered 

entities affiliated with all reporters.1205 If transitioning reporting systems to meet the 

requirements of the final rule impose one-time costs and IT burdens comparable with those of 

the metrics requirements of the 2013 rule,1206 the compliance costs related to the 2013 rule can 

be used to estimate potential one-time switching costs for some banking entities. In the proposal, 

the SEC reported an estimate from a market participant incurring approximately $3 million in 

costs associated with the buildout of new IT infrastructure and system enhancements.1207 Using 

this estimate, the one-time costs related to transitioning metrics reporting to comply with the 

requirements of the final rule may be as high as $540,0001208 for SEC-registered dealers 

 1204 In Regulation Crowdfunding, the SEC estimated that intermediaries (whether broker-dealers 

or funding portals) that already have in place platforms and related systems that will need to 

tailor their existing platform and systems to comply with the requirements of Regulation 

Crowdfunding may incur an initial average cost of $250,000. See 80 FR 71509. Since the 

qualitative information requirements in the final rule are considerably more limited than the 

requirements in Regulation Crowdfunding, the SEC estimates that tailoring existing platforms 

and systems with respect to the qualitative information requirements for metrics reporters may be 

half as costly as the cost estimate in Regulation Crowdfunding. $250,000 x 0.5 x 0.18 = 

$22,500. 

1205 $22,500 x 12 reporters = $270,000.

1206 See SIFMA.

1207 Id.

1208 $3 million x 0.18 x 1 reporter = $540,000.
450

affiliated with a single Group A metrics reporter and as high as $6,480,0001209 for all SECregistered entities affiliated with all reporters.

(4) Time to Report 

The agencies are amending the time frame for metrics reporting by requiring quarterly 

reporting for all reporters and extending the timeline for metrics submissions to 30 days 

following the end of each calendar quarter. The SEC has received comments supporting a move 

to quarterly reporting1210 and an extended reporting timeframe for reporters with more than $50 

billion in trading assets and liabilities1211 and stating that such timeframes account for the scale 

and complexity of profit and loss reconciliations as well as the internal compliance and 

governance processes of such banking entities. The SEC also notes that, to the extent that the 

shorter timeframe for submission may result in later resubmissions to correct errors, the increase 

in time for some reporters may decrease compliance burdens and make the information 

collection process more efficient. 

As estimated in Table 5 of the economic baseline, this amendment would not affect the 

reporting schedule of four reporters with between $20 billion and $50 billion in trading assets 

and liabilities and would provide additional flexibility and time to eight reporters with over $50 

billion in trading assets and liabilities. In addition to reductions in compliance burdens, the final 

rule may also involve greater improvements in the number of banking entities reporting on time 

and in the quality of submissions. As estimated in Panel A of Table 7, approximately 66% of all 

 1209 $540,000 x 12 reporters = $6,480,000.

1210 See, e.g., SIFMA.

1211 See, e.g., Goldman Sachs; Credit Suisse and FSF.
451

records submitted by reporters with over $50 billion in trading assets and liabilities are 

resubmitted to the SEC at least once. In addition, from Panel B of Table 7, the average delay in 

initial submissions is approximately 2 days. The SEC notes that in addition to resulting in 

potentially higher quality submissions with fewer resubmissions, under the final rule the 

agencies may not receive the information as promptly. 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. 

(5) XML Format

The agencies are requiring 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.1212 Under the 2013 rule, the metrics are not required to be reported in a 

structured format, and banking entities are currently reporting quantitative measurement data 

electronically. In the proposal, the SEC noted that, 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, 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. 

 1212 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. 
452

The SEC believes that familiarity with these practices at the bank level will facilitate the 

implementation of these practices for SEC registrants. Furthermore, FINRA requires its member 

broker-dealers to file their FOCUS Reports in a structured format through its eFOCUS 

system.1213 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 continues to believe that SECregulated dealers covered by the metrics reporting and recordkeeping requirements may have 

experience applying the XML format to their data.

Reporting metrics and other information in XML allows data to be 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 agencies’ ability to process and analyze 

the data. Once the data is in a structured format, it can be easily organized for viewing, 

manipulation, and analysis through the use of commonly used software tools and applications. 

Structured data can allow the agencies to discern patterns from large quantities of information 

much more easily than unstructured data. The SEC continues to believe that structured data also 

facilitates the ability 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. 

 1213 For example, FINRA members commonly use FINRA’s Web EFT system, which requires 

that all data be submitted in XML. See http://www.finra.org/industry/web-crd/web-eft-schemadocumentation-and-schema-files. Also see 81 FR 49499. Information about FINRA’s eFOCUS 

system is available at http://www.finra.org/industry/focus. 
453

Specifying the format in which banking entities must report information may help ensure 

that the agencies 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 under the final rule 

and the current reporting process. 

In the proposal, the SEC recognized 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 one-time costs and estimated such costs at an average of 

$75,0001214 per reporter, for an expected aggregate one-time cost of approximately $229,500 for 

 1214 These cost estimates were 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, in the Proposing 

Release, the SEC stated that similar costs may 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 expected 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, in the Proposing Release, the SEC 

noted that the proposed metrics amendments would require banking entities to produce in XML 
454

all SEC registrants.1215 

The agencies received several comments regarding the costs of transitioning to metrics 

reporting in an XML format. Some commenters indicated that they did not support the 

amendment as it would increase costs related to switching formats of reporting software and 

systems and supported the retention of existing (.DAT) format used for submissions but did not 

provide any quantification for the costs of switching to the .XML format.1216 Other commenters 

generally supported metrics reporting in a standardized data format and the proposed transition 

to XML reporting.1217 One commenter indicated that the transition to XML reporting of metrics 

will require significant switching costs and that there will also be ongoing costs because of 

potential changes to the XML schema or the underlying information to which the XML schema 

relates over time.1218 Another commenter supported the XML reporting format and estimated 

that reporters would incur a one-time switching cost related to equipment, systems, training, and 

staffing or maintenance of $40,000 per banking entity.1219

The SEC continues to estimate that each reporter may incur a one-time switching cost of 

 

metrics reports that they are already required (or will be required) to provide. However, the 

SEC’s estimate was 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. 

The SEC’s cost estimates at proposal included 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. 

1215 In the Proposing Release, the SEC computed total costs as follows: $75,000 x 17 reporters x 

0.18 entity weight = $229,500.

1216 See, e.g., JBA and Credit Suisse.

1217 See, e.g., Goldman Sachs and Data Boiler.

1218 See SIFMA. 

1219 See Data Boiler.
455

up to $75,000 but is adjusting the total aggregate reporting costs to reflect an updated count of 

metrics reporters with affiliated SEC-registered banking entities. As discussed in the economic 

baseline, using data from March 2018 through March 2019, the SEC estimates that 12 reporters 

with trading assets and liabilities in excess of $20 billion may be subject to the final metrics 

reporting amendments, resulting in an aggregate estimate of a one-time switching cost of 

$162,000 for all SEC registrants.1220 Moreover, since the final rule involves a single one-time 

change to the reporting format, the SEC continues to believe that SEC- regulated banking entities 

will not incur significant ongoing costs from this aspect of the final rule. Moreover, the SEC 

continues to believe that XML reporting will result in a more efficient submission process, 

including validation of submissions, and anticipates that some of the implementation costs may 

be offset over time by these greater efficiencies. 

ii. Competition, Efficiency, and Capital Formation

Under the amendments, entities that have between $10 and $20 billion in trading assets 

and liabilities would incur lower costs of compliance as they would no longer be subject to 

metrics requirements. To the extent that these compliance burdens may be significant for some 

entities, and since Group B entities are not subject to any metrics requirements, Group A entities

close to the threshold may become more competitive with Group B entities. To the extent that 

some entities are currently experiencing significant metrics-reporting costs and partially or fully 

passing them along to customers in the form of reduced willingness to transact or higher costs, 

the final rule may reduce costs of and increase access to capital. However, estimated reporting 

and recordkeeping burden savings resulting from the final rule are relatively modest, and the 

 1220 $75,000 x 12 reporters x 0.18 entity weight = $162,000.
456

SEC does not anticipate a substantial increase in access to capital as a result of the final rule to 

metrics reporting requirements.

iii. Alternatives

The agencies could have taken several alternative approaches. First, the agencies could 

have kept the metrics being reported unchanged, but increased or decreased the trading activity 

thresholds used to determine metrics recordkeeping and reporting by filers and the frequency of 

such reporting. For instance, the agencies could have used the $10 billion trading activity 

threshold as proposed. As shown in Table 2, the SEC estimates that this alternative would affect 

nine bank-affiliated SEC-registered broker-dealers. The alternative would increase the amount 

and frequency of quantitative data available for regulatory oversight of banking entities. 

However, under the alternative, these dealers would be required to keep or report metrics, 

experiencing higher compliance burdens. Similarly, increasing the recordkeeping and reporting 

thresholds would reduce the scope of application of the metrics reporting requirement, lowering 

accompanying recordkeeping and reporting obligations as well as potential oversight and 

supervision benefits. The SEC continues to recognize that while metrics may be used to flag 

risks and enhance general supervision, as well as demonstrate prudent risk management, metrics 

being reported under the 2013 rule do not clearly distinguish proprietary trading from market 

making or hedging activities. 

In addition, the agencies could have eliminated the VaR requirement1221 or replaced VaR 

with Expected Shortfall1222 as a potentially better measure of tail risk of a trading desk or 

 1221 See, e.g., Goldman Sachs.
457

banking entity.1223 The SEC recognizes that VaR and Expected Shortfall are normally based on 

firm-wide activity, and some entities may not be routinely using such measures to manage and 

control risk at the trading desk level. As a result, VaR, or Expected Shortfall limits may not be 

meaningful at the trading desk level. These alternatives may reduce the burden of reporting and 

compliance costs relative to the approach being adopted without necessarily reducing the 

effectiveness of regulatory oversight by the SEC. In addition, VaR and Expected Shortfall may 

not be informative about banking entity compliance with section 13 of the BHC Act but may 

help agencies understand the tail risk of supervised entities as a part of ongoing oversight and 

supervision. 

The agencies could have required all Group A banking entities to report metrics on a 

monthly basis within 20 days of the end of the calendar month. The SEC believes that this 

alternative would have two partly offsetting effects relative to the baseline. First, the reporters 

with more than $50 billion in trading assets and liabilities, which are required to report metrics 

monthly and within 10 days of the end of each calendar month under the 2013 rule, would, under 

the alternative, have 20 days after the end of each calendar month to report metrics. As 

estimated in Table 5 of the economic baseline, this aspect of the alternative would affect eight 

reporters with SEC-registered affiliated banking entities. Second, reporters with more than $20 

billion but less than $50 billion in trading assets and liabilities are required to report metrics on a 

quarterly basis and have 30 days after the end of reach calendar month to do so under the 2013 

 1222 Expected Shortfall is an estimate of the expected value of losses beyond a given confidence 

level and is generally calculated as the area under the probability distribution of asset or portfolio 

returns in the left tail. For an expected shortfall at the 99 percent confidence level, the measure 

would capture the area under the probability distribution from the 99th percentile to the 100th

percentile. See Saunders and Cornett (2014), pp. 458-461.

1223 See, e.g., Data Boiler.
458

rule. Under the alternative, these reporters would be required to report on a monthly basis and 

would have 10 fewer days to do so, relative to the baseline. As estimated in Table 5, this aspect 

of the alternative would affect four reporters with SEC-registered affiliated banking entities. 

Thus, the effects of the alternative on the compliance costs and resubmissions of data, as well on 

changes to the timeliness of data available to the SEC, would likely to be partly offsetting for 

these two groups of reporters.

The SEC recognizes that the alternative would increase how promptly the SEC receives 

data from some SEC-registered banking entities relative to the baseline and the final rule. 

However, more frequent reporting may also decrease the quality of submissions and the need for 

resubmissions by some SEC-registered banking entities. In addition, because processes enabling 

more frequent reporting under tight deadlines may generally be costlier, the alternative would 

result in even smaller reductions in compliance costs for reporters. 

The agencies could have eliminated all quantitative metrics recordkeeping and reporting 

requirements under Appendix A of the 2013 rule.1224 Alternatively, the agencies could have 

eliminated all quantitative metrics except for Risk Management and Source of Revenue 

Metrics.1225 The SEC recognizes that these alternatives would reduce the amount of data 

produced and transmitted to the agencies. Metrics reporting enables regulators to have a more 

complete picture of risk exposures from trading and profit and loss attribution for supervised 

entities. However, the metrics reporting regime is costly, and banking entities subject to the 

2013 rule and SEC oversight are also subject to other compliance and reporting requirements 

unrelated to the 2013 rule, as well as the standard examination and review process. It is not clear 

 1224 See New England Council.

1225 See, e.g., New England Council and State Street.
459

that 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 illustrating risk exposures 

and profitability of various activities by SEC registrants. As previously noted, 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. In 

addition, reporting at the trading desk level may obscure potential prohibited proprietary trades 

since a banking entity could attempt to accumulate large proprietary trading exposures by 

allocating them to a large number of trading desks and comingling these proprietary positions 

with customer facilitation positions for reporting purposes. For example, as can be seen from 

Table 6 of the economic baseline, reporters across various trading assets and liabilities thresholds 

currently report metrics for an average or 38 to 56 trading desks. Moreover, reporters’ flexibility 

in defining the metrics may reduce their comparability. The SEC continues to recognize that 

metrics do not delineate a prohibited proprietary trade and a permitted market making, 

underwriting or hedging trade, but they may be used to enhance regulatory oversight. The SEC 

notes that reporters are already currently subject to a large number of reporting obligations 

unrelated to section 13 of the BHC Act, such as those under the Market Risk Capital rule and 

Form FOCUS reporting requirements, providing large volumes of distinct data that can be used 

to flag risks and enhance general supervision. However, as discussed above, the SEC recognizes 

that metrics may have value for ongoing oversight, and the final rule tailors and streamlines 

metrics reporting requirements rather than eliminating all metrics as a whole.

As discussed elsewhere in this supplementary information, the final rule has a 

compliance date of January 1, 2021, while enabling early voluntary compliance with the final 

rule (subject to the agencies’ completion of necessary technological changes). This approach 
460

recognizes the heterogeneity in the existing compliance burdens related to the 2013 rule and in 

the one-time burdens and time costs that different banking entities may incur as a result of 

transitioning their compliance programs, while preserving continuity of metrics reporting and 

agency oversight. The SEC has considered alternative approaches adopting more (or less) 

delayed compliance dates and disallowing voluntary early compliance with some aspects of the 

final rule. Such alternatives would provide more (or less) time to transition their compliance 

programs and adapt reporting systems to the requirements of the final rule. Moreover, as 

discussed elsewhere in this economic analysis, the SEC continues to believe that the final rule 

may result in significant burden reductions for some banking entities. Alternatives disallowing 

early voluntary compliance would delay the benefits of such burden reductions for the most 

affected banking entities. 

G. Congressional Review Act

For the SEC, the Office of Information and Regulatory Affairs, pursuant to the 

Congressional Review Act (CRA), has designated this rule as a “major rule” as defined by 5 

U.S.C. § 804(2). For the FDIC and OCC, the Office of Information and Regulatory Affairs, 

pursuant to the CRA, has designated this rule as not a “major rule.”
461

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.

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, Conflicts of interest, Credit, Government securities, Insurance, Insurance 

companies, Investments, Penalties, Reporting and recordkeeping requirements, 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
462

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

amends 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.

Subpart A — Authority and Definitions

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) Bank holding company has the same meaning as in section 2 of the Bank Holding Company 

Act of 1956 (12 U.S.C. 1841).

(c) Banking entity. (1) Except as provided in paragraph (c)(2) of this section, banking entity

means:

(i) Any insured depository institution; 

(ii) Any company that controls an insured depository institution;
463

(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 (c)(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 (c)(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 (c)(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.

(d) Board means the Board of Governors of the Federal Reserve System.

(e) CFTC means the Commodity Futures Trading Commission.

(f) Dealer has the same meaning as in section 3(a)(5) of the Exchange Act (15 U.S.C. 78c(a)(5)).

(g) Depository institution has the same meaning as in section 3(c) of the Federal Deposit 

Insurance Act (12 U.S.C. 1813(c)).

(h) Derivative. (1) Except as provided in paragraph (h)(2) of this section, derivative means:
464

(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, 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)).
465

(i) Employee includes a member of the immediate family of the employee.

(j) Exchange Act means the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).

(k) Excluded commodity has the same meaning as in section 1a(19) of the Commodity Exchange 

Act (7 U.S.C. 1a(19)).

(l) FDIC means the Federal Deposit Insurance Corporation.

(m) Federal banking agencies means the Board, the Office of the Comptroller of the Currency, 

and the FDIC.

(n) 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.

(o) 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.

(p) General account means all of the assets of an insurance company except those allocated to 

one or more separate accounts.

(q) 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).

(r) Insured depository institution has the same meaning as in section 3(c) of the Federal Deposit 
466

Insurance Act (12 U.S.C. 1813(c)), but does not include:

(1) 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)); or

(2) an insured depository institution if it has, and if every company that controls it has, total 

consolidated assets of $10 billion or less and total trading assets and trading liabilities, on a 

consolidated basis, that are 5 percent or less of total consolidated assets.

(s) Limited trading assets and liabilities.

(1) Limited 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 (excluding trading assets and liabilities attributable to trading activities permitted 

pursuant to § 44.6(a)(1) and (2) of subpart B) 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; and 

(ii) 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.

(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 (s) means trading assets and liabilities 

(excluding trading assets and liabilities attributable to trading activities permitted pursuant to 

§ 44.6(a)(1) and (2) of subpart B) 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 (s) 

means the trading assets and liabilities (excluding trading assets and liabilities attributable to 

trading activities permitted pursuant to § 44.6(a)(1) and (2) of subpart B) of the combined U.S. 
467

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 (s)(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. For purposes of 

paragraph (s)(3)(i) of this section, all foreign operations of a U.S. agency, branch, or subsidiary 

of a foreign banking organization are considered to be located in the United States, including 

branches outside the United States that are managed or controlled by a U.S. branch or agency of 

the foreign banking organization, for purposes of calculating the banking entity’s U.S. trading 

assets and liabilities.

(t) Loan means any loan, lease, extension of credit, or secured or unsecured receivable that is not 

a security or derivative. 

(u) 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.

(v) Primary financial regulatory agency has the same meaning as in section 2(12) of the DoddFrank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5301(12)).

(w) 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 
468

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.

(x) 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)).

(y) SEC means the Securities and Exchange Commission.

(z) 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.

(aa) Security has the meaning specified in section 3(a)(10) of the Exchange Act (15 U.S.C. 

78c(a)(10)).

(bb) 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)).

(cc) Security future has the meaning specified in section 3(a)(55) of the Exchange Act (15 U.S.C. 

78c(a)(55)).

(dd) 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 
469

the insurance company.

(ee) 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 $20

billion; 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) of 

this section, trading assets and liabilities for purposes of paragraph (ee) of this section means 

trading assets and liabilities (excluding trading assets and liabilities attributable to trading 

activities permitted pursuant to § 44.6(a)(1) and (2) of subpart B) 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 paragraph (ee) of this 

section means the trading assets and liabilities (excluding trading assets and liabilities 

attributable to trading activities permitted pursuant to § 44.6(a)(1) and (2) of subpart B) 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 as well as branches outside the United States that are managed or 

controlled by a branch or agency of the foreign banking entity operating, located or organized in 

the United States). 
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(ii) For purposes of paragraph (ee)(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. For purposes of 

paragraph (ee)(3)(i) of this section, all foreign operations of a U.S. agency, branch, or subsidiary 

of a foreign banking organization are considered to be located in the United States for purposes 

of calculating the banking entity’s U.S. trading assets and liabilities.

(ff) 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.

(gg) Subsidiary has the same meaning as in section 2(d) of the Bank Holding Company Act of 

1956 (12 U.S.C. 1841(d)).

(hh) 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.

(ii) 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

3. Section 44.3 is amended by:

a. Revising paragraph (b);

b. Revising paragraph (d)(3), (d)(8), and (d)(9), and adding paragraphs (d)(10), (11), 

(12), and (13);

c. Redesignating paragraphs (e)(5) through (e)(13) as paragraphs (e)(6) through (e)(14);

d. Adding new paragraph (e)(5); and
471

e. Revising paragraph (e)(11), (12), and (14).

The revisions and additions read as follows:

§ 44.3 Prohibition on proprietary trading.

* * * * *

(b) Definition of trading account. (1) Trading account means:

(i) 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 actual or expected 

short-term price movements, realizing short-term arbitrage profits, or hedging one or more of the 

positions resulting from the purchases or sales of financial instruments described in this 

paragraph;

(ii) Any account that is used by a banking entity to 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 

with which the banking entity is consolidated for regulatory reporting purposes, calculates riskbased capital ratios under the market risk capital rule; or

(iii) Any account that is used by a banking entity to purchase or sell one or more financial 

instruments, if the banking entity:

(A) 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
472

(B) 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.

(2)(i) A banking entity that is subject to paragraph (b)(1)(ii) in determining the scope of its 

trading account is not subject to paragraph (b)(1)(i). 

(ii) A banking entity that does not calculate risk-based capital ratios under the market risk capital 

rule and is not a consolidated affiliate for regulatory reporting purposes of a banking entity that 

calculates risk based capital ratios under the market risk capital rule may elect to apply paragraph 

(b)(1)(ii) of this section in determining the scope of its trading account as if it were subject to 

that paragraph. A banking entity that elects under this subsection to apply paragraph (b)(1)(ii) of 

this section in determining the scope of its trading account as if it were subject to that paragraph 

is not required to apply paragraph (b)(1)(i) of this section. 

(3) Consistency of account election for certain banking entities. 

(i) Any election or change to an election under paragraph (b)(2)(ii) of this section must apply to 

the electing banking entity and all of its wholly owned subsidiaries. The primary financial 

regulatory agency of a banking entity that is affiliated with but is not a wholly owned subsidiary 

of such electing banking entity may require that the banking entity be subject to this uniform 

application requirement if the primary financial regulatory agency determines that it is necessary 

to prevent evasion of the requirements of this part after notice and opportunity for response as 

provided in Subpart D. 

(ii) Transition. A banking entity that does not elect under paragraph (b)(2)(ii) of this section to 

be subject to the trading account definition in (b)(1)(ii) may continue to apply the trading 

account definition in paragraph (b)(1)(i) of this section for one year from the date on which it 
473

becomes, or becomes a consolidated affiliate for regulatory reporting purposes with, a banking 

entity that calculates risk-based capital ratios under the market risk capital rule.

(4) Rebuttable presumption for certain purchases and sales. The purchase (or sale) of a financial 

instrument by a banking entity shall be presumed not to be for the trading account of the banking 

entity under paragraph (b)(1)(i) of this section if the banking entity holds the financial instrument 

for sixty days or longer and does not transfer substantially all of the risk of the financial 

instrument within sixty days of the purchase (or sale). 

* * * * *

(d) * * *

(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 

cross-currency swap by a banking entity for the purpose of liquidity management in accordance 

with a documented liquidity management plan of the banking entity that: 

(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;
474

(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 financial 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 (d)(3) of this section; and

(vi) Is consistent with the OCC’s regulatory requirements regarding liquidity management;

* * * * * 

(8) Any purchase or sale of one or more financial instruments by a banking entity through a 

deferred compensation, stock-bonus, profit-sharing, or pension plan of the banking entity that is 

established and administered in accordance with the law of the United States or a foreign 

sovereign, if the purchase or sale is made directly or indirectly by the banking entity as trustee 

for the benefit of persons who are or were employees of the banking entity;

(9) Any purchase or sale of one or more financial instruments by a banking entity in the ordinary 

course of collecting a debt previously contracted in good faith, provided that the banking entity 
475

divests the financial instrument as soon as practicable, and in no event may the banking entity 

retain such instrument for longer than such period permitted by the OCC;

(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;

(11) Contemporaneously entering into a customer-driven swap or customer-driven securitybased swap and a matched swap or security-based swap if:

(i) The banking entity retains no more than minimal price risk; and 

(ii) The banking entity is not a registered dealer, swap dealer, or security-based swap dealer; 

(12) Any purchase or sale of one or more financial instruments that the banking entity uses to 

hedge mortgage servicing rights or mortgage servicing assets in accordance with a documented 

hedging strategy; or

(13) Any purchase or sale of a financial instrument that does not meet the definition of trading 

asset or trading liability under the applicable reporting form for a banking entity as of January 1, 

2020.

(e) * * *

(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.

* * * * * 
476

(11) Market risk capital rule covered position and trading position means a financial instrument 

that meets the criteria to be a covered position and a trading position, as those terms are 

respectively defined, without regard to whether the financial instrument is reported as a covered 

position or trading position on any applicable regulatory reporting forms: 

(i) In the case of a banking entity that is a bank holding company, savings and loan holding 

company, or insured depository institution, under the market risk capital rule that is applicable to 

the banking entity; and

(ii) In the case of a banking entity that is affiliated with a bank holding company or savings and 

loan holding company, other than a banking entity to which a market risk capital rule is 

applicable, under the market risk capital rule that is applicable to the affiliated bank holding 

company or savings and loan holding company.

(12) Market risk capital rule means the market risk capital rule that is contained in subpart F of 

12 CFR part 3 with respect to a banking entity for which the OCC is the primary financial 

regulatory agency, 12 CFR part 217 with respect to a banking entity for which the Board is the 

primary financial regulatory agency, or 12 CFR part 324 with respect to a banking entity for 

which the FDIC is the primary financial regulatory agency.

* * * * * 

(14) Trading desk means 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:

(i)(A) Structured by the banking entity to implement a well-defined business strategy;

(B) Organized to ensure appropriate setting, monitoring, and management review of the desk’s 

trading and hedging limits, current and potential future loss exposures, and strategies; and

(C) Characterized by a clearly defined unit that:
477

(1) Engages in coordinated trading activity with a unified approach to its key elements;

(2) Operates subject to a common and calibrated set of risk metrics, risk levels, and joint trading 

limits;

(3) Submits compliance reports and other information as a unit for monitoring by management; 

and

(4) Books its trades together; or

(ii) For a banking entity that calculates risk-based capital ratios under the market risk capital rule, 

or a consolidated affiliate for regulatory reporting purposes of a banking entity that calculates 

risk-based capital ratios under the market risk capital rule, established by the banking entity or its 

affiliate for purposes of market risk capital calculations under the market risk capital rule.

4. Section 44.4 is revised to read as follows:

§ 44.4. Permitted underwriting and market making-related activities.

(a) Underwriting activities—(1) Permitted underwriting activities. The prohibition contained in 

§ 44.3(a) does not apply to a banking entity’s underwriting activities conducted in accordance 

with this paragraph (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 types of securities; and (B) reasonable efforts are made to sell or otherwise reduce the 
478

underwriting position within a reasonable period, taking into account the liquidity, maturity, and 

depth of the market for the relevant types of securities;

(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)(2)(ii)(A) of this section; 

(C) Written 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; and

(D) Internal controls and ongoing monitoring and analysis of each trading desk’s compliance 

with its limits.

A banking entity with significant trading assets and liabilities may satisfy the requirements in (B) 

and (C) by complying with the requirements set forth below in paragraph (c) of this section;

(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.
479

(3) Definition of distribution. For purposes of this paragraph (a), a distribution of securities 

means:

(i) An offering of securities, whether or not subject to registration under the Securities Act of 

1933, that is distinguished from ordinary trading transactions by the presence of special selling 

efforts and selling methods; or

(ii) An offering of securities made pursuant to an effective registration statement under the 

Securities Act of 1933.

(4) Definition of underwriter. For purposes of this paragraph (a), underwriter means:

(i) A person who has agreed with an issuer or selling security holder to:

(A) Purchase securities from the issuer or selling security holder for distribution;

(B) Engage in a distribution of securities for or on behalf of the issuer or selling security holder; 

or

(C) Manage a distribution of securities for or on behalf of the issuer or selling security holder; or

(ii) A person who has agreed to participate or is participating in a distribution of such securities 

for or on behalf of the issuer or selling security holder.

(5) Definition of selling security holder. For purposes of this paragraph (a), selling security 

holder means any person, other than an issuer, on whose behalf a distribution is made.

(6) Definition of underwriting position. For purposes of this section, underwriting position

means the long or short positions in one or more securities held by a banking entity or its 

affiliate, and managed by a particular trading desk, in connection with a particular distribution of 

securities for which such banking entity or affiliate is acting as an underwriter.

(7) Definition of client, customer, and counterparty. For purposes of this paragraph (a), the 

terms client, customer, and counterparty, on a collective or individual basis, refer to market 
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participants that may transact with the banking entity in connection with a particular distribution 

for which the banking entity is acting as underwriter.

(b) Market making-related activities—(1) Permitted market making-related activities. The 

prohibition contained in § 44.3(a) does not apply to a banking entity’s market making-related 

activities conducted in accordance with this paragraph (b).

(2) Requirements. The market making-related 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, taking into account the liquidity, maturity, and depth of the market for the 

relevant types of financial instruments;

(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:
481

(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)(2)(ii) of this section; 

(D) Written 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; and

(E) Internal controls and ongoing monitoring and analysis of each trading desk’s compliance 

with its limits. 

A banking entity with significant trading assets and liabilities may satisfy the requirements in (C) 

and (D) by complying with the requirements set forth below in paragraph (c) of this section; 

(iv) The compensation arrangements of persons performing the activities described in this 

paragraph (b) are designed not to reward or incentivize prohibited proprietary trading; and

(v) The banking entity is licensed or registered to engage in activity described in this paragraph 

(b) in accordance with applicable law.
482

(3) Definition of client, customer, and counterparty. For purposes of paragraph (b) of this 

section, the terms client, customer, and counterparty, on a collective or individual basis refer to 

market participants that make use of the banking entity’s market making-related services by 

obtaining such services, responding to quotations, or entering into a continuing relationship with 

respect to such services, provided that:

(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 § 44.2(ee) of this 

part, unless:

(A) The trading desk documents how and why a particular trading desk or other organizational 

unit of the entity should be treated as a client, customer, or counterparty of the trading desk for 

purposes of paragraph (b)(2) of this section; or

(B) The purchase or sale by the trading desk is conducted anonymously on an exchange or 

similar trading facility that permits trading on behalf of a broad range of market participants.

(4) Definition of financial exposure. For purposes of this section, financial exposure means the 

aggregate risks of one or more financial instruments and any associated loans, commodities, or 

foreign exchange or currency, held by a banking entity or its affiliate and managed by a 

particular trading desk as part of the trading desk’s market making-related activities.

(5) Definition of market-maker positions. For the purposes of this section, 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 (b)(2)(i) of this section, that are managed 

by the trading desk, including the trading desk’s open positions or exposures arising from open 

transactions.
483

(c) Rebuttable presumption of compliance.

(1) Internal Limits.

(i) A banking entity shall be presumed to meet the requirement in paragraph (a)(2)(ii)(A) or 

(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 internal limits for the 

relevant trading desk as described in paragraph (c)(1)(ii) of this section.

(ii)(A) With respect to underwriting activities conducted pursuant to paragraph (a) of this 

section, the presumption described in paragraph (c)(1)(i) of this section shall be available to each 

trading desk that establishes, implements, maintains, and enforces internal limits 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.

Such internal limits should take into account the liquidity, maturity, and depth of the market for 

the relevant types of securities.

(B) With respect to market making-related activities conducted pursuant to paragraph (b) of this 

section, the presumption described in paragraph (c)(1)(i) of this section shall be available to each 

trading desk that establishes, implements, maintains, and enforces internal limits 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, that address the:
484

(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.

Such internal limits should take into account the liquidity, maturity, and depth of the market for 

the relevant types of financial instruments.

(2) Supervisory review and oversight. The limits described in paragraph (c)(1) of this section 

shall be subject to supervisory review and oversight by the OCC on an ongoing basis. 

(3) Limit Breaches and Increases. (i) With respect to any limit set pursuant to paragraphs

(c)(1)(ii)(A) or (c)(1)(ii)(B) of this section, a banking entity shall maintain and make available to 

the OCC upon request records regarding (1) any limit that is exceeded and (2) any temporary or 

permanent increase to any limit(s), in each case in the form and manner as directed by the OCC.

(ii) In the event of a breach or increase of any limit set pursuant to paragraphs (c)(1)(ii)(A) or 

(c)(1)(ii)(B) of this section, the presumption described in paragraph (c)(1)(i) of this section shall 

continue to be available only if the banking entity:

(1) Takes action as promptly as possible after a breach to bring the trading desk into compliance; 

and

(2) Follows established written authorization procedures, including escalation procedures that 

require review and approval of any trade that exceeds 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.
485

(4) Rebutting the presumption. The presumption in paragraph (c)(1)(i) of this section may be 

rebutted by the OCC if the OCC determines, taking into account the liquidity, maturity, and 

depth of the market for the relevant types of financial instruments and 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’s rebuttal of the 

presumption in paragraph (c)(1)(i) must be made in accordance with the notice and response 

procedures in Subpart D.

5. Section 44.5 is revised 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
486

(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
487

(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:

* * * * *
488

(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 limits for the 

trading desk purchasing or selling the financial instrument for hedging activities undertaken for 

one or more other trading desks. The 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); removing paragraphs (e)(4) and (e)(6); 

and redesignating paragraph (e)(5) as paragraph (e)(4). The revision, removal, and redesignation

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 paragraph (e) of this 

section 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;
489

(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 risk-mitigating 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

7. Section 44.10 is amended by revising paragraph (c)(7)(ii) and paragraph (c)(8)(i)(A) to read as 

follows:

§ 44.10 Prohibition on Acquiring or Retaining an Ownership Interest in and Having 

Certain Relationships with a Covered Fund

* * * * *

(c) * * *

(7) * * *

(ii) Participates in the profits and losses of the separate account other than in compliance with 

applicable requirements regarding bank owned life insurance.

* * * * *

(8) * * *

(i) * * *

(A) Loans as defined in § 44.2(t) of subpart A;

* * * * *
490

8. Section 44.11 is amended by revising paragraph (c) to read 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 either a 

securitizer, as that term is used in section 15G(a)(3) of the Exchange Act (15 U.S.C. 78o11(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 Permitted investment in a covered fund.
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9. Section 44.12 is amended by redesignating the second instance of paragraph (e)(2)(vi) as 

paragraph (e)(2)(vii).

10. Section 44.13 is amended by revising paragraphs (a), (b)(3), (b)(4) and (c) 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
492

(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 
493

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.

(4) An activity or investment occurs solely outside of the United States for purposes of paragraph 

(b)(1)(iv) of this section only if:

(i) 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 organized under the laws of 

the United States or of any State;

(ii) 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 United States or

organized under the laws of the United States or of any State; and

(iii) 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.

* * * * *

(c) Permitted covered fund interests and activities by a regulated insurance company. The

prohibition contained in § 44.10(a) of this subpart does not apply to the acquisition or retention 
494

by an insurance company, or an affiliate thereof, of any ownership interest in, or the sponsorship 

of, a covered fund only if:

(1) The insurance company or its affiliate acquires and retains the ownership interest solely for 

the general account of the insurance company or for one or more separate accounts established 

by the insurance company;

(2) The acquisition and retention of the ownership interest is conducted in compliance with, and 

subject to, the insurance company investment laws and regulations of the State or jurisdiction in 

which such insurance company is domiciled; and

(3) The appropriate Federal banking agencies, after consultation with the Financial Stability 

Oversight Council and the relevant insurance commissioners of the States and foreign 

jurisdictions, as appropriate, have not jointly determined, after notice and comment, that a 

particular law or regulation described in paragraph (c)(2) of this section is insufficient to protect 

the safety and soundness of the banking entity, or the financial stability of the United States.

11. Section 44.14 is amended by revising paragraph (a)(2)(ii)(B) to read 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
495

* * * * *

Subpart D — Compliance Program Requirement; Violations

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 paragraphs (g), (h), and (i).

The revisions and additions 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:

* * * * *
496

(c) CEO attestation. The CEO of a banking entity that has significant trading assets and 

liabilities 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 to establish, 

maintain, enforce, review, test and modify the compliance program required by paragraph (b) of 

this section in a manner 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.

(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 subject to the Appendix shall report the information 

required by the Appendix for each quarter within 30 days of the end of the quarter.

(e) Additional documentation for covered funds. A banking entity with significant trading assets 

and liabilities shall maintain records that include:

* * * * * 

(f) * * *
497

(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. 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. The OCC’s rebuttal of the 

presumption in this paragraph must be made in accordance with the notice and response 

procedures in paragraph (i) of this Subpart.

(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 
498

a banking entity with moderate trading assets and liabilities, as applicable. The OCC’s exercise 

of this reservation of authority must be made in accordance with the notice and response 

procedures in paragraph (i) of this Subpart.

(i) Notice and Response Procedures.

(1) Notice. The OCC will notify the banking entity in writing of any determination requiring 

notice under this part and will provide an explanation of the determination. 

(2) Response. The banking entity may respond to any or all items in the notice described in 

paragraph (i)(1) of this section. The response should include any matters that the banking entity 

would have the OCC consider in deciding whether to make the determination. 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 of the time period at the time of notice, or with the consent of the 

banking entity. In its discretion, the OCC may extend the time period for good cause. 

(3) 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. 

(4) The OCC will notify the banking entity of the decision in writing. The notice will include an 

explanation of the decision.

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
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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:

(1) Better understanding and evaluating the scope, type, and profile of the banking entity’s 

covered trading activities;

(2) Monitoring the banking entity’s covered trading activities;

(3) Identifying covered trading activities that warrant further review or examination by the 

banking entity to verify compliance with the proprietary trading restrictions;

(4) Evaluating whether the covered trading activities of trading desks engaged in market makingrelated activities subject to § 44.4(b) are consistent with the requirements governing permitted 

market making-related activities;

(5) 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 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;
500

(6) 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

(7) 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 
501

otherwise-permitted 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(d), 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.
502

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. Internal Limits and Usage;

ii. Value-at-Risk;

iii. Comprehensive Profit and Loss Attribution;

iv. Positions; and

v. Transaction Volumes.

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 may 

provide an optional 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 
503

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;

v. A list identifying each Agency receiving the submission of the trading desk;

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. An Internal Limits Information Schedule that provides identifying and descriptive 

information for each limit reported pursuant to the Internal Limits and Usage quantitative 

measurement, including the name of the limit, a unique identification label for the limit, a 

description of the limit, the unit of measurement for the limit, the type of limit, and identification 

of the corresponding risk factor attribution in the particular case that the limit type is a limit on a 

risk factor sensitivity and profit and loss attribution to the same risk factor is reported; and
504

2. 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.

d. Narrative Statement

Each banking entity made subject to this appendix by § 44.20 may submit in a separate 

electronic document a Narrative Statement to the OCC with any information the banking entity 

views as relevant for assessing the information reported. The Narrative Statement may include 

further description of or changes to calculation methods, identification of material events, 

description of and reasons for changes in the banking entity’s trading desk structure or trading 

desk strategies, and when any such changes occurred.

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 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 
505

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. Internal Limits and Usage

i. Description: For purposes of this appendix, Internal Limits are the constraints that define the 

amount of risk and the positions 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. Internal

limits and their usage are key compliance and 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 trading 

desk’s risk limits, commonly including a limit on “Value-at-Risk,” are useful 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)(C) and § 44.5(b)(1)(i)(A) must meet the applicable requirements under § 

44.4(b)(2)(iii)(C) and § 44.5(b)(1)(i)(A) and also must include appropriate metrics for the trading 

desk limits including, at a minimum, “Value-at-Risk” except to the extent the “Value-at-Risk” 

metric is 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.
506

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 

Internal 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. 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 ninetynine percent confidence level over a one-day period, based on current market conditions. 

ii. Calculation Period: One trading day.

iii. Measurement Frequency: Daily.

iv. Applicability: All trading desks engaged in covered trading activities. 

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 two 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”); and (ii) profit and loss 

attributable to new positions resulting from the current day’s trading activity (“new positions”).
507

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 (i) changes in 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 from existing positions that is not attributed to 

changes in specific risk factors and other factors must be allocated to a residual category. 

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.
508

c. Positions and Transaction Volumes 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, short securities positions, derivatives receivables, and 

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-making-related activity, respectively.

2. Transaction Volumes

i. Description: For purposes of this appendix, Transaction Volumes measures three 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; and (iii) trading desks and other organizational units where the transaction is 

booked into either the same banking entity or an affiliated banking entity. For securities, value 

means gross market value. For derivatives, value means gross notional value. For purposes of 

 1 See § 44.2(h), (aa). 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.
509

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 § 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-making-related activity, respectively.

 2 See § 44.2(h), (aa).
510

BOARD OF GOVERNORS OF THE FEDERAL RESERVE

12 CFR Chapter II

Authority and Issuance

For the reasons stated in the Common Preamble, the Board amends chapter I of Title 12, Code of 

Federal Regulations as follows:

PART 248 PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND 

RELATIONSHIPS WITH COVERED FUNDS (Regulation VV)

1. 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

2. Section 248.2 is revised to read 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) Bank holding company has the same meaning as in section 2 of the Bank Holding Company 

Act of 1956 (12 U.S.C. 1841).

(c) Banking entity. (1) Except as provided in paragraph (c)(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 
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International Banking Act of 1978 (12 U.S.C. 3106); and

(iv) Any affiliate or subsidiary of any entity described in paragraphs (c)(1)(i), (ii), or (iii) of this 

section. 

(2) Banking entity does not include:

(iv) A covered fund that is not itself a banking entity under paragraphs (c)(1)(i), (ii), or (iii) of 

this section; 

(v) 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 (c)(1)(i), (ii), or (iii) of this 

section; or

(vi) 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.

(d) Board means the Board of Governors of the Federal Reserve System.

(e) CFTC means the Commodity Futures Trading Commission.

(f) Dealer has the same meaning as in section 3(a)(5) of the Exchange Act (15 U.S.C. 78c(a)(5)).

(g) Depository institution has the same meaning as in section 3(c) of the Federal Deposit 

Insurance Act (12 U.S.C. 1813(c)).

(h) Derivative. (1) Except as provided in paragraph (h)(2) of this section, derivative means:
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(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, 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)).

(i) Employee includes a member of the immediate family of the employee.
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(j) Exchange Act means the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).

(k) Excluded commodity has the same meaning as in section 1a(19) of the Commodity Exchange 

Act (7 U.S.C. 1a(19)).

(l) FDIC means the Federal Deposit Insurance Corporation.

(m) Federal banking agencies means the Board, the Office of the Comptroller of the Currency, 

and the FDIC.

(n) Foreign banking organization has the same meaning as in § 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.

(o) 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.

(p) General account means all of the assets of an insurance company except those allocated to 

one or more separate accounts.

(q) 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).

(r) 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:
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(1) 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)); or

(2) an insured depository institution if it has, and if every company that controls it has, total 

consolidated assets of $10 billion or less and total trading assets and trading liabilities, on a 

consolidated basis, that are 5 percent or less of total consolidated assets.

(s) Limited trading assets and liabilities.

(1) Limited 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 (excluding trading assets and liabilities attributable to trading activities permitted 

pursuant to § 248.6(a)(1) and (2) of subpart B) 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; and 

(ii) 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.

(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 (s) means trading assets and liabilities 

(excluding trading assets and liabilities attributable to trading activities permitted pursuant to 

§ 248.6(a)(1) and (2) of subpart B) 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 (s) 

means the trading assets and liabilities (excluding trading assets and liabilities attributable to 

trading activities permitted pursuant to § 248.6(a)(1) and (2) of subpart B) of the combined U.S. 

operations of the top-tier foreign banking organization (including all subsidiaries, affiliates, 
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branches, and agencies of the foreign banking organization operating, located, or organized in 

the United States). 

(ii) For purposes of paragraph (s)(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. For purposes of 

paragraph (s)(3)(i) of this section, all foreign operations of a U.S. agency, branch, or subsidiary 

of a foreign banking organization are considered to be located in the United States, including 

branches outside the United States that are managed or controlled by a U.S. branch or agency of 

the foreign banking organization, for purposes of calculating the banking entity’s U.S. trading 

assets and liabilities.

(t) Loan means any loan, lease, extension of credit, or secured or unsecured receivable that is not 

a security or derivative. 

(u) 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.

(v) Primary financial regulatory agency has the same meaning as in section 2(12) of the DoddFrank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5301(12)).

(w) 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 
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extinguishing of rights or obligations under, a derivative, as the context may require.

(x) 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)).

(y) SEC means the Securities and Exchange Commission.

(z) 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.

(aa) Security has the meaning specified in section 3(a)(10) of the Exchange Act (15 U.S.C. 

78c(a)(10)).

(bb) 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)).

(cc) Security future has the meaning specified in section 3(a)(55) of the Exchange Act (15 U.S.C. 

78c(a)(55)).

(dd) 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.
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(ee) 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 

$20 billion; 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) of 

this section, trading assets and liabilities for purposes of paragraph (ee) of this section means 

trading assets and liabilities (excluding trading assets and liabilities attributable to trading 

activities permitted pursuant to § 248.6(a)(1) and (2) of subpart B) 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 paragraph (ee) of this 

section means the trading assets and liabilities (excluding trading assets and liabilities 

attributable to trading activities permitted pursuant to § 248.6(a)(1) and (2) of subpart B) 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 as well as branches outside the United States that are managed or 

controlled by a branch or agency of the foreign banking entity operating, located or organized in 

the United States). 
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(ii) For purposes of paragraph (ee)(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. For purposes of 

paragraph (ee)(3)(i) of this section, all foreign operations of a U.S. agency, branch, or subsidiary 

of a foreign banking organization are considered to be located in the United States for purposes 

of calculating the banking entity’s U.S. trading assets and liabilities.

(ff) 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.

(gg) Subsidiary has the same meaning as in section 2(d) of the Bank Holding Company Act of 

1956 (12 U.S.C. 1841(d)).

(hh) 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.

(ii) 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

3. Section 248.3 is amended by:

a. Revising paragraph (b);

b. Revising paragraph (d)(3), (d)(8), and (d)(9), and adding paragraphs (d)(10), (11), (12), 

and (13);

c. Redesignating paragraphs (e)(5) through (e)(13) as paragraphs (e)(6) through (e)(14);

d. Adding new paragraph (e)(5); and
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e. Revising paragraph (e)(11), (12), and (14).

The revisions and additions read as follows:

§ 248.3 Prohibition on proprietary trading.

* * * * *

(b) Definition of trading account. (1) Trading account means:

(i) 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 actual or expected 

short-term price movements, realizing short-term arbitrage profits, or hedging one or more of the 

positions resulting from the purchases or sales of financial instruments described in this 

paragraph;

(ii) Any account that is used by a banking entity to 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 

with which the banking entity is consolidated for regulatory reporting purposes, calculates riskbased capital ratios under the market risk capital rule; or

(iii) Any account that is used by a banking entity to purchase or sell one or more financial 

instruments, if the banking entity:

(A) 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
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(B) 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.

(2)(i) A banking entity that is subject to paragraph (b)(1)(ii) in determining the scope of its 

trading account is not subject to paragraph (b)(1)(i). 

(ii) A banking entity that does not calculate risk-based capital ratios under the market risk capital 

rule and is not a consolidated affiliate for regulatory reporting purposes of a banking entity that 

calculates risk based capital ratios under the market risk capital rule may elect to apply paragraph 

(b)(1)(ii) of this section in determining the scope of its trading account as if it were subject to 

that paragraph. A banking entity that elects under this subsection to apply paragraph (b)(1)(ii) of 

this section in determining the scope of its trading account as if it were subject to that paragraph 

is not required to apply paragraph (b)(1)(i) of this section. 

(3) Consistency of account election for certain banking entities. 

(i) Any election or change to an election under paragraph (b)(2)(ii) of this section must apply to 

the electing banking entity and all of its wholly owned subsidiaries. The primary financial 

regulatory agency of a banking entity that is affiliated with but is not a wholly owned subsidiary 

of such electing banking entity may require that the banking entity be subject to this uniform 

application requirement if the primary financial regulatory agency determines that it is necessary 

to prevent evasion of the requirements of this part after notice and opportunity for response as 

provided in Subpart D. 

(ii) Transition. A banking entity that does not elect under paragraph (b)(2)(ii) of this section to 

be subject to the trading account definition in (b)(1)(ii) may continue to apply the trading 

account definition in paragraph (b)(1)(i) of this section for one year from the date on which it 
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becomes, or becomes a consolidated affiliate for regulatory reporting purposes with, a banking 

entity that calculates risk-based capital ratios under the market risk capital rule.

(4) Rebuttable presumption for certain purchases and sales. The purchase (or sale) of a financial 

instrument by a banking entity shall be presumed not to be for the trading account of the banking 

entity under paragraph (b)(1)(i) of this section if the banking entity holds the financial instrument 

for sixty days or longer and does not transfer substantially all of the risk of the financial 

instrument within sixty days of the purchase (or sale). 

* * * * *

(d) * * *

(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 

cross-currency swap by a banking entity for the purpose of liquidity management in accordance 

with a documented liquidity management plan of the banking entity that: 

(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;
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(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 financial 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 (d)(3) of this section; and

(vi) Is consistent with the Board’s supervisory requirements regarding liquidity management;

* * * * * 

(8) Any purchase or sale of one or more financial instruments by a banking entity through a 

deferred compensation, stock-bonus, profit-sharing, or pension plan of the banking entity that is 

established and administered in accordance with the law of the United States or a foreign 

sovereign, if the purchase or sale is made directly or indirectly by the banking entity as trustee 

for the benefit of persons who are or were employees of the banking entity;

(9) Any purchase or sale of one or more financial instruments by a banking entity in the ordinary 

course of collecting a debt previously contracted in good faith, provided that the banking entity 
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divests the financial instrument as soon as practicable, and in no event may the banking entity 

retain such instrument for longer than such period permitted by the Board;

(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;

(11) Contemporaneously entering into a customer-driven swap or customer-driven securitybased swap and a matched swap or security-based swap if:

(i) The banking entity retains no more than minimal price risk; and 

(ii) The banking entity is not a registered dealer, swap dealer, or security-based swap dealer; 

(12) Any purchase or sale of one or more financial instruments that the banking entity uses to 

hedge mortgage servicing rights or mortgage servicing assets in accordance with a documented 

hedging strategy; or

(13) Any purchase or sale of a financial instrument that does not meet the definition of trading 

asset or trading liability under the applicable reporting form for a banking entity as of January 1, 

2020.

(e) * * *

(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.

* * * * * 
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(11) Market risk capital rule covered position and trading position means a financial instrument 

that meets the criteria to be a covered position and a trading position, as those terms are 

respectively defined, without regard to whether the financial instrument is reported as a covered 

position or trading position on any applicable regulatory reporting forms: 

(i) In the case of a banking entity that is a bank holding company, savings and loan holding 

company, or insured depository institution, under the market risk capital rule that is applicable to 

the banking entity; and

(ii) In the case of a banking entity that is affiliated with a bank holding company or savings and 

loan holding company, other than a banking entity to which a market risk capital rule is 

applicable, under the market risk capital rule that is applicable to the affiliated bank holding 

company or savings and loan holding company.

(12) Market risk capital rule means the market risk capital rule that is contained in subpart F of 

12 CFR part 3 with respect to a banking entity for which the OCC is the primary financial 

regulatory agency, 12 CFR part 217 with respect to a banking entity for which the Board is the 

primary financial regulatory agency, or 12 CFR part 324 with respect to a banking entity for 

which the FDIC is the primary financial regulatory agency.

* * * * * 

(14) Trading desk means 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:

(i)(A) Structured by the banking entity to implement a well-defined business strategy;

(B) Organized to ensure appropriate setting, monitoring, and management review of the desk’s 

trading and hedging limits, current and potential future loss exposures, and strategies; and

(C) Characterized by a clearly defined unit that:
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(1) Engages in coordinated trading activity with a unified approach to its key elements;

(2) Operates subject to a common and calibrated set of risk metrics, risk levels, and joint trading 

limits;

(3) Submits compliance reports and other information as a unit for monitoring by management; and

(4) Books its trades together; or

(ii) For a banking entity that calculates risk-based capital ratios under the market risk capital rule, 

or a consolidated affiliate for regulatory reporting purposes of a banking entity that calculates 

risk-based capital ratios under the market risk capital rule, established by the banking entity or its 

affiliate for purposes of market risk capital calculations under the market risk capital rule.

4. Section 248.4 is revised to read as follows:

§ 248.4 Permitted underwriting and market making-related activities.

(a) Underwriting activities—(1) Permitted underwriting activities. The prohibition contained in 

§ 248.3(a) does not apply to a banking entity’s underwriting activities conducted in accordance 

with this paragraph (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 types of securities; and (B) reasonable efforts are made to sell or otherwise reduce the 
526

underwriting position within a reasonable period, taking into account the liquidity, maturity, and 

depth of the market for the relevant types of securities; 

(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)(2)(ii)(A) of this section; 

(C) Written 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; and

(D) Internal controls and ongoing monitoring and analysis of each trading desk’s compliance 

with its limits.

A banking entity with significant trading assets and liabilities may satisfy the requirements in (B) 

and (C) by complying with the requirements set forth below in paragraph (c) of this section;

(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.
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(3) Definition of distribution. For purposes of this paragraph (a), a distribution of securities 

means:

(i) An offering of securities, whether or not subject to registration under the Securities Act of 

1933, that is distinguished from ordinary trading transactions by the presence of special selling 

efforts and selling methods; or

(ii) An offering of securities made pursuant to an effective registration statement under the 

Securities Act of 1933.

(4) Definition of underwriter. For purposes of this paragraph (a), underwriter means:

(i) A person who has agreed with an issuer or selling security holder to:

(A) Purchase securities from the issuer or selling security holder for distribution;

(B) Engage in a distribution of securities for or on behalf of the issuer or selling security holder; 

or

(C) Manage a distribution of securities for or on behalf of the issuer or selling security holder; or

(ii) A person who has agreed to participate or is participating in a distribution of such securities 

for or on behalf of the issuer or selling security holder.

(5) Definition of selling security holder. For purposes of this paragraph (a), selling security 

holder means any person, other than an issuer, on whose behalf a distribution is made.

(6) Definition of underwriting position. For purposes of this section, underwriting position

means the long or short positions in one or more securities held by a banking entity or its 

affiliate, and managed by a particular trading desk, in connection with a particular distribution of 

securities for which such banking entity or affiliate is acting as an underwriter.

(7) Definition of client, customer, and counterparty. For purposes of this paragraph (a), the 

terms client, customer, and counterparty, on a collective or individual basis, refer to market 
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participants that may transact with the banking entity in connection with a particular distribution 

for which the banking entity is acting as underwriter.

(b) Market making-related activities—(1) Permitted market making-related activities. The 

prohibition contained in § 248.3(a) does not apply to a banking entity’s market making-related 

activities conducted in accordance with this paragraph (b).

(2) Requirements. The market making-related 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, taking into account the liquidity, maturity, and depth of the market for the 

relevant types of financial instruments; 

(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:
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(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)(2)(ii) of this section; 

(D) Written 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; and

(E) Internal controls and ongoing monitoring and analysis of each trading desk’s compliance 

with its limits. 

A banking entity with significant trading assets and liabilities may satisfy the requirements in (C) 

and (D) by complying with the requirements set forth below in paragraph (c) of this section; 

(iv) The compensation arrangements of persons performing the activities described in this 

paragraph (b) are designed not to reward or incentivize prohibited proprietary trading; and

(v) The banking entity is licensed or registered to engage in activity described in this paragraph 

(b) in accordance with applicable law.
530

(3) Definition of client, customer, and counterparty. For purposes of paragraph (b) of this 

section, the terms client, customer, and counterparty, on a collective or individual basis refer to 

market participants that make use of the banking entity’s market making-related services by 

obtaining such services, responding to quotations, or entering into a continuing relationship with 

respect to such services, provided that:

(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 § 248.2(ee) of this 

part, unless:

(C) The trading desk documents how and why a particular trading desk or other organizational 

unit of the entity should be treated as a client, customer, or counterparty of the trading desk for 

purposes of paragraph (b)(2) of this section; or

(D) The purchase or sale by the trading desk is conducted anonymously on an exchange or 

similar trading facility that permits trading on behalf of a broad range of market participants.

(6) Definition of financial exposure. For purposes of this section, financial exposure means the 

aggregate risks of one or more financial instruments and any associated loans, commodities, or 

foreign exchange or currency, held by a banking entity or its affiliate and managed by a 

particular trading desk as part of the trading desk’s market making-related activities.

(7) Definition of market-maker positions. For the purposes of this section, 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 (b)(2)(i) of this section, that are managed 

by the trading desk, including the trading desk’s open positions or exposures arising from open 

transactions.
531

(c) Rebuttable presumption of compliance.

(1) Internal Limits.

(i) A banking entity shall be presumed to meet the requirement in paragraph (a)(2)(ii)(A) or 

(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 internal limits for the 

relevant trading desk as described in paragraph (c)(1)(ii) of this section.

(ii)(A) With respect to underwriting activities conducted pursuant to paragraph (a) of this 

section, the presumption described in paragraph (c)(1)(i) of this section shall be available to each 

trading desk that establishes, implements, maintains, and enforces internal limits 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.

Such internal limits should take into account the liquidity, maturity, and depth of the market for 

the relevant types of securities.

(B) With respect to market making-related activities conducted pursuant to paragraph (b) of this 

section, the presumption described in paragraph (c)(1)(i) of this section shall be available to each 

trading desk that establishes, implements, maintains, and enforces internal limits 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, that address the:
532

(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.

Such internal limits should take into account the liquidity, maturity, and depth of the market for 

the relevant types of financial instruments.

(2) Supervisory review and oversight. The limits described in paragraph (c)(1) of this section 

shall be subject to supervisory review and oversight by the Board on an ongoing basis. 

(3) Limit Breaches and Increases. (i) With respect to any limit set pursuant to paragraphs 

(c)(1)(ii)(A) or (c)(1)(ii)(B) of this section, a banking entity shall maintain and make available to 

the Board upon request records regarding (1) any limit that is exceeded and (2) any temporary or 

permanent increase to any limit(s), in each case in the form and manner as directed by the Board.

(ii) In the event of a breach or increase of any limit set pursuant to paragraphs (c)(1)(ii)(A) or 

(c)(1)(ii)(B) of this section, the presumption described in paragraph (c)(1)(i) of this section shall 

continue to be available only if the banking entity:

(1) Takes action as promptly as possible after a breach to bring the trading desk into compliance; 

and

(2) Follows established written authorization procedures, including escalation procedures that 

require review and approval of any trade that exceeds 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.
533

(4) Rebutting the presumption. The presumption in paragraph (c)(1)(i) of this section may be 

rebutted by the Board if the Board determines, taking into account the liquidity, maturity, and 

depth of the market for the relevant types of financial instruments and 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’s rebuttal of the 

presumption in paragraph (c)(1)(i) must be made in accordance with the notice and response 

procedures in Subpart D.

5. Section 248.5 is revised 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
534

(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
535

(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:
536

* * * * *

(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 limits for the 

trading desk purchasing or selling the financial instrument for hedging activities undertaken for 

one or more other trading desks. The 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 248.6 is amended by revising paragraph (e)(3); removing paragraphs (e)(4) and (e)(6); 

and redesignating paragraph (e)(5) as paragraph (e)(4). The revisions, removals and 

redesignations 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 paragraph (e) of this 

section if:
537

(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 risk-mitigating 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

7. Section 248.10 is amended by revising paragraph (c)(7)(ii) and paragraph (c)(8)(i)(A) to read 

as follows:

§ 248.10 Prohibition on Acquiring or Retaining an Ownership Interest in and Having 

Certain Relationships with a Covered Fund

* * * * *

(c) * * *

(7) * * *

(ii) Participates in the profits and losses of the separate account other than in compliance with 

applicable requirements regarding bank owned life insurance.

* * * * *

(8) * * *
538

(i) * * *

(A) Loans as defined in § 248.2(t) of subpart A;

* * * * *

8. Section 248.11 is amended by revising paragraph (c) to read 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. 78o11(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 
539

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 Permitted investment in a covered fund. 

9. Section 248.12 is amended by:

a. Removing paragraph (e)(2)(vii); and

b. Redesignating the second instance of paragraph (e)(2)(vi) as paragraph (e)(2)(vii).

10. Section 248.13 is amended by revising paragraphs (a), (b)(3), (b)(4) and (c) 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:
540

(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 
541

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.

(4) An activity or investment occurs solely outside of the United States for purposes of paragraph 

(b)(1)(iv) of this section only if:

(i) 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 organized under the laws of 

the United States or of any State;

(ii) 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 United States or 

organized under the laws of the United States or of any State; and

(iii) 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 
542

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.

* * * * *

(c) Permitted covered fund interests and activities by a regulated insurance company. The 

prohibition contained in § 248.10(a) of this subpart does not apply to the acquisition or retention 

by an insurance company, or an affiliate thereof, of any ownership interest in, or the sponsorship 

of, a covered fund only if:

(1) The insurance company or its affiliate acquires and retains the ownership interest solely for 

the general account of the insurance company or for one or more separate accounts established 

by the insurance company;

(2) The acquisition and retention of the ownership interest is conducted in compliance with, and 

subject to, the insurance company investment laws and regulations of the State or jurisdiction in 

which such insurance company is domiciled; and

(3) The appropriate Federal banking agencies, after consultation with the Financial Stability 

Oversight Council and the relevant insurance commissioners of the States and foreign 

jurisdictions, as appropriate, have not jointly determined, after notice and comment, that a 

particular law or regulation described in paragraph (c)(2) of this section is insufficient to protect 

the safety and soundness of the banking entity, or the financial stability of the United States.

11. Section 248.14 is amended by revising paragraph (a)(2)(ii)(B) to read as follows:

§ 248.14 Limitations on relationships with a covered fund.

(a) * * *

(2) * * *

(ii) * * *
543

(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

12. Section 248.20 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 paragraphs (g), (h), and (i).

The revisions and additions read 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 
544

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. The CEO of a banking entity that has significant trading assets and 

liabilities 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 to 

establish, maintain, enforce, review, test and modify the compliance program required by 

paragraph (b) of this section in a manner 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.

(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.
545

(2) Frequency of reporting: Unless the Board notifies the banking entity in writing that it must 

report on a different basis, a banking entity subject to the Appendix shall report the information 

required by the Appendix for each quarter within 30 days of the end of the quarter.

(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. If upon examination or audit, the Board 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 Board may require the banking entity to be treated 

under this part as if it did not have limited trading assets and liabilities. The Board’s rebuttal of 
546

the presumption in this paragraph must be made in accordance with the notice and response 

procedures in paragraph (i) of this Subpart.

(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. The Board’s exercise 

of this reservation of authority must be made in accordance with the notice and response 

procedures in paragraph (i) of this Subpart.

(i) Notice and Response Procedures.

(1) Notice. The Board will notify the banking entity in writing of any determination requiring 

notice under this part and will provide an explanation of the determination. 

(2) Response. The banking entity may respond to any or all items in the notice described in 

paragraph (i)(1) of this section. The response should include any matters that the banking entity 

would have the Board consider in deciding whether to make the determination. 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 of the time period at the time of notice, or with the consent of 

the banking entity. In its discretion, the Board may extend the time period for good cause. 
547

(3) 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. 

(4) The Board will notify the banking entity of the decision in writing. The notice will include an 

explanation of the decision.

13. Remove Appendix A and Appendix B to Part 248 and add Appendix to Part 248—

Reporting and Recordkeeping Requirements for Covered Trading Activities

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:

(1) Better understanding and evaluating the scope, type, and profile of the banking entity’s 

covered trading activities;

(2) Monitoring the banking entity’s covered trading activities;
548

(3) Identifying covered trading activities that warrant further review or examination by the 

banking entity to verify compliance with the proprietary trading restrictions;

(4) Evaluating whether the covered trading activities of trading desks engaged in market makingrelated activities subject to § 248.4(b) are consistent with the requirements governing permitted 

market making-related activities;

(5) 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 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;

(6) 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 Board of such activities; and

(7) 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 
549

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 

otherwise-permitted 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 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.
550

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 may include in its covered trading activity trading 

conducted under § 248.3(d), 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. Internal Limits and Usage;

ii. Value-at-Risk;

iii. Comprehensive Profit and Loss Attribution;

iv. Positions; and

v. Transaction Volumes.
551

2. Trading desk information. Each banking entity made subject to this appendix by § 248.20 

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 § 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 may 

provide an optional 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;

v. A list identifying each Agency receiving the submission of the trading desk;
552

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. An Internal Limits Information Schedule that provides identifying and descriptive 

information for each limit reported pursuant to the Internal Limits and Usage quantitative 

measurement, including the name of the limit, a unique identification label for the limit, a 

description of the limit, the unit of measurement for the limit, the type of limit, and identification 

of the corresponding risk factor attribution in the particular case that the limit type is a limit on a 

risk factor sensitivity and profit and loss attribution to the same risk factor is reported; and

2. 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.

d. Narrative Statement

Each banking entity made subject to this appendix by § 248.20 may submit in a separate 

electronic document a Narrative Statement to the Board with any information the banking entity 

views as relevant for assessing the information reported. The Narrative Statement may include 

further description of or changes to calculation methods, identification of material events, 
553

description of and reasons for changes in the banking entity’s trading desk structure or trading 

desk strategies, and when any such changes occurred.

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 Trading Desk Information, the Quantitative Measurements 

Identifying Information, and each applicable quantitative measurement electronically to the 

Board on the reporting schedule established in § 248.20 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 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. Internal Limits and Usage

i. Description: For purposes of this appendix, Internal Limits are the constraints that define the 

amount of risk and the positions that a trading desk is permitted to take at a point in time, as 
554

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. Internal 

limits and their usage are key compliance and 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 trading 

desk’s risk limits, commonly including a limit on “Value-at-Risk,” are useful 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)(C) and § 248.5(b)(1)(i)(A) must meet the applicable requirements under § 

248.4(b)(2)(iii)(C) and § 248.5(b)(1)(i)(A) and also must include appropriate metrics for the 

trading desk limits including, at a minimum, “Value-at-Risk” except to the extent the “Value-atRisk” metric is 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 

Internal 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. 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 ninetynine percent confidence level over a one-day period, based on current market conditions. 
555

ii. Calculation Period: One trading day.

iii. Measurement Frequency: Daily.

iv. Applicability: All trading desks engaged in covered trading activities. 

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 two 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”); and (ii) profit and loss 

attributable to new positions resulting from the current day’s trading activity (“new positions”).

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 (i) changes in 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.
556

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 from existing positions that is not attributed to 

changes in specific risk factors and other factors must be allocated to a residual category. 

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 and Transaction Volumes 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, short securities positions, derivatives receivables, and 

derivatives payables.

 1 See § 248.2(h), (aa). 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.
557

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.

2. Transaction Volumes

i. Description: For purposes of this appendix, Transaction Volumes measures three 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; and (iii) trading desks and other organizational units where the transaction is 

booked into either the same banking entity or 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 § 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.

 2 See § 248.2(h), (aa).
558

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.
559

Federal Deposit Insurance Corporation

12 CFR Chapter I 

Authority and Issuance

For the reasons stated in the Common Preamble, the Federal Deposit Insurance 

Corporation amends chapter III of Title 12, Code of Federal Regulations as follows:

PART 351 PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND 

RELATIONSHIPS WITH COVERED FUNDS

1. 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.

Subpart A — Authority and Definitions

2. Section 351.2 is revised 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) Bank holding company has the same meaning as in section 2 of the Bank Holding 

Company Act of 1956 (12 U.S.C. 1841).

(c) Banking entity. (1) Except as provided in paragraph (c)(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
560

(iv) Any affiliate or subsidiary of any entity described in paragraphs (c)(1)(i), (ii), or (iii) 

of this section. 

(2) Banking entity does not include:

(vii) A covered fund that is not itself a banking entity under paragraphs (c)(1)(i), (ii), or 

(iii) of this section; 

(viii) 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 

(c)(1)(i), (ii), or (iii) of this section; or

(ix) 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.

(d) Board means the Board of Governors of the Federal Reserve System.

(e) CFTC means the Commodity Futures Trading Commission.

(f) Dealer has the same meaning as in section 3(a)(5) of the Exchange Act (15 U.S.C. 

78c(a)(5)).

(g) Depository institution has the same meaning as in section 3(c) of the Federal Deposit 

Insurance Act (12 U.S.C. 1813(c)).

(h) Derivative. (1) Except as provided in paragraph (h)(2) of this section, derivative

means:
561

(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, 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
562

(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)).

(i) Employee includes a member of the immediate family of the employee.

(j) Exchange Act means the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).

(k) Excluded commodity has the same meaning as in section 1a(19) of the Commodity 

Exchange Act (7 U.S.C. 1a(19)).

(l) FDIC means the Federal Deposit Insurance Corporation.

(m) Federal banking agencies means the Board, the Office of the Comptroller of the 

Currency, and the FDIC.

(n) 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.

(o) 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.

(p) General account means all of the assets of an insurance company except those 

allocated to one or more separate accounts.

(q) Insurance company means a company that is organized as an insurance company, 

primarily and predominantly engaged in writing insurance or reinsuring risks 
563

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).

(r) 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:

(1) 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)); or

(2) an insured depository institution if it has, and if every company that controls it has, 

total consolidated assets of $10 billion or less and total trading assets and trading 

liabilities, on a consolidated basis, that are 5 percent or less of total consolidated assets.

(s) Limited trading assets and liabilities.

(1) Limited 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 (excluding trading assets and liabilities attributable to trading activities 

permitted pursuant to § 351.6(a)(1) and (2) of subpart B) 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; and 

(ii) 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.

(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 (s) means trading assets 

and liabilities (excluding trading assets and liabilities attributable to trading activities 

permitted pursuant to § 351.6(a)(1) and (2) of subpart B) on a worldwide consolidated
564

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 (s) means the trading assets and liabilities (excluding trading assets and 

liabilities attributable to trading activities permitted pursuant to § 351.6(a)(1) and (2) of 

subpart B) 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 (s)(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. For purposes of paragraph (s)(3)(i) of this section, all foreign operations of 

a U.S. agency, branch, or subsidiary of a foreign banking organization are considered to 

be located in the United States, including branches outside the United States that are 

managed or controlled by a U.S. branch or agency of the foreign banking organization,

for purposes of calculating the banking entity’s U.S. trading assets and liabilities.

(t) Loan means any loan, lease, extension of credit, or secured or unsecured receivable 

that is not a security or derivative. 

(u) 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.

(v) Primary financial regulatory agency has the same meaning as in section 2(12) of the 
565

Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5301(12)).

(w) 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.

(x) 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)).

(y) SEC means the Securities and Exchange Commission.

(z) 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.

(aa) Security has the meaning specified in section 3(a)(10) of the Exchange Act 

(15 U.S.C. 78c(a)(10)).

(bb) 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)).
566

(cc) Security future has the meaning specified in section 3(a)(55) of the Exchange Act 

(15 U.S.C. 78c(a)(55)).

(dd) 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.

(ee) 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 $20 billion; 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) of this section, trading assets and liabilities for purposes of paragraph (ee) of this 

section means trading assets and liabilities (excluding trading assets and liabilities 

attributable to trading activities permitted pursuant to § 351.6(a)(1) and (2) of subpart B) 

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 
567

paragraph (ee) of this section means the trading assets and liabilities (excluding trading 

assets and liabilities attributable to trading activities permitted pursuant to § 351.6(a)(1) 

and (2) of subpart B) 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 as well as 

branches outside the United States that are managed or controlled by a branch or agency 

of the foreign banking entity operating, located or organized in the United States). 

(ii) For purposes of paragraph (ee)(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. For purposes of paragraph (ee)(3)(i) of this section, all foreign operations 

of a U.S. agency, branch, or subsidiary of a foreign banking organization are considered 

to be located in the United States for purposes of calculating the banking entity’s U.S. 

trading assets and liabilities.

(ff) 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.

(gg) Subsidiary has the same meaning as in section 2(d) of the Bank Holding Company 

Act of 1956 (12 U.S.C. 1841(d)).

(hh) 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.
568

(ii) 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

3. Section 351.3 is amended by:

a. Revising paragraph (b);

b. Revising paragraph (d)(3), (d)(8), and (d)(9), and adding paragraphs (d)(10), (11), 

(12), and (13);

c. Redesignating paragraphs (e)(5) through (e)(13) as paragraphs (e)(6) through 

(e)(14);

d. Adding new paragraph (e)(5); and

e. Revising redesignated paragraphs (e)(11), (12), and (14).

The revisions and additions read as follows:

§ 351.3 Prohibition on proprietary trading.

* * * * *

(b) Definition of trading account. (1) Trading account means:

(i) 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 actual or 

expected short-term price movements, realizing short-term arbitrage profits, or hedging 

one or more of the positions resulting from the purchases or sales of financial instruments 

described in this paragraph;

(ii) Any account that is used by a banking entity to 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 with which the banking entity is consolidated for regulatory reporting 

purposes, calculates risk-based capital ratios under the market risk capital rule; or
569

(iii) Any account that is used by a banking entity to purchase or sell one or more financial 

instruments, if the banking entity:

(A) 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

(B) 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.

(2)(i) A banking entity that is subject to paragraph (b)(1)(ii) in determining the scope of 

its trading account is not subject to paragraph (b)(1)(i). 

(ii) A banking entity that does not calculate risk-based capital ratios under the market risk 

capital rule and is not a consolidated affiliate for regulatory reporting purposes of a 

banking entity that calculates risk based capital ratios under the market risk capital rule 

may elect to apply paragraph (b)(1)(ii) of this section in determining the scope of its 

trading account as if it were subject to that paragraph. A banking entity that elects under 

this subsection to apply paragraph (b)(1)(ii) of this section in determining the scope of its 

trading account as if it were subject to that paragraph is not required to apply paragraph 

(b)(1)(i) of this section. 

(3) Consistency of account election for certain banking entities. 

(i) Any election or change to an election under paragraph (b)(2)(ii) of this section must 

apply to the electing banking entity and all of its wholly owned subsidiaries. The primary 

financial regulatory agency of a banking entity that is affiliated with but is not a wholly 
570

owned subsidiary of such electing banking entity may require that the banking entity be 

subject to this uniform application requirement if the primary financial regulatory agency 

determines that it is necessary to prevent evasion of the requirements of this part after 

notice and opportunity for response as provided in Subpart D. 

(ii) Transition. A banking entity that does not elect under paragraph (b)(2)(ii) of this 

section to be subject to the trading account definition in (b)(1)(ii) may continue to apply 

the trading account definition in paragraph (b)(1)(i) of this section for one year from the 

date on which it becomes, or becomes a consolidated affiliate for regulatory reporting 

purposes with, a banking entity that calculates risk-based capital ratios under the market 

risk capital rule.

(4) Rebuttable presumption for certain purchases and sales. The purchase (or sale) of a 

financial instrument by a banking entity shall be presumed not to be for the trading 

account of the banking entity under paragraph (b)(1)(i) of this section if the banking 

entity holds the financial instrument for sixty days or longer and does not transfer 

substantially all of the risk of the financial instrument within sixty days of the purchase 

(or sale). 

* * * * *

(d) * * *

(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 cross-currency swap by a banking entity for the purpose of liquidity 
571

management in accordance with a documented liquidity management plan of the banking 

entity that: 

(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 financial 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 §§ .6(a) or (b) of this subpart are for the purpose of liquidity management and in 
572

accordance with the liquidity management plan described in paragraph (d)(3) of this 

section; and

(vi) Is consistent with the FDIC’s regulatory requirements regarding liquidity 

management;

* * * * * 

(8) Any purchase or sale of one or more financial instruments by a banking entity through 

a deferred compensation, stock-bonus, profit-sharing, or pension plan of the banking 

entity that is established and administered in accordance with the law of the United States 

or a foreign sovereign, if the purchase or sale is made directly or indirectly by the 

banking entity as trustee for the benefit of persons who are or were employees of the 

banking entity;

(9) Any purchase or sale of one or more financial instruments by a banking entity in the 

ordinary course of collecting a debt previously contracted in good faith, provided that the 

banking entity divests the financial instrument as soon as practicable, and in no event 

may the banking entity retain such instrument for longer than such period permitted by 

the FDIC;

(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;

(11) Contemporaneously entering into a customer-driven swap or customer-driven 

security-based swap and a matched swap or security-based swap if:

(i) The banking entity retains no more than minimal price risk; and 
573

(ii) The banking entity is not a registered dealer, swap dealer, or security-based swap 

dealer; 

(12) Any purchase or sale of one or more financial instruments that the banking entity 

uses to hedge mortgage servicing rights or mortgage servicing assets in accordance with a 

documented hedging strategy; or

(13) Any purchase or sale of a financial instrument that does not meet the definition of 

trading asset or trading liability under the applicable reporting form for a banking entity 

as of January 1, 2020.

(e) * * *

(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.

* * * * * 

(11) Market risk capital rule covered position and trading position means a financial 

instrument that meets the criteria to be a covered position and a trading position, as those 

terms are respectively defined, without regard to whether the financial instrument is 

reported as a covered position or trading position on any applicable regulatory reporting 

forms: 

(i) In the case of a banking entity that is a bank holding company, savings and loan 

holding company, or insured depository institution, under the market risk capital rule that 

is applicable to the banking entity; and
574

(ii) In the case of a banking entity that is affiliated with a bank holding company or 

savings and loan holding company, other than a banking entity to which a market risk 

capital rule is applicable, under the market risk capital rule that is applicable to the 

affiliated bank holding company or savings and loan holding company.

(12) Market risk capital rule means the market risk capital rule that is contained in 

subpart F of 12 CFR part 3 with respect to a banking entity for which the OCC is the 

primary financial regulatory agency, 12 CFR part 217 with respect to a banking entity for 

which the Board is the primary financial regulatory agency, or 12 CFR part 324 with 

respect to a banking entity for which the FDIC is the primary financial regulatory agency.

* * * * * 

(14) Trading desk means 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:

(i)(A) Structured by the banking entity to implement a well-defined business strategy;

(B) Organized to ensure appropriate setting, monitoring, and management review of the 

desk’s trading and hedging limits, current and potential future loss exposures, and 

strategies; and

(C) Characterized by a clearly defined unit that:

(1) Engages in coordinated trading activity with a unified approach to its key elements;

(2) Operates subject to a common and calibrated set of risk metrics, risk levels, and joint 

trading limits;

(3) Submits compliance reports and other information as a unit for monitoring by 

management; and
575

(4) Books its trades together; or

(ii) For a banking entity that calculates risk-based capital ratios under the market risk 

capital rule, or a consolidated affiliate for regulatory reporting purposes of a banking 

entity that calculates risk-based capital ratios under the market risk capital rule, 

established by the banking entity or its affiliate for purposes of market risk capital 

calculations under the market risk capital rule.

4. Section 351.4 is revised to read as follows:

§ 351.4 Permitted underwriting and market making-related activities.

(a) Underwriting activities—(1) Permitted underwriting activities. The prohibition 

contained in § 351.3(a) does not apply to a banking entity’s underwriting activities 

conducted in accordance with this paragraph (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 types of securities; 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 types of 

securities;
576

(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)(2)(ii)(A) of this 

section; 

(C) Written 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; and

(D) Internal controls and ongoing monitoring and analysis of each trading desk’s 

compliance with its limits.

A banking entity with significant trading assets and liabilities may satisfy the 

requirements in (B) and (C) by complying with the requirements set forth below in 

paragraph (c) of this section;

(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
577

(v) The banking entity is licensed or registered to engage in the activity described in this 

paragraph (a) in accordance with applicable law.

(3) Definition of distribution. For purposes of this paragraph (a), a distribution of 

securities means:

(i) An offering of securities, whether or not subject to registration under the Securities 

Act of 1933, that is distinguished from ordinary trading transactions by the presence of 

special selling efforts and selling methods; or

(ii) An offering of securities made pursuant to an effective registration statement under 

the Securities Act of 1933.

(4) Definition of underwriter. For purposes of this paragraph (a), underwriter means:

(i) A person who has agreed with an issuer or selling security holder to:

(A) Purchase securities from the issuer or selling security holder for distribution;

(B) Engage in a distribution of securities for or on behalf of the issuer or selling security 

holder; or

(C) Manage a distribution of securities for or on behalf of the issuer or selling security 

holder; or

(ii) A person who has agreed to participate or is participating in a distribution of such 

securities for or on behalf of the issuer or selling security holder.

(5) Definition of selling security holder. For purposes of this paragraph (a), selling 

security holder means any person, other than an issuer, on whose behalf a distribution is 

made.

(6) Definition of underwriting position. For purposes of this section, underwriting 

position means the long or short positions in one or more securities held by a banking 
578

entity or its affiliate, and managed by a particular trading desk, in connection with a 

particular distribution of securities for which such banking entity or affiliate is acting as 

an underwriter.

(7) Definition of client, customer, and counterparty. For purposes of this paragraph (a), 

the terms client, customer, and counterparty, on a collective or individual basis, refer to 

market participants that may transact with the banking entity in connection with a 

particular distribution for which the banking entity is acting as underwriter.

(b) Market making-related activities—(1) Permitted market making-related activities. 

The prohibition contained in § 351.3(a) does not apply to a banking entity’s market 

making-related activities conducted in accordance with this paragraph (b).

(2) Requirements. The market making-related 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, taking into account the liquidity, maturity, and depth of the market for the 

relevant types of financial instruments;
579

(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)(2)(ii) of this section; 

(D) Written 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; and

(E) Internal controls and ongoing monitoring and analysis of each trading desk’s 

compliance with its limits. 
580

A banking entity with significant trading assets and liabilities may satisfy the 

requirements in (C) and (D) by complying with the requirements set forth below in 

paragraph (c) of this section; 

(iv) The compensation arrangements of persons performing the activities described in this 

paragraph (b) are designed not to reward or incentivize prohibited proprietary trading; 

and

(v) The banking entity is licensed or registered to engage in activity described in this 

paragraph (b) in accordance with applicable law.

(3) Definition of client, customer, and counterparty. For purposes of paragraph (b) of 

this section, the terms client, customer, and counterparty, on a collective or individual 

basis refer to market participants that make use of the banking entity’s market makingrelated services by obtaining such services, responding to quotations, or entering into a 

continuing relationship with respect to such services, provided that:

(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 § 351.2(ee) of this part, unless:

(E) The trading desk documents how and why a particular trading desk or other 

organizational unit of the entity should be treated as a client, customer, or counterparty of 

the trading desk for purposes of paragraph (b)(2) of this section; or

(F) The purchase or sale by the trading desk is conducted anonymously on an exchange 

or similar trading facility that permits trading on behalf of a broad range of market 

participants.
581

(8) Definition of financial exposure. For purposes of this section, financial exposure

means the aggregate risks of one or more financial instruments and any associated loans, 

commodities, or foreign exchange or currency, held by a banking entity or its affiliate and 

managed by a particular trading desk as part of the trading desk’s market making-related 

activities.

(9) Definition of market-maker positions. For the purposes of this section, 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 (b)(2)(i) of this section, that 

are managed by the trading desk, including the trading desk’s open positions or exposures 

arising from open transactions.

(c) Rebuttable presumption of compliance.

(1) Internal Limits.

(i) A banking entity shall be presumed to meet the requirement in paragraph (a)(2)(ii)(A) 

or (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 internal 

limits for the relevant trading desk as described in paragraph (c)(1)(ii) of this section.

(ii)(A) With respect to underwriting activities conducted pursuant to paragraph (a) of this 

section, the presumption described in paragraph (c)(1)(i) of this section shall be available 

to each trading desk that establishes, implements, maintains, and enforces internal limits 

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;
582

(2) Level of exposures to relevant risk factors arising from its underwriting position; and

(3) Period of time a security may be held.

Such internal limits should take into account the liquidity, maturity, and depth of the 

market for the relevant types of securities.

(B) With respect to market making-related activities conducted pursuant to paragraph (b) 

of this section, the presumption described in paragraph (c)(1)(i) of this section shall be 

available to each trading desk that establishes, implements, maintains, and enforces 

internal limits 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, that address 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.

Such internal limits should take into account the liquidity, maturity, and depth of the 

market for the relevant types of financial instruments.

(2) Supervisory review and oversight. The limits described in paragraph (c)(1) of this 

section shall be subject to supervisory review and oversight by the FDIC on an ongoing 

basis. 

(3) Limit Breaches and Increases. (i) With respect to any limit set pursuant to paragraphs

(c)(1)(ii)(A) or (c)(1)(ii)(B) of this section, a banking entity shall maintain and make 

available to the FDIC upon request records regarding (1) any limit that is exceeded and 
583

(2) any temporary or permanent increase to any limit(s), in each case in the form and 

manner as directed by the FDIC.

(ii) In the event of a breach or increase of any limit set pursuant to paragraphs

(c)(1)(ii)(A) or (c)(1)(ii)(B) of this section, the presumption described in paragraph 

(c)(1)(i) of this section shall continue to be available only if the banking entity:

(1) Takes action as promptly as possible after a breach to bring the trading desk into 

compliance; and

(2) Follows established written authorization procedures, including escalation procedures 

that require review and approval of any trade that exceeds 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.

(4) Rebutting the presumption. The presumption in paragraph (c)(1)(i) of this section 

may be rebutted by the FDIC if the FDIC determines, taking into account the liquidity, 

maturity, and depth of the market for the relevant types of financial instruments and 

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’s rebuttal of the presumption in paragraph (c)(1)(i) must be 

made in accordance with the notice and response procedures in Subpart D.

5. Section 351.5 is revised to read as follows:

§ 351.5 Permitted risk-mitigating hedging activities.

* * * * *

(b) Requirements. 
584

(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 
585

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 risk-mitigating hedging activity:
586

(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) Documentation requirement—(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 riskmitigating 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 preapproved 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
587

(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, preapproved limits for the trading desk purchasing or selling the financial instrument for 

hedging activities undertaken for one or more other trading desks. The 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 351.6 is amended by revising paragraph (e)(3); removing paragraphs (e)(4) and

(e)(6); and redesignating paragraph (e)(5) as paragraph (e)(4). The revisions, removals, 

and redesignations 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 paragraph (e) of 

this section 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;
588

(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 risk-mitigating 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

7. Section 351.10 is amended by revising paragraph (c)(7)(ii) and paragraph (c)(8)(i)(A) 

to read as follows:

§ 351.10 Prohibition on Acquiring or Retaining an Ownership Interest in and 

Having Certain Relationships with a Covered Fund

* * * * *

(c) * * *

(7) * * *

(ii) Participates in the profits and losses of the separate account other than in compliance 

with applicable requirements regarding bank owned life insurance.

* * * * *

(8) * * *

(i) * * *

(A) Loans as defined in § 351.2(t) of subpart A;

* * * * *
589

8. Section 351.11 is amended by revising paragraph (c) to read as follows:

§ 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.78o11) 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.
590

§ 351.12 Permitted investment in a covered fund

9. Section 351.12 is amended by:

a. Redesignating the second instance of paragraph (e)(2)(vi) as paragraph 

(e)(2)(vii).

10. Section 351.13 is amended by revising paragraphs (a), (b)(3), (b)(4), and (c) 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 
591

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 
592

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.

(4) An activity or investment occurs solely outside of the United States for purposes of 

paragraph (b)(1)(iv) of this section only if:

(i) 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 organized 

under the laws of the United States or of any State;

(ii) 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 

United States or organized under the laws of the United States or of any State; and

(iii) The investment or sponsorship, including any transaction arising from riskmitigating hedging related to an ownership interest, is not accounted for as principal 
593

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.

* * * * *

(c) Permitted covered fund interests and activities by a regulated insurance company. The

prohibition contained in § 351.10(a) of this subpart does not apply to the acquisition or 

retention by an insurance company, or an affiliate thereof, of any ownership interest in, or 

the sponsorship of, a covered fund only if:

(1) The insurance company or its affiliate acquires and retains the ownership interest 

solely for the general account of the insurance company or for one or more separate 

accounts established by the insurance company;

(2) The acquisition and retention of the ownership interest is conducted in compliance 

with, and subject to, the insurance company investment laws and regulations of the State 

or jurisdiction in which such insurance company is domiciled; and

(3) The appropriate Federal banking agencies, after consultation with the Financial 

Stability Oversight Council and the relevant insurance commissioners of the States and 

foreign jurisdictions, as appropriate, have not jointly determined, after notice and 

comment, that a particular law or regulation described in paragraph (c)(2) of this section 

is insufficient to protect the safety and soundness of the banking entity, or the financial 

stability of the United States.

11. Section 351.14 is amended by revising paragraph (a)(2)(ii)(B) to read as follows:

§ 351.14 Limitations on relationships with a covered fund.

(a) * * *
594

(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

* * * * *

Subpart D — Compliance Program Requirement; Violations

12. Section 351.20 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 paragraphs (g), (h), and (i).

The revisions and additions 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 liabilities) shall develop and provide for the continued administration 

of a compliance program reasonably designed to ensure and monitor compliance with the 
595

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. The CEO of a banking entity that has significant trading assets and 

liabilities 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 

to establish, maintain, enforce, review, test and modify the compliance program required 

by paragraph (b) of this section in a manner 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.

(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.
596

(2) Frequency of reporting: Unless the FDIC notifies the banking entity in writing that it 

must report on a different basis, a banking entity subject to the Appendix shall report the 

information required by the Appendix for each quarter within 30 days of the end of the 

quarter.

(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. 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 
597

liabilities. The FDIC’s rebuttal of the presumption in this paragraph must be made in 

accordance with the notice and response procedures in paragraph (i) of this Subpart.

(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. The FDIC’s exercise of this reservation of authority 

must be made in accordance with the notice and response procedures in paragraph (i) of 

this Subpart.

(i) Notice and Response Procedures.

(1) Notice. The FDIC will notify the banking entity in writing of any determination 

requiring notice under this part and will provide an explanation of the determination. 

(2) Response. The banking entity may respond to any or all items in the notice described 

in paragraph (i)(1) of this section. The response should include any matters that the 

banking entity would have the FDIC consider in deciding whether to make the 

determination. 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 
598

of the time period at the time of notice, or with the consent of the banking entity. In its 

discretion, the FDIC may extend the time period for good cause. 

(3) 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 determination. 

(4) The FDIC will notify the banking entity of the decision in writing. The notice will 

include an explanation of the decision.

13. Remove Appendix A and Appendix B to Part 351 and add Appendix to Part 351—

Reporting and Recordkeeping Requirements for Covered Trading Activities

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, 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.
599

b. The purpose of this appendix is to assist banking entities and the FDIC in:

(1) Better understanding and evaluating the scope, type, and profile of the banking 

entity’s covered trading activities;

(2) Monitoring the banking entity’s covered trading activities;

(3) Identifying covered trading activities that warrant further review or examination by 

the banking entity to verify compliance with the proprietary trading restrictions;

(4) 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;

(5) 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 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;

(6) 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

(7) 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 
600

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 otherwise-permitted 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.
601

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(d), 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 
602

trading desk of the banking entity engaged in covered trading activities and calculate 

these quantitative measurements in accordance with this appendix:

i. Internal Limits and Usage;

ii. Value-at-Risk;

iii. Comprehensive Profit and Loss Attribution;

iv. Positions; and

v. Transaction Volumes.

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 

may provide an optional 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.
603

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;

v. A list identifying each Agency receiving the submission of the trading desk;

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. An Internal Limits Information Schedule that provides identifying and descriptive

information for each limit reported pursuant to the Internal Limits and Usage quantitative 

measurement, including the name of the limit, a unique identification label for the limit, a 

description of the limit, the unit of measurement for the limit, the type of limit, and 

identification of the corresponding risk factor attribution in the particular case that the 

limit type is a limit on a risk factor sensitivity and profit and loss attribution to the same 

risk factor is reported; and
604

2. 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.

d. Narrative Statement

Each banking entity made subject to this appendix by § 351.20 may submit in a separate 

electronic document a Narrative Statement to the FDIC with any information the banking 

entity views as relevant for assessing the information reported. The Narrative Statement 

may include further description of or changes to calculation methods, identification of 

material events, description of and reasons for changes in the banking entity’s trading 

desk structure or trading desk strategies, and when any such changes occurred.

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 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.
605

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. Internal Limits and Usage

i. Description: For purposes of this appendix, Internal Limits are the constraints that 

define the amount of risk and the positions 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. Internal limits and their usage are key compliance and 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 trading desk’s risk limits, commonly 

including a limit on “Value-at-Risk,” are useful 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)(C) and § 351.5(b)(1)(i)(A) must meet the applicable requirements under § 
606

351.4(b)(2)(iii)(C) and § 351.5(b)(1)(i)(A) and also must include appropriate metrics for 

the trading desk limits including, at a minimum, “Value-at-Risk” except to the extent the 

“Value-at-Risk” metric is 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 Internal 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. 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. 

ii. Calculation Period: One trading day.

iii. Measurement Frequency: Daily.

iv. Applicability: All trading desks engaged in covered trading activities. 

b. Source-of-Revenue Measurements

1. Comprehensive Profit and Loss Attribution 
607

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 two 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”); and (ii) profit and loss attributable to new positions resulting from the current 

day’s trading activity (“new positions”).

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 (i) changes in 

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 
608

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 from existing positions that is not 

attributed to changes in specific risk factors and other factors must be allocated to a 

residual category. 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 and Transaction Volumes 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, 

short securities positions, derivatives receivables, and derivatives payables.

ii. Calculation Period: One trading day.

iii. Measurement Frequency: Daily.

 1 See § 351.2(h), (aa). 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.
609

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.

2. Transaction Volumes

i. Description: For purposes of this appendix, Transaction Volumes measures three

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; and (iii) trading desks and other 

organizational units where the transaction is booked into either the same banking entity 

or 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.

 2 See § 351.2(h), (aa).
610

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.
611

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 amends 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

1. The authority citation for part 255 continues to read as follows: 

Authority: 12 U.S.C. 1851 

Subpart A — Authority and Definitions

2. Section 255.2 is revised 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) Bank holding company has the same meaning as in section 2 of the Bank Holding 

Company Act of 1956 (12 U.S.C. 1841).

(c) Banking entity. (1) Except as provided in paragraph (c)(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 
612

the International Banking Act of 1978 (12 U.S.C. 3106); and

(iv) Any affiliate or subsidiary of any entity described in paragraphs (c)(1)(i), (ii), or (iii) 

of this section. 

(2) Banking entity does not include:

(x) A covered fund that is not itself a banking entity under paragraphs (c)(1)(i), (ii), or 

(iii) of this section; 

(xi) 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 

(c)(1)(i), (ii), or (iii) of this section; or

(xii) 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.

(d) Board means the Board of Governors of the Federal Reserve System.

(e) CFTC means the Commodity Futures Trading Commission.

(f) Dealer has the same meaning as in section 3(a)(5) of the Exchange Act (15 U.S.C. 

78c(a)(5)).

(g) Depository institution has the same meaning as in section 3(c) of the Federal Deposit 

Insurance Act (12 U.S.C. 1813(c)).

(h) Derivative. (1) Except as provided in paragraph (h)(2) of this section, derivative

means:
613

(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, 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
614

(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)).

(i) Employee includes a member of the immediate family of the employee.

(j) Exchange Act means the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).

(k) Excluded commodity has the same meaning as in section 1a(19) of the Commodity 

Exchange Act (7 U.S.C. 1a(19)).

(l) FDIC means the Federal Deposit Insurance Corporation.

(m) Federal banking agencies means the Board, the Office of the Comptroller of the 

Currency, and the FDIC.

(n) 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.

(o) 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.

(p) General account means all of the assets of an insurance company except those 

allocated to one or more separate accounts.

(q) Insurance company means a company that is organized as an insurance company, 

primarily and predominantly engaged in writing insurance or reinsuring risks 
615

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).

(r) 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:

(1) 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)); or

(2) an insured depository institution if it has, and if every company that controls it has, 

total consolidated assets of $10 billion or less and total trading assets and trading 

liabilities, on a consolidated basis, that are 5 percent or less of total consolidated assets.

(s) Limited trading assets and liabilities.

(1) Limited 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 (excluding trading assets and liabilities attributable to trading activities 

permitted pursuant to § 255.6(a)(1) and (2) of subpart B) 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; and 

(ii) 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.

(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 (s) means trading assets 

and liabilities (excluding trading assets and liabilities attributable to trading activities 

permitted pursuant to § 255.6(a)(1) and (2) of subpart B) on a worldwide consolidated
616

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 (s) means the trading assets and liabilities (excluding trading assets and 

liabilities attributable to trading activities permitted pursuant to § 255.6(a)(1) and (2) of 

subpart B) 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 (s)(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. For purposes of paragraph (s)(3)(i) of this section, all foreign operations of 

a U.S. agency, branch, or subsidiary of a foreign banking organization are considered to 

be located in the United States, including branches outside the United States that are 

managed or controlled by a U.S. branch or agency of the foreign banking organization,

for purposes of calculating the banking entity’s U.S. trading assets and liabilities.

(t) Loan means any loan, lease, extension of credit, or secured or unsecured receivable 

that is not a security or derivative. 

(u) 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.

(v) Primary financial regulatory agency has the same meaning as in section 2(12) of the 
617

Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5301(12)).

(w) 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.

(x) 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)).

(y) SEC means the Securities and Exchange Commission.

(z) 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.

(aa) Security has the meaning specified in section 3(a)(10) of the Exchange Act 

(15 U.S.C. 78c(a)(10)).

(bb) 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)).
618

(cc) Security future has the meaning specified in section 3(a)(55) of the Exchange Act 

(15 U.S.C. 78c(a)(55)).

(dd) 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.

(ee) 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 $20 billion; 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) of this section, trading assets and liabilities for purposes of paragraph (ee) of this 

section means trading assets and liabilities (excluding trading assets and liabilities 

attributable to trading activities permitted pursuant to § 255.6(a)(1) and (2) of subpart B) 

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 
619

paragraph (ee) of this section means the trading assets and liabilities (excluding trading 

assets and liabilities attributable to trading activities permitted pursuant to § 255.6(a)(1) 

and (2) of subpart B) 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 as well as 

branches outside the United States that are managed or controlled by a branch or agency 

of the foreign banking entity operating, located or organized in the United States). 

(ii) For purposes of paragraph (ee)(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. For purposes of paragraph (ee)(3)(i) of this section, all foreign operations 

of a U.S. agency, branch, or subsidiary of a foreign banking organization are considered 

to be located in the United States for purposes of calculating the banking entity’s U.S. 

trading assets and liabilities.

(ff) 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.

(gg) Subsidiary has the same meaning as in section 2(d) of the Bank Holding Company 

Act of 1956 (12 U.S.C. 1841(d)).

(hh) 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.
620

(ii) 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

3. Section 255.3 is amended by:

a. Revising paragraph (b);

b. Revising paragraph (d)(3), (d)(8), and (d)(9), and adding paragraphs (d)(10), 

(11), (12), and (13);

c. Redesignating paragraphs (e)(5) through (e)(13) as paragraphs (e)(6) through 

(e)(14);

d. Adding new paragraph (e)(5); and

e. Revising paragraph (e)(11), (12), and (14).

The revisions and additions read as follows:

§ 255.3 Prohibition on proprietary trading.

* * * * *

(b) Definition of trading account. (1) Trading account means:

(i) 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 actual or 

expected short-term price movements, realizing short-term arbitrage profits, or hedging 

one or more of the positions resulting from the purchases or sales of financial instruments 

described in this paragraph;

(ii) Any account that is used by a banking entity to 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 
621

any affiliate with which the banking entity is consolidated for regulatory reporting 

purposes, calculates risk-based capital ratios under the market risk capital rule; or

(iii) Any account that is used by a banking entity to purchase or sell one or more financial 

instruments, if the banking entity:

(A) 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

(B) 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.

(2)(i) A banking entity that is subject to paragraph (b)(1)(ii) in determining the scope of 

its trading account is not subject to paragraph (b)(1)(i). 

(ii) A banking entity that does not calculate risk-based capital ratios under the market risk 

capital rule and is not a consolidated affiliate for regulatory reporting purposes of a 

banking entity that calculates risk based capital ratios under the market risk capital rule 

may elect to apply paragraph (b)(1)(ii) of this section in determining the scope of its 

trading account as if it were subject to that paragraph. A banking entity that elects under 

this subsection to apply paragraph (b)(1)(ii) of this section in determining the scope of its 

trading account as if it were subject to that paragraph is not required to apply paragraph 

(b)(1)(i) of this section. 

(3) Consistency of account election for certain banking entities. 
622

(i) Any election or change to an election under paragraph (b)(2)(ii) of this section must 

apply to the electing banking entity and all of its wholly owned subsidiaries. The primary 

financial regulatory agency of a banking entity that is affiliated with but is not a wholly 

owned subsidiary of such electing banking entity may require that the banking entity be 

subject to this uniform application requirement if the primary financial regulatory agency 

determines that it is necessary to prevent evasion of the requirements of this part after 

notice and opportunity for response as provided in Subpart D. 

(ii) Transition. A banking entity that does not elect under paragraph (b)(2)(ii) of this 

section to be subject to the trading account definition in (b)(1)(ii) may continue to apply 

the trading account definition in paragraph (b)(1)(i) of this section for one year from the 

date on which it becomes, or becomes a consolidated affiliate for regulatory reporting 

purposes with, a banking entity that calculates risk-based capital ratios under the market 

risk capital rule.

(4) Rebuttable presumption for certain purchases and sales. The purchase (or sale) of a 

financial instrument by a banking entity shall be presumed not to be for the trading 

account of the banking entity under paragraph (b)(1)(i) of this section if the banking 

entity holds the financial instrument for sixty days or longer and does not transfer 

substantially all of the risk of the financial instrument within sixty days of the purchase 

(or sale). 

* * * * *

(d) * * *

(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 
623

swap (as that term is defined in section 1a(25) of the Commodity Exchange Act (7 U.S.C. 

1a(25)), or cross-currency swap by a banking entity for the purpose of liquidity 

management in accordance with a documented liquidity management plan of the banking 

entity that: 

(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 financial 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;
624

(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 §§ .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 (d)(3) of this 

section; and

(vi) Is consistent with the SEC’s regulatory requirements regarding liquidity 

management;

* * * * * 

(8) Any purchase or sale of one or more financial instruments by a banking entity through 

a deferred compensation, stock-bonus, profit-sharing, or pension plan of the banking 

entity that is established and administered in accordance with the law of the United States 

or a foreign sovereign, if the purchase or sale is made directly or indirectly by the 

banking entity as trustee for the benefit of persons who are or were employees of the 

banking entity;

(9) Any purchase or sale of one or more financial instruments by a banking entity in the 

ordinary course of collecting a debt previously contracted in good faith, provided that the 

banking entity divests the financial instrument as soon as practicable, and in no event 

may the banking entity retain such instrument for longer than such period permitted by 

the SEC;

(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;
625

(11) Contemporaneously entering into a customer-driven swap or customer-driven 

security-based swap and a matched swap or security-based swap if:

(i) The banking entity retains no more than minimal price risk; and 

(ii) The banking entity is not a registered dealer, swap dealer, or security-based swap 

dealer; 

(12) Any purchase or sale of one or more financial instruments that the banking entity 

uses to hedge mortgage servicing rights or mortgage servicing assets in accordance with a 

documented hedging strategy; or

(13) Any purchase or sale of a financial instrument that does not meet the definition of 

trading asset or trading liability under the applicable reporting form for a banking entity 

as of January 1, 2020.

(e) * * *

(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.

* * * * * 

(11) Market risk capital rule covered position and trading position means a financial 

instrument that meets the criteria to be a covered position and a trading position, as those 

terms are respectively defined, without regard to whether the financial instrument is 

reported as a covered position or trading position on any applicable regulatory reporting 

forms: 
626

(i) In the case of a banking entity that is a bank holding company, savings and loan 

holding company, or insured depository institution, under the market risk capital rule that 

is applicable to the banking entity; and

(ii) In the case of a banking entity that is affiliated with a bank holding company or 

savings and loan holding company, other than a banking entity to which a market risk 

capital rule is applicable, under the market risk capital rule that is applicable to the 

affiliated bank holding company or savings and loan holding company.

(12) Market risk capital rule means the market risk capital rule that is contained in 

subpart F of 12 CFR part 3 with respect to a banking entity for which the OCC is the 

primary financial regulatory agency, 12 CFR part 217 with respect to a banking entity for 

which the Board is the primary financial regulatory agency, or 12 CFR part 324 with 

respect to a banking entity for which the FDIC is the primary financial regulatory agency.

* * * * * 

(14) Trading desk means 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:

(i)(A) Structured by the banking entity to implement a well-defined business strategy;

(B) Organized to ensure appropriate setting, monitoring, and management review of the 

desk’s trading and hedging limits, current and potential future loss exposures, and 

strategies; and

(C) Characterized by a clearly defined unit that:

(1) Engages in coordinated trading activity with a unified approach to its key elements;
627

(2) Operates subject to a common and calibrated set of risk metrics, risk levels, and joint 

trading limits;

(3) Submits compliance reports and other information as a unit for monitoring by 

management; and

(4) Books its trades together; or

(ii) For a banking entity that calculates risk-based capital ratios under the market risk 

capital rule, or a consolidated affiliate for regulatory reporting purposes of a banking 

entity that calculates risk-based capital ratios under the market risk capital rule, 

established by the banking entity or its affiliate for purposes of market risk capital 

calculations under the market risk capital rule.

4. Section 255.4 is revised to read as follows:

§ 255.4 Permitted underwriting and market making-related activities.

(a) Underwriting activities—(1) Permitted underwriting activities. The prohibition 

contained in § 255.3(a) does not apply to a banking entity’s underwriting activities 

conducted in accordance with this paragraph (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 types of securities; and (B) reasonable efforts are made to sell or 
628

otherwise reduce the underwriting position within a reasonable period, taking into 

account the liquidity, maturity, and depth of the market for the relevant types of 

securities;

(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)(2)(ii)(A) of this 

section; 

(C) Written 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; and

(D) Internal controls and ongoing monitoring and analysis of each trading desk’s 

compliance with its limits.

A banking entity with significant trading assets and liabilities may satisfy the 

requirements in (B) and (C) by complying with the requirements set forth below in 

paragraph (c) of this section;
629

(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.

(3) Definition of distribution. For purposes of this paragraph (a), a distribution of 

securities means:

(i) An offering of securities, whether or not subject to registration under the Securities 

Act of 1933, that is distinguished from ordinary trading transactions by the presence of 

special selling efforts and selling methods; or

(ii) An offering of securities made pursuant to an effective registration statement under 

the Securities Act of 1933.

(4) Definition of underwriter. For purposes of this paragraph (a), underwriter means:

(i) A person who has agreed with an issuer or selling security holder to:

(A) Purchase securities from the issuer or selling security holder for distribution;

(B) Engage in a distribution of securities for or on behalf of the issuer or selling security 

holder; or

(C) Manage a distribution of securities for or on behalf of the issuer or selling security 

holder; or

(ii) A person who has agreed to participate or is participating in a distribution of such 

securities for or on behalf of the issuer or selling security holder.
630

(5) Definition of selling security holder. For purposes of this paragraph (a), selling 

security holder means any person, other than an issuer, on whose behalf a distribution is 

made.

(6) Definition of underwriting position. For purposes of this section, underwriting 

position means the long or short positions in one or more securities held by a banking 

entity or its affiliate, and managed by a particular trading desk, in connection with a 

particular distribution of securities for which such banking entity or affiliate is acting as 

an underwriter.

(7) Definition of client, customer, and counterparty. For purposes of this paragraph (a), 

the terms client, customer, and counterparty, on a collective or individual basis, refer to 

market participants that may transact with the banking entity in connection with a 

particular distribution for which the banking entity is acting as underwriter.

(b) Market making-related activities—(1) Permitted market making-related activities. 

The prohibition contained in § 255.3(a) does not apply to a banking entity’s market 

making-related activities conducted in accordance with this paragraph (b).

(2) Requirements. The market making-related 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 
631

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, taking into account the liquidity, maturity, and depth of the market for the 

relevant types of financial instruments;

(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)(2)(ii) of this section; 
632

(D) Written 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; and

(E) Internal controls and ongoing monitoring and analysis of each trading desk’s 

compliance with its limits. 

A banking entity with significant trading assets and liabilities may satisfy the 

requirements in (C) and (D) by complying with the requirements set forth below in 

paragraph (c) of this section; 

(iv) The compensation arrangements of persons performing the activities described in this 

paragraph (b) are designed not to reward or incentivize prohibited proprietary trading; 

and

(v) The banking entity is licensed or registered to engage in activity described in this 

paragraph (b) in accordance with applicable law.

(3) Definition of client, customer, and counterparty. For purposes of paragraph (b) of 

this section, the terms client, customer, and counterparty, on a collective or individual 

basis refer to market participants that make use of the banking entity’s market makingrelated services by obtaining such services, responding to quotations, or entering into a 

continuing relationship with respect to such services, provided that:

(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 § 255.2(ee) of this part, unless:
633

(G) The trading desk documents how and why a particular trading desk or other 

organizational unit of the entity should be treated as a client, customer, or counterparty of 

the trading desk for purposes of paragraph (b)(2) of this section; or

(H) The purchase or sale by the trading desk is conducted anonymously on an exchange 

or similar trading facility that permits trading on behalf of a broad range of market 

participants.

(10) Definition of financial exposure. For purposes of this section, financial exposure

means the aggregate risks of one or more financial instruments and any associated loans, 

commodities, or foreign exchange or currency, held by a banking entity or its affiliate and 

managed by a particular trading desk as part of the trading desk’s market making-related 

activities.

(11) Definition of market-maker positions. For the purposes of this section, marketmaker 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 (b)(2)(i) of this 

section, that are managed by the trading desk, including the trading desk’s open positions 

or exposures arising from open transactions.

(c) Rebuttable presumption of compliance.

(1) Internal Limits.

(i) A banking entity shall be presumed to meet the requirement in paragraph (a)(2)(ii)(A) 

or (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 internal 

limits for the relevant trading desk as described in paragraph (c)(1)(ii) of this section.
634

(ii)(A) With respect to underwriting activities conducted pursuant to paragraph (a) of this 

section, the presumption described in paragraph (c)(1)(i) of this section shall be available 

to each trading desk that establishes, implements, maintains, and enforces internal limits 

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.

Such internal limits should take into account the liquidity, maturity, and depth of the 

market for the relevant types of securities.

(B) With respect to market making-related activities conducted pursuant to paragraph (b) 

of this section, the presumption described in paragraph (c)(1)(i) of this section shall be 

available to each trading desk that establishes, implements, maintains, and enforces 

internal limits 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, that address 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.
635

Such internal limits should take into account the liquidity, maturity, and depth of the 

market for the relevant types of financial instruments.

(2) Supervisory review and oversight. The limits described in paragraph (c)(1) of this 

section shall be subject to supervisory review and oversight by the SEC on an ongoing 

basis. 

(3) Limit Breaches and Increases. (i) With respect to any limit set pursuant to paragraphs

(c)(1)(ii)(A) or (c)(1)(ii)(B) of this section, a banking entity shall maintain and make 

available to the SEC upon request records regarding (1) any limit that is exceeded and (2) 

any temporary or permanent increase to any limit(s), in each case in the form and manner 

as directed by the SEC.

(ii) In the event of a breach or increase of any limit set pursuant to paragraphs

(c)(1)(ii)(A) or (c)(1)(ii)(B) of this section, the presumption described in paragraph 

(c)(1)(i) of this section shall continue to be available only if the banking entity:

(1) Takes action as promptly as possible after a breach to bring the trading desk into 

compliance; and 

(2) Follows established written authorization procedures, including escalation procedures 

that require review and approval of any trade that exceeds 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.

(4) Rebutting the presumption. The presumption in paragraph (c)(1)(i) of this section 

may be rebutted by the SEC if the SEC determines, taking into account the liquidity, 

maturity, and depth of the market for the relevant types of financial instruments and 

based on all relevant facts and circumstances, that a trading desk is engaging in activity 
636

that is not based on the reasonably expected near term demands of clients, customers, or 

counterparties. The SEC’s rebuttal of the presumption in paragraph (c)(1)(i) must be 

made in accordance with the notice and response procedures in Subpart D.

5. Section 255.5 is revised 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:
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(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
638

(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 risk-mitigating 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 
639

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 preapproved 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, preapproved limits for the trading desk purchasing or selling the financial instrument for 

hedging activities undertaken for one or more other trading desks. The 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 255.6 is amended by revising paragraph (e)(3); removing paragraphs (e)(4) and

(e)(6); and redesignating paragraph (e)(5) as paragraph (e)(4). The revisions, removals, 

and redesignations read as follows:

§ 255.6 Other permitted proprietary trading activities.
640

* * * * *

(e) * * *

(3) A purchase or sale by a banking entity is permitted for purposes of paragraph (e) of this 

section 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 risk-mitigating 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

7. Section 255.10 is amended by revising paragraph (c)(7)(ii) and paragraph (c)(8)(i)(A) 

to read as follows:

§ 255.10 Prohibition on Acquiring or Retaining an Ownership Interest in and 

Having Certain Relationships with a Covered Fund

* * * * *

(c) * * *

(7) * * *
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(ii) Participates in the profits and losses of the separate account other than in compliance 

with applicable requirements regarding bank owned life insurance.

* * * * *

(8) * * *

(i) * * *

(A) Loans as defined in § 255.2(t) of subpart A;

* * * * *

8. Section 255.11 is amended 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 
642

interest in such covered fund in compliance with section 15G of that Act (15 U.S.C.78o11) 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.

§ 255.12 Permitted investment in a covered fund.

9. Section 255.12 is amended by:

a. Redesignating the second instance of paragraph (e)(2)(vi) as paragraph 

(e)(2)(vii).

10. Section 255.13 is amended by revising paragraphs (a), (b)(3), (b)(4), and (c) 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
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(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;
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(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.

(4) An activity or investment occurs solely outside of the United States for purposes of 

paragraph (b)(1)(iv) of this section only if:

(i) 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 
645

directly or indirectly by, a banking entity that is 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 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; and

(iii) The investment or sponsorship, including any transaction arising from riskmitigating 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.

* * * * *

(c) Permitted covered fund interests and activities by a regulated insurance company. The 

prohibition contained in § 255.10(a) of this subpart does not apply to the acquisition or 

retention by an insurance company, or an affiliate thereof, of any ownership interest in, or 

the sponsorship of, a covered fund only if:

(1) The insurance company or its affiliate acquires and retains the ownership interest 

solely for the general account of the insurance company or for one or more separate 

accounts established by the insurance company;

(2) The acquisition and retention of the ownership interest is conducted in compliance 

with, and subject to, the insurance company investment laws and regulations of the State 

or jurisdiction in which such insurance company is domiciled; and

(3) The appropriate Federal banking agencies, after consultation with the Financial 

Stability Oversight Council and the relevant insurance commissioners of the States and 

foreign jurisdictions, as appropriate, have not jointly determined, after notice and 
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comment, that a particular law or regulation described in paragraph (c)(2) of this section 

is insufficient to protect the safety and soundness of the banking entity, or the financial 

stability of the United States.

11. Section 255.14 is amended by revising paragraph (a)(2)(ii)(B) to read 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

* * * * *

Subpart D — Compliance Program Requirement; Violations

12. Section 255.20 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
647

g. Adding paragraphs (g),(h) and (i).

The revisions and additions 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. The CEO of a banking entity that has significant trading assets and 

liabilities 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 

to establish, maintain, enforce, review, test and modify the compliance program required 

by paragraph (b) of this section in a manner 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.
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(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 subject to the Appendix shall report the 

information required by the Appendix for each quarter within 30 days of the end of the 

quarter.

(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 
649

subpart B and subpart C and shall have no obligation to demonstrate compliance with this 

part on an ongoing basis.

(2) Rebuttal of presumption. 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. The SEC’s rebuttal of the presumption in this paragraph must be made in 

accordance with the notice and response procedures in paragraph (i) of this Subpart.

(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. The SEC’s exercise of this reservation of authority 

must be made in accordance with the notice and response procedures in paragraph (i) of 

this Subpart.

(i) Notice and Response Procedures.

(1) Notice. The SEC will notify the banking entity in writing of any determination 

requiring notice under this part and will provide an explanation of the determination. 

(2) Response. The banking entity may respond to any or all items in the notice described 

in paragraph (i)(1) of this section. The response should include any matters that the 
650

banking entity would have the SEC consider in deciding whether to make the 

determination. 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 

of the time period at the time of notice, or with the consent of the banking entity. In its 

discretion, the SEC may extend the time period for good cause. 

(3) 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. 

(4) The SEC will notify the banking entity of the decision in writing. The notice will 

include an explanation of the decision.

13. Remove Appendix A and Appendix B to Part 255 and add Appendix to Part 255—

Reporting and Recordkeeping Requirements for Covered Trading Activities

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 
651

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:

(1) Better understanding and evaluating the scope, type, and profile of the banking 

entity’s covered trading activities;

(2) Monitoring the banking entity’s covered trading activities;

(3) Identifying covered trading activities that warrant further review or examination by 

the banking entity to verify compliance with the proprietary trading restrictions;

(4) 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;

(5) 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 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;

(6) 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 SEC of such activities; and

(7) Assessing and addressing the risks associated with the banking entity’s covered 

trading activities.
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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 otherwise-permitted 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 

SEC, and remediation, where appropriate. The quantitative measurements discussed in 
653

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 

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(d), 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
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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. Internal Limits and Usage;

ii. Value-at-Risk;

iii. Comprehensive Profit and Loss Attribution;

iv. Positions; and

v. Transaction Volumes.

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 

may provide an optional 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.
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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;

v. A list identifying each Agency receiving the submission of the trading desk;

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. An Internal Limits Information Schedule that provides identifying and descriptive 

information for each limit reported pursuant to the Internal Limits and Usage quantitative 

measurement, including the name of the limit, a unique identification label for the limit, a 

description of the limit, the unit of measurement for the limit, the type of limit, and 

identification of the corresponding risk factor attribution in the particular case that the 

limit type is a limit on a risk factor sensitivity and profit and loss attribution to the same 

risk factor is reported; and
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2. 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.

d. Narrative Statement

Each banking entity made subject to this appendix by § 255.20 may submit in a separate 

electronic document a Narrative Statement to the SEC with any information the banking 

entity views as relevant for assessing the information reported. The Narrative Statement 

may include further description of or changes to calculation methods, identification of 

material events, description of and reasons for changes in the banking entity’s trading 

desk structure or trading desk strategies, and when any such changes occurred.

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 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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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. Internal Limits and Usage

i. Description: For purposes of this appendix, Internal Limits are the constraints that 

define the amount of risk and the positions 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. Internal limits and their usage are key compliance and 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 trading desk’s risk limits, commonly including a limit on 

“Value-at-Risk,” are useful 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)(C) and § 255.5(b)(1)(i)(A)

must meet the applicable requirements under § 255.4(b)(2)(iii)(C) and § 255.5(b)(1)(i)(A) 
658

and also must include appropriate metrics for the trading desk limits including, at a 

minimum, “Value-at-Risk” except to the extent the “Value-at-Risk” metric is 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 Internal 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. 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. 

ii. Calculation Period: One trading day.

iii. Measurement Frequency: Daily.

iv. Applicability: All trading desks engaged in covered trading activities. 

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 
659

to various sources. First, the daily profit and loss of the aggregated positions is divided 

into two 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”); and (ii) profit and loss attributable to new positions resulting from the current 

day’s trading activity (“new positions”).

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 (i) changes in 

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 
660

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 from existing positions that is not 

attributed to changes in specific risk factors and other factors must be allocated to a 

residual category. 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 and Transaction Volumes 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, 

short securities positions, derivatives receivables, and derivatives payables.

ii. Calculation Period: One trading day.

iii. Measurement Frequency: Daily.

 1 See § 255.2(h), (aa). 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.
661

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.

2. Transaction Volumes

i. Description: For purposes of this appendix, Transaction Volumes measures three 

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; and (iii) trading desks and other 

organizational units where the transaction is booked into either the same banking entity 

or 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.

 2 See § 255.2(h), (aa).
662

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.
663

COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I 

Authority and Issuance

For the reasons stated in the Common Preamble, the Commodity Futures Trading 

Commission amends part 75 to chapter I of Title 17 Code of Federal Regulations as 

follows:

PART 75 PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND 

RELATIONSHIPS WITH COVERED FUNDS

1. The authority citation for part 75 continues to read as follows: 

Authority: 12 U.S.C. 1851

Subpart A — Authority and Definitions

2. Section 75.2 is revised 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) Bank holding company has the same meaning as in section 2 of the Bank Holding 

Company Act of 1956 (12 U.S.C. 1841).

(c) Banking entity. (1) Except as provided in paragraph (c)(2) of this section, banking 

entity means:

(i) Any insured depository institution; 

(ii) Any company that controls an insured depository institution;
664

(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 (c)(1)(i), (ii), or (iii) 

of this section. 

(2) Banking entity does not include:

(xiii) A covered fund that is not itself a banking entity under paragraphs (c)(1)(i), (ii), or 

(iii) of this section; 

(xiv) 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 

(c)(1)(i), (ii), or (iii) of this section; or

(xv) 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.

(d) Board means the Board of Governors of the Federal Reserve System.

(e) CFTC means the Commodity Futures Trading Commission.

(f) Dealer has the same meaning as in section 3(a)(5) of the Exchange Act (15 U.S.C. 

78c(a)(5)).

(g) Depository institution has the same meaning as in section 3(c) of the Federal Deposit 

Insurance Act (12 U.S.C. 1813(c)).

(h) Derivative. (1) Except as provided in paragraph (h)(2) of this section, derivative
665

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, 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
666

(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)).

(i) Employee includes a member of the immediate family of the employee.

(j) Exchange Act means the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).

(k) Excluded commodity has the same meaning as in section 1a(19) of the Commodity 

Exchange Act (7 U.S.C. 1a(19)).

(l) FDIC means the Federal Deposit Insurance Corporation.

(m) Federal banking agencies means the Board, the Office of the Comptroller of the 

Currency, and the FDIC.

(n) 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.

(o) 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.

(p) General account means all of the assets of an insurance company except those 

allocated to one or more separate accounts.

(q) Insurance company means a company that is organized as an insurance company, 

primarily and predominantly engaged in writing insurance or reinsuring risks 
667

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).

(r) 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:

(1) 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)); or

(2) an insured depository institution if it has, and if every company that controls it has, 

total consolidated assets of $10 billion or less and total trading assets and trading 

liabilities, on a consolidated basis, that are 5 percent or less of total consolidated assets.

(s) Limited trading assets and liabilities.

(1) Limited 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 (excluding trading assets and liabilities attributable to trading activities 

permitted pursuant to § 75.6(a)(1) and (2) of subpart B) 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; and 

(ii) The CFTC 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.

(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 (s) means trading assets 

and liabilities (excluding trading assets and liabilities attributable to trading activities 

permitted pursuant to § 75.6(a)(1) and (2) of subpart B) on a worldwide consolidated
668

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 (s) means the trading assets and liabilities (excluding trading assets and 

liabilities attributable to trading activities permitted pursuant to § 75.6(a)(1) and (2) of 

subpart B) 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 (s)(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. For purposes of paragraph (s)(3)(i) of this section, all foreign operations of 

a U.S. agency, branch, or subsidiary of a foreign banking organization are considered to 

be located in the United States, including branches outside the United States that are 

managed or controlled by a U.S. branch or agency of the foreign banking organization,

for purposes of calculating the banking entity’s U.S. trading assets and liabilities.

(t) Loan means any loan, lease, extension of credit, or secured or unsecured receivable 

that is not a security or derivative. 

(u) 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.

(v) Primary financial regulatory agency has the same meaning as in section 2(12) of the 
669

Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5301(12)).

(w) 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.

(x) 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)).

(y) SEC means the Securities and Exchange Commission.

(z) 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.

(aa) Security has the meaning specified in section 3(a)(10) of the Exchange Act 

(15 U.S.C. 78c(a)(10)).

(bb) 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)).
670

(cc) Security future has the meaning specified in section 3(a)(55) of the Exchange Act 

(15 U.S.C. 78c(a)(55)).

(dd) 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.

(ee) 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 $20 billion; or 

(ii) The CFTC 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) of this section, trading assets and liabilities for purposes of paragraph (ee) of this 

section means trading assets and liabilities (excluding trading assets and liabilities 

attributable to trading activities permitted pursuant to § 75.6(a)(1) and (2) of subpart B) 

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 
671

paragraph (ee) of this section means the trading assets and liabilities (excluding trading 

assets and liabilities attributable to trading activities permitted pursuant to § 75.6(a)(1) 

and (2) of subpart B) 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 as well as 

branches outside the United States that are managed or controlled by a branch or agency 

of the foreign banking entity operating, located or organized in the United States). 

(ii) For purposes of paragraph (ee)(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. For purposes of paragraph (ee)(3)(i) of this section, all foreign operations 

of a U.S. agency, branch, or subsidiary of a foreign banking organization are considered 

to be located in the United States for purposes of calculating the banking entity’s U.S. 

trading assets and liabilities.

(ff) 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.

(gg) Subsidiary has the same meaning as in section 2(d) of the Bank Holding Company 

Act of 1956 (12 U.S.C. 1841(d)).

(hh) 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.
672

(ii) 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

3. Section 75.3 is amended by:

a. Revising paragraph (b);

b. Revising paragraph (d)(3), (d)(8), and (d)(9), and adding paragraphs (d)(10), 

(11), (12), and (13);

c. Redesignating paragraphs (e)(5) through (e)(13) as paragraphs (e)(6) through 

(e)(14);

d. Adding new paragraph (e)(5); and

e. Revising paragraph (e)(11), (12), and (14).

The revisions and additions read as follows:

§ 75.3 Prohibition on proprietary trading.

* * * * *

(b) Definition of trading account. (1) Trading account means:

(i) 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 actual or 

expected short-term price movements, realizing short-term arbitrage profits, or hedging 

one or more of the positions resulting from the purchases or sales of financial instruments 

described in this paragraph;

(ii) Any account that is used by a banking entity to 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 
673

any affiliate with which the banking entity is consolidated for regulatory reporting 

purposes, calculates risk-based capital ratios under the market risk capital rule; or

(iii) Any account that is used by a banking entity to purchase or sell one or more financial 

instruments, if the banking entity:

(A) 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

(B) 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.

(2)(i) A banking entity that is subject to paragraph (b)(1)(ii) in determining the scope of 

its trading account is not subject to paragraph (b)(1)(i). 

(ii) A banking entity that does not calculate risk-based capital ratios under the market risk 

capital rule and is not a consolidated affiliate for regulatory reporting purposes of a 

banking entity that calculates risk based capital ratios under the market risk capital rule 

may elect to apply paragraph (b)(1)(ii) of this section in determining the scope of its 

trading account as if it were subject to that paragraph. A banking entity that elects under 

this subsection to apply paragraph (b)(1)(ii) of this section in determining the scope of its 

trading account as if it were subject to that paragraph is not required to apply paragraph 

(b)(1)(i) of this section. 

(3) Consistency of account election for certain banking entities. 
674

(i) Any election or change to an election under paragraph (b)(2)(ii) of this section must 

apply to the electing banking entity and all of its wholly owned subsidiaries. The primary 

financial regulatory agency of a banking entity that is affiliated with but is not a wholly 

owned subsidiary of such electing banking entity may require that the banking entity be 

subject to this uniform application requirement if the primary financial regulatory agency 

determines that it is necessary to prevent evasion of the requirements of this part after 

notice and opportunity for response as provided in Subpart D. 

(ii) Transition. A banking entity that does not elect under paragraph (b)(2)(ii) of this 

section to be subject to the trading account definition in (b)(1)(ii) may continue to apply 

the trading account definition in paragraph (b)(1)(i) of this section for one year from the 

date on which it becomes, or becomes a consolidated affiliate for regulatory reporting 

purposes with, a banking entity that calculates risk-based capital ratios under the market 

risk capital rule.

(4) Rebuttable presumption for certain purchases and sales. The purchase (or sale) of a 

financial instrument by a banking entity shall be presumed not to be for the trading 

account of the banking entity under paragraph (b)(1)(i) of this section if the banking 

entity holds the financial instrument for sixty days or longer and does not transfer 

substantially all of the risk of the financial instrument within sixty days of the purchase 

(or sale). 

* * * * *

(d) * * *

(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 
675

swap (as that term is defined in section 1a(25) of the Commodity Exchange Act (7 U.S.C. 

1a(25)), or cross-currency swap by a banking entity for the purpose of liquidity 

management in accordance with a documented liquidity management plan of the banking 

entity that: 

(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 financial 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;
676

(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 §§ .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 (d)(3) of this 

section; and

(vi) Is consistent with the CFTC’s regulatory requirements regarding liquidity 

management;

* * * * * 

(8) Any purchase or sale of one or more financial instruments by a banking entity through 

a deferred compensation, stock-bonus, profit-sharing, or pension plan of the banking 

entity that is established and administered in accordance with the law of the United States 

or a foreign sovereign, if the purchase or sale is made directly or indirectly by the 

banking entity as trustee for the benefit of persons who are or were employees of the 

banking entity;

(9) Any purchase or sale of one or more financial instruments by a banking entity in the 

ordinary course of collecting a debt previously contracted in good faith, provided that the 

banking entity divests the financial instrument as soon as practicable, and in no event 

may the banking entity retain such instrument for longer than such period permitted by 

the OCC;

(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;
677

(11) Contemporaneously entering into a customer-driven swap or customer-driven 

security-based swap and a matched swap or security-based swap if:

(i) The banking entity retains no more than minimal price risk; and 

(ii) The banking entity is not a registered dealer, swap dealer, or security-based swap 

dealer; 

(12) Any purchase or sale of one or more financial instruments that the banking entity 

uses to hedge mortgage servicing rights or mortgage servicing assets in accordance with a 

documented hedging strategy; or

(13) Any purchase or sale of a financial instrument that does not meet the definition of 

trading asset or trading liability under the applicable reporting form for a banking entity 

as of January 1, 2020.

(e) * * *

(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.

* * * * * 

(11) Market risk capital rule covered position and trading position means a financial 

instrument that meets the criteria to be a covered position and a trading position, as those 

terms are respectively defined, without regard to whether the financial instrument is 

reported as a covered position or trading position on any applicable regulatory reporting 

forms: 
678

(i) In the case of a banking entity that is a bank holding company, savings and loan 

holding company, or insured depository institution, under the market risk capital rule that 

is applicable to the banking entity; and

(ii) In the case of a banking entity that is affiliated with a bank holding company or 

savings and loan holding company, other than a banking entity to which a market risk 

capital rule is applicable, under the market risk capital rule that is applicable to the 

affiliated bank holding company or savings and loan holding company.

(12) Market risk capital rule means the market risk capital rule that is contained in 

subpart F of 12 CFR part 3 with respect to a banking entity for which the OCC is the 

primary financial regulatory agency, 12 CFR part 217 with respect to a banking entity for 

which the Board is the primary financial regulatory agency, or 12 CFR part 324 with 

respect to a banking entity for which the FDIC is the primary financial regulatory agency.

* * * * * 

(14) Trading desk means 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:

(i)(A) Structured by the banking entity to implement a well-defined business strategy;

(B) Organized to ensure appropriate setting, monitoring, and management review of the 

desk’s trading and hedging limits, current and potential future loss exposures, and 

strategies; and

(C) Characterized by a clearly defined unit that:

(1) Engages in coordinated trading activity with a unified approach to its key elements;
679

(2) Operates subject to a common and calibrated set of risk metrics, risk levels, and joint 

trading limits;

(3) Submits compliance reports and other information as a unit for monitoring by 

management; and

(4) Books its trades together; or

(ii) For a banking entity that calculates risk-based capital ratios under the market risk 

capital rule, or a consolidated affiliate for regulatory reporting purposes of a banking 

entity that calculates risk-based capital ratios under the market risk capital rule, 

established by the banking entity or its affiliate for purposes of market risk capital 

calculations under the market risk capital rule.

4. Section 75.4 is revised to read as follows:

§ 75.4 Permitted underwriting and market making-related activities.

(a) Underwriting activities—(1) Permitted underwriting activities. The prohibition 

contained in § 75.3(a) does not apply to a banking entity’s underwriting activities 

conducted in accordance with this paragraph (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 types of securities; and (B) reasonable efforts are made to sell or 
680

otherwise reduce the underwriting position within a reasonable period, taking into 

account the liquidity, maturity, and depth of the market for the relevant types of 

securities;

(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)(2)(ii)(A) of this 

section; 

(C) Written 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; and

(D) Internal controls and ongoing monitoring and analysis of each trading desk’s 

compliance with its limits.

A banking entity with significant trading assets and liabilities may satisfy the 

requirements in (B) and (C) by complying with the requirements set forth below in 

paragraph (c) of this section;
681

(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.

(3) Definition of distribution. For purposes of this paragraph (a), a distribution of 

securities means:

(i) An offering of securities, whether or not subject to registration under the Securities 

Act of 1933, that is distinguished from ordinary trading transactions by the presence of 

special selling efforts and selling methods; or

(ii) An offering of securities made pursuant to an effective registration statement under 

the Securities Act of 1933.

(4) Definition of underwriter. For purposes of this paragraph (a), underwriter means:

(i) A person who has agreed with an issuer or selling security holder to:

(A) Purchase securities from the issuer or selling security holder for distribution;

(B) Engage in a distribution of securities for or on behalf of the issuer or selling security 

holder; or

(C) Manage a distribution of securities for or on behalf of the issuer or selling security 

holder; or

(ii) A person who has agreed to participate or is participating in a distribution of such 

securities for or on behalf of the issuer or selling security holder.
682

(5) Definition of selling security holder. For purposes of this paragraph (a), selling 

security holder means any person, other than an issuer, on whose behalf a distribution is 

made.

(6) Definition of underwriting position. For purposes of this section, underwriting 

position means the long or short positions in one or more securities held by a banking 

entity or its affiliate, and managed by a particular trading desk, in connection with a 

particular distribution of securities for which such banking entity or affiliate is acting as 

an underwriter.

(7) Definition of client, customer, and counterparty. For purposes of this paragraph (a), 

the terms client, customer, and counterparty, on a collective or individual basis, refer to 

market participants that may transact with the banking entity in connection with a 

particular distribution for which the banking entity is acting as underwriter.

(b) Market making-related activities—(1) Permitted market making-related activities. 

The prohibition contained in § 75.3(a) does not apply to a banking entity’s market 

making-related activities conducted in accordance with this paragraph (b).

(2) Requirements. The market making-related 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 
683

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, taking into account the liquidity, maturity, and depth of the market for the 

relevant types of financial instruments;

(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)(2)(ii) of this section; 
684

(D) Written 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; and

(E) Internal controls and ongoing monitoring and analysis of each trading desk’s 

compliance with its limits. 

A banking entity with significant trading assets and liabilities may satisfy the 

requirements in (C) and (D) by complying with the requirements set forth below in 

paragraph (c) of this section; 

(iv) The compensation arrangements of persons performing the activities described in this 

paragraph (b) are designed not to reward or incentivize prohibited proprietary trading; 

and

(v) The banking entity is licensed or registered to engage in activity described in this 

paragraph (b) in accordance with applicable law.

(3) Definition of client, customer, and counterparty. For purposes of paragraph (b) of 

this section, the terms client, customer, and counterparty, on a collective or individual 

basis refer to market participants that make use of the banking entity’s market makingrelated services by obtaining such services, responding to quotations, or entering into a 

continuing relationship with respect to such services, provided that:

(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 § 75.2(ee) of this part, unless:
685

(I) The trading desk documents how and why a particular trading desk or other 

organizational unit of the entity should be treated as a client, customer, or counterparty of 

the trading desk for purposes of paragraph (b)(2) of this section; or

(J) The purchase or sale by the trading desk is conducted anonymously on an exchange or 

similar trading facility that permits trading on behalf of a broad range of market 

participants.

(12) Definition of financial exposure. For purposes of this section, financial exposure

means the aggregate risks of one or more financial instruments and any associated loans, 

commodities, or foreign exchange or currency, held by a banking entity or its affiliate and 

managed by a particular trading desk as part of the trading desk’s market making-related 

activities.

(13) Definition of market-maker positions. For the purposes of this section, marketmaker 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 (b)(2)(i) of this 

section, that are managed by the trading desk, including the trading desk’s open positions 

or exposures arising from open transactions.

(c) Rebuttable presumption of compliance.

(1) Internal Limits.

(i) A banking entity shall be presumed to meet the requirement in paragraph (a)(2)(ii)(A) 

or (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 internal 

limits for the relevant trading desk as described in paragraph (c)(1)(ii) of this section.
686

(ii)(A) With respect to underwriting activities conducted pursuant to paragraph (a) of this 

section, the presumption described in paragraph (c)(1)(i) of this section shall be available 

to each trading desk that establishes, implements, maintains, and enforces internal limits 

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.

Such internal limits should take into account the liquidity, maturity, and depth of the 

market for the relevant types of securities.

(B) With respect to market making-related activities conducted pursuant to paragraph (b) 

of this section, the presumption described in paragraph (c)(1)(i) of this section shall be 

available to each trading desk that establishes, implements, maintains, and enforces 

internal limits 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, that address 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.
687

Such internal limits should take into account the liquidity, maturity, and depth of the 

market for the relevant types of financial instruments.

(2) Supervisory review and oversight. The limits described in paragraph (c)(1) of this 

section shall be subject to supervisory review and oversight by the CFTC on an ongoing 

basis. 

(3) Limit Breaches and Increases. (i) With respect to any limit set pursuant to paragraphs

(c)(1)(ii)(A) or (c)(1)(ii)(B) of this section, a banking entity shall maintain and make 

available to the CFTC upon request records regarding (1) any limit that is exceeded and 

(2) any temporary or permanent increase to any limit(s), in each case in the form and 

manner as directed by the CFTC.

(ii) In the event of a breach or increase of any limit set pursuant to paragraphs

(c)(1)(ii)(A) or (c)(1)(ii)(B) of this section, the presumption described in paragraph 

(c)(1)(i) of this section shall continue to be available only if the banking entity:

(1) Takes action as promptly as possible after a breach to bring the trading desk into 

compliance; and

(2) Follows established written authorization procedures, including escalation procedures 

that require review and approval of any trade that exceeds 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.

(4) Rebutting the presumption. The presumption in paragraph (c)(1)(i) of this section 

may be rebutted by the CFTC if the CFTC determines, taking into account the liquidity, 

maturity, and depth of the market for the relevant types of financial instruments and 

based on all relevant facts and circumstances, that a trading desk is engaging in activity 
688

that is not based on the reasonably expected near term demands of clients, customers, or 

counterparties. The CFTC’s rebuttal of the presumption in paragraph (c)(1)(i) must be 

made in accordance with the notice and response procedures in Subpart D.

5. Section 75.5 is amended by revising paragraphs (b) and (c) to read as follows:

§ 75.5 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:
689

(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
690

(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 risk-mitigating 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 
691

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 preapproved 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, preapproved limits for the trading desk purchasing or selling the financial instrument for 

hedging activities undertaken for one or more other trading desks. The 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 75.6 is amended by revising paragraph (e)(3); removing paragraphs (e)(4) and

(e)(6); and redesignating paragraph (e)(5) as paragraph (e)(4). The revisions, removals, 

and redesignations read as follows:

§ 75.6 Other permitted proprietary trading activities.
692

* * * * *

(e) * * *

(3) A purchase or sale by a banking entity is permitted for purposes of paragraph (e) of 

this section 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 risk-mitigating 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

7. Section 75.10 is amended by revising paragraph (c)(7)(ii) and paragraph (c)(8)(i)(A) to 

read as follows:

§ 75.10 Prohibition on Acquiring or Retaining an Ownership Interest in and 

Having Certain Relationships with a Covered Fund

* * * * *

(c) * * *

(7) * * *
693

(ii) Participates in the profits and losses of the separate account other than in compliance 

with applicable requirements regarding bank owned life insurance.

* * * * *

(8) * * *

(i) * * *

(A) Loans as defined in § 75.2(t) of subpart A;

* * * * *

8. Section 75.11 is amended 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 
694

interest in such covered fund in compliance with section 15G of that Act (15 U.S.C.78o11) 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 Permitted investment in a covered fund.

9. Section 75.12 is amended by:

Redesignating the second instance of paragraph (e)(2)(vi) as paragraph (e)(2)(vii).

10. Section 75.13 is amended by revising paragraphs (a), (b)(3), (b)(4), and (c) 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
695

(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;
696

(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.

(4) An activity or investment occurs solely outside of the United States for purposes of 

paragraph (b)(1)(iv) of this section only if:

(i) 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 
697

directly or indirectly by, a banking entity that is 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 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; and

(iii) The investment or sponsorship, including any transaction arising from riskmitigating 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.

* * * * *

(c) Permitted covered fund interests and activities by a regulated insurance company. The 

prohibition contained in § 75.10(a) of this subpart does not apply to the acquisition or 

retention by an insurance company, or an affiliate thereof, of any ownership interest in, or 

the sponsorship of, a covered fund only if:

(1) The insurance company or its affiliate acquires and retains the ownership interest 

solely for the general account of the insurance company or for one or more separate 

accounts established by the insurance company;

(2) The acquisition and retention of the ownership interest is conducted in compliance 

with, and subject to, the insurance company investment laws and regulations of the State 

or jurisdiction in which such insurance company is domiciled; and

(3) The appropriate Federal banking agencies, after consultation with the Financial 

Stability Oversight Council and the relevant insurance commissioners of the States and 

foreign jurisdictions, as appropriate, have not jointly determined, after notice and 
698

comment, that a particular law or regulation described in paragraph (c)(2) of this section 

is insufficient to protect the safety and soundness of the banking entity, or the financial 

stability of the United States.

11. Section 75.14 is amended by revising paragraph (a)(2)(ii)(B) to read 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 CFTC (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

12. Section 75.20 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
699

g. Adding paragraphs (g), (h), and (i).

The revisions and additions read as follows:

§ 75.20 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. The CEO of a banking entity that has significant trading assets and 

liabilities must, based on a review by the CEO of the banking entity, attest in writing to 

the CFTC, each year no later than March 31, that the banking entity has in place 

processes to establish, maintain, enforce, review, test and modify the compliance 

program required by paragraph (b) of this section in a manner 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.
700

(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 CFTC notifies the banking entity in writing that it must satisfy the reporting 

requirements contained in the Appendix.

(2) Frequency of reporting: Unless the CFTC notifies the banking entity in writing that 

it must report on a different basis, a banking entity subject to the Appendix shall report 

the information required by the Appendix for each quarter within 30 days of the end of 

the quarter.

(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 
701

subpart B and subpart C and shall have no obligation to demonstrate compliance with this 

part on an ongoing basis.

(2) Rebuttal of presumption. If upon examination or audit, the CFTC 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 CFTC may require the banking 

entity to be treated under this part as if it did not have limited trading assets and 

liabilities. The CFTC’s rebuttal of the presumption in this paragraph must be made in 

accordance with the notice and response procedures in paragraph (i) of this Subpart.

(h) Reservation of authority. Notwithstanding any other provision of this part, the CFTC

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 CFTC 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. The CFTC’s exercise of this reservation of authority 

must be made in accordance with the notice and response procedures in paragraph (i) of 

this Subpart.

(i) Notice and Response Procedures.

(1) Notice. The CFTC will notify the banking entity in writing of any determination 

requiring notice under this part and will provide an explanation of the determination. 

(2) Response. The banking entity may respond to any or all items in the notice described 

in paragraph (i)(1) of this section. The response should include any matters that the 
702

banking entity would have the CFTC consider in deciding whether to make the 

determination. The response must be in writing and delivered to the designated CFTC

official within 30 days after the date on which the banking entity received the notice. The 

CFTC may shorten the time period when, in the opinion of the CFTC, the activities or 

condition of the banking entity so requires, provided that the banking entity is informed 

of the time period at the time of notice, or with the consent of the banking entity. In its 

discretion, the CFTC may extend the time period for good cause. 

(3) Failure to respond within 30 days or such other time period as may be specified by the 

CFTC shall constitute a waiver of any objections to the CFTC’s determination. 

(4) The CFTC will notify the banking entity of the decision in writing. The notice will 

include an explanation of the decision.

13. Remove Appendix A and Appendix B to Part 75 and add Appendix to Part 75—

Reporting and Recordkeeping Requirements for Covered Trading Activities

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. These entities are required to (i) furnish periodic 

reports to the CFTC regarding a variety of quantitative measurements of their covered 

trading activities, which vary depending on the scope and size of covered trading 
703

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 CFTC in:

(1) Better understanding and evaluating the scope, type, and profile of the banking 

entity’s covered trading activities;

(2) Monitoring the banking entity’s covered trading activities;

(3) Identifying covered trading activities that warrant further review or examination by 

the banking entity to verify compliance with the proprietary trading restrictions;

(4) 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;

(5) 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 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;

(6) 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 CFTC of such activities; and

(7) Assessing and addressing the risks associated with the banking entity’s covered 

trading activities.
704

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 otherwise-permitted 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 

CFTC, and remediation, where appropriate. The quantitative measurements discussed in 
705

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(d), 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
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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. Internal Limits and Usage;

ii. Value-at-Risk;

iii. Comprehensive Profit and Loss Attribution;

iv. Positions; and

v. Transaction Volumes.

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 

may provide an optional 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 CFTC 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.
707

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;

v. A list identifying each Agency receiving the submission of the trading desk;

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. An Internal Limits Information Schedule that provides identifying and descriptive 

information for each limit reported pursuant to the Internal Limits and Usage quantitative 

measurement, including the name of the limit, a unique identification label for the limit, a 

description of the limit, the unit of measurement for the limit, the type of limit, and 

identification of the corresponding risk factor attribution in the particular case that the 

limit type is a limit on a risk factor sensitivity and profit and loss attribution to the same 

risk factor is reported; and
708

2. 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.

d. Narrative Statement

Each banking entity made subject to this appendix by § 75.20 may submit in a separate 

electronic document a Narrative Statement to the CFTC with any information the banking 

entity views as relevant for assessing the information reported. The Narrative Statement 

may include further description of or changes to calculation methods, identification of 

material events, description of and reasons for changes in the banking entity’s trading 

desk structure or trading desk strategies, and when any such changes occurred.

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 Trading Desk Information, the Quantitative 

Measurements Identifying Information, and each applicable quantitative measurement 

electronically to the CFTC on the reporting schedule established in § 75.20 unless 

otherwise requested by the CFTC. A banking entity must report the Trading Desk 

Information, the Quantitative Measurements Identifying Information, and each applicable 

quantitative measurement to the CFTC in accordance with the XML Schema specified 

and published on the CFTC’s website.

f. Recordkeeping
709

A banking entity must, for any quantitative measurement furnished to the CFTC 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 

CFTC 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 CFTC.

IV. Quantitative Measurements

a. Risk-Management Measurements

1. Internal Limits and Usage

i. Description: For purposes of this appendix, Internal Limits are the constraints that 

define the amount of risk and the positions 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. Internal limits and their usage are key compliance and 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 trading desk’s risk limits, commonly 

including a limit on “Value-at-Risk,” are useful 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)(C) 

and § 75.5(b)(1)(i)(A) must meet the applicable requirements under § 75.4(b)(2)(iii)(C) 

and § 75.5(b)(1)(i)(A) and also must include appropriate metrics for the trading desk 
710

limits including, at a minimum, “Value-at-Risk” except to the extent the “Value-at-Risk” 

metric is 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 Internal 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. 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. 

ii. Calculation Period: One trading day.

iii. Measurement Frequency: Daily.

iv. Applicability: All trading desks engaged in covered trading activities. 

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 
711

into two 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”); and (ii) profit and loss attributable to new positions resulting from the current 

day’s trading activity (“new positions”).

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 (i) changes in 

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. 
712

D. The portion of comprehensive profit and loss from existing positions that is not 

attributed to changes in specific risk factors and other factors must be allocated to a 

residual category. 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 and Transaction Volumes 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.”3

 A banking 

entity must separately report the trading desk’s market value of long securities positions, 

short securities positions, derivatives receivables, and 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-making-related activity, respectively.

2. Transaction Volumes

 3 See § 75.2(h), (aa). 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.
713

i. Description: For purposes of this appendix, Transaction Volumes measures three 

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; and (iii) trading desks and other 

organizational units where the transaction is booked into either the same banking entity 

or 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.”4

 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-making-related activity, respectively.

 4 See § 75.2(h), (aa).
714

[THIS SIGNATURE PAGE RELATES TO THE JOINT FINAL RULE TITLED 

“REVISIONS TO PROHIBITIONS AND RESTRICTIONS ON PROPRIETARY 

TRADING AND CERTAIN INTERESTS IN, AND RELATIONSHIPS WITH, HEDGE 

FUNDS AND PRIVATE EQUITY FUNDS.”]

Dated: [•]

___________________________________

Joseph M. Otting,

Comptroller of the Currency
715

[THIS SIGNATURE PAGE RELATES TO THE JOINT FINAL RULE TITLED 

“REVISIONS TO PROHIBITIONS AND RESTRICTIONS ON PROPRIETARY 

TRADING AND CERTAIN INTERESTS IN, AND RELATIONSHIPS WITH, HEDGE 

FUNDS AND PRIVATE EQUITY FUNDS.”]

By order of the Board of Governors of the Federal Reserve System, [•]

___________________________________

Ann E. Misback,

Secretary of the Board.
716

[THIS SIGNATURE PAGE RELATES TO THE JOINT FINAL RULE TITLED 

“REVISIONS TO PROHIBITIONS AND RESTRICTIONS ON PROPRIETARY 

TRADING AND CERTAIN INTERESTS IN, AND RELATIONSHIPS WITH, HEDGE 

FUNDS AND PRIVATE EQUITY FUNDS.”]

Dated at Washington, D.C. on [•].

By order of the Board of Directors.

Federal Deposit Insurance Corporation.

_______________________________

Valerie Jean Best

Assistant Executive Secretary.
717

[THIS SIGNATURE PAGE RELATES TO THE JOINT FINAL RULE TITLED 

“REVISIONS TO PROHIBITIONS AND RESTRICTIONS ON PROPRIETARY 

TRADING AND CERTAIN INTERESTS IN, AND RELATIONSHIPS WITH, HEDGE 

FUNDS AND PRIVATE EQUITY FUNDS.”]

By the Securities and Exchange Commission.

Date: [•]

Brent J. Fields

Secretary
718

[THIS SIGNATURE PAGE RELATES TO THE JOINT FINAL RULE TITLED 

“REVISIONS TO PROHIBITIONS AND RESTRICTIONS ON PROPRIETARY 

TRADING AND CERTAIN INTERESTS IN, AND RELATIONSHIPS WITH, HEDGE 

FUNDS AND PRIVATE EQUITY FUNDS.”]

Issued in Washington, D.C., on October 11, 2019, by the Commodity Futures Trading 

Commission.

Christopher Kirkpatrick,

Secretary of the Commodity Futures Trading Commission
719

NOTE: The following appendices will not appear in the Code of Federal Regulations.

Appendices to Revisions to Prohibitions and Restrictions on Proprietary Trading 

and Certain Interests in, and Relationships With, Hedge Funds and Private Equity 

Funds—Commission Voting Summary and Commissioners’ Statements

Appendix 1—CFTC Voting Summary 

On this matter, Chairman Tarbert and Commissioners Quintenz and Stump voted 

in the affirmative. Commissioners Behnam and Berkovitz voted in the negative. The 

document submitted to the CFTC Commissioners for a vote did not include Section V.F. 

SEC Economic Analysis or Section V.G. Congressional Review Act.

Appendix 2—Statement of CFTC Chairman Heath Tarbert in Support of Revisions 

to the Volcker Rule

I have voted to approve revisions to the Volcker Rule, among the most wellintentioned but poorly designed regulations in the history of American finance. My 

involvement with the Volcker Rule started nearly a decade ago when I served as special 

counsel to the Senate Banking Committee before the passage of the Dodd-Frank Act. In 

fact, I was the staff member responsible for arranging for former Federal Reserve 

Chairman Paul Volcker to testify before the committee on the original version of the rule 

that now bears his name. Having had the opportunity to interact with Chairman Volcker 

at various points throughout my career, I have always had immense respect for him. He 

had a clear-cut vision: banks should be barred from speculating in the markets (a practice 

known as proprietary trading) and from running hedge funds and private-equity firms. 

“If you are doing this stuff,” he would say, “you should not be a commercial bank.” 
720

Five federal agencies—the Federal Reserve, the FDIC, the OCC, the SEC, and the 

CFTC (together, the “Agencies”)—issued final regulations in December 2013 to 

implement the statutory language of the Volcker Rule in Title VI of the Dodd-Frank Act. 

The basic premise of this law is to restrict financial institutions with deposits insured by 

the Federal Government from engaging in proprietary trading, but permit trading for 

market making, hedging, and other traditional financial services activities. 

We now have five years of experience with the initial version of the regulations 

implementing the Volcker Rule, and over that time, a number of legitimate concerns have 

arisen. In my view, the initial regulations adopted by the Agencies have metastasized 

from Mr. Volcker’s original, simple vision to the degree where his distinction between 

proprietary and non-proprietary trading is hardly recognizable. I agree with Mr. Volcker 

that the rule has become overly complex and hard to understand;1 at this point it is also 

nearly unadministrable. Among other things, the regulations create confusion over what 

is acceptable activity for banking entities.2

 Indeed, the Agencies have had to issue 21 

sets of frequently asked questions (“FAQs”) in the first three years since the regulations 

 1 See, e.g., “Why Paul Volcker Soured on His Own Rule,” Time (Oct. 25, 2011), 

available at: http://business.time.com/2011/10/25/why-paul-volcker-soured-on-thevolcker-rule; “Paul Volcker Says Volcker Rule Too Complicated,” Reuters (Nov. 9, 

2011), available at https://www.reuters.com/article/us-regulation-volcker/paul-volckersays-volcker-rule-too-complicated. This is not to suggest that Mr. Volcker agrees with 

the proposed changes now before the interagency process. See “Volcker the Man Blasts 

Volcker the Rule in Letter to Fed Chair,” Bloomberg (Sept. 10, 2019), available at 

https://www.bloomberg.com/news/articles/2019-09-10/volcker-the-man-blasts-volckerthe-rule-in-letter-to-fed-chair (describing a private letter purportedly criticizing the 

proposed amendments to the current regulations). 

2 I have written a number of legal articles over the years to help market participants make 

sense of the Volcker Rule and how it might apply to them. See, e.g., The Vagaries of the 

Volcker Rule, Int’l Fin. L. Rev. (Sept. 2010); The Volcker Rule and the Future of Private 

Equity (co-author), Rev. of Banking & Fin. Serv. (May 2011); and CLOs and the Volcker 

Rule (co-author), Rev. of Banking & Fin. Serv. (Aug. 2015).
721

were adopted.3 This is not a model of clear rulemaking. Furthermore, the Volcker Rule 

imposes highly intensive compliance burdens that unfairly benefit large Wall Street 

banks over smaller regional ones. No one ever intended these results. 

In addition, the Volcker Rule has an extraterritorial reach that is breathtaking in 

its expansiveness, something I witnessed personally several years ago in Australia. There 

I met with a senior executive at a local, Australian financial institution. He handed me 

his business card, and it listed his title as “Head of Volcker Rule Compliance.” In 

Australia! We have created a mess not just for the United States, but for the whole 

world.

I do not doubt the good intentions of the original drafters of both the Volcker Rule 

and its implementing regulations. I continue to affirm that deposit insurance 

underwritten by the FDIC and discount window access provided by the Federal 

Reserve—both ultimately backstopped by U.S. taxpayers—should not subsidize non-

 3 See FAQ on Conformance Period (June 10, 2014); FAQ on Foreign Public Fund 

Seeding Vehicles (June 10, 2014); FAQ on Loan Securitization Servicing Assets (June 

10, 2014); FAQ on Namesharing Prohibition (June 10, 2014); FAQ on Metrics Reporting 

Date (June 10, 2014); FAQ on Trading Desk (June 10, 2014); FAQ on Mortgage-Backed 

Securities of Government-Sponsored Enterprises (November 12, 2014); FAQ on Metrics 

Reporting During the Conformance Period (Nov. 13, 2014); FAQ on Annual CEO 

Attestation (Sept. 10, 2014); FAQ on Metrics Reporting and Confidentiality (Dec. 23, 

2014); FAQ on Treasury STRIPS (Jan. 29, 2015); FAQ on 30-Day Metrics Reporting 

During the Conformance Period (Jan. 29, 2015); FAQ on SOTUS Covered Fund 

Exemption: Marketing Restriction (Feb. 27, 2015); FAQ on Foreign Public Funds 

Sponsored by Banking Entities (June 12, 2015); FAQ on Joint Venture Exclusion for 

Covered Funds (June 12, 2015); FAQ on Seeding Period Treatment of Registered 

Investment Companies and Foreign Public Funds (June 16, 2015); FAQ on CEO 

Certification for Prime Brokerage Transactions (Sept. 25, 2015); FAQ on Compliance for 

Market Making and the Identification of Covered Funds (Sept. 25, 2015); FAQ on 

Termination of Market-making Activity (Nov. 20, 2015); FAQ on Applicability of the 

Restrictions in Section 13(f) of the BHC Act (Nov. 20, 2015); FAQ on Capital Treatment 

of Banking Entity Investments in TruPS CDOs (Mar. 4, 2016).
722

banking activities.4 I will not raise the related question whether non-banks affiliated with 

insured depository institutions should be allowed to engage in proprietary trading. I 

recognize that this is a decision for Congress, not me.5 

As Chairman of the CFTC, my job is to ensure that the derivatives markets are 

liquid, resilient, and vibrant so they can serve the price discovery and risk management 

functions critical to our real economy. I have seen reports that liquidity in bond markets 

may have been adversely affected by the Volcker Rule.6 I am concerned that the Volcker 

Rule may also affect liquidity in the derivatives markets. This could negatively impact 

the ability of agricultural, energy, manufacturing, and other companies in the real 

economy to engage in risk mitigation activities.

 4 See Hearing Before the Committee on Banking, Housing, and Urban Affairs, United 

States Senate, 150th Congress, Session 1 (May 17, 2017) at 22 (“I [Heath Tarbert] 

believe that Federal deposit insurance should not subsidize nonbanking activities. . . . 

[This] should not be controversial.”).

5 It is worth noting that the Dodd-Frank Act of 2010 contained a provision addressing the 

specific issue of insured banks engaging in trading activities perceived to go beyond 

traditional banking services. The “push-out” rule of Section 716, also known as the 

Lincoln Amendment, would have confined an insured depository institution’s trading of 

swaps to those used for hedging or otherwise related to the well-known list of eligible 

(and appropriately conservative) investments permissible for national banks. Exotic and 

non-traditional products such as credit default swaps, equity swaps, and most physical 

commodity swaps would have been effectively “pushed out” out of insured banks and 

into non-bank affiliates not directly backstopped by U.S. taxpayers. Whatever the merits 

of the Lincoln Amendment, no one can deny that it was a clear rule aimed at an equally 

clear and widely-shared policy objective. But it was not to last. In December 2014, a 

bipartisan Congress passed—and President Obama signed into law—a budget bill 

containing a provision that largely gutted the original push-out rule of the Dodd-Frank 

Act. See Consolidated and Further Continuing Appropriations Act, 2015, Pub. L. No. 

113-235, 128 Stat. 2130 at section 630 (2014).

6 See, e.g., M. Allahrakha & J. Cetina, et al., “The Effects of the Volcker Rule on 

Corporate Bond Trading: Evidence from the Underwriting Exemption,” OFR Working 

Paper (Aug. 6, 2019); J. Bao, & M. O’Hara, et al., The Volcker Rule and Market-Making 

in Times of Stress, J. of Fin. Econ. (2018); H. Bessembinder & S. Jacobsen, et al., Capital 

Commitment and Illiquidity in Corporate Bonds, J. of Fin. (Aug. 2018).
723

I am happy to say that the amended regulations we have now adopted help to 

simplify the Volcker Rule and include a number of important amendments that lessen the 

burden on smaller regional banks and benefit end users of derivatives. The amendments 

seek to tailor the Volcker Rule to increase efficiency, right-size firms’ compliance 

obligations, and allow banking entities—especially smaller ones—to provide services to 

clients more efficiently. 

The amended regulations adopt a risk-based approach that relies on a set of 

clearly articulated standards for prohibited and permitted activities and investments. In 

particular, the new regulations revise elements of the prohibition on proprietary trading to 

provide banking entities—including CFTC-registered swap dealers and futures 

commission merchants (“FCMs”)—with greater flexibility in their trading activities and 

simplified compliance procedures. 

The final regulations also expand existing, and include additional, exclusions 

from the definition of proprietary trading. For example, the amended regulations add an 

exclusion for matched derivatives transactions to facilitate customer-driven swaps, 

especially by customers of small regional banks, which should benefit end users who rely 

on derivatives to hedge their commercial risks. The amended final regulations also 

expand the list of permissible products for the liquidity management exclusion to include 

FX forwards/swaps and cross-currency swaps. Banking entities commonly purchase and 

sell these instruments for the purpose of managing their liquidity and funding needs. 

This can ultimately benefit commercial firms who use banks for loans and other products 

to hedge their foreign exchange risks arising from import and export transactions.
724

In addition, the final regulations tailor the compliance and metrics reporting 

requirements of the Volcker Rule to focus on entities with relatively large trading 

operations. As a result, financial institutions on Wall Street will retain their reporting 

procedures, while smaller and more traditional commercial banks without major trading 

operations will get some relief. What is more, the new regulations simplify requirements 

by clarifying prohibited and permissible activities, so that all institutions—including 

those headquartered abroad but who lend and deploy capital in the United States—have a 

better understanding of how to comply with our laws. 

I believe laws should be as clear and concise as possible. The point of having 

laws is for people to follow them, but before they can follow them they first have to 

understand them. As Judge Learned Hand put it 90 years ago, “The language of the law 

must not be foreign to the ears of those who are to obey it.”7

 For too long the Volcker 

Rule has been just that—very peculiar and virtually unintelligible to market participants 

and regulators alike. 

In short, the amended regulations will provide banking entities and their affiliates 

(including a number of swap dealers, FCMs, and commodity pools subject to CFTC 

oversight) with greater clarity and certainty about what activities are permitted under the 

Volcker Rule. The revised regulations will also generally reduce the compliance burden 

for these entities, which will benefit those end users of derivatives who are critical to our 

real economy. These changes, which will make the Volcker Rule simpler without 

reducing its fundamental benefits, are something we should all support.

 7 Hand, L. Is There a Common Will? in The Spirit of Liberty: Papers and Addresses of 

Learned Hand 56 (I. Dilliard, 3d ed. 1960) (quoting from address before the American 

Law Institute in 1929). 
725

Appendix 3—Supporting Statement of CFTC Commissioner Brian Quintenz

I support today’s targeted amendments to the Volcker Rule, which I believe will 

simplify firms’ compliance with the statutory ban on proprietary trading and improve the 

agencies’ supervision of banking entities. Based upon the agencies’ implementation 

experience since 2013, it has become apparent that the rule as originally adopted has 

resulted in ambiguity over permissible activities, an overbroad application, and 

unnecessarily complex compliance processes. The revised rule before us today tailors 

and simplifies the rule to enable banking entities to effectively provide traditional 

banking services to their clients in a manner that is consistent with the statute. 

Adopting a risk-based approach, the revised rule tailors the scale of a banking 

entity’s compliance program to be commensurate with the firm’s size and level of trading 

activities. Under the final rule, the most stringent compliance requirements apply to 

those entities with the most significant amount of trading activities, while banks with 

simpler business models and more limited trading operations would be subject to tiered 

compliance requirements tailored to the complexity and scope of their activities. As a 

result, firms with little or no activity subject to the Volcker Rule’s prohibitions will face 

lower compliance costs and reduced regulatory burdens. However, because activity 

implicated by the Volcker Rule is concentrated in a small number of banks, the agencies 

estimate that, even under this tiered approach, approximately 93% of the trading assets 

and liabilities in the U.S. banking system would continue to be held by firms subject to 

the strictest compliance standards. 

The final rule also clarifies and simplifies the application of the short-term intent 

prong. Under the 2013 rule, the purchase (or sale) of a financial instrument by a banking 
726

entity was presumed to be for the trading account if the banking entity held the financial 

instrument for fewer than sixty days (or substantially transferred the risk of the financial 

instrument within 60 days of purchase or sale). In practice, firms have found it difficult 

to rebut the presumption, with the result that the short term intent prong has captured 

many activities that should not be included in the definition of proprietary trading. The

final rule addresses this issue by reversing the rebuttable presumption, providing that the 

purchase or sale of a financial instrument presumptively lacks short-term trading intent if 

the banking entity holds the financial instrument for 60 days or longer. In addition, the 

final rule includes new or expanded exclusions from the definition of proprietary trading 

for liquidity management programs, certain customer-driven swaps, error trades, and 

certain traditional banking activities, such as the hedging of mortgage servicing rights. 

These modifications clarify the scope of permissible activities and ensure that the 

application of the proprietary trading ban is not overbroad. 

I believe today’s final rule serves as an example of effective cooperation among 

five regulators: the CFTC; the Securities and Exchange Commission; the Federal Reserve 

Board; the Office of the Comptroller of the Currency; and the Federal Deposit Insurance 

Corporation. The agencies have come together to address many of the unintended 

consequences of the prior rule, while continuing to comply with statutory requirements. 

Finally, I would like to thank the staff of the Division of Swap Dealer and Intermediary 

Oversight for their efforts on this matter.

Appendix 4—Dissenting Statement of CFTC Commissioner Rostin Behnam

I respectfully dissent as to the Commission’s decision to approve revisions to the 

Volcker Rule. In June 2018, when I voted against the proposed rule, I expressed that my 
727

biggest concern was that our action would encourage a return to the risky activities that 

led to the financial crisis, and perhaps further consolidate trading activity into a few 

institutions.1 My concern last June was that we were weakening the Volcker Rule around 

the edges, and I raised specific issues regarding unnecessary complexity, lack of clarity, 

and a flawed process that chilled dissent. Unfortunately, today’s final rule does not do 

anything to assuage these concerns. To make matters worse, while the proposal merely 

threatened to kill Volcker through a thousand little cuts, the final rule goes for the throat. 

It significantly weakens the prohibition on proprietary trading by narrowing the scope of 

financial instruments subject to the Volcker Rule. What remains is so watered down that 

it leaves one questioning whether it should be called the Volcker rule at all. To that 

point, Paul Volcker himself recently sent a letter to the Chairman of the Federal Reserve 

criticizing the rule and stating that the rule “amplifies risk in the financial system, 

increases moral hazard and erodes protections against conflicts of interest that were so 

glaringly on display during the last crisis.”2

In my dissent last June, I pointed out that the proposal further complicated the 

Volcker rule while calling it simplification. We do the same thing in the final rule. 

Where once there was one set of rules for all banking entities, there will now be three 

 1 Opening Statement of Commissioner Rostin Behnam Before the Open Commission 

Meeting on June 4, 2018 (Jun. 4, 2018), 

https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement060418.

2 Jesse Hamilton and Yalman Onaran, “Vocker the Man Blasts Volcker the Rule in Letter 

to Fed Chair,” Bloomberg (Sep. 10, 2019), 

https://www.bloomberg.com/news/articles/2019-09-10/volcker-the-man-blasts-volckerthe-rule-in-letter-to-fed-chair.
728

categories of banking entities with different rules for each: Banking entities with 

Significant trading assets and liabilities, banking entities with Limited trading assets and 

liabilities, banking entities in between with Moderate trading assets and liabilities. While 

numerous commenters expressed concerns with this three-tiered compliance framework, 

we nonetheless are finalizing this needlessly complex system. In addition, the majority 

today makes “targeted adjustments” that further complicate matters. In some instances, 

these adjustments are at least requested by the commenters. In others, they are invented 

seemingly out of whole cloth. 

The most troubling aspect of today’s rule, though, is something new. The final 

rule includes changes to the definition of “trading account” that will significantly reduce 

the scope of financial instruments subject to the Volcker Rule’s prohibition on 

proprietary trading. This change is described in the preamble to the final rule as avoiding 

having the trading account definition “inappropriately scope in” certain financial 

instruments, almost as if they were included in the proposal’s scope by mistake. 

However, these financial instruments were within the scope of the 2013 rule, and they 

were within the scope of the proposal. Removing them now limits the scope of the 

Volcker rule so significantly that it no longer will provide meaningful constraints on 

speculative proprietary trading by banks. As such, I cannot vote for the rule.
729

Appendix 5—Dissenting Statement of CFTC Commissioner Dan M. Berkovitz

Congress adopted the statute commonly known as the “Volcker Rule” in the wake of the 

2008 financial crisis to prevent banks that benefit from federal depository insurance or other 

government support from taking excessive risks that could lead to future taxpayer bailouts. The 

Volcker Rule prohibits proprietary trading and the owning of hedge funds and private equity 

funds by banks and their subsidiaries (“banking entities”), with certain exceptions and 

exemptions. In 2013 the Commission and other financial regulators adopted regulations to 

implement the Volcker Rule. The final rule before the Commission today (“revised Volcker 

Rule”) substantially weakens these implementing regulations.

The revised Volcker Rule eliminates or reduces a variety of substantive standards in the 

current rule. The revised Volcker Rule will render enforcement of the rule difficult if not 

impossible by leaving implementation of significant requirements to the discretion of the 

banking entities, creating presumptions of compliance that would be nearly impossible to 

overcome, and eliminating numerous reporting requirements. The revised Volcker Rule also 

substantially reduces the bank trading activity covered by the rule. Finally, the revised Volcker 

Rule includes a number of changes and additions not contemplated or adequately discussed in 

the notice of proposed rulemaking (NPRM) in violation of the Administrative Procedure Act 

(“APA”) requirements for public notice and comment for rulemakings.

For these reasons, I dissent.

Weak Regulation and Enforceability Concerns

Nearly every amending provision of the revised Volcker Rule adopts the weakened 

provisions from the NPRM, further weakens the proposed changes, or makes new changes that 

weaken or eliminate existing requirements and standards. New presumptions of compliance 
730

favoring the banking entities, regulatory determinations left to the banking entities, and 

reductions in reporting requirements by the banking entities will make the revised Volcker Rule 

more difficult to enforce. The cumulative effect of this myriad of changes is a set of regulations 

that is ineffective and unenforceable. Although a single chip off a sculpture, by itself, may not 

create a noticeable blemish, widespread chiseling will disfigure the object. Such is the result 

here. 

The “trading account” definition and related regulatory exclusions in the 2013 rule 

determine which financial transactions are subject to the restrictions on proprietary trading. 

Financial transactions of banking entities are subject to the Volcker regulations if they fall within 

certain “prongs” established in the trading account provision. The revised Volcker Rule rejects 

the “accounting prong” proposed in the NPRM and effectively jettisons the existing “short-term 

intent prong” for most entities.1 In addition, there are a number of newly created outright 

exclusions of whole types of transactions and broadening of existing exclusions under the 

revised Volcker Rule.

FDIC Commissioner Martin Gruenberg provided an analysis of how these changes will 

significantly reduce the banking activity subject to Volcker oversight. “By excluding these 

financial instruments from the Volcker Rule, the final rule . . . opens up vast new opportunity –

hundreds of billions of dollars of financial instruments – at both the bank and bank holding 

company level, for speculative proprietary trading funded by the public safety net.”2

 1 While the short-term intent prong remains for a limited number of banks not subject to the 

market risk capital rules in banking regulations, compliance with the short-term intent prong is 

now optional if those banking entities instead elect to comply with the market risk capital rules 

for Volcker compliance.

2 Statement by Martin J. Gruenberg, Member, FDIC Board of Directors, The Volcker Rule (Aug. 

20, 2019) at 3, available at https://www.fdic.gov/news/news/speeches/spaug2019b.pdf.
731

The 2013 Volcker rules define the “trading desk” as the “smallest discrete unit of 

organization” that purchases and sells financial instruments. The revised Volcker Rule removes 

the quoted text, and instead provides four broad criteria for designating a trading desk. The rule 

then allows the banking entities to designate the trading desks for purposes of Volcker.

The new trading desk designation criteria appear to be broad enough that a “trading desk” 

could include whole business lines, divisions, or an entire swap dealer. The opportunities for 

undertaking greater amounts of proprietary trading expand significantly when the limits (which 

are set by the banking entities themselves), the desk-specific positions being hedged, and 

reporting requirements are applied to much larger trading portfolios. Because the revised 

Volcker Rule effectively presumes that these trading desk designations by the banking entities 

are valid, it will be more difficult for the applicable regulator to reign in proprietary trading 

undertaken by more expansively designated trading desks.

How much proprietary trading can occur under the market making exemption in the 

revised Volcker Rule will be determined by the risk limits set for each trading desk. The risk 

limits are to be established at the discretion of each banking entity and, as noted above, the scope 

of a trading desk also will be determined by the banking entity within broad criteria.

“Reasonably expected near-term demand” (“RENTD”) of customers is included in the Volcker 

statute to establish the level of market making permissible. While the RENTD concept is still in 

the revised Volcker Rule, a presumption has been added that the RENTD levels set by each 

banking entity are correct.

Because these determinations will be established by the banking entity and presumed to 

be compliant, it will be difficult for any regulator to challenge them or take any enforcement 
732

action – even if a banking entity experiences large losses from proprietary trading – so long as 

the trading is found to be within the set limits.

These concerns about enforcement and oversight are exacerbated by the reduced metrics 

and other reporting, documentation, and compliance requirements. Numerous changes are made 

both as proposed and added on in this final rule. To name a few, stressed value at risk, daily risk 

factor sensitivities, and risk limit breaches need not be reported. In some cases, changes to 

reporting requirements make sense if experience shows a metric has little or no regulatory value.

But most of these changes in the revised Volcker Rule are purportedly justified because they 

reduce the burden on banking entities and the cumulative effect on the ability of a regulator to 

monitor for compliance and potential significant issues is not addressed.

Logical Outgrowth Concerns

The revised Volcker Rule includes a number of new rules and amendments that were not 

mentioned or adequately described in the NPRM. The APA requires that a proposed rulemaking 

be published in the Federal Register and that interested persons be given an opportunity to 

comment.3 A “notice of proposed rulemaking must provide sufficient factual detail and rationale 

for the rule to permit interested parties to comment meaningfully.”4

In comparing the revised Volcker Rule to the NPRM, there are a number of changes that 

were either not addressed in the NPRM or at best are based on comments received in response to 

general questions. For example, the NPRM included a proposal to replace the short-term intent 

prong with what is commonly referred to as the “accounting prong.” In the revised Volcker 

Rule, the accounting prong was rejected, but the short-term interest prong also is eliminated for 

 3 5 U.S.C. 553(b) and (c).

4 Honeywell Int’l, Inc. v. EPA, 372 F.3d 441, 445 (D.C. Cir. 2004) (internal quotation marks 

omitted).
733

most banking entities.5 While replacing the short-term intent prong was discussed in the 

proposal, effectively eliminating the prong without a replacement was not proposed. Similarly 

the option for certain banking entities to now elect to comply with the market risk capital rule 

prong rather than the short-term intent prong was not discussed as an alternative. Nor was the 

replacement of the rebuttable presumption of proprietary trading for positions held shorter than 

60 days with the opposite presumption that positions held longer than 60 days are not proprietary 

trading for purposes of the Volcker Rule. Agencies cannot “pull a surprise switcheroo” in the 

rulemaking process.6 

Furthermore, the NPRM appears to not even contemplate excluding government bond 

assets and liabilities, mortgage servicing rights hedges, or financial instruments that are not 

trading assets or trading liabilities from counting as proprietary trading. Other changes, such as 

the elimination of incentive compensation limits, the matched derivatives transaction exclusion, 

and elimination of risk factor sensitivity metrics reporting appear to be based on general 

questions in the NPRM. In each case, no draft rule text or adequate discussion of such 

amendments was provided that would allow the public to have anticipated those amendments. 

Rather, many of these changes appear to be based on de novo comments made by banks or their 

trade organizations. “[I]f the final rule ‘substantially departs from the terms or substance of the 

proposed rule,’ the notice is inadequate.”7

 

Conclusion

 5 Firms subject to, or which elect to be subject to, the market risk capital rule prong are no longer 

subject to the short-term intent prong.

6 Environmental Integrity Project v. EPA, 425 F.3d 992, 996 (D.C. Cir. 2005).

7 Chocolate Manufacturers Assoc. of the United States v. Block, 755 F.2d 1098, 1105 (4th Cir. 1985) (quoting 

Rowell v. Andrus, 631 F.2d 699, 702 n.2 (10th Cir. 1980).
734

Self-regulation failed us in the early part of this century. Dodd-Frank, including the 

Volcker Rule, has helped this country rebuild a strong and better managed financial sector. To 

maintain a robust financial sector that benefits the American people, we must maintain strong 

standards and vigorous oversight. Otherwise, it is only a matter of time before the memory of 

the huge losses and resulting pressures for a taxpayer bailout fades and excessive risk taking 

comes home to roost. While the Dodd-Frank regulations may not be perfect and modest 

adjustments may be appropriate, the wholesale revision of regulations that greatly weaken the 

enforceability of those regulations such as we have before us today will, in the long run, weaken 

the financial sector and pose risks to the American public.