[Federal Register Volume 84, Number 220 (Thursday, November 14, 2019)]
[Rules and Regulations]
[Pages 61974-62277]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22695]



[[Page 61973]]

Vol. 84

Thursday,

No. 220

November 14, 2019

Part II





Department of Treasury





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Office of the Comptroller of the Currency





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12 CFR Part 44





Federal Reserve System





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12 CFR Part 248





Federal Deposit Insurance Corporation





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12 CFR Part 351





Commodity Futures Trading Commission





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17 CFR Part 75





Securities and Exchange Commission





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17 CFR Part 255





Prohibitions and Restrictions on Proprietary Trading and Certain 
Interests in, and Relationships With, Hedge Funds and Private Equity 
Funds; Final Rule

  Federal Register / Vol. 84 , No. 220 / Thursday, November 14, 2019 / 
Rules and Regulations  

[[Page 61974]]


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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-7; File no. S7-14-18]
RIN 3235-AM10


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.

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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 entities with clarity about 
what activities are prohibited and to improve supervision and 
implementation of section 13.

DATES: 
    Effective date: The effective date for amendatory instructions 1 
through 14 (OCC), 16 through 29 (Board), 31 through 44 (FDIC), and 46 
through 58 (CFTC) is January 1, 2020; the effective date for amendatory 
instructions 60 through 73 (SEC) is January 13, 2020; and the effective 
date for the addition of appendices Z at amendatory instructions 15 
(OCC), 30 (Board), and 45 (FDIC) is January 1, 2020, through December 
31, 2020, except for amendatory instruction 74 (SEC), which is 
effective January 13, 2020, through December 31, 2020.
    Compliance date: Banking entities must comply with the final 
amendments by January 1, 2021. Until the compliance date, banking 
entities must continue to comply with the 2013 rule (as set forth in 
appendices Z to 12 CFR parts 44, 248, and 351 and 17 CFR parts 75 and 
255). 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 Markets 
Branch, (202) 898-6888; Michael B. Phillips, Counsel, 
mphillips@fdic.gov, Benjamin J. Klein, Counsel, 44262f28212d2a0422202d276a232b32, 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
    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

[[Page 61975]]

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:
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    \1\ 12 U.S.C. 1851.
    \2\ Id.
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     Trading in U.S. government, agency, and municipal 
obligations;
     Underwriting and market making-related activities;
     Risk-mitigating hedging activities;
     Trading on behalf of customers;
     Trading for the general account of insurance companies; 
and
     Foreign trading by non-U.S. banking entities.\3\
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    \3\ 12 U.S.C. 1851(d)(1).
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    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\
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    \4\ E.g., 12 U.S.C. 1851(d)(1)(G).
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    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\
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    \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).
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    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 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.\7\
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    \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).
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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 agencies also invited comments 
on whether certain definitions, including ``banking entity'' \9\ and 
``trading desk,'' \10\ and ``covered fund'' \11\ should be modified.
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    \8\ See 83 FR 33437, 40-42.
    \9\ See 83 FR 33442-46.
    \10\ See 83 FR 33453-54.
    \11\ See 83 FR 33471-82.
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    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.
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    \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.
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    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 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\
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    \14\ See 83 FR 33454-62.
    \15\ See 83 FR 33464-67.
    \16\ See 83 FR 33467-70.
    \17\ See 83 FR 33451-52.
    \18\ See 83 FR 33452-53.
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    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 funds \19\ 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\
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    \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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    To enhance compliance efficiencies, the agencies proposed tailoring 
the

[[Page 61976]]

compliance requirements based on new compliance tiers. The proposed 
rule would have applied the six-pillar 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 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.
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    \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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    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

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.
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    \28\ See, e.g., Senators Merkley et al.; Elise J. Bean (Bean); 
National Association of Federally-Insured Credit Unions (NAFCU); 
Better Markets, Inc. (Better Markets); Americans for Financial 
Reform (AFR); Volcker Alliance; Occupy the SEC; and Volcker 2.0 Form 
Letter.
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    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 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\
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    \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.
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    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 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, risk-mitigating 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

[[Page 61977]]

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 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.
    For the OCC, Board, FDIC, and CFTC, the final amendments will be 
effective on January 1, 2020. For the SEC, the final amendments will be 
effective on January 13, 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. During that time, the 2013 rule will remain in effect 
as codified in appendix Z, which is a temporary appendix that will 
expire on the compliance date. 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 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.
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    \30\ 12 U.S.C. 1851(b)(2)(B)(ii).
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    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 information sharing between 
the agencies by entering into a formal written agreement, such as an 
interagency Memorandum of Understanding.\35\
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    \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.
    \35\ See, e.g., ABA; BB&T CCMR; and FSF.
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    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\
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    \36\ See, e.g., AFR; Public Citizen; Volcker Alliance; and CFA.
    \37\ See, e.g., CAP; Merkley; and Public Citizen.
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    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 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

[[Page 61978]]

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.
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    \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.
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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\
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    \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 Sec.  __.2(c).
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    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 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\
---------------------------------------------------------------------------

    \45\ See final rule Sec.  __.2(r).
    \46\ Public Law 115-174 (May 24, 2018).
    \47\ See 84 FR 35008.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \48\ See 83 FR 33442-446.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \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.
    \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).
---------------------------------------------------------------------------

    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 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

[[Page 61979]]

rulemaking that specifically addresses the fund structures under the 
rule, including the treatment of foreign excluded funds.
---------------------------------------------------------------------------

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

    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 Sec.  __.13(b) of the 2013 rule, as if the qualifying 
foreign excluded fund were a covered fund.\57\
---------------------------------------------------------------------------

    \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.
    \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.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \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-volcker-rule/volcker-rule-implementation-faqs.html (OCC); https://www.federalreserve.gov/bankinforeg/volcker-rule/faq.htm (Board); https://www.fdic.gov/regulations/reform/volcker/faq.html (FDIC); https://www.sec.gov/divisions/marketreg/faq-volcker-rulesection13.htm (SEC); https://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_28_VolckerRule/index.htm 
(CFTC).
    \60\ Id., FAQ 16.
    \61\ Id., FAQ 14.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \63\ See Bank Policy Institute (BPI).
---------------------------------------------------------------------------

    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 
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 activities under the BHC 
Act.\70\
---------------------------------------------------------------------------

    \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.
    \70\ See, e.g., EnerBank USA (EnerBank); Marketplace Lending 
Association; National Association of Industrial Bankers.
---------------------------------------------------------------------------

    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

[[Page 61980]]

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 three-pronged 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 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\
---------------------------------------------------------------------------

    \75\ 12 U.S.C. 1841(a)(2); 12 CFR 225.2(e).
    \76\ Id.
    \77\ See ``Control and Divestiture Proceedings,'' 84 FR 21634-
666 (May 14, 2019).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \78\ See, e.g., Economic Growth, Regulatory Relief, and Consumer 
Protection Act Sec.  203 (excluding community banks from the 
definition of ``banking entity'').
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

    \79\ See proposed rule Sec.  __.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 Sec.  
__.2(t)(1), (ff)(2)-(3).
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \80\ Proposed rule Sec.  __.2(ff).
    \81\ Proposed rule Sec.  __.2(v).
    \82\ Proposed rule Sec.  __.2(t).
    \83\ Proposed rule Sec.  __.20(h).
    \84\ See 83 FR at 33442 (question 7).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \85\ See final rule Sec.  __.2(s), (u), (ee).
---------------------------------------------------------------------------

    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 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

[[Page 61981]]

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.
---------------------------------------------------------------------------

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

    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\ 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\
---------------------------------------------------------------------------

    \92\ See, e.g., ABA; Capital One et al.; and BPI.
    \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 Sec.  __.2(s)(2)-(3).
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \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.
    \96\ Id.
    \97\ Id.
    \98\ See, e.g., ABA; Capital One et al.; and SIFMA.
    \99\ See final rule Sec.  __.2(ee)(1)(i).
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \100\ See Capital One et al.
    \101\ See, e.g., final rule Sec.  __.2(ee)(1)(i).
---------------------------------------------------------------------------

    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 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 non-U.S. trading activities of a banking entity with 
minimal U.S. trading activities.\105\
---------------------------------------------------------------------------

    \102\ See, e.g., IIB and JBA.
    \103\ See proposed rule Sec.  __.2(t)(1), (ff)(2)-(3).
    \104\ See, e.g., IIB and JBA.
    \105\ Id.
---------------------------------------------------------------------------

    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

[[Page 61982]]

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\
---------------------------------------------------------------------------

    \106\ See final rule Sec.  __.2(s)(3), (ee)(3).
    \107\ See Section 13(d)(1)(H), (I) (12 U.S.C. 1851(d)(1)(H), 
(I)).
---------------------------------------------------------------------------

    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 
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.
---------------------------------------------------------------------------

    \108\ See JBA.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \109\ See, e.g., ABA; Capital One et al.
    \110\ See, e.g., Data Boiler and John Hoffman.
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \111\ See, e.g., BMO Financial Group (BMO); Capital One et al.; 
and KeyCorp.
    \112\ See final rule Sec.  __.2(s)(2), (3); see also final rule 
Sec.  __.6(a)(1), (2).
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \113\ See, e.g., ABA; Arvest; and BOK Financial (BOK).
    \114\ See Insurance Coalition.
    \115\ See JBA.
    \116\ See final rule Sec.  __.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.
---------------------------------------------------------------------------

    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

[[Page 61983]]

certain types of 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\
---------------------------------------------------------------------------

    \118\ See, e.g., Bank of Oklahoma; KeyCorp; BPI; and Capital One 
et al Banks.
    \119\ See, e.g., BMO and Capital One et al.
    \120\ See final rule Sec.  __.2(s)(1)(i), (ee)(1)(i).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \124\ See BPI.
    \125\ See final rule Sec.  __.20(i).
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

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

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) short-
term 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 entity did not purchase (or sell) the financial instrument 
principally for any of the purposes described in the short-term intent 
prong.\128\
---------------------------------------------------------------------------

    \127\ See 2013 rule Sec.  __.3(b)(1)(i).
    \128\ See 2013 rule Sec.  __.3(b)(2).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \129\ See 2013 rule Sec.  __.3(b)(1)(ii).
---------------------------------------------------------------------------

    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

[[Page 61984]]

connection with the activities of such business.\130\
---------------------------------------------------------------------------

    \130\ See 2013 rule Sec.  __.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 instrument 
falls within the definition of trading account under at least one of 
the other prongs. See 79 FR at 5549.
---------------------------------------------------------------------------

    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 
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.
---------------------------------------------------------------------------

    \131\ See final rule Sec.  __.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.
    \133\ See final rule Sec.  __.3(b)(2)(i).
    \134\ See final rule Sec.  __.3(b)(2)(ii).
---------------------------------------------------------------------------

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 short-term 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\
---------------------------------------------------------------------------

    \135\ See proposed rule Sec.  __.3(b)(3); 83 FR at 33447-48.
    \136\ See 83 FR at 33447-48.
---------------------------------------------------------------------------

    Many commenters strongly opposed replacing the short-term intent 
prong with the accounting prong.\137\ These commenters asserted that 
the accounting prong could 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 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

[[Page 61985]]

assets and liabilities under applicable accounting standards is not 
indicative of short-term trading intent.\158\
---------------------------------------------------------------------------

    \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 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.
    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \164\ See, e.g., Public Citizen; CAP; Better Markets; and AFR.
    \165\ See CAP.
    \166\ See Better Markets.
    \167\ See Better Markets.
---------------------------------------------------------------------------

    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'' 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \170\ See proposed rule Sec.  __.3(c); 83 FR at 33449-51.
---------------------------------------------------------------------------

    Two commenters supported adopting the presumption of compliance 
with the prohibition on proprietary trading.\171\ Several commenters 
opposed adopting this presumption of 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\
---------------------------------------------------------------------------

    \171\ See, e.g., New England Council and CFA.
    \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.
---------------------------------------------------------------------------

    After considering the comments, the agencies have decided not to 
adopt a trading desk-level presumption of compliance with the 
prohibition on

[[Page 61986]]

proprietary trading. As discussed in the 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.
---------------------------------------------------------------------------

    \181\ See 83 FR at 33449.
---------------------------------------------------------------------------

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) short-term 
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 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\
---------------------------------------------------------------------------

    \182\ See 2013 rule Sec.  __.3(b)(1)(i).
    \183\ See 2013 rule Sec.  __.3(b(2).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \189\ See final rule Sec.  __.3(b)(1)(i).
    \190\ See 12 U.S.C. 1851(h)(6).
---------------------------------------------------------------------------

    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, 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\
---------------------------------------------------------------------------

    \191\ See final rule Sec.  __.3(b)(2)(i), (ii).
    \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.
---------------------------------------------------------------------------

    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

[[Page 61987]]

subject to the market risk capital prong.\196\ Under the final rule, a 
banking entity that is 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.
---------------------------------------------------------------------------

    \195\ See final rule Sec.  __.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 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.
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \197\ See final rule Sec.  __.3(b)(3).
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

    \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.
    \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.
---------------------------------------------------------------------------

    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 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\

[[Page 61988]]

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \213\ See 79 FR at 5550; see also ABA; KeyCorp; Capital One et 
al.; State Street; Arvest; and SIFMA.
    \214\ See final rule Sec.  __.3(b)(4).
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \215\ See proposed rule Sec.  __. 3(b)(1)(ii); 83 FR at 33447.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \216\ See IIB.
    \217\ See id.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \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).
    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \220\ See final rule Sec.  __.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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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

[[Page 61989]]

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 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\
---------------------------------------------------------------------------

    \222\ See 12 CFR 3.202; 12 CFR 217.202; 12 CFR 324.202 (defining 
``covered position'').
    \223\ See 12 CFR part 217.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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 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.
---------------------------------------------------------------------------

    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-by-position 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 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.
---------------------------------------------------------------------------

    \228\ See final rule Sec.  __.3(b)(1)(iii).
    \229\ See final rule Sec.  __.3(b)(1)(i), (ii).
    \230\ See infra section IV.B.1.b.v.
---------------------------------------------------------------------------

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 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

[[Page 61990]]

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 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.
---------------------------------------------------------------------------

    \231\ See 2013 rule Sec.  __.3(d)(3).
    \232\ See 79 FR at 5555.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \233\ See 7 U.S.C. 1a(24) and 1a(25).
    \234\ See proposed rule Sec.  __.3(e)(3).
    \235\ See 83 FR at 33451-52
    \236\ See id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    Several commenters claimed that the eligibility criteria of the 
liquidity management exclusion are opaque and confusing, and suggested 
modifying, clarifying, or eliminating some or 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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\ 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\
---------------------------------------------------------------------------

    \249\ See, e.g., Volcker Alliance; Data Boiler; NAFCU; Public 
Citizen; CAP; Occupy the SEC; and Merkley.
    \250\ See Bean.
    \251\ See Volcker Alliance.
    \252\ See Data Boiler.
    \253\ See, e.g., Public Citizen and Bean.
---------------------------------------------------------------------------

    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

[[Page 61991]]

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 swaps \255\ entered into by a banking 
entity for the purpose of liquidity management in accordance with a 
documented liquidity management plan.\256\
---------------------------------------------------------------------------

    \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 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 Sec.  __.3(d)(3).
---------------------------------------------------------------------------

    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 cross-currency 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 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\
---------------------------------------------------------------------------

    \257\ See Sec.  __.3(e)(3)(i)-(vi) of the final rule.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \258\ See 83 FR at 33452.
    \259\ See Sec.  __.3(d)(3)(ii) of the final rule.
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \260\ See Sec.  __.3(d)(3).
---------------------------------------------------------------------------

    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

[[Page 61992]]

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\
---------------------------------------------------------------------------

    \261\ See 79 FR at 5555.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \262\ See 2013 rule Sec.  __.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, 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.
---------------------------------------------------------------------------

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 Sec.  __.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 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.
---------------------------------------------------------------------------

    \265\ See 83 FR at 33452-53.
---------------------------------------------------------------------------

    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 
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\
---------------------------------------------------------------------------

    \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.
    \269\ See SIFMA.
    \270\ See Capital One et al.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \271\ See Better Markets.
---------------------------------------------------------------------------

    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 
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\
---------------------------------------------------------------------------

    \272\ See Public Citizen.
    \273\ See CAP.
---------------------------------------------------------------------------

    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

[[Page 61993]]

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 
permissible activities.\277\ Accordingly, the agencies are adopting 
this exclusion to provide clarity regarding bona fide trading errors 
and subsequent correcting transactions.
---------------------------------------------------------------------------

    \274\ Final rule Sec.  __.3(d)(10).
    \275\ See final rule Sec.  __.3(b)(4).
    \276\ See 12 U.S.C. 1851(h)(6).
    \277\ See, e.g., BPI and FSF.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \278\ See, e.g., ABA; Credit Suisse; FSF; JBA; and SIFMA.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \279\ See Better Markets.
---------------------------------------------------------------------------

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 floating-rate 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 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.
---------------------------------------------------------------------------

    Loan-related swaps have presented a compliance challenge 
particularly for smaller non-dealer 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\
---------------------------------------------------------------------------

    \286\ Id.
    \287\ Id. at 33463.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \288\ Id.
    \289\ Id. at 33464.
    \290\ Id. at 33463.
---------------------------------------------------------------------------

    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\ 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

[[Page 61994]]

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 lending-
related 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\
---------------------------------------------------------------------------

    \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.
    \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.
---------------------------------------------------------------------------

    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 transactions in Sec.  __.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\
---------------------------------------------------------------------------

    \299\ See, e.g., Covington and BPI.
    \300\ See, e.g., SIFMA and Credit Suisse.
    \301\ See, e.g., Covington; BPI; SIFMA; and Credit Suisse.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \307\ See, e.g., ABA; Arvest; and IIB.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \308\ See Chatham.
    \309\ See BOK.
    \310\ See Covington.
    \311\ See id.
---------------------------------------------------------------------------

    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 security-based 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 risk; \312\ 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.
---------------------------------------------------------------------------

    \312\ Price risk is the risk of loss on a fair-value position 
that could result from movements in market prices.
    \313\ Final rule Sec.  __.3(d)(11).
---------------------------------------------------------------------------

    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 risk-mitigating hedging 
exemption, as one commenter suggested.
---------------------------------------------------------------------------

    \314\ See final rule Sec.  __.3(b)(4).
    \315\ See 12 U.S.C. 1851(h)(6).
---------------------------------------------------------------------------

    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 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

[[Page 61995]]

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 
corn-price 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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 Sec.  __.4(b).
---------------------------------------------------------------------------

    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 security-
based 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 security-based 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-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.
---------------------------------------------------------------------------

    \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.
    \324\ The exclusion only applies to transactions where the 
customer-driven swap or customer-driven 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.
---------------------------------------------------------------------------

    The agencies have considered the comments requesting an exclusion 
for unmatched loan-related 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-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\
---------------------------------------------------------------------------

    \327\ See ABA and Arvest.
    \328\ See final rule Sec.  __.3(b).
---------------------------------------------------------------------------

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 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

[[Page 61996]]

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.
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 certainty to banking entities subject to 
the short-term intent prong as is provided by operation of the market 
risk capital prong.
---------------------------------------------------------------------------

    \329\ See final rule Sec.  __.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.
---------------------------------------------------------------------------

    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 
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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 banking entity 
that purchases or sells financial instruments for the trading account 
of the banking entity or an affiliate thereof.\335\
---------------------------------------------------------------------------

    \334\ See 2013 rule Sec. Sec.  __.4, __.5, App. A., App. B; 
final rule Sec. Sec.  __.4, __.5, App. A.
    \335\ 2013 rule Sec.  __.3(e)(13).
---------------------------------------------------------------------------

    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

[[Page 61997]]

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\
---------------------------------------------------------------------------

    \336\ See 83 FR at 33453.
    \337\ See id.
    \338\ See id.
    \339\ See id.
---------------------------------------------------------------------------

    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 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 institution \344\ and another said it 
is not necessary to introduce complexity into how banking entities 
organize their internal operations.\345\
---------------------------------------------------------------------------

    \340\ See, e.g., ABA; ISDA 1; CCMC; SIFMA 2; Goldman Sachs; FSF; 
JBA; and AFR.
    \341\ See, e.g., ABA and CCMC.
    \342\ See, e.g., ABA; ISDA 1; CCMC; SIFMA 2; Goldman Sachs; FSF; 
and JBA.
    \343\ See AFR.
    \344\ See JBA.
    \345\ See CCMC.
---------------------------------------------------------------------------

    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 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 
Sec.  __.20 as appropriate, the agencies expect aligning the definition 
of trading desk will minimize compliance burden on banking entities 
subject to both rules.
---------------------------------------------------------------------------

    \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 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 Sec.  __.3(e)(13)(ii).
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \348\ Final rule Sec.  __.3(e)(13)(i)(A).
    \349\ See Basel Committee on Banking Supervision, Minimum 
Capital Requirements for Market Risk (Feb. 2019).
---------------------------------------------------------------------------

    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 Volcker Rule. Thus, the final rule 
does not incorporate any reference to incentive compensation.\350\
---------------------------------------------------------------------------

    \350\ Compare 83 FR at 33453 with final rule Sec.  
__.3(e)(13)(i)(B).
---------------------------------------------------------------------------

    The final rule does not require the agencies to approve banking 
entities'

[[Page 61998]]

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.
---------------------------------------------------------------------------

    \351\ See AFR.
    \352\ See JBA.
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

    \353\ See 83 FR at 33454.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \354\ See, e.g., BB&T and CFA.
    \355\ Id.
    \356\ See CFA.
---------------------------------------------------------------------------

    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 proposed accounting prong and is aligned with the 
statutory standard, the agencies do not find it necessary to retain a 
reservation of authority.
---------------------------------------------------------------------------

    \357\ See proposed rule Sec.  __.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.
---------------------------------------------------------------------------

2. Section __.4: Permitted Underwriting and Market Making Related 
Activities
a. Current Exemptions for Underwriting and Market Making--Related 
Activities \359\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \360\ 12 U.S.C. 1851(d)(1)(B).
    \361\ See 79 FR at 5615.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \362\ See 79 FR at 5561 (internal footnotes omitted).
    \363\ Id.
    \364\ See 79 FR at 5576.
    \365\ See 79 FR at 5541.
---------------------------------------------------------------------------

    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 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:
    [cir] The products, instruments, or exposures each trading desk may 
purchase, sell, or manage as part of its underwriting activities;
    [cir] Limits for each trading desk, based on the nature and amount 
of the trading

[[Page 61999]]

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;
    [cir] Internal controls and ongoing monitoring and analysis of each 
trading desk's compliance with its limits; and
    [cir] Authorization procedures, including escalation procedures 
that require review and approval of any trade that would exceed a 
trading desk's limit(s), demonstrable analysis of the basis for any 
temporary or permanent increase to a trading desk's limit(s), and 
independent review of such demonstrable analysis and approval;
     The compensation arrangements of persons performing the 
banking entity's underwriting activities are designed not to reward or 
incentivize prohibited proprietary trading; and
     The banking entity is licensed or registered to engage in 
the activity described in the underwriting exemption in accordance with 
applicable law.
    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 market-maker 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 designed written 
policies and procedures, internal controls, analysis, and independent 
testing identifying and assessing certain specified factors; \366\
---------------------------------------------------------------------------

    \366\ See 2013 rule Sec.  __.4(b)(2)(iii).
---------------------------------------------------------------------------

     To the extent that any required limit \367\ 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;
---------------------------------------------------------------------------

    \367\ See 79 FR at 5615.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \368\ 2013 rule Sec.  __.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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \369\ 83 FR at 33435, 33459.
    \370\ 83 FR at 33445-46.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \371\ Proposed rules Sec.  __.4(a)(8) and Sec.  __.4(b)(6).
    \372\ 83 FR at 33438 and 33459.
---------------------------------------------------------------------------

b. Proposed Presumption of Compliance With the Statutory RENTD 
Requirement
    As described above, the statutory exemptions for underwriting and 
market making-related 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 reasonable period, taking into account 
the liquidity, maturity, and depth of the market for the relevant type 
of security.\374\
---------------------------------------------------------------------------

    \373\ 12 U.S.C. 1851(d)(1)(B).
    \374\ 2013 rule Sec.  __.4(a)(2)(ii).
---------------------------------------------------------------------------

    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 Sec.  __.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\
---------------------------------------------------------------------------

    \375\ 2013 rule Sec.  __.4(b)(2)(ii).
    \376\ Id.
    \377\ 2013 rule Sec.  __.4(b)(2)(iii)(C).
---------------------------------------------------------------------------

    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

[[Page 62000]]

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 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\
---------------------------------------------------------------------------

    \378\ See 83 FR at 33455, 33459.
    \379\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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 Sec.  __.4(a)(8); proposed rule Sec.  
__.4(b)(6).
    \382\ 83 FR at 33438.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \383\ Proposed rule Sec.  __.4(a)(8)(i).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \384\ Proposed rule Sec.  __.4(6)(i)(B).
---------------------------------------------------------------------------

    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\ 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\
---------------------------------------------------------------------------

    \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 
trading desk as part of the underwriting compliance program 
requirement in Sec.  __.4(a)(2)(iii)(B), the elements of which would 
cross-reference directly to the requirement in proposed Sec.  
__.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 
Sec.  __.4(b)(2)(iii)(C), the elements of which would cross-
reference directly to the requirement in proposed Sec.  
__.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 Sec.  __.4(a)(8)(iii); proposed rule Sec.  
__.4(b)(6)(iii).
---------------------------------------------------------------------------

    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's 
RENTD, based on the nature and amount of the trading desk's 
underwriting or market making-related activities.\388\
---------------------------------------------------------------------------

    \388\ See 83 FR at 33456.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \389\ See proposed rule Sec.  __.4(a)(8)(iv); proposed rule 
Sec.  __.4(b)(6)(iv).
---------------------------------------------------------------------------

    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.

[[Page 62001]]

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 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\
---------------------------------------------------------------------------

    \390\ See proposed rule Sec.  __.4(a)(8); proposed rule Sec.  
__.4(b)(6).
    \391\ See, e.g., Credit Suisse; SIFMA; State Street; Real Estate 
Associations; and BOK.
    \392\ See SIFMA.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \393\ See State Street.
    \394\ Id.
    \395\ See JBA.
    \396\ See ABA.
---------------------------------------------------------------------------

    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 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 
entities \400\ 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\
---------------------------------------------------------------------------

    \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.
    \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.
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

    \404\ See 83 FR 33459.
    \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.
---------------------------------------------------------------------------

    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 Sec.  
__.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\
---------------------------------------------------------------------------

    \406\ See, e.g., Capital One et al. and SIFMA.
    \407\ See FSF; State Street and SIFMA.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \408\ See Merkley; Volcker Alliance; and Data Boiler.
    \409\ See Better Markets.
    \410\ See AFR.
---------------------------------------------------------------------------

    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

[[Page 62002]]

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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 activity-
based 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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 banking entities to set limits based 
on the absolute value of profits and losses in the case of an 
underwriting desk.\419\
---------------------------------------------------------------------------

    \417\ Id.
    \418\ Id.
    \419\ See JBA.
---------------------------------------------------------------------------

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 entities \423\ 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 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\
---------------------------------------------------------------------------

    \420\ See proposed rule Sec.  __.4(a)(8)(iii); proposed rule 
Sec.  __.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 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.
---------------------------------------------------------------------------

    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 processes to 
monitor limit breaches and increases,\432\ including the internal 
limits and usage metric.\433\
---------------------------------------------------------------------------

    \431\ See, e.g., CCMR and BB&T.
    \432\ See, e.g., FSF; GFMA; and Real Estate Associations.
    \433\ See, e.g., FSF; JBA; and ABA.
---------------------------------------------------------------------------

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

[[Page 62003]]

on the trading desk's RENTD on an ongoing basis.\434\
---------------------------------------------------------------------------

    \434\ See proposed rule Sec.  __.4(a)(8)(iv); proposed rule 
Sec.  __.4(b)(6)(iv).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \435\ See MBA.
    \436\ See IIB.
    \437\ See Better Markets.
---------------------------------------------------------------------------

d. Final Presumption of Compliance With the Statutory RENTD Requirement
    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\
---------------------------------------------------------------------------

    \438\ In addition to the changes described in this section, the 
presumption of compliance has been moved into a new paragraph (c) in 
Sec.  __.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 Sec. Sec.  __.4(c)(2)(A) and __.4(c)(2)(B).
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \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 Sec.  __.4(c)(1) has been changed from ``risk 
limits'' to ``limits.''
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \441\ 83 FR at 33459.
---------------------------------------------------------------------------

    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 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 Sec.  __.4 (a)(2)(ii)(A) or Sec.  
__.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:
---------------------------------------------------------------------------

    \442\ See final rule, Sec.  __.4(c)(1)(i).
---------------------------------------------------------------------------

    (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\
---------------------------------------------------------------------------

    \443\ See final rule Sec.  __.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 Sec.  __.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.
---------------------------------------------------------------------------

    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;
    (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\
---------------------------------------------------------------------------

    \444\ See final rule Sec.  __.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.

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[[Page 62004]]

    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 making-related 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.
---------------------------------------------------------------------------

    \445\ See e.g., FSF, SIFMA.
---------------------------------------------------------------------------

    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 
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\
---------------------------------------------------------------------------

    \446\ As previously noted, the final rule also replaces the 
existing definition of ``market maker-inventory'' 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.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \448\ See final rule Sec.  __.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 Sec.  __.4(c)(2) in the final rule.
    \449\ See final rule Sec.  __.4(c)(4).
    \450\ See infra notes 655-58 and accompanying text (discussion 
of the notice and response procedures in Sec.  __.20(i)).
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \451\ See proposed rule Sec. Sec.  __.4(a)(8)(iii) and 
__.4(b)(6)(iii). See also supra note 387 and accompanying text.
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \452\ See final rule Sec. __.4(c)(3)(i).
---------------------------------------------------------------------------

    (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\
---------------------------------------------------------------------------

    \453\ See final rule Sec.  __.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 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.

---------------------------------------------------------------------------

[[Page 62005]]

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 Sec.  __.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 
maker-inventory'' with a definition for ``market-maker positions'' to 
correspond with the language in Sec.  __.4(c)(ii)(B)(1), which is the 
only place such definition is used.\458\
---------------------------------------------------------------------------

    \455\ Unlike the 2013 rule, Sec.  __.4(a)(ii) in the final rule 
contains subparagraphs (A) and (B).
    \456\ See Sec.  __.4(a)(6).
    \457\ See Sec.  __.4(b)(4).
    \458\ See Sec.  __.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.
---------------------------------------------------------------------------

f. Compliance Program and Other Requirements for Underwriting and 
Market Making-Related Activities
2013 Rule Compliance Program Requirements
    The underwriting exemption in Sec.  __.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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    The exemption for market making-related activities in the 2013 rule 
contains similar requirements. Specifically, Sec.  __.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 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 making-related 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

    \461\ Under the 2013 rule, the compliance program requirement in 
Sec.  __.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.
---------------------------------------------------------------------------

Comments on the Proposed Compliance Program Requirement
    Some commenters did not support the removal of the underwriting or 
market making-specific compliance program

[[Page 62006]]

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 making-related activities, even 
for those banking entities with limited or moderate trading assets and 
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\
---------------------------------------------------------------------------

    \462\ See Better Markets.
    \463\ Id.
    \464\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \465\ Id.
    \466\ See Data Boiler.
---------------------------------------------------------------------------

    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' 
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\
---------------------------------------------------------------------------

    \467\ See Coalition of Derivatives End Users.
    \468\ Id.
---------------------------------------------------------------------------

    Another commenter expressed the view that the proposed approach of 
applying the compliance program requirements under the exemptions for 
underwriting and market making-related 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\
---------------------------------------------------------------------------

    \469\ See CFA.
    \470\ Id.
---------------------------------------------------------------------------

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 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 Sec.  __.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 Sec.  __.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 Sec.  __.20 of the final rule, as discussed 
below.
    Accordingly, Sec.  __.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 Sec.  
__.4(a)(2)(ii)(A); \471\
---------------------------------------------------------------------------

    \471\ Final rule Sec.  __.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.

---------------------------------------------------------------------------

[[Page 62007]]

    (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, 
Sec.  __.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 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 Sec.  __.4(b)(2)(i); \472\
---------------------------------------------------------------------------

    \472\ Final rule Sec.  __.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.
---------------------------------------------------------------------------

    (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 Sec.  __.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 Sec.  
__.4(b)(2)(ii); \473\
---------------------------------------------------------------------------

    \473\ Final rule Sec.  __.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.
---------------------------------------------------------------------------

    (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.
    The agencies are clarifying in the final rule that the 
authorization procedures for banking entities with significant trading 
assets and liabilities of proposed Sec.  __.4(a)(2)(iii)(D) and Sec.  
__.4(b)(2)(iii)(E) are to be in writing pursuant to Sec.  
__.4(a)(2)(iii)(C) and Sec.  __.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 Sec.  __.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 Sec.  
__.4(c).\474\ As such, Sec.  __.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 Sec.  
__.4(a)(2)(ii)(A) and Sec.  __.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 the statutory RENTD requirement would be unnecessary and may 
reduce the benefit of relying on internal limits set pursuant to Sec.  
__.4(c)(1).
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 Sec.  
__.4(a)(2)(iii)(C) are not required if the criteria in Sec.  __.4(c) 
are satisfied. Without the requirement to establish limits pursuant to 
Sec.  __.4(a)(iii)(B), such a requirement for written authorization 
procedures would be unnecessary. Further, because Sec.  
__.4(c)(3)(ii)(2) contains written authorization procedures, also 
requiring written authorization procedures in Sec.  __.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 Sec.  
__.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 Sec.  __.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 Sec.  
__.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 Sec.  __.4(c), the rebuttable presumption 
of compliance for banking entities that establish internal limits 
pursuant to Sec.  __.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 procedures \476\

[[Page 62008]]

require internal compliance processes to handle such limit breaches.
---------------------------------------------------------------------------

    \475\ See final rule Sec.  __.4(b)(2)(iii)(C).
    \476\ See final rule Sec.  __.4(b)(2)(iii)(D).
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

    \477\ See CCMC.
    \478\ See 79 FR 5607.
    \479\ See 79 FR 5606-5607.
    \480\ See ISDA.
---------------------------------------------------------------------------

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 Sec.  __.4(b) or 
alternatively the risk-mitigating hedging requirements under Sec.  
__.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\
---------------------------------------------------------------------------

    \481\ 83 FR at 33464.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \482\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \483\ Id.
---------------------------------------------------------------------------

    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 
Sec.  __.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 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 
Sec.  __.5 for such activity.\484\
---------------------------------------------------------------------------

    \484\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \485\ See, e.g., HSBC; JBA; and IIB.
    \486\ See Data Boiler.
---------------------------------------------------------------------------

    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 limits, because such 
an approach would allow banking entities to take an enterprise-wide 
view of risk management.\487\
---------------------------------------------------------------------------

    \487\ See IIB.
---------------------------------------------------------------------------

    Two commenters explained that, to increase efficiencies, certain 
internationally active banking entities employ a ``hub-and-spoke'' 
model, where trading desks at local entities

[[Page 62009]]

(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 inter-affiliate 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\
---------------------------------------------------------------------------

    \488\ See HSBC and JBA.
    \489\ See JBA.
    \490\ See HSBC.
---------------------------------------------------------------------------

    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 
desks \491\ 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 Sec.  __.4(b)(2)(ii) of the exemption for market 
making-related activities.
---------------------------------------------------------------------------

    \491\ See 79 FR at 5594.
    \492\ Sec.  __.4(b)(3).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \493\ See 79 FR at 5590.
---------------------------------------------------------------------------

    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 rule \495\ and the amendments 
to the liquidity management exemption in the final rule \496\ will 
provide banking entities with additional flexibility to manage risks 
more efficiently than the 2013 rule.
---------------------------------------------------------------------------

    \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 Sec.  
__.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 Sec.  __.3(e); 
See also section IV.B.1.b.i, supra.
---------------------------------------------------------------------------

    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 above \497\ 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 making-related 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 Sec.  __.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 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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 designed not to 
reward or incentivize

[[Page 62010]]

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, Sec.  __.5 establishes certain documentation 
requirements with respect to the purchase or sale of financial 
instruments made in reliance of the risk-mitigating exemption under 
certain circumstances.\501\
---------------------------------------------------------------------------

    \499\ See 2013 rule Sec.  __.5(b)(1) and (3).
    \500\ See 2013 rule Sec.  __.5(b)(2).
    \501\ See 2013 rule Sec.  __.5(c).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \502\ See 83 FR at 33465.
    \503\ See 83 FR at 33465.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \504\ See id.
    \505\ See id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \506\ See 83 FR at 33465.
    \507\ 12 U.S.C. 1851(d)(1)(C).
---------------------------------------------------------------------------

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 Sec.  
__.5(b)(1)(iii), Sec.  __.5(b)(2)(ii), and Sec.  __.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 or otherwise 
significantly mitigate specific risks.\509\ Thus, the agencies proposed 
to remove the ``demonstrably reduces or otherwise significantly 
mitigates'' specific risk requirement from Sec.  __.5(b)(2)(ii) and 
Sec.  __.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.
---------------------------------------------------------------------------

    \508\ See 83 FR at 33465.
    \509\ See id.
---------------------------------------------------------------------------

    The agencies also proposed to remove parallel provisions in Sec.  
__.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 Sec.  
__.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 Sec.  
__.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 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\
---------------------------------------------------------------------------

    \510\ See id.
---------------------------------------------------------------------------

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 risk-mitigating hedging 
under Sec.  __.5(b)(1); certain of the specific requirements of Sec.  
__.5(b)(2); the limits on compensation arrangements for persons 
performing risk-mitigating activities in Sec.  __.5(b)(3); and the 
documentation requirements for certain hedging activities in Sec.  
__.5(c).\511\ In place of those requirements, the agencies proposed a 
new Sec.  __.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 Sec.  __.5(b)(1) and Sec.  __.5(c) of 
the 2013 rule to make the requirements of those sections

[[Page 62011]]

applicable only to banking entities that have significant trading 
assets and liabilities.\513\
---------------------------------------------------------------------------

    \511\ See 83 FR at 33466.
    \512\ Id.
    \513\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \514\ Id.
---------------------------------------------------------------------------

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 Sec.  
__.5(c)(1) to permit evaluation of the activity.\515\ However, the 
agencies proposed a new paragraph (c)(4) in Sec.  __.5 that would 
eliminate the enhanced documentation requirement for hedging activities 
that meets certain conditions.\516\ Under new paragraph (c)(4) in Sec.  
__.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\
---------------------------------------------------------------------------

    \515\ Id.
    \516\ Id.
    \517\ Id.
    \518\ Id.
---------------------------------------------------------------------------

    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 risk-mitigating 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\
---------------------------------------------------------------------------

    \519\ See 83 FR at 33466-67.
---------------------------------------------------------------------------

c. Commenters' Views
    One commenter argued that the requirements associated with the 2013 
rule's risk-mitigating 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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \523\ See, e.g., SIFMA; JBA; ABA; BPI; FSF; and CREFC.
    \524\ See BPI.
    \525\ See Credit Suisse.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

d. Final Rule
i. Correlation Analysis for Section __.5(b)(1)(i)(C)
    The agencies are adopting Sec.  __.5(b)(1)(iii) as proposed, but 
renumbered as Sec.  __.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 uncertainties discussed in the proposal without 
substantially impacting the conditions that risk-mitigating hedging 
activities must meet in order to qualify for the exemption.\530\
---------------------------------------------------------------------------

    \530\ See 83 FR at 33465.
---------------------------------------------------------------------------

    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,

[[Page 62012]]

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.
---------------------------------------------------------------------------

    \531\ 12 U.S.C. 1851(d)(1)(C).
---------------------------------------------------------------------------

    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)
    The agencies are adopting Sec.  __.5(b)(1)(iii), Sec.  
__.5(b)(2)(ii), and Sec.  __.5(b)(2)(iv)(B) as proposed, but renumbered 
as Sec.  __.5(b)(1)(i)(C), Sec.  __.5(b)(1)(ii)(B) and Sec.  
__.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 ``demonstrably reduces or 
otherwise significantly mitigates'' specific risk requirement from 
Sec.  __.5(b)(1)(i)(C), Sec.  __.5(b)(1)(ii)(B) and Sec.  
__.5(b)(1)(ii)(D)(2).
---------------------------------------------------------------------------

    \532\ See 83 FR at 33465.
    \533\ See id.
---------------------------------------------------------------------------

    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 Sec.  __.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.
---------------------------------------------------------------------------

    \534\ 12 U.S.C. 1851(d)(1)(C).
---------------------------------------------------------------------------

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 Sec. Sec.  __.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 Sec. Sec.  __.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 Sec.  __.5(b)(1); certain of the specific 
requirements of Sec.  __.5(b)(2); the limits on compensation 
arrangements for persons performing risk-mitigating activities in Sec.  
__.5(b)(1)(iii); and the documentation requirements for those 
activities in Sec.  __.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 Sec.  __.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

[[Page 62013]]

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 Sec. Sec.  
__.5(b)(1) and __.5(c) of the 2013 rule to make the requirements of 
those sections applicable only to banking entities that have 
significant trading assets and liabilities.
iv. Reduced Documentation Requirements for Banking Entities That Have 
Significant Trading Assets and Liabilities for Section __.5(c)
    The agencies are adopting Sec.  __.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 Sec.  __.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 Sec.  __.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 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 Sec.  __.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 risk-mitigating 
activity more efficient and potentially improve the timeliness of 
important risk-mitigating hedging activity, the effectiveness of which 
can be time sensitive.
    Therefore, Sec.  __.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 Sec.  
__.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 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
    Section 13(d)(1)(H) of the BHC Act \535\ 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)

[[Page 62014]]

or (13) of Sec.  __.4(c) of the BHC Act,\537\ the 2013 rule provides 
that the foreign trading exemption is available only if: \538\
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    \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, anti-manipulation, 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 Sec.  
__.6(e)(1)(i) and (ii).
    \538\ See 2013 rule Sec.  __.6(e).
---------------------------------------------------------------------------

    (i) The banking entity engaging as principal in the purchase or 
sale (including any personnel of the banking entity or its affiliate 
that arrange, negotiate, or execute such purchase or sale) is not 
located in the United States or organized under the laws of the United 
States or of any State.
    (ii) The banking entity (including relevant personnel) that makes 
the decision to purchase or sell as principal 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:
---------------------------------------------------------------------------

    \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 Sec.  __.6(e)(4).
---------------------------------------------------------------------------

    (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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    (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 Sec.  
__.6(e)(3). As a result, Sec.  __.6(e)(3), as modified by the proposal, 
would have required that for a foreign banking entity to be eligible 
for this exemption:
    (i) The banking entity engaging as principal in the purchase or 
sale (including relevant personnel) is not located in the United States 
or organized under the laws of the United States or of any State;
    (ii) The banking entity (including relevant personnel) that makes 
the decision to purchase or sell as principal is not located in the 
United States or organized under the laws of the United States or of 
any State; and
    (iii) The purchase or sale, including any transaction arising from 
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.
    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

[[Page 62015]]

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 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 proposal would 
have removed the requirements of Sec.  __.6(e)(3) since they are less 
directly relevant to these considerations.
---------------------------------------------------------------------------

    \541\ See 12 U.S.C. 1851(h)(4) (emphasis added).
---------------------------------------------------------------------------

    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 
Sec.  __.6(e) of the 2013 rule, so long as the U.S. banking entity 
complies with the requirements of Sec.  __.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 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., sub-servicing, 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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    A few commenters opposed the proposed changes to eliminate the 
financing and counterparty requirements.\548\ These commenters argued 
that the proposed changes might 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\
---------------------------------------------------------------------------

    \548\ See, e.g., Bean; Data Boiler; and Better Markets.
    \549\ See, e.g., Better Markets and FSF.
    \550\ See Bean.
    \551\ See Bean.
---------------------------------------------------------------------------

    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

[[Page 62016]]

States. The statute also contains a prohibition on proprietary trading 
for U.S. banking entities regardless of where their activity is 
conducted. The statute generally prohibits U.S. banking entities from 
engaging in proprietary trading because of the perceived risks of those 
activities to U.S. banking entities and the U.S. 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 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

2. Section __.11: Permitted Organizing and Offering, Underwriting, and 
Market Making With Respect to a Covered Fund
    Section 13(d)(1)(B) of the BHC Act permits a banking entity to 
purchase and sell securities and other instruments described in 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:
---------------------------------------------------------------------------

    \557\ 12 U.S.C. 1851(d)(1)(B).
---------------------------------------------------------------------------

     The banking entity conducts the activities in accordance 
with the requirements of the underwriting exemption in Sec.  __.4(a) of 
the 2013 rule or market making exemption in Sec.  __.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
---------------------------------------------------------------------------

    \558\ 2013 rule Sec.  __.12(a)(2)(iii).
    \559\ 2013 rule Sec.  __.12(d).
---------------------------------------------------------------------------

     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 Sec.  __.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) 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 Sec.  
__.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\
---------------------------------------------------------------------------

    \560\ See 2013 rule Sec.  __.11(c).
---------------------------------------------------------------------------

    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 Sec.  __.11 of the final rule) acquired 
or retained in accordance with the underwriting or market-making 
exemptions in Sec.  __.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 Sec.  __.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.

[[Page 62017]]

    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 
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\
---------------------------------------------------------------------------

    \561\ See, e.g., ABA; BPI; FSF; Goldman Sachs; IIB; ISDA; and 
SIFMA.
    \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.
---------------------------------------------------------------------------

    Several commenters supported making additional revisions to Sec.  
__.11 by eliminating the aggregate fund limit and capital deduction for 
other funds, such as affiliated funds or sponsored funds \568\ 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 
hedging, market-making or underwriting exemptions would nevertheless be 
subject to the restrictions contained in those exemptions.\570\
---------------------------------------------------------------------------

    \568\ See ISDA.
    \569\ See, e.g., BPI; ISDA; and SIFMA.
    \570\ See, e.g., BPI and ISDA.
---------------------------------------------------------------------------

    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 Sec.  
__.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 
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.
---------------------------------------------------------------------------

    \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 
Sec.  __.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); Sec. Sec.  __.14 and __.15 of the final rule. 
See also 12 CFR 7.1017 (limiting authority of national bank to act 
as a guarantor).
    \572\ See SIFMA.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \573\ See Bean.
    \574\ See 79 FR 5535, 5722.
    \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).
---------------------------------------------------------------------------

    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 Sec.  __.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 Sec.  __.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 Sec.  
__.4.
---------------------------------------------------------------------------

    \576\ See, e.g., AFR; Bean; and Volcker Alliance.
---------------------------------------------------------------------------

    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 investments at a lower level, such as at the level of an

[[Page 62018]]

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.
---------------------------------------------------------------------------

    \577\ See Credit Suisse.
    \578\ Id.
    \579\ Id.
    \580\ See Goldman Sachs.
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

    \581\ 12 U.S.C. 1851(d)(1)(C).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \582\ See 83 FR at 33483-84.
---------------------------------------------------------------------------

    The proposal also would have amended Sec.  __.13(a) to align with 
the proposed modifications to Sec.  __.5. In particular, the proposal 
would have required that a risk-mitigating hedging transaction pursuant 
to Sec.  __.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 Sec.  __.5.\583\
---------------------------------------------------------------------------

    \583\ See supra Part IV.B.3.b.ii.
---------------------------------------------------------------------------

    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 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 
involving ownership interests in covered funds should be further 
restricted or completely removed from the rule.\591\
---------------------------------------------------------------------------

    \584\ See, e.g., ABA; BPI; FSF; Goldman Sachs; IIB; ISDA; SIFMA; 
and IIB.
    \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.
    \591\ See Occupy the SEC.
---------------------------------------------------------------------------

    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 Sec.  __.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 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

[[Page 62019]]

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:
---------------------------------------------------------------------------

    \592\ See, e.g., FSF; ISDA; and SIFMA.
    \593\ See, e.g., final rule Sec.  __.3(d)(11).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \594\ See final rule Sec.  __.13.
---------------------------------------------------------------------------

    In addition, these activities remain subject to Sec.  __.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 Sec.  __.13(a) with Sec.  __.5 by eliminating the 
requirement that a risk-mitigating hedging transaction ``demonstrably'' 
reduces or otherwise significantly mitigates the relevant risks. The 
agencies are adopting this amendment to Sec.  __.13(a) for the same 
reason the agencies are adopting the amendment to Sec.  __.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).
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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;
     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 risk-mitigating hedging related to an ownership interest, 
is not accounted for as principal directly or indirectly on a 
consolidated basis by any branch or affiliate that is located in the 
United States or organized under the laws of the United States or of 
any State; and
     No financing for the banking entity's ownership or 
sponsorship is provided, directly or indirectly, by any branch or 
affiliate that is located in the United States or organized under the 
laws of the United States or of any State (the ``financing 
prong'').\596\
---------------------------------------------------------------------------

    \596\ See final rule Sec.  __.13(b)(4).
---------------------------------------------------------------------------

    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.
    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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--
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, 
Sec.  __.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\
---------------------------------------------------------------------------

    \601\ See 12 U.S.C. 1851(d)(1)(I).
    \602\ See final rule Sec.  __.13(b)(1)(iii).
---------------------------------------------------------------------------

    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

[[Page 62020]]

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 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 Sec.  __.11(a) or (b) of the 
final rule) and will enable long-term strategies in reliance on this 
provision.\607\
---------------------------------------------------------------------------

    \603\ See proposal Sec.  __.13(b)(3).
    \604\ See supra note 59, FAQ 13.
    \605\ See, e.g., AIC; BPI; BVI; IIB; and EBF.
    \606\ See, e.g., EBF and IIB.
    \607\ See, e.g., AIC; BPI; and BVI.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \608\ See supra note 59, FAQ 13.
---------------------------------------------------------------------------

    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 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. The agencies intend to address and request further 
comment on additional covered fund issues in a future proposed 
rulemaking.
---------------------------------------------------------------------------

    \609\ See BVI.
    \610\ 79 FR at 5741.
    \611\ See supra Part IV.B.4.
---------------------------------------------------------------------------

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 Sec.  
__.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.
---------------------------------------------------------------------------

    \612\ See U.S.C. 1851(f)(1).
    \613\ See final rule Sec.  __.14(a)(1).
---------------------------------------------------------------------------

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, 
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

[[Page 62021]]

2013 rule's conditions are that (i) the banking entity is in compliance 
with each of the limitations set forth in[thinsp]Sec.  __.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 Sec.  __.14(a)(2)(ii).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \622\ See SIFMA.
    \623\ See id.
    \624\ See ABA.
    \625\ See id.
    \626\ See Occupy the SEC.
---------------------------------------------------------------------------

    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.

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. Sec.  __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. Sec.  __.20(f)(2).
---------------------------------------------------------------------------

    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 (Sec.  __.20(b) of the 2013 rule), the metrics 
reporting requirements (Sec.  __.20(d) of the 2013 rule),\629\ the 
covered fund documentation requirements (Sec.  __.20(e) of the 2013 
rule), and the CEO attestation

[[Page 62022]]

requirement (Appendix B of the 2013 rule).\630\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

     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 Sec.  __.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, 
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 Sec.  __.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, 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 
Sec.  __.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 Sec.  __.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 2013 rule,\631\ except for the CEO attestation 
requirement discussed below. The proposal also would have revised the 
covered fund documentation requirements in Sec.  __.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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \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.
    \636\ See AFR.
    \637\ Id.
---------------------------------------------------------------------------

    The agencies are adopting the six-pillar compliance program 
requirements and retaining the covered fund

[[Page 62023]]

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 
Sec. Sec.  __.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.
    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 Sec.  __.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 Sec.  __.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 Sec.  __.20 of the 2013 
rule in a manner reasonably designed to achieve compliance with section 
13 of the BHC Act and the implementing regulations.
    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 Sec.  __.20(b) or 
Sec.  __.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 Sec.  __.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.
    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.
---------------------------------------------------------------------------

    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 Sec.  __.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;

[[Page 62024]]

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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 permitted under Sec.  __.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\
---------------------------------------------------------------------------

    \649\ 2013 rule Sec.  __.20(f)(2).
---------------------------------------------------------------------------

    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 Sec. Sec.  __.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 and liabilities qualifies for the 
simplified compliance program under Sec.  __.20(f)(2) of the final 
rule.
---------------------------------------------------------------------------

    \650\ See, e.g., BB&T and JBA.
---------------------------------------------------------------------------

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 Sec.  __.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 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\
---------------------------------------------------------------------------

    \651\ See B&F.
    \652\ See JBA.
    \653\ See SIFMA.
    \654\ See ABA.
---------------------------------------------------------------------------

    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 Sec.  __.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 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

[[Page 62025]]

actions may include, for example, integrating the requirements for 
permitted trading activities under the exemptions in Sec.  __.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. 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\
---------------------------------------------------------------------------

    \655\ See proposed rule Sec.  __.20(g)(2)(ii).
    \656\ See proposed rule Sec. Sec.  __.3(c), __.3(g)(2), 
__.4(a)(8)(iv), __.4(b)(6)(iv).
---------------------------------------------------------------------------

    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 
Sec. Sec.  __.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.
---------------------------------------------------------------------------

    \657\ See IIB.
    \658\ See final rule Sec.  __.20(i).
---------------------------------------------------------------------------

E. Subpart E--Metrics: Appendix to Part []--Reporting and 
Recordkeeping Requirements

    Under the 2013 rule, a banking entity with substantial trading 
activity \659\ must furnish the following quantitative measurements for 
each of its trading desks engaged in covered trading activity, 
calculated in accordance with Appendix A:
---------------------------------------------------------------------------

    \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 quarters (excluding trading assets and 
liabilities involving obligations of or guaranteed by the United 
States or any agency of the United States). 2013 rule Sec.  
__.20(d)(1).
---------------------------------------------------------------------------

     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:
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

     Limit the applicability of certain metrics only to market 
making and underwriting desks.
     Replace the Customer-Facing Trade Ratio with a new 
Transaction Volumes metric to more precisely cover types of trading 
desk transactions with counterparties.
     Replace Inventory Turnover with a new Positions metric, 
which measures the value of all securities and derivatives positions.
     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 (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.
---------------------------------------------------------------------------

     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

[[Page 62026]]

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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 compliance period, the 
final amendments also should facilitate firms in integrating these 
requirements into existing or planned compliance programs.
---------------------------------------------------------------------------

    \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.
    \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.
---------------------------------------------------------------------------

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 
Sec.  __.3(d), __.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.
---------------------------------------------------------------------------

    \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''.
---------------------------------------------------------------------------

    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 agencies' oversight ability. However, the 
Agencies feel the definition of trading day is appropriate because the 
potential for impermissible

[[Page 62027]]

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 
Sec.  __.4, Sec.  __.5, or Sec.  __.6(a) (i.e., permitted underwriting, 
market making, and risk-mitigating hedging activity and trading in 
certain government obligations).\673\
---------------------------------------------------------------------------

    \673\ In addition, the 2013 rule permits banking entities to 
optionally include trading under Sec.  __.3(d), Sec.  __.6(c), Sec.  
__.6(d), or Sec.  __.6(e).
---------------------------------------------------------------------------

    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 securities \674\ 
and changed the name of the quantitative 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 Sec.  __.4(a) or Sec.  __.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\
---------------------------------------------------------------------------

    \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 Sec.  __.2 of the 2013 rule. See 2013 rule Sec. Sec.  
__.2 (h), (y).
    \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.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \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.
    \679\ See, e.g., Goldman Sachs; JBA; and States Street (on 
leveraging current industry practices for FX).
    \680\ See SIFMA.
---------------------------------------------------------------------------

    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 
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\
---------------------------------------------------------------------------

    \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.
    \687\ See AFR.
    \688\ See, e.g., SIFMA and IIB.
    \689\ See Data Boiler.
---------------------------------------------------------------------------

    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

[[Page 62028]]

banking entities to report certain descriptive information for each 
trading desk engaged in covered trading 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\
---------------------------------------------------------------------------

    \690\ See, e.g., ABA; Credit Suisse; CCMR; FSF; IIB; JBA; and 
SIFMA.
    \691\ See, e.g., ABA; CCMR; and SIFMA.
---------------------------------------------------------------------------

    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 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 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 Sec.  __.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.
---------------------------------------------------------------------------

    \692\ See, e.g., ABA; CCMR; Credit Suisse; Data Boiler; JBA; and 
SIFMA.
    \693\ See SIFMA.
---------------------------------------------------------------------------

    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 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

[[Page 62029]]

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 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\
---------------------------------------------------------------------------

    \694\ See, e.g., ABA; CCMR; Credit Suisse; Data Boiler; JBA; and 
SIFMA.
    \695\ See SIFMA.
---------------------------------------------------------------------------

    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 Sec.  __.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\
---------------------------------------------------------------------------

    \696\ See Sec.  __.20(d) of the proposal.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \697\ See, e.g., FSF and Goldman Sachs.
    \698\ See, e.g., Credit Suisse and SIFMA.
    \699\ See SIFMA.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \701\ See, e.g., Credit Suisse and JBA.
    \702\ See Goldman Sachs.
    \703\ See Data Boiler.
    \704\ See SIFMA.
---------------------------------------------------------------------------

    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., 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\
---------------------------------------------------------------------------

    \705\ The recordkeeping requirement in the final rule does not 
require that banking entities retain a copy of the Narrative 
Statement.
---------------------------------------------------------------------------

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

[[Page 62030]]

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.
---------------------------------------------------------------------------

    \706\ See, e.g., Credit Suisse; FSF; and JBA.
    \707\ See supra note 662.
---------------------------------------------------------------------------

a. Risk-Management Measurements
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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \709\ See, e.g., FSF and Data Boiler.
    \710\ See JBA.
    \711\ See Data Boiler.
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
    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 Sec.  
__.3(d)(2) of the proposal. The proposal would have also revised the 
definition of Value-at-Risk 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\
---------------------------------------------------------------------------

    \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-at-
Risk. See, e.g., 12 CFR part 3 subpart F; 12 CFR part 217 subpart F; 
12 CFR part 324 subpart F.
---------------------------------------------------------------------------

    In general, a few commenters supported eliminating Stressed VaR, 
including for non-financial 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\
---------------------------------------------------------------------------

    \714\ See, e.g., FSF and Data Boiler.
    \715\ See JBA.
    \716\ See Goldman Sachs.
---------------------------------------------------------------------------

    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

[[Page 62031]]

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \718\ See SIFMA.
    \719\ See SIFMA.
    \720\ See, e.g., Goldman Sachs and FSF.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \721\ As under the 2013 rule, significant unexplained profit and 
loss must be escalated for further investigation and analysis under 
the final rule.
---------------------------------------------------------------------------

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 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 Sec.  __.4(a) or Sec.  __.4(b) to conduct underwriting activity 
or market making-related activity, respectively. As a result, a trading 
desk that did not rely on Sec.  __.4(a) or Sec.  __.4(b) would not have 
been subject to the proposed Positions metric.\722\
---------------------------------------------------------------------------

    \722\ For example, a trading desk that relies solely on Sec.  
__.5 to conduct risk-mitigating hedging activity would not have been 
subject to the Positions metric under the proposed rule.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \724\ See, e.g., GFMA and SIFMA.
    \725\ See, e.g., GFMA; Goldman Sachs; and State Street.
    \726\ See e.g., Credit Suisse.
---------------------------------------------------------------------------

    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 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

[[Page 62032]]

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\
---------------------------------------------------------------------------

    \727\ See final rule Sec.  __.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).
---------------------------------------------------------------------------

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 Sec.  __.4(b) of the 
2013 rule describing the permitted activity exemption for market 
making-related activities. This metric is required to be calculated on 
a daily basis for 30-day, 60-day, and 90-day calculation periods.
    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 value \729\ of all securities and 
derivatives transactions \730\ 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 Sec.  __.4(a) for underwriting desks and in Sec.  __.4(b) for 
market-making desks. To reduce reporting inefficiencies, the proposed 
rule would have only required trading desks engaged in underwriting or 
market making-related activity under Sec.  __.4(a) or Sec.  __.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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \732\ See, e.g., IIB and SIFMA.
    \733\ See SIFMA.
    \734\ See, e.g., Credit Suisse.
---------------------------------------------------------------------------

    The final rule adopts the proposed change to add a category of 
counterparty for desk-to-desk transactions within the same legal entity 
and transactions between affiliates (collectively, Internal 
Transactions). In order to connect the transactions metric with the 
other quantitate 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 non-affiliated 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.
---------------------------------------------------------------------------

    \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 non-customers, and sometimes do not report them at 
all.
---------------------------------------------------------------------------

    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 Sec.  
__.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 desk-to-desk transactions within the same legal entity does not 
justify the

[[Page 62033]]

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 Sec.  __.4(a) or Sec.  __.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.
---------------------------------------------------------------------------

    \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 Sec. Sec.  __.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).
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \737\ See, e.g., Data Boiler; Credit Suisse; FSF; Goldman Sachs, 
GFMA; and State Street.
---------------------------------------------------------------------------

V. Administrative Law Matters

A. Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \738\ 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.
---------------------------------------------------------------------------

    \738\ Public Law 106-102, section 722, 113 Stat. 1338, 1471 
(1999).
---------------------------------------------------------------------------

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 
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 risk-mitigating 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 
requirements \739\ 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

[[Page 62034]]

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 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).
    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/financial-markets/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/index.htm; and
     SEC: https://www.sec.gov/structureddata/dera_taxonomies.
Proposed Revision, With Extension, of the Following Information 
Collections
    Estimated average hours per response:
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.
    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,
     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

[[Page 62035]]

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.
    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 
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.
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    \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.
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    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\
---------------------------------------------------------------------------

    \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).
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    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\
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    \743\ 12 U.S.C. 1851(b)(2).
---------------------------------------------------------------------------

    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 
Board-regulated 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.
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    \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.
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    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 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\

[[Page 62036]]

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.
---------------------------------------------------------------------------

    \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.
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(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 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.
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    \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.
---------------------------------------------------------------------------

    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 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\
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    \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).
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \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.

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[[Page 62037]]

    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.
    The revisions the agencies are adopting today will generally apply 
to banking entities, including certain SEC-registered entities.\753\ 
These entities include SEC-registered broker-dealers, 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 reason, the SEC 
certifies that the rule, as adopted, will not have a significant 
economic impact on a substantial number of small entities.
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    \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 Sec.  _.2(c) (definition of banking entity); 
2013 rule Sec.  _.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 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).
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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.
---------------------------------------------------------------------------

    \758\ 12 U.S.C. 4802(a).
---------------------------------------------------------------------------

    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 for the OCC, Board, and FDIC is January 
1, 2020, the first day of the calendar quarter.\760\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

[[Page 62038]]

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 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\
---------------------------------------------------------------------------

    \761\ See 12 U.S.C. 1851(h)(1).
    \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.
---------------------------------------------------------------------------

    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, 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.
---------------------------------------------------------------------------

    \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 SEC-registered broker-dealers. See Capital, 
Margin, and Segregation Requirements for Security-Based 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.
---------------------------------------------------------------------------

    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 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\
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    \764\ See 83 FR at 33520-33552.
    \765\ See, e.g., 83 FR at 33521.
    \766\ See, e.g., 83 FR at 33532.
    \767\ Id.
    \768\ See, e.g., 83 FR at 33522.
    \769\ Id.
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    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.
---------------------------------------------------------------------------

    \770\ See, e.g., Occupy the SEC; Better Markets; SIFMA and 
Center for American Entrepreneurship.
    \771\ See 83 FR at 33520-33521.
---------------------------------------------------------------------------

    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, 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

[[Page 62039]]

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 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.
---------------------------------------------------------------------------

    \772\ See, e.g., sections IV.B.2 and IV.D.1.
---------------------------------------------------------------------------

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 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, 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.
---------------------------------------------------------------------------

    \773\ See, e.g., 79 FR 5541.
---------------------------------------------------------------------------

    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 alternative credit markets may have contributed to liquidity 
fragmentation across markets while potentially increasing access to 
capital.\774\
---------------------------------------------------------------------------

    \774\ See Sec. & Exch. Comm'n, Access To Capital And Market 
Liquidity, (2017) [hereinafter SEC Report 2017].
---------------------------------------------------------------------------

    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 post-crisis regulations affecting

[[Page 62040]]

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 near-term demand (RENTD) 
requirement; (2) the extent to which internal limits may capture 
expected 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 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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \777\ This aspect of the baseline is discussed in section 
V.F.3.b.
---------------------------------------------------------------------------

    The 2013 rule provides several exclusions from the definition of 
proprietary trading in section Sec.  __.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 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, self-regulatory 
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.
---------------------------------------------------------------------------

    \778\ This aspect of the baseline is discussed in section 
IV.B.1.b.i.
---------------------------------------------------------------------------

    In addition, section Sec.  __.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\
---------------------------------------------------------------------------

    \779\ See 2013 rule Sec. Sec.  __.4, __.5, App. A., App. B; 
final rule Sec. Sec.  __.4, __.5, App. A.
---------------------------------------------------------------------------

(2) Exemption for Underwriting and Market Making-Related 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 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\
---------------------------------------------------------------------------

    \780\ See 2013 rule Sec.  __.4 (a).
    \781\ See 2013 rule Sec.  __.4 (b).
---------------------------------------------------------------------------

    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,

[[Page 62041]]

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.
---------------------------------------------------------------------------

    \782\ See 2013 rule Sec.  __.4 (b)(3)(i).
---------------------------------------------------------------------------

(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 activities; and (3) the 
existence of compensation arrangements for persons performing risk-
mitigating hedging activities that are designed not to reward or 
incentivize prohibited proprietary trading. In addition, certain 
activities under the exemption for risk-mitigating hedging are subject 
to documentation requirements.\783\
---------------------------------------------------------------------------

    \783\ See 2013 rule Sec.  __.5.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \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/nr-occ-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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \786\ See 2013 rule Sec.  __.5(b)(2)(ii).
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \787\ See 2013 rule Sec.  __.5(c)(1).
    \788\ See 2013 rule Sec.  __.5(c)(3). See also 2013 rule Sec.  
__.20(b)(6).
---------------------------------------------------------------------------

(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 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

[[Page 62042]]

exchange or similar trading facility, and is promptly cleared and 
settled through a central counterparty.\790\
---------------------------------------------------------------------------

    \789\ See 2013 rule Sec.  __.6(e).
    \790\ See 2013 rule Sec.  __.6(e)(3).
---------------------------------------------------------------------------

(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 Sec.  __.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 investment 
limits in Sec.  __.12 of the 2013 rule and is subject to the capital 
deduction provided in Sec.  __.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\
---------------------------------------------------------------------------

    \791\ See 2013 rule Sec.  __.12(a)(2)(ii); see also Sec.  
__.11(c)(2).
    \792\ See 2013 rule Sec.  __.12(a)(2)(iii); see also Sec.  
__.11(c)(3).
    \793\ See 2013 rule Sec.  __.13(a).
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

(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.
    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\
---------------------------------------------------------------------------

    \795\ See 2013 rule Sec.  __.20(a).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \796\ See 2013 rule Sec.  __.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.
---------------------------------------------------------------------------

    All other banking entities with covered activities are, at a 
minimum, required to implement a six-pillar compliance program. The six 
pillars include (1) written policies and procedures reasonably designed 
to document, describe, monitor and limit proprietary trading and 
covered fund activities and investments for compliance; (2) a system of 
internal controls reasonably designed to monitor compliance; (3) a 
management framework that clearly delineates responsibility and 
accountability for compliance, including management review of trading 
limits, strategies, hedging activities, investments, and incentive 
compensation; (4) independent testing and audit of the effectiveness of 
the compliance program; (5) training for personnel to

[[Page 62043]]

effectively implement and enforce the compliance program; and (6) 
recordkeeping sufficient to demonstrate compliance.\797\
---------------------------------------------------------------------------

    \797\ See 2013 rule Sec.  __.20(b).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \798\ See 2013 rule Sec.  __.20(c) and Appendix B.
---------------------------------------------------------------------------

    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 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 SEC-regulated business development company within the time 
period specified.\799\
---------------------------------------------------------------------------

    \799\ See 2013 rule Sec.  __.20(e).
---------------------------------------------------------------------------

(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 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.
---------------------------------------------------------------------------

    \800\ See 2013 rule Sec.  __.20(d) and Appendix A.
---------------------------------------------------------------------------

    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 high-risk trading strategies; identification of the profile 
of particular covered trading activities of the banking entity, and its 
individual trading desks, to help establish the appropriate frequency 
and scope of the SEC's examinations of such activity; and the 
assessment and addressing of the risks associated with the banking 
entity's covered trading activities.\801\
---------------------------------------------------------------------------

    \801\ See 2013 rule Sec.  __.20 and Appendix A.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \802\ See 2013 rule Sec.  __.20(d)(3).
---------------------------------------------------------------------------

ii. EGRRCPA and Conforming Amendments
    In accordance with section 203 of EGRRCPA,\803\ the agencies 
amended the definition of ``insured depository institution'' in Sec.  
__.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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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

[[Page 62044]]

sections 203 and 204 of EGRRCPA.\805\ Therefore, the economic baseline 
against which the SEC is assessing the final rule incorporates the 
economic effects of sections 203 and 204 of EGRRCPA, as analyzed in the 
agencies' release adopting the conforming amendments.\806\
---------------------------------------------------------------------------

    \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.
    \806\ See EGRRCPA Conforming Amendments Adopting Release, 84 FR 
at 35008.
---------------------------------------------------------------------------

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 
rule \807\ 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\
---------------------------------------------------------------------------

    \807\ See 83 FR at 33520-33521.
    \808\ See 83 FR at 33521.
    \809\ Id.
---------------------------------------------------------------------------

    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 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 services \813\ 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.
---------------------------------------------------------------------------

    \810\ See, e.g., Occupy the SEC, Better Markets, SIFMA, Center 
for American Entrepreneurship.
    \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.
---------------------------------------------------------------------------

    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.
    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 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.
---------------------------------------------------------------------------

    \815\ See CCMC; Oonagh McDonald; JBA; Occupy the SEC and 
Systemic Risk Council.
---------------------------------------------------------------------------

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 regulatory oversight and compliance with the 
substantive prohibitions in section 13 of the BHC Act.\817\
---------------------------------------------------------------------------

    \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.
    \817\ See, e.g., 83 FR at 33520.
---------------------------------------------------------------------------

    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

[[Page 62045]]

industry; \824\ and that section 13 of the BHC Act and the implementing 
rules are no longer necessary given Basel III capital requirements, 
stress testing, and liquidity coverage ratio rules that promote short-
term resilience of bank risk profiles.\825\
---------------------------------------------------------------------------

    \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.
    \825\ See Oonagh McDonald. See also infra note 849.
---------------------------------------------------------------------------

    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 insurance \827\ 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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 reduced the overall risk of individual 
banking entities and potentially of banking entities as a whole.
    For example, one study \830\ 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 Act \831\ 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-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.
---------------------------------------------------------------------------

    \830\ See Alexander Sch[auml]fer 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-press-office/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 risk-taking 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).
---------------------------------------------------------------------------

    In contrast, another paper \834\ 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 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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 non-targeted banks. As a result, 
the measurement of targeted banks may simply be capturing prior 
performance of an institution during times of severe

[[Page 62046]]

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.
---------------------------------------------------------------------------

    \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 risk-taking.
---------------------------------------------------------------------------

    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-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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 (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.
---------------------------------------------------------------------------

    \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.pdf, last accessed 07/15/2019. See 
also Juliane Begenau et al., Banks' Risk Exposures, (Nat'l 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).
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \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-statement-proposed-amendments-volcker-rule.
    \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 z-score 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 Gramm-Leach-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.
---------------------------------------------------------------------------

    Another recent paper \844\ 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--

[[Page 62047]]

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 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.
---------------------------------------------------------------------------

    \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/public-statement/jackson-statement-proposed-amendments-volcker-rule.
    \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.
---------------------------------------------------------------------------

    Finally, a recent paper \846\ 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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 compliance \848\ 
and that the implementation of other financial reforms can create 
effects inconsistent with the regulators' intentions.\849\
---------------------------------------------------------------------------

    \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 government-
sponsored 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.
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \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-volcker-rule on potential effects of pay practices on 
proprietary trading.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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 funds resulted in

[[Page 62048]]

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\
---------------------------------------------------------------------------

    \852\ See, e.g., 79 FR at 5659.
    \853\ See, e.g., CAP.
    \854\ See SIFMA.
---------------------------------------------------------------------------

    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 study \855\ 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 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.
---------------------------------------------------------------------------

    \855\ See Michelle Lowry et al., Informed Trading By Advisor 
Banks: Evidence from Options Holdings, 32 Rev. Fin. Stud 605 (2018).
    \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.
---------------------------------------------------------------------------

    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 
literature \857\ 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 
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.
---------------------------------------------------------------------------

    \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-proposed-amendments-volcker-rule.
---------------------------------------------------------------------------

    Finance research on this type of conflict of interest between banks 
and their customers finds mixed effects. One of the earlier papers 
\858\ 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 work 
\859\ explores the trading activity of IPO underwriters and finds that 
lead underwriter trades in IPO firms are associated with subsequent IPO 
abnormal returns.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    Another study \860\ 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 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.
---------------------------------------------------------------------------

    \860\ See Semi Kedia and Xing Zhou, Informed Trading Around 
Acquisitions: Evidence From Corporate Bonds, 18 J. Fin. Mkt. 182 
(2014).
---------------------------------------------------------------------------

    Similarly, another paper \861\ 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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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

[[Page 62049]]

specifically on banking entities that are SEC registrants, some of the 
incentive 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\
---------------------------------------------------------------------------

    \862\ See, e.g., 79 FR at 5541, 79 FR at 5546, 79 FR at 5561.
---------------------------------------------------------------------------

    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 transactions \864\ with 
customers, which, along with reducing profits, may reduce the volume of 
transactions intermediated by banking entities.\865\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \866\ See, e.g., ABA.
    \867\ See, e.g., 83 FR at 33465.
    \868\ Id.
    \869\ See, e.g., JBA and SIFMA.
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \870\ See, e.g., 83 FR at 33535.
    \871\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 section 13 of the BHC

[[Page 62050]]

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.
    A number of studies documented declines in several dimensions of 
liquidity after the financial crisis and post-crisis reforms. For 
example, one study \881\ 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    Another paper \882\ 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 post-crisis dealer behavior is most severe for 
bank dealers and concludes that such changes are consistent with the 
effects of the Volcker Rule.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 
supply have significantly worsened.\883\ A few studies seek to 
reconcile these two effects. One paper \884\ 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    Another study \885\ 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 moved from dealers to large asset 
managers and that the effect is consistent with the effects of tighter 
banking regulations.
---------------------------------------------------------------------------

    \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 elsewhere, the difference between these 
two results may stem from different proxies for transaction costs 
and the measurement of principal trading activity.
---------------------------------------------------------------------------

    A recent paper \887\ 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

[[Page 62051]]

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 
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 short-term, 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.
---------------------------------------------------------------------------

    \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-effects-of-the-volcker-rule-on-corporate-bond-trading.pdf, last accessed 8/9/2019.
    \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.
---------------------------------------------------------------------------

    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 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 papers \889\ 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.
---------------------------------------------------------------------------

    A related study \891\ 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\
---------------------------------------------------------------------------

    \891\ See Mike Anderson & Ren[eacute] 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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

[[Page 62052]]

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 
regulation with the biggest effect on the profitability of trades 
exploiting arbitrage opportunities.\896\
---------------------------------------------------------------------------

    \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.
    \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.
---------------------------------------------------------------------------

    Post-crisis regulations may also be having effects on the co-
movement \897\ in liquidity metrics across markets. A recent paper 
\898\ 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 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 paper \900\ 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.
---------------------------------------------------------------------------

    \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-Costs-and-Liquidity-Evidence-from-CDS-Markets.pdf, last 
accessed 7/5/2019.
---------------------------------------------------------------------------

    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 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 model \902\ 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-to-customer trading but may also reduce the 
ability of dealers to demand liquidity from other dealers.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 post-crisis 
regulations, limiting the ability of non-dealers to arbitrage away 
mispricings. It is even 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 end-users 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 issue \905\ 
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

[[Page 62053]]

(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 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 post-crisis financial regulations may 
adversely affect the ability of affected dealers to intermediate 
customer trading in bond markets.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 study \907\ 
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.
---------------------------------------------------------------------------

    \907\ See Marco Macchiavelli and Luke Pettit, Liquidity 
Regulation and Financial Intermediaries (Jul. 29, 2019) (working 
paper) last accessed 8/29/2019.
---------------------------------------------------------------------------

    Importantly, reduced ability and willingness to engage in repo 
activity are likely to have downstream effects on customers and market 
quality. For example, a paper \908\ 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 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 spillover effects across different types of 
financial institutions vary over time and may be more significant in 
times of stress.\911\
---------------------------------------------------------------------------

    \910\ See 83 FR at 33534.
    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \912\ See, e.g., 83 FR at 33550.
---------------------------------------------------------------------------

    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 elimination of proprietary trading but that lost profits are not 
costs but intended regulatory effects of section 13 of the BHC 
Act.\914\
---------------------------------------------------------------------------

    \913\ See, e.g., Volcker Alliance and AFR.
    \914\ See, e.g., Occupy the SEC.

---------------------------------------------------------------------------

[[Page 62054]]

    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 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\
---------------------------------------------------------------------------

    \915\ See Data Boiler, citing its own analysis as well as SIA 
Partners Briefing Note, July 2015, ``Volcker Implementation,'' 
available at http://en.finance.sia-partners.com/sites/default/files/post/sia_partners_-_briefing_note_volcker_coveredfunds_blog_version.pdf, last accessed 
6/4/2019.
    \916\ See CCMC.
    \917\ See SFIG.
    \918\ See SIFMA.
---------------------------------------------------------------------------

    Moreover, the SEC notes that risk-averse market participants are 
compensated for bearing greater systematic \919\ 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \921\ See, e.g., IIB; CCMC; CREFC; CCMR; Covington; Capital One 
et al. and Credit Suisse.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \922\ See 83 FR at 33550.
---------------------------------------------------------------------------

    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-Dealers \923\
---------------------------------------------------------------------------

    \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 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.
---------------------------------------------------------------------------

    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.

[[Page 62055]]

    While the 199 bank-affiliated broker-dealers subject to the 2013 
rule (affected broker-dealers) 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).

                        Table 1--Broker-Dealer Count, Assets, and Holdings by Affiliation
----------------------------------------------------------------------------------------------------------------
                                                                                                     Holdings
         Broker-dealer bank affiliation               Number       Total assets,  Holdings, $mln    (altern.),
                                                                    $mln \924\         \925\        $mln \926\
----------------------------------------------------------------------------------------------------------------
Bank broker-dealers affected by the final rule               199       3,142,780         761,532         567,387
 \927\..........................................
All other broker-dealers \928\..................           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 bank-affiliated 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 Sec.  __.20(d)(1).
    \930\ See supra note 926.
    \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 
government-sponsored 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.)

             Table 2--Broker-Dealer Counts, Assets, and Holdings by Consolidated Trading Assets and Liabilities of the Banking Entity \931\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Total assets,                                                  Holdings
 Consolidated trading assets and liabilities \932\     Number          $mln         Percent     Holdings, $mln    Percent    (altern.), $mln    Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
>=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-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.
---------------------------------------------------------------------------

    \933\ See Capital, Margin, Segregation Adopting Release, 84 FR 
at 43960.
    \934\ Id.
---------------------------------------------------------------------------

    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

[[Page 62056]]

overestimate or underestimate the number of SBSDs that are not broker-
dealers and that may become SEC-registered entities affected by the 
final rule. Quantitative cost estimates are provided separately for 
affected broker-dealers and potential SBSDs.
---------------------------------------------------------------------------

    \935\ Id.
---------------------------------------------------------------------------

iii. Private Funds and Private Fund Advisers \936\
---------------------------------------------------------------------------

    \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 SEC-registered 
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.
---------------------------------------------------------------------------

    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.

 Table 3--SEC-Registered Investment Advisers Advising Private Funds, by
                             Fund Type \937\
------------------------------------------------------------------------
                                                               Bank-
                Fund type                     All RIA       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\
----------------------------------------------------------------------------------------------------------------
                                                      Number of private funds           Gross assets, $bln
                                                 ---------------------------------------------------------------
                    Fund type                                          Bank-                           Bank-
                                                      All RIA     affiliated RIA      All RIA     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
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\
---------------------------------------------------------------------------

    \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.
    \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.
---------------------------------------------------------------------------

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

[[Page 62057]]

15,700 RICs \940\ 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 their level of 
investment in the funds they advise, or potentially close those funds, 
to avoid those funds becoming banking entities themselves.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

v. Entities Reporting Metrics to the SEC \941\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 full-fledged 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 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.
---------------------------------------------------------------------------

    \942\ See, e.g., ABA; Credit Suisse; CCMR; FSF, Public Citizen 
and SIFMA.
    \943\ See SIFMA Annex C.
    \944\ See CCMR.
    \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.

   Table 5--Volume of Metrics Records Submitted to the SEC, by Trading
                      Assets and Liabilities \948\
------------------------------------------------------------------------
                                             Number of        Records
      Trading assets & liabilities           reporters       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
----------------------------------------------------------------------------------------------------------------
                                                                                      Average         Average
                                                                      Average        number of       number of
                  Trading assets & liabilities                      number  of      records per    records  per
                                                                       desks        submission         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
----------------------------------------------------------------------------------------------------------------
                                                                                    Percent of      Percent of
                                                   Total number     Percent of        records         records
          Trading assets & liabilities             of submitted     records not     resubmitted     resubmitted
                                                      records       resubmitted        once            twice
----------------------------------------------------------------------------------------------------------------
                                    Panel A. Resubmissions of Initial Records
----------------------------------------------------------------------------------------------------------------
>50bln..........................................      40,785,033              34              56              10
20bln-50bln.....................................       6,908,332              61              39               0
<20bln..........................................      10,441,265              96               4               0
----------------------------------------------------------------------------------------------------------------


[[Page 62058]]


 
                                                                                                   Average delay
                                                   Total records                   Average delay    in initial
                                                  submitted late    Percent of      in initial      submissions
          Trading assets & liabilities               (initial      late initial     submissions       (days,
                                                    submission)     submissions    (days, simple    weighted by
                                                                                     average)      record count)
----------------------------------------------------------------------------------------------------------------
                                 Panel B. Delayed Submission of Initial Records
----------------------------------------------------------------------------------------------------------------
>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 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 Sec.  __.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 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 
fluctuations and provides banking entities that are near or approaching 
$10 billion in trading assets and liabilities with more certainty 
regarding their compliance burdens.
---------------------------------------------------------------------------

    \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 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).
    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \954\ See, e.g., ABA; Custody Banks; New England Council; 
Capital One et al.; SIFMA; State Street and BPI.
---------------------------------------------------------------------------

    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 Sec.  __.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

[[Page 62059]]

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 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 broker-dealers 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 Sec.  
__.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 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.
---------------------------------------------------------------------------

    \955\ See, e.g., KeyCorp; BMO and Capital One et al.
    \956\ See Sec.  __.6(a)(2).
---------------------------------------------------------------------------

    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 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 
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.

[[Page 62060]]

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 incentive 
conflicts that could be posed by certain types of proprietary trading 
by dealers, as well as enhancing oversight and supervision.
---------------------------------------------------------------------------

    \957\ See 83 FR at 33526.
---------------------------------------------------------------------------

    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 
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 scoped into the Group A regime.\958\ For 
example, Table 2 shows that 57 bank-affiliated broker-dealers 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 broker-
dealer 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 
billion threshold appropriately accounts for the risks posed by Group B 
and Group C entities; therefore, the agencies are not adopting this 
alternative.
---------------------------------------------------------------------------

    \960\ See, e.g., ABA.
---------------------------------------------------------------------------

    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

[[Page 62061]]

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.
---------------------------------------------------------------------------

    \961\ This alternative approach was also suggested by some 
commenters. See, e.g., Capital One et al.
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \962\ See, e.g., KeyCorp.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \963\ Some commenters supported this view. See, e.g., Data 
Boiler.
---------------------------------------------------------------------------

    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.

   Table 8--Broker-Dealer Assets and Holdings, by Gross Trading Assets and Liabilities Threshold of Affiliated
                                                Banking Entities
----------------------------------------------------------------------------------------------------------------
                                                                                                     Holdings
              Type of broker-dealer                   Number       Total assets,  Holdings, $mln    (altern.),
                                                                       $mln                            $mln
----------------------------------------------------------------------------------------------------------------
Holdings >=$20bln and affiliated with firms with              19       2,225,989         594,513         514,360
 gross trading assets and liabilities >=$20bln..
Holdings <$20bln and affiliated with firms with               17         275,951          31,328          13,576
 gross trading assets and liabilities >=$20bln..
Affiliated with firms with gross trading assets              163         640,840         135,691          39,451
 and liabilities <$20bln \964\..................
                                                 ---------------------------------------------------------------
    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

[[Page 62062]]

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 complexity of a firm's trading 
activity, the architecture of trading systems, the location and 
skillsets of personnel across various dealers affiliated with such 
entities, and current inter-affiliate hedging and risk mitigation 
practices.
---------------------------------------------------------------------------

    \965\ See, e.g., JBA.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
    \966\ See, e.g., BPI and Capital One et al.
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

    \967\ See 2013 rule Sec.  __.3(b).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \968\ See 2013 rule Sec.  __.3(b)(1)(iii).
---------------------------------------------------------------------------

    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 
trading activity by dealers may be affected by the changes to the 
definition of the trading account.
---------------------------------------------------------------------------

    \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.'').
---------------------------------------------------------------------------

    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 short-term 
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 short-term 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 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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

[[Page 62063]]

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.

                                  Table 9--Market Risk Capital Rule Application
----------------------------------------------------------------------------------------------------------------
                                                     Number of     Total assets,                     Holdings
      Market risk capital rule application        broker-dealers       $mln          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 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-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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

(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 SEC-regulated entities, including the effects on efficiency, 
competition, and capital formation, may be de minimis.

[[Page 62064]]

(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 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.
---------------------------------------------------------------------------

    \975\ See proposed rule Sec.  __.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.
    \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.
---------------------------------------------------------------------------

    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. 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\
---------------------------------------------------------------------------

    \985\ See 83 FR 33432.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \986\ See proposed rule Sec.  __. 3(b)(1)(ii); 83 FR at 33447.
    \987\ See, e.g., IIB.
    \988\ See section IV.B.1.a.v.
---------------------------------------------------------------------------

    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 near-term 
definition boundary (e.g., for 61, 91, or 121 days) to take advantage 
of a directional market view, to profit from mispricing in an 
instrument, or to collect a liquidity premium in a particular 
instrument. This may significantly increase 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

[[Page 62065]]

recalibrating complex thresholds to exempt non-near-term proprietary 
trading and so could introduce additional uncertainty and increase the 
compliance burdens on SEC-regulated banking entities.
    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 long-term 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\
---------------------------------------------------------------------------

    \989\ See, e.g., SIFMA and BPI.
    \990\ See 79 FR 5549.
---------------------------------------------------------------------------

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.
(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 cross-currency 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.
---------------------------------------------------------------------------

    \991\ See, e.g., ISDA; Goldman Sachs and SIFMA.
---------------------------------------------------------------------------

    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 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.
---------------------------------------------------------------------------

    \992\ See Volcker Alliance and Data Boiler.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \993\ See 2013 rule Sec.  __.3(e)(7).
    \994\ Id.

---------------------------------------------------------------------------

[[Page 62066]]

    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 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\
----------------------------------------------------------------------------------------------------------------
                                                                                                     Holdings
 Broker-dealers subject to section 13 of the BHC      Number       Total assets,  Holdings, $mln    (altern.),
                       Act                                             $mln                            $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 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.
---------------------------------------------------------------------------

    \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.
    \998\ See, e.g., ABA; BB&T BPI and Capital One et al.
---------------------------------------------------------------------------

Exclusion for Customer-Driven Swaps and Customer-Driven Security-Based 
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, 
commonly for smaller and medium-size banking entities that engage in 
trading in connection with loans and other extensions of customer 
credit. Some commenters stated that this amendment increases the scope 
of permissible trading activity. 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 SEC-regulated entities would be de minimis.
---------------------------------------------------------------------------

    \999\ Commenters agreed with this view. See, e.g., Covington; 
Credit Suisse; SIFMA; Chatham and ABA.
---------------------------------------------------------------------------

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 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.\1000\
---------------------------------------------------------------------------

    \1000\ 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.
---------------------------------------------------------------------------

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-

[[Page 62067]]

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 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.\1001\ 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.
---------------------------------------------------------------------------

    \1001\ As discussed above, the final rule eliminates the 60-day 
rebuttable presumption in the short-term prong and instead 
establishes a new rebuttable presumption that financial instruments 
held for 60 days or more are not within the short-term prong.
---------------------------------------------------------------------------

(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 transactions in 
other derivatives, such as derivatives related to government 
securities, derivatives on foreign sovereign debt,\1002\ 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.\1003\
---------------------------------------------------------------------------

    \1002\ 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.
    \1003\ See, e.g., Capital One et al. and ABA.
---------------------------------------------------------------------------

    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 
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

[[Page 62068]]

compliance costs.\1004\ The agencies agree with these commenters and, 
therefore, are not adopting this alternative.
---------------------------------------------------------------------------

    \1004\ See, e.g., ABA; Credit Suisse; JBA and SIFMA.
---------------------------------------------------------------------------

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.
(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.\1005\ 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,\1006\ 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.\1007\ 
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 extent 
that establishing a large number of desks is more costly, this 
amendment will reduce compliance costs for dealers that are banking 
entities.
---------------------------------------------------------------------------

    \1005\ See, e.g., ABA and CCMC.
    \1006\ This was also supported by commenters. See, e.g., ABA; 
JBA; FSF; Goldman; ISDA; SIFMA and CCMC.
    \1007\ See section V.0.
---------------------------------------------------------------------------

    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.\1008\ 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.
---------------------------------------------------------------------------

    \1008\ See id.
---------------------------------------------------------------------------

(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.\1009\ 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 entities and the conflicts of interest that the 
prohibitions of section 13 of the BHC Act aimed to address.\1010\ 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.
---------------------------------------------------------------------------

    \1009\ This alternative was also suggested by a commenter. See 
JBA.
    \1010\ See, e.g., Volcker Alliance.
---------------------------------------------------------------------------

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

[[Page 62069]]

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.
    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.
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,\1011\ 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,\1012\ 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 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,\1013\ 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.
---------------------------------------------------------------------------

    \1011\ See, e.g., ABA; Credit Suisse; State Street and BB&T.
    \1012\ See JBA.
    \1013\ See section V.F.2.
---------------------------------------------------------------------------

    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.\1014\ 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.\1015\ 
As discussed above, sections __.4(c)(1)(i)-(ii) of the final rule 
require that such limits must be designed not to exceed RENTD.
---------------------------------------------------------------------------

    \1014\ See JBA.
    \1015\ See, e.g., Better Markets.
---------------------------------------------------------------------------

    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 
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.\1016\ 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

[[Page 62070]]

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.\1017\ 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 burdens \1018\ by $8,870 \1019\ for SEC-registered 
banking entities and ongoing burdens for SEC-registered broker-dealers 
by approximately $227,278 per year and for SBSDs by approximately 
$38,831 per year.\1020\
---------------------------------------------------------------------------

    \1016\ See, e.g., Volcker Alliance; Better Markets; NAFCU and 
Public Citizen.
    \1017\ See, e.g., Capital One et al.; Better Markets; and State 
Street.
    \1018\ 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 1,800-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.
    \1019\ Initial reporting and recordkeeping burdens: 0.5 hours x 
0.18 dealer weight x [199 broker-dealers + 34 SBSDs not already 
registered as broker-dealers] x Attorney at $423 per hour = $8,870.
    \1020\ 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.
---------------------------------------------------------------------------

    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 RENTD \1021\ and that banking entities should be required to 
demonstrate the analysis behind their RENTD forecasts and compare ex-
ante forecasts with ex-post realizations.\1022\ 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 about market 
conditions and the evolving risks of a particular desk.\1023\ 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.
---------------------------------------------------------------------------

    \1021\ See Volcker Alliance.
    \1022\ See Data Boiler.
    \1023\ See, e.g., FSF.
---------------------------------------------------------------------------

    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.
    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.\1024\ 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 SEC-regulated banking 
entities. The SEC is not aware of any such data, and commenters did not 
provide data enabling such quantification.\1025\
---------------------------------------------------------------------------

    \1024\ See, e.g., 83 FR at 33532.
    \1025\ 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.
---------------------------------------------------------------------------

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-
[agrave]-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 bank-
affiliated dealers, have, on aggregate, significantly reduced their 
capital commitment post-crisis.\1026\ 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

[[Page 62071]]

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.\1027\ 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.\1028\
---------------------------------------------------------------------------

    \1026\ See, e.g., FRB's ``Staff Q2 2017 Report on Corporate Bond 
Market Liquidity.'' See also section V.F.2 above.
    \1027\ See section V.F.2. above.
    \1028\ For a literature review and data, see SEC Report 2017, 
supra note 774.
---------------------------------------------------------------------------

    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 risk-mitigating 
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 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.\1029\ 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.
---------------------------------------------------------------------------

    \1029\ See 83 FR at 33533.
---------------------------------------------------------------------------

    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.\1030\ On the one hand, where proprietary 
trading 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.
---------------------------------------------------------------------------

    \1030\ See 83 FR at 33534.
---------------------------------------------------------------------------

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.\1031\ 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.\1032\
---------------------------------------------------------------------------

    \1031\ See, e.g., Data Boiler.
    \1032\ See, e.g., CFA.
---------------------------------------------------------------------------

    However, consistent with the views of a number of commenters,\1033\ 
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.\1034\ 
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,\1035\ as 
well as for non-U.S. banking entities with large non-U.S. 
operations.\1036\ 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.\1037\ 
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; 
\1038\ alternatively, entities may set higher internal limits to avoid 
breaches or increases.\1039\
---------------------------------------------------------------------------

    \1033\ See, e.g., ABA; Committee on Capital Markets; Credit 
Suisse; GFMA; FSF; JBA and BB&T.
    \1034\ See, e.g., FSF; SIFMA; ABA; CREFC; GFMA; Goldman Sachs; 
Real Estate Associations and ISDA.
    \1035\ See, e.g., Capital One et al.
    \1036\ See, e.g., JBA and IIB.
    \1037\ See BOK.
    \1038\ See, e.g., CCMC.
    \1039\ See, e.g., Capital One et al.; Better Markets; MBA and 
State Street.
---------------------------------------------------------------------------

    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 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

[[Page 62072]]

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).\1040\ 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.\1041\ 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.\1042\ 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.\1043\ Alternatives that would 
provide banking entities with greater flexibility in setting internal 
limits would bolster the ability of market makers and underwriters to 
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.
---------------------------------------------------------------------------

    \1040\ See JBA.
    \1041\ See, e.g., FSF and SIFMA.
    \1042\ See Capital One et al.
    \1043\ See BB&T.
---------------------------------------------------------------------------

    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.\1044\ Another 
commenter stated that such a one-size-fits all approach ignores 
differences in the business models of banking entities and desks.\1045\ 
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.
---------------------------------------------------------------------------

    \1044\ See Better Markets.
    \1045\ See Committee on Capital Markets.
---------------------------------------------------------------------------

    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 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.\1046\ 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.
---------------------------------------------------------------------------

    \1046\ See, e.g., ISDA.
---------------------------------------------------------------------------

d. Permitted Risk-Mitigating Hedging
i. Costs and Benefits
    As discussed in the proposal,\1047\ 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.
---------------------------------------------------------------------------

    \1047\ See, e.g., 83 FR at 33535.
---------------------------------------------------------------------------

    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.
    As discussed in the proposal,\1048\ 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

[[Page 62073]]

requirements for banking entities that do not have significant trading 
assets and liabilities.\1049\ 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.\1050\ 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.\1051\
---------------------------------------------------------------------------

    \1048\ See, e.g., 83 FR at 33536.
    \1049\ See, e.g., Credit Suisse and BB&T.
    \1050\ See BB&T.
    \1051\ See Better Markets.
---------------------------------------------------------------------------

    The SEC continues to believe that compliance with the 2013 rule, 
including compliance with the requirements of Sec.  __.5(b)(2), imposes 
disproportionate costs on banking entities without significant trading 
assets and liabilities.\1052\ 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, 
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.
---------------------------------------------------------------------------

    \1052\ See, e.g., 83 FR at 33536.
---------------------------------------------------------------------------

    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 risk-mitigating 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.\1053\ 
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 under the 2013 rule 
and amendments, and supported the complete elimination of the 
documentation requirements for all banking entities.\1054\
---------------------------------------------------------------------------

    \1053\ See, e.g., Better Markets; Data Boiler and Bean.
    \1054\ See, e.g., ABA; FSF; CREFC; BPI and SIFMA.
---------------------------------------------------------------------------

    Consistent with the views of some commenters,\1055\ 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.\1056\ 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.
---------------------------------------------------------------------------

    \1055\ See, e.g., Credit Suisse.
    \1056\ See, e.g., 83 FR at 33536.
---------------------------------------------------------------------------

    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 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,\1057\ 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.\1058\ 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.\1059\ The SEC continues to recognize that this may 
result in increased risks from the trading activity of some banking 
entities.\1060\ 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 hedged by tradeable assets all 
contribute to the overall risk of a banking entity or group of banking 
entities. As a result, the SEC

[[Page 62074]]

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.
---------------------------------------------------------------------------

    \1057\ See, e.g., ABA; Credit Suisse and SIFMA.
    \1058\ See 83 FR at 33535. See also, e.g., Better Markets; Bean; 
Data Boiler and CFA.
    \1059\ See, e.g., Public Citizen.
    \1060\ See, e.g., 83 FR at 33536.
---------------------------------------------------------------------------

    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.\1061\ The agencies received 
comment that permitting additional time to provide correlation analysis 
would better address time-related challenges; \1062\ that requiring 
statistical tests of randomness to the observed returns on the hedged 
positions may serve to duly constrain hedging; \1063\ and that there 
should be no regulation-related delays when hedging if banking entities 
rely on documented and stable risk relationships.\1064\ 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.\1065\ 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 
risk-mitigating hedging activities.\1066\
---------------------------------------------------------------------------

    \1061\ See 83 FR at 33535. See also, e.g., ABA; Credit Suisse; 
JBA; SIFMA and CREFC.
    \1062\ See, e.g., Better Markets.
    \1063\ Id.
    \1064\ Id.
    \1065\ See, e.g., SIFMA.
    \1066\ See, e.g., 83 FR at 33535.
---------------------------------------------------------------------------

    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.\1067\ 
Other commenters indicated that correlation analysis is highly 
automated and forces banking entities to be more purposeful in hedging 
activities.\1068\ 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.\1069\ 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 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.
---------------------------------------------------------------------------

    \1067\ See, e.g., AFR; Bean; NAFCU; Public Citizen; Volcker 
Alliance; Better Markets and Systemic Risk Council.
    \1068\ See, e.g., AFR and Data Boiler.
    \1069\ See 83 FR at 33536.
---------------------------------------------------------------------------

    As discussed above, the SEC estimates burden reductions, per firm, 
as a result of the final rule. The final amendments to Sec.  __.5(c) 
may result in ongoing cost savings for SEC-registered broker-dealers 
\1070\ estimated at $1,295,903.\1071\ 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.\1072\ However, the SEC recognizes 
that compliance with SBSD registration

[[Page 62075]]

requirements is not yet required and that there are currently no 
registered SBSDs.
---------------------------------------------------------------------------

    \1070\ 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.
    \1071\ 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.
    \1072\ 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 broker-
dealers = $51,775. This estimate assumes all SBSDs are Group A 
entities and will still be subject to these ongoing recordkeeping 
obligations.
---------------------------------------------------------------------------

ii. Efficiency, Competition, and Capital Formation
    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 risk-
mitigating 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
    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.\1073\ 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.\1074\ 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.\1075\ As a result, some commenters \1076\ 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.
---------------------------------------------------------------------------

    \1073\ See, e.g., Capital One et al., JBA, ABA and KeyCorp.
    \1074\ See JBA.
    \1075\ 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.
    \1076\ See Capital One et al. and JBA.
---------------------------------------------------------------------------

    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 13 of the BHC Act.\1077\ 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.
---------------------------------------------------------------------------

    \1077\ See, e.g., Data Boiler.
---------------------------------------------------------------------------

    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.\1078\ 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.\1079\ 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.
---------------------------------------------------------------------------

    \1078\ See, e.g., Credit Suisse and CCMC.
    \1079\ Id.
---------------------------------------------------------------------------

    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.\1080\ 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.
---------------------------------------------------------------------------

    \1080\ See, e.g., ABA; FSF; CREFC; BPI and SIFMA.
---------------------------------------------------------------------------

    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

[[Page 62076]]

presumption of the 2013 rule.\1081\ 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 risk-
mitigating hedging exemption.
---------------------------------------------------------------------------

    \1081\ See KeyCorp.
---------------------------------------------------------------------------

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.\1082\ 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.\1083\ 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.\1084\ The final rule removes the financing and counterparty 
prongs.
---------------------------------------------------------------------------

    \1082\ See, e.g., JBA; HSBC; ABA; ISDA; Credit Suisse; Committee 
on Capital Markets and IIB.
    \1083\ See, e.g., EBF (citing 83 FR at 33468-69).
    \1084\ See, e.g., 83 FR at 33537.
---------------------------------------------------------------------------

    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.\1085\ At the same time, the 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.\1086\ 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.\1087\ 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.\1088\
---------------------------------------------------------------------------

    \1085\ See, e.g., ABA; ISDA; Credit Suisse; Committee on Capital 
Markets and IIB.
    \1086\ See, e.g., Bean; NAFCU; Better Markets; Merkley and Data 
Boiler.
    \1087\ Id.
    \1088\ 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 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.
---------------------------------------------------------------------------

    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 bearing \1089\ 
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.\1090\
---------------------------------------------------------------------------

    \1089\ See, e.g., HSBC.
    \1090\ See, e.g., JBA.
---------------------------------------------------------------------------

    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.\1091\ 
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.\1092\ 
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 foreign banking entities without the constraints under the 
counterparty prong on the involvement of their U.S. personnel.\1093\
---------------------------------------------------------------------------

    \1091\ See, e.g., FSF.
    \1092\ See, e.g., IIB.
    \1093\ Id.
---------------------------------------------------------------------------

    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.\1094\ 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

[[Page 62077]]

securities and prudential regulations that address these concerns.
---------------------------------------------------------------------------

    \1094\ See, e.g., 83 FR at 33537. See also JBA.
---------------------------------------------------------------------------

    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.\1095\ 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 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.
---------------------------------------------------------------------------

    \1095\ See, e.g., EBF; HSBC and IIB.
---------------------------------------------------------------------------

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 of U.S. market participants to 
foreign banking entity counterparties, on the one hand,\1096\ and, 
advancement of the objectives of section 13 of the BHC Act, on the 
other hand.
---------------------------------------------------------------------------

    \1096\ 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.
---------------------------------------------------------------------------

    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 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,\1097\ the SEC continues to 
recognize that the final rule may also affect competition among banking 
entities.\1098\ 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.\1099\ 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. 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

[[Page 62078]]

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.\1100\
---------------------------------------------------------------------------

    \1097\ See, e.g., Bean; Data Boiler; FSF and Better Markets.
    \1098\ See 83 FR at 33538.
    \1099\ See, e.g., JBA.
    \1100\ See, e.g., IIB.
---------------------------------------------------------------------------

    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
    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.\1101\ 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. 
\1102\ 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.
---------------------------------------------------------------------------

    \1101\ See, e.g., JBA.
    \1102\ Id.
---------------------------------------------------------------------------

    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.\1103\ 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 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.
---------------------------------------------------------------------------

    \1103\ See IIB.
---------------------------------------------------------------------------

f. Covered Funds
    The agencies are adopting amendments to Sec.  __.11 and Sec.  
__.13, as proposed.
i. Costs and Benefits
    First, the final rule removes the requirement in Sec.  __.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 Sec.  
__.11 of the 2013 rule) acquired or retained in accordance with the 
underwriting or market making exemptions in Sec.  __.4. In addition, 
the final rule removes the guarantee language in Sec.  __.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.
    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 commenters \1104\ 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,\1105\ the final amendments 
provide banking entities with greater flexibility in underwriting and 
market making ownership interests in covered funds.
---------------------------------------------------------------------------

    \1104\ See, e.g., SIFMA.
    \1105\ See, e.g., SIFMA and ISDA.
---------------------------------------------------------------------------

    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.\1106\ 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 capital-
raising activities of covered funds,\1107\ increase liquidity, and 
generally benefit the marketplace.\1108\ The SEC agrees with these 
commenters and continues to believe that SEC-regulated banking

[[Page 62079]]

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,\1109\ banking entities may become more willing and able to 
underwrite and make markets in ownership interests in covered funds.
---------------------------------------------------------------------------

    \1106\ See, e.g., BPI; IIB; SIFMA; ABA and Goldman Sachs.
    \1107\ See SIFMA.
    \1108\ See ISDA.
    \1109\ See, e.g., BPI.
---------------------------------------------------------------------------

    Some commenters indicated that these amendments would greatly 
increase banking entities' exposure to interests in covered funds, 
which would entail additional risks.\1110\ For example, the removal of 
the guarantee language in Sec.  __.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.\1111\ However, the SEC also 
continues to recognize that the risks of market making or underwriting 
of ownership interests in covered 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.
---------------------------------------------------------------------------

    \1110\ See, e.g., Volcker Alliance; AFR and Bean.
    \1111\ See, e.g., AFR and Data Boiler.
---------------------------------------------------------------------------

    Second, the final rule amends section Sec.  __.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.\1112\ 
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.\1113\ 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 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.\1114\ 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.\1115\ 
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.
---------------------------------------------------------------------------

    \1112\ The effects of removal of demonstrability requirement are 
discussed in section V.F.3.c.
    \1113\ See, e.g., BPI and FSF.
    \1114\ See 83 FR at 33547-33549.
    \1115\ This was also supported by commenters. See, e.g., BPI; 
Forum; ISDA and SIFMA.
---------------------------------------------------------------------------

    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 risk-mitigating hedging activities may 
result in banking entities' exposure to greater risk.\1116\ Some 
commenters supported this view.\1117\ The SEC continues to recognize 
that banking entities' transactions in fund-linked products that 
reference covered funds with customers can expose a banking entity to 
risk in cases where a customer fails to perform, transforming the 
banking entity's covered fund hedge of the customer trade into an 
unhedged, and potentially illiquid, position in the covered fund 
(unless and until the banking entity takes action to hedge this 
exposure and bears the corresponding costs 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.\1118\ 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 risk-mitigating 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.
---------------------------------------------------------------------------

    \1116\ 79 FR at 5737.
    \1117\ See, e.g., AFR and Volcker Alliance.
    \1118\ See, e.g., SIFMA; Forum and ISDA.
---------------------------------------------------------------------------

    Third, the final rule amends section Sec.  __.13(b)(4) of the 2013 
rule to remove the financing prong of the foreign fund exemption and 
formally incorporates existing staff guidance regarding the marketing 
of ownership

[[Page 62080]]

interests in foreign funds to U.S. residents into section Sec.  
__.13(b)(3).\1119\ 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.\1120\
---------------------------------------------------------------------------

    \1119\ 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.
    \1120\ 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.
---------------------------------------------------------------------------

    In light of commenters' responses,\1121\ 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 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.
---------------------------------------------------------------------------

    \1121\ Several commenters supported removing the financing prong 
from the foreign fund exemption. See, e.g., BPI; EBF; IIB; JBA and 
New England Council.
---------------------------------------------------------------------------

    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.\1122\ 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.\1123\ 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.
---------------------------------------------------------------------------

    \1122\ See, e.g., Better Markets and CAP.
    \1123\ Some commenters supported this view. See, e.g., EBF and 
BPI.
---------------------------------------------------------------------------

ii. Efficiency, Competition, and Capital Formation
    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 Sec.  __.11 and Sec.  __.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
    The agencies considered alternatives that would scope out from 
calculation of the per-fund 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.\1124\ 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.
---------------------------------------------------------------------------

    \1124\ Some commenters supported this alternative. See, e.g., 
ISDA.
---------------------------------------------------------------------------

    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

[[Page 62081]]

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 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
    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) 
\1125\ 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.\1126\ 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.\1127\
---------------------------------------------------------------------------

    \1125\ See 83 FR 33432.
    \1126\ Id.
    \1127\ Id.
---------------------------------------------------------------------------

    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 banking entities. However, 
the SEC agrees with commenters \1128\ that compliance programs are 
important to support the safety and soundness of the U.S. financial 
markets.
---------------------------------------------------------------------------

    \1128\ See, e.g., AFR and Bean.
---------------------------------------------------------------------------

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.\1129\ 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 broker-dealers 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. 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.\1130\
---------------------------------------------------------------------------

    \1129\ See, e.g., B&F Capital Markets Inc.
    \1130\ See section V.B. Ongoing cost reduction for broker-
dealers: (40 hours per firm x 18 broker-dealers + 265 hours per firm 
x 79 broker-dealers) x 0.18 dealer weight x (Attorney at $423 per 
hour) = $1,648,812.
---------------------------------------------------------------------------

    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,\1131\ and, as a result, incur compliance costs related to 
establishing internal systems and controls in anticipation of potential 
rebuttal of the presumption.\1132\ 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

[[Page 62082]]

consulting or legal advice fees.\1133\ 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.\1134\
---------------------------------------------------------------------------

    \1131\ See, e.g., Chatham; ABA and SIFMA.
    \1132\ See, e.g., Covington; Chatham; EBF; JBA and Data Boiler.
    \1133\ See Data Boiler.
    \1134\ 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.
---------------------------------------------------------------------------

    Some commenters opposed the presumption of compliance.\1135\ The 
SEC continues to recognize that the presumption of compliance for Group 
C entities may increase the risks of non-compliance 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.
---------------------------------------------------------------------------

    \1135\ See, e.g., Occupy the SEC and Data Boiler.
---------------------------------------------------------------------------

    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.\1136\ 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.\1137\ 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.\1138\
---------------------------------------------------------------------------

    \1136\ See, e.g., CFA and JBA.
    \1137\ See 83 FR 33432.
    \1138\ Cost reduction for broker-dealers: 225 hours per firm x 
0.18 dealer weight x 66 broker-dealers 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 SBSDs 
assumes that 34 SBSDs not already registered as broker-dealers would 
be Group B entities and so may overestimate the cost savings.
---------------------------------------------------------------------------

    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.\1139\ 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 requirements to be 
$2,208,060 for registered broker-dealers and up to $517,752 for 
entities that may choose to register as SBSDs.\1140\
---------------------------------------------------------------------------

    \1139\ 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.
    \1140\ Cost reduction for broker-dealers: 200 hours per firm x 
0.18 dealer weight x 145 broker-dealers 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.
---------------------------------------------------------------------------

    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.\1141\ 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.\1142\ 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.\1143\ 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 
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.\1144\
---------------------------------------------------------------------------

    \1141\ See, e.g., Insurance Coalition; Real Estate Associations; 
CREFC; Credit Suisse; JBA; FSF and ABA.
    \1142\ See, e.g., Credit Suisse; CREFC; SIFMA and Capital One et 
al.
    \1143\ See 83 FR at 33551.
    \1144\ Cost reduction for broker-dealers: 1,100 hours per firm x 
0.18 dealer weight x 122 broker-dealers 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.
---------------------------------------------------------------------------

    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.\1145\ 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 Sec.  __.20.
---------------------------------------------------------------------------

    \1145\ See, e.g., AFR and Bean.
---------------------------------------------------------------------------

    Finally, the agencies are adopting the amendment to require CEO 
attestation

[[Page 62083]]

for Group A entities only.\1146\ 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 time dedicated towards the compliance 
program by as much as 10%.\1147\ 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.\1148\ 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.
---------------------------------------------------------------------------

    \1146\ 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.
    \1147\ See 83 FR at 33551.
    \1148\ See, e.g., Capital One, et al.
---------------------------------------------------------------------------

    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.\1149\
---------------------------------------------------------------------------

    \1149\ Cost reduction for broker-dealers: 100 hours per firm x 
0.18 dealer weight x 86 broker-dealers 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.
    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.
---------------------------------------------------------------------------

    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.\1150\ 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.
---------------------------------------------------------------------------

    \1150\ 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.
---------------------------------------------------------------------------

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 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 
commenters.\1151\ As discussed above and noted by commenters,\1152\ 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.
---------------------------------------------------------------------------

    \1151\ See, e.g., IIB.
    \1152\ See, e.g., Capital One et al.; BB&T ABA; Arvest; State 
Street and IIB.
---------------------------------------------------------------------------

    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

[[Page 62084]]

much as 10%.\1153\ 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 Sec.  __.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.
---------------------------------------------------------------------------

    \1153\ See 83 FR at 33551.
---------------------------------------------------------------------------

    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, procedure, process, and control, 
as pointed out by some commenters,\1154\ 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.\1155\ 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.
---------------------------------------------------------------------------

    \1154\ See, e.g., FSF; BPI and SIFMA.
    \1155\ See, e.g., BOK.
---------------------------------------------------------------------------

    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.\1156\ 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 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.
---------------------------------------------------------------------------

    \1156\ See 83 FR at 33552.
---------------------------------------------------------------------------

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.\1157\ 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 year-to-
year.\1158\ 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.\1159\
---------------------------------------------------------------------------

    \1157\ See 83 FR at 33539.
    \1158\ Id.
    \1159\ 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.
---------------------------------------------------------------------------

    The SEC continues to believe that the metrics reporting and 
recordkeeping requirements of the 2013 rule may involve large 
compliance costs.\1160\ The agencies have received comment that the 
proposed amendments do not streamline metrics reporting and 
recordkeeping requirements but impose costly new requirements.\1161\ 
Moreover, the agencies received comment that the new qualitative 
information requirements, such as the trading desk information, are 
unlikely to enhance review by regulators.\1162\ 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.\1163\
---------------------------------------------------------------------------

    \1160\ See, e.g., 83 FR at 33538.
    \1161\ See, e.g., CCMC; JBA; Committee on Capital Markets; SIFMA 
Annex C and IIB.
    \1162\ See SIFMA.
    \1163\ Id.
---------------------------------------------------------------------------

    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 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.\1164\ The SEC 
allocates these costs to the affiliated

[[Page 62085]]

SEC-regulated banking entity.\1165\ 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 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.
---------------------------------------------------------------------------

    \1164\ 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.
    \1165\ See supra note 1070.
---------------------------------------------------------------------------

    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 SEC-Regulated 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.\1166\ 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.
---------------------------------------------------------------------------

    \1166\ See 2013 rule Sec.  __.20(d) and Appendix A.
---------------------------------------------------------------------------

    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 month within 10 days of the end of that 
month.\1167\ 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.
---------------------------------------------------------------------------

    \1167\ See 2013 rule Sec.  __.20(d)(3).
---------------------------------------------------------------------------

    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.\1168\ The commenter 
indicated that the exercise is not dissimilar from the initial 
implementation of the 2013 rule's metrics.\1169\ 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.\1170\
---------------------------------------------------------------------------

    \1168\ See SIFMA.
    \1169\ Id.
    \1170\ See, e.g., JBA.
---------------------------------------------------------------------------

    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 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,\1171\ 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.\1172\ Using this estimate, the one-time costs 
related to transitioning metrics reporting to

[[Page 62086]]

comply with the requirements of the final rule may be as high as 
$540,000 \1173\ for SEC-regulated dealers affiliated with a single 
Group A metrics reporter and as high as $6,480,000 \1174\ for all SEC-
regulated entities affiliated with all reporters.
---------------------------------------------------------------------------

    \1171\ See SIFMA.
    \1172\ Id.
    \1173\ $3 million x 0.18 x 1 reporter = $540,000.
    \1174\ $540,000 x 12 reporters = $6,480,000.
---------------------------------------------------------------------------

    However, as discussed earlier in this section, the SEC believes 
that the final metrics amendments may reduce reporting and 
recordkeeping burdens.\1175\ The SEC estimates that the amendments may 
decrease ongoing annual reporting and recordkeeping cost by 
$463,921.\1176\ These figures reflect the estimated burden reductions 
net of any new systems costs imposed by the final rule.
---------------------------------------------------------------------------

    \1175\ 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.
    \1176\ 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.
---------------------------------------------------------------------------

(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 Positions metric will be required 
only by desks involved in underwriting or market making-related 
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-, 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 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 non-
comparable 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

[[Page 62087]]

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.
    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.\1177\ 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.\1178\ 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.\1179\
---------------------------------------------------------------------------

    \1177\ See, e.g., SIFMA and GFMA.
    \1178\ Id.
    \1179\ See IIB; SIFMA and JBA.
---------------------------------------------------------------------------

    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.\1180\ 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 Customer-Facing 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 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.
---------------------------------------------------------------------------

    \1180\ See, e.g., 83 FR at 33541.
---------------------------------------------------------------------------

    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.\1181\ 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.\1182\ In addition, in the proposal, the SEC estimated that 
modifying the 2013 rule's requirements of the Customer-Facing Trade 
Ratio to require SEC-regulated banking entities to further categorize 
trading desk transactions may impose additional systems costs related 
to tagging internal transactions and maintaining associated records 
valued at $21,420 for all reporters.\1183\ The SEC now revises this 
estimate to $15,120 to reflect updated information about the number of 
reporters with affiliated SEC-registered dealers affected by the 
metrics amendments.\1184\
---------------------------------------------------------------------------

    \1181\ 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.
    \1182\ $8,000 x 12 reporters x 0.18 SEC-registered banking 
entity weight = $17,280.
    \1183\ 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.
    \1184\ $7,000 x 12 reporters x 0.18 SEC-registered banking 
entity weight = $15,120.
---------------------------------------------------------------------------

    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 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.\1185\ The SEC also notes that banking 
entities may already provide information about risk factor 
sensitivities as part of market risk

[[Page 62088]]

reporting.\1186\ 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.
---------------------------------------------------------------------------

    \1185\ See SIFMA.
    \1186\ Id.
---------------------------------------------------------------------------

    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.\1187\ 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.
---------------------------------------------------------------------------

    \1187\ 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.
---------------------------------------------------------------------------

    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.\1188\ 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.\1189\
---------------------------------------------------------------------------

    \1188\ See, e.g., Data Boiler.
    \1189\ See, e.g., Goldman Sachs; FSF and Data Boiler.
---------------------------------------------------------------------------

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.
(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.\1190\ 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.
---------------------------------------------------------------------------

    \1190\ See 79 FR 5798.
---------------------------------------------------------------------------

    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.
    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.\1191\ 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.\1192\ In addition, some commenters stated that the 
requirements are costly and burdensome as they vastly expand the scope 
of information requested.\1193\ 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

[[Page 62089]]

unnecessary given that the agencies may be able to obtain this 
information through other supervision.\1194\ 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.\1195\
---------------------------------------------------------------------------

    \1191\ See, e.g., Credit Suisse; JBA and SIFMA.
    \1192\ See ABA; CCMR; SIFMA and Credit Suisse.
    \1193\ See, e.g., Credit Suisse and CCMR.
    \1194\ See SIFMA.
    \1195\ See Credit Suisse.
---------------------------------------------------------------------------

    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 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 cross-reference 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 different trading desks of a 
banking entity.\1196\ 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.
---------------------------------------------------------------------------

    \1196\ See, e.g., SIFMA.
---------------------------------------------------------------------------

    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.\1197\ 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.\1198\ The commenter indicated that the 
exercise is not dissimilar from the initial implementation of the 2013 
rule's metrics.\1199\ 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.\1200\
---------------------------------------------------------------------------

    \1197\ 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.
    \1198\ See SIFMA.
    \1199\ Id.
    \1200\ See, e.g., JBA.
---------------------------------------------------------------------------

    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 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 reporter \1201\ and

[[Page 62090]]

$270,000 for all SEC-registered entities affiliated with all 
reporters.\1202\ 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,\1203\ 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.\1204\ 
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 $540,000 \1205\ for SEC-registered dealers affiliated 
with a single Group A metrics reporter and as high as $6,480,000 \1206\ 
for all SEC-registered entities affiliated with all reporters.
---------------------------------------------------------------------------

    \1201\ 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.
    \1202\ $22,500 x 12 reporters = $270,000.
    \1203\ See SIFMA.
    \1204\ Id.
    \1205\ $3 million x 0.18 x 1 reporter = $540,000.
    \1206\ $540,000 x 12 reporters = $6,480,000.
---------------------------------------------------------------------------

(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 reporting \1207\ and an extended reporting timeframe for 
reporters with more than $50 billion in trading assets and liabilities 
\1208\ 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.
---------------------------------------------------------------------------

    \1207\ See, e.g., SIFMA.
    \1208\ See, e.g., Goldman Sachs; Credit Suisse and FSF.
---------------------------------------------------------------------------

    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 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.\1209\ 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. 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.\1210\ 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 SEC-
regulated dealers covered by the metrics reporting and recordkeeping 
requirements may have experience applying the XML format to their data.
---------------------------------------------------------------------------

    \1209\ 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.
    \1210\ 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-schema-documentation-and-schema-files. Also see 81 FR 49499. Information about FINRA's eFOCUS 
system is available at http://www.finra.org/industry/focus.
---------------------------------------------------------------------------

    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.
    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

[[Page 62091]]

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 $75,000 \1211\ per reporter, for an expected aggregate 
one-time cost of approximately $229,500 for all SEC registrants.\1212\
---------------------------------------------------------------------------

    \1211\ 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 one-time 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 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.
    \1212\ In the Proposing Release, the SEC computed total costs as 
follows: $75,000 x 17 reporters x 0.18 entity weight = $229,500.
---------------------------------------------------------------------------

    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.\1213\ Other commenters generally 
supported metrics reporting in a standardized data format and the 
proposed transition to XML reporting.\1214\ 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.\1215\ 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.\1216\
---------------------------------------------------------------------------

    \1213\ See, e.g., JBA and Credit Suisse.
    \1214\ See, e.g., Goldman Sachs and Data Boiler.
    \1215\ See SIFMA.
    \1216\ See Data Boiler.
---------------------------------------------------------------------------

    The SEC continues to estimate that each reporter may incur a one-
time switching cost of 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.\1217\ 
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.
---------------------------------------------------------------------------

    \1217\ $75,000 x 12 reporters x 0.18 entity weight = $162,000.
---------------------------------------------------------------------------

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 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 requirement 
\1218\ or replaced VaR with Expected Shortfall \1219\ as a potentially 
better measure of tail risk of a trading desk or banking entity.\1220\ 
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

[[Page 62092]]

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.
---------------------------------------------------------------------------

    \1218\ See, e.g., Goldman Sachs.
    \1219\ 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.
    \1220\ See, e.g., Data Boiler.
---------------------------------------------------------------------------

    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 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.\1221\ Alternatively, the agencies could have eliminated all 
quantitative metrics except for Risk Management and Source of Revenue 
Metrics.\1222\ 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 
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.
---------------------------------------------------------------------------

    \1221\ See New England Council.
    \1222\ See, e.g., New England Council and State Street.
---------------------------------------------------------------------------

    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 
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.''

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

[[Page 62093]]

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.

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

0
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

0
2. Section 44.2 is revised to read as follows:


Sec.  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;
    (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 
paragraph (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 
paragraph (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 paragraph (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:
    (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.
    (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 Sec.  
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

[[Page 62094]]

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 means with respect to a 
banking entity that:
    (1)(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 Sec.  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 Sec.  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 (s)(3) of this section, 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 Sec.  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 
Sec.  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).
    (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 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 Sec.  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.
    (ee) Significant trading assets and liabilities means with respect 
to a banking entity that:
    (1)(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 Sec.  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 (ee)(3) of this section, trading assets and 
liabilities for purposes of this paragraph (ee) means trading assets 
and liabilities (excluding trading assets and liabilities attributable 
to trading activities permitted pursuant to Sec.  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 (ee) means the 
trading assets and liabilities (excluding trading assets and 
liabilities attributable to trading activities permitted pursuant to 
Sec.  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

[[Page 62095]]

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.
    (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

0
3. Section 44.3 is amended by:
0
a. Revising paragraphs (b), (d)(3), and (d)(8) and (9);
0
b. Adding paragraphs (d)(10) through (13);
0
c. Redesignating paragraphs (e)(5) through (13) as paragraphs (e)(6) 
through (14);
0
d. Adding new paragraph (e)(5); and
0
e. Revising newly redesignated paragraphs (e)(11), (12), and (14).
    The revisions and additions read as follows:


Sec.  44.3   Prohibition on proprietary trading.

* * * * *
    (b) Definition of trading account. (1) Trading account. 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
    (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) Trading account application for certain banking entities. (i) A 
banking entity that is subject to paragraph (b)(1)(ii) of this section 
in determining the scope of its trading account is not subject to 
paragraph (b)(1)(i) of this section.
    (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 section 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 of this part.
    (ii) 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) of this section 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 
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

[[Page 62096]]

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 Sec.  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 this 
paragraph (d)(3); 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 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 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:
    (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 12 CFR part 3, subpart F, 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
    (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.

0
4. Section 44.4 is revised to read as follows:


Sec.  44.4   Permitted underwriting and market making-related 
activities.

    (a) Underwriting activities--(1) Permitted underwriting activities. 
The prohibition contained in Sec.  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 
underwriting position within a reasonable period, taking into account 
the liquidity,

[[Page 62097]]

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.
    (iv) A banking entity with significant trading assets and 
liabilities may satisfy the requirements in paragraphs (a)(2)(iii)(B) 
and (C) of this section by complying with the requirements set forth in 
paragraph (c) of this section;
    (v) The compensation arrangements of persons performing the 
activities described in this paragraph (a) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (vi) 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 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 Sec.  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 this 
paragraph (b), 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.
    (iv) A banking entity with significant trading assets and 
liabilities may satisfy the requirements in paragraphs (b)(2)(iii)(C) 
and (D) by complying with the requirements set forth in paragraph (c) 
of this section;
    (v) The compensation arrangements of persons performing the 
activities described in this paragraph (b) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (vi) The banking entity is licensed or registered to engage in 
activity

[[Page 62098]]

described in this paragraph (b) in accordance with applicable law.
    (3) Definition of client, customer, and counterparty. For purposes 
of this paragraph (b), 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 
Sec.  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.
    (ii) [Reserved]
    (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.
    (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 should take into account the liquidity, maturity, and depth 
of the market for the relevant types of securities and 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.
    (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 should take into account the liquidity, maturity, and depth 
of the market for the relevant types of financial instruments and 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.
    (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 paragraph (c)(1)(ii)(A) or (B) of this section, a banking 
entity shall maintain and make available to the OCC upon request 
records regarding:
    (A) Any limit that is exceeded; and
    (B) Any temporary or permanent increase to any limit(s), in each 
case in the form and manner as directed by the OCC.
    (ii) In the event of a breach or increase of any limit set pursuant 
to paragraph (c)(1)(ii)(A) or (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:
    (A) Takes action as promptly as possible after a breach to bring 
the trading desk into compliance; and
    (B) 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 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 of this part.

0
5. Section 44.5 is amended by revising paragraphs (b) and (c)(1) 
introductory text and adding paragraph (c)(4) to read as follows:


Sec.  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

[[Page 62099]]

authorization procedures, including relevant escalation procedures; and
    (C) The conduct of analysis and independent testing designed to 
ensure that the positions, techniques and strategies that may be used 
for hedging may reasonably be expected to reduce or otherwise 
significantly mitigate the specific, identifiable risk(s) being hedged;
    (ii) The risk-mitigating hedging activity:
    (A) Is conducted in accordance with the written policies, 
procedures, and internal controls required under this section;
    (B) At the inception of the hedging activity, including, without 
limitation, any adjustments to the hedging activity, is designed to 
reduce or otherwise significantly mitigate one or more specific, 
identifiable risks, including market risk, counterparty or other credit 
risk, currency or foreign exchange risk, interest rate risk, commodity 
price risk, basis risk, or similar risks, arising in connection with 
and related to identified positions, contracts, or other holdings of 
the banking entity, based upon the facts and circumstances of the 
identified underlying and hedging positions, contracts or other 
holdings and the risks and liquidity thereof;
    (C) Does not give rise, at the inception of the hedge, to any 
significant new or additional risk that is not itself hedged 
contemporaneously in accordance with this section;
    (D) Is subject to continuing review, monitoring and management by 
the banking entity that:
    (1) Is consistent with the written hedging policies and procedures 
required under paragraph (b)(1)(i) of this section;
    (2) Is designed to reduce or otherwise significantly mitigate the 
specific, identifiable risks that develop over time from the risk-
mitigating hedging activities undertaken under this section and the 
underlying positions, contracts, and other holdings of the banking 
entity, based upon the facts and circumstances of the underlying and 
hedging positions, contracts and other holdings of the banking entity 
and the risks and liquidity thereof; and
    (3) Requires ongoing recalibration of the hedging activity by the 
banking entity to ensure that the hedging activity satisfies the 
requirements set out in paragraph (b)(1)(ii) of this section and is not 
prohibited proprietary trading; and
    (iii) The compensation arrangements of persons performing risk-
mitigating hedging activities are designed not to reward or incentivize 
prohibited proprietary trading.
    (2) The risk-mitigating hedging activities of a banking entity that 
does not have significant trading assets and liabilities are permitted 
under paragraph (a) of this section only if the 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 sale of financial 
instruments made in reliance on this section for risk-mitigating 
hedging purposes that is:
* * * * *
    (4) The requirements of paragraphs (c)(2) and (3) of this section 
do not apply to the purchase or sale of a financial instrument 
described in paragraph (c)(1) of this section if:
    (i) The financial instrument purchased or sold is identified on a 
written list of pre-approved financial instruments that are commonly 
used by the trading desk for the specific type of hedging activity for 
which the financial instrument is being purchased or sold; and
    (ii) At the time the financial instrument is purchased or sold, the 
hedging activity (including the purchase or sale of the financial 
instrument) complies with written, pre-approved 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.

0
6. Section 44.6 is amended by revising paragraph (e)(3), removing 
paragraphs (e)(4) and (6), and redesignating paragraph (e)(5) as 
paragraph (e)(4).
    The revision reads as follows:


Sec.  44.6   Other permitted proprietary trading activities.

* * * * *
    (e) * * *
    (3) A purchase or sale by a banking entity is permitted for 
purposes of this paragraph (e) if:
    (i) The banking entity engaging as principal in the purchase or 
sale (including relevant personnel) is not located in the United States 
or organized under the laws of the United States or of any State;
    (ii) The banking entity (including relevant personnel) that makes 
the decision to purchase or sell as principal is not located in the 
United States or organized under the laws of the United States or of 
any State; and
    (iii) The purchase or sale, including any transaction arising from 
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

0
7. Section 44.10 is amended by revising paragraphs (c)(7)(ii) and 
(c)(8)(i)(A) to read as follows:


Sec.  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 Sec.  44.2(t) of subpart A;
* * * * *

0
8. Section 44.11 is amended by revising paragraph (c) to read as 
follows:

[[Page 62100]]

Sec.  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 Sec.  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 Sec.  44.4(a) or (b) of subpart B, respectively; and
    (2) With respect to any banking entity (or any affiliate thereof) 
that: Acts as a sponsor, investment adviser or commodity trading 
advisor to a particular covered fund or otherwise acquires and retains 
an ownership interest in such covered fund in reliance on paragraph (a) 
of this section; or acquires and retains an ownership interest in such 
covered fund and is either a securitizer, as that term is used in 
section 15G(a)(3) of the Exchange Act (15 U.S.C. 78o-11(a)(3)), or is 
acquiring and retaining an ownership interest in such covered fund in 
compliance with section 15G of that Act (15 U.S.C. 78o-11) and the 
implementing regulations issued thereunder each as permitted by 
paragraph (b) of this section, then in each such case any ownership 
interests acquired or retained by the banking entity and its affiliates 
in connection with underwriting and market making related activities 
for that particular covered fund are included in the calculation of 
ownership interests permitted to be held by the banking entity and its 
affiliates under the limitations of Sec.  44.12(a)(2)(ii) and (iii) and 
(d).


Sec.  44.12   [Amended]

0
9. Section 44.12 is amended by redesignating the second instance of 
paragraph (e)(2)(vi) as paragraph (e)(2)(vii).

0
10. Section 44.13 is amended by revising paragraphs (a), (b)(3) and 
(4), and (c) to read as follows:


Sec.  44.13   Other permitted covered fund activities and investments.

    (a) Permitted risk-mitigating hedging activities. (1) The 
prohibition contained in Sec.  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) The risk-mitigating hedging activities of a banking entity are 
permitted under this paragraph (a) only if:
    (i) The banking entity has established and implements, maintains 
and enforces an internal compliance program in accordance with subpart 
D of this part that is reasonably designed to ensure the banking 
entity's compliance with the requirements of this section, including:
    (A) Reasonably designed written policies and procedures; and
    (B) Internal controls and ongoing monitoring, management, and 
authorization procedures, including relevant escalation procedures; and
    (ii) The acquisition or retention of the ownership interest:
    (A) Is made in accordance with the written policies, procedures, 
and internal controls required under this section;
    (B) At the inception of the hedge, is designed to reduce or 
otherwise significantly mitigate one or more specific, identifiable 
risks arising:
    (1) Out of a transaction conducted solely to accommodate a specific 
customer request with respect to the covered fund; or
    (2) In connection with the compensation arrangement with the 
employee that directly provides investment advisory, commodity trading 
advisory, or other services to the covered fund;
    (C) Does not give rise, at the inception of the hedge, to any 
significant new or additional risk that is not itself hedged 
contemporaneously in accordance with this section; and
    (D) Is subject to continuing review, monitoring and management by 
the banking entity.
    (iii) With respect to risk-mitigating hedging activity conducted 
pursuant to paragraph (a)(1)(i) of this section, 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 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 Sec.  44.10(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;

[[Page 62101]]

    (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.

0
11. Section 44.14 is amended by revising paragraph (a)(2)(ii)(B) to 
read as follows:


Sec.  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
* * * * *

Subpart D--Compliance Program Requirement; Violations

0
12. Section 44.20 is amended by revising paragraphs (a), (b) 
introductory text, (c), (d), (e) introductory text, and (f)(2) and 
adding paragraphs (g), (h), and (i) to read as follows:


Sec.  44.20   Program for compliance; reporting.

    (a) Program requirement. Each banking entity (other than a banking 
entity with limited trading assets and liabilities) shall develop and 
provide for the continued administration of a compliance program 
reasonably designed to ensure and monitor compliance with the 
prohibitions and restrictions on proprietary trading and covered fund 
activities and investments set forth in section 13 of the BHC Act and 
this part. The terms, scope, and detail of the compliance program shall 
be appropriate for the types, size, scope, and complexity of activities 
and business structure of the banking entity.
    (b) Banking entities with significant trading assets and 
liabilities. With respect to a banking entity with significant trading 
assets and liabilities, the compliance program required by paragraph 
(a) of this section, at a minimum, shall include:
* * * * *
    (c) CEO attestation. 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 appendix A to this part. (1) A 
banking entity engaged in proprietary trading activity permitted under 
subpart B of this part shall comply with the reporting requirements 
described in appendix A to this part, 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 appendix A to this 
part.
    (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 
appendix A to this part 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 of this part 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 of this part, 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 section.
    (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 of this part, 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 OCC's 
exercise of this reservation of authority must be made in accordance 
with the notice and response procedures in paragraph (i) of this 
section.
    (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

[[Page 62102]]

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) Waiver. 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) Decision. The OCC will notify the banking entity of the 
decision in writing. The notice will include an explanation of the 
decision.

0
13. Revise appendix A to part 44 to read as follows:

Appendix A to Part 44--Reporting and Recordkeeping Requirements for 
Covered Trading Activities

I. Purpose

    a. This appendix sets forth reporting and recordkeeping 
requirements that certain banking entities must satisfy in 
connection with the restrictions on proprietary trading set forth in 
subpart B (``proprietary trading restrictions''). Pursuant to Sec.  
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 Sec.  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 making-related activities subject to Sec.  
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 
Sec.  44.4, Sec.  44.5, or Sec.  44.6(a) and (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 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 Sec.  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 otherwise-permitted 
activities under Sec. Sec.  44.4 through 44.6(a) and (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 Sec. Sec.  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 Sec.  44.4, Sec.  44.5, Sec.  44.6(a), or Sec.  44.6(b). 
A banking entity may include in its covered trading activity trading 
conducted under Sec.  44.3(d), Sec.  44.6(c), Sec.  44.6(d), or 
Sec.  44.6(e).
    Measurement frequency means the frequency with which a 
particular quantitative metric must be calculated and recorded.
    Trading day means a calendar day on which a trading desk is open 
for trading.

III. Reporting and Recordkeeping

a. Scope of Required Reporting

    1. Quantitative measurements. Each banking entity made subject 
to this appendix by Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  44.20 must provide file 
identifying information in each submission to the OCC pursuant to 
this appendix, including the name of the banking entity, the RSSD ID 
assigned to the top-tier banking entity by the Board, and 
identification of the reporting period and creation date and time.

b. Trading Desk Information

    1. Each banking entity must provide descriptive information 
regarding each trading desk engaged in covered trading activities, 
including:
    i. Name of the trading desk used internally by the banking 
entity and a unique identification label for the trading desk;
    ii. Identification of each type of covered trading activity in 
which the trading desk is engaged;
    iii. Brief description of the general strategy of the trading 
desk;
    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

[[Page 62103]]

    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 Sec.  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 
Sec.  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 Sec.  44.20(d), 
create and maintain records documenting the preparation and content 
of these reports, as well as such information as is necessary to 
permit the OCC to verify the accuracy of such reports, for a period 
of five years from the end of the calendar year for which the 
measurement was taken. A banking entity must retain the Narrative 
Statement, the Trading Desk Information, and the Quantitative 
Measurements Identifying Information for a period of five years from 
the end of the calendar year for which the information was reported 
to the OCC.

IV. Quantitative Measurements

a. Risk-Management Measurements

1. 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 Sec. Sec.  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 Sec.  44.4(b) and hedging activity under Sec.  44.5. 
Accordingly, the limits required under Sec. Sec.  44.4(b)(2)(iii)(C) 
and 44.5(b)(1)(i)(A) must meet the applicable requirements under 
Sec. Sec.  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.
    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 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.
    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.'' \1223\ A banking

[[Page 62104]]

entity must separately report the trading desk's market value of 
long securities positions, short securities positions, derivatives 
receivables, and derivatives payables.
---------------------------------------------------------------------------

    \1223\ See Sec.  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.
---------------------------------------------------------------------------

    ii. Calculation Period: One trading day.
    iii. Measurement Frequency: Daily.
    iv. Applicability: All trading desks that rely on Sec.  44.4(a) 
or (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.'' \1224\ Further, for purposes of the Transaction 
Volumes quantitative measurement, a customer of a trading desk that 
relies on Sec.  44.4(a) to conduct underwriting activity is a market 
participant identified in Sec.  44.4(a)(7), and a customer of a 
trading desk that relies on Sec.  44.4(b) to conduct market making-
related activity is a market participant identified in Sec.  
44.4(b)(3).
---------------------------------------------------------------------------

    \1224\ See Sec.  44.2(h), (aa).
---------------------------------------------------------------------------

    ii. Calculation Period: One trading day.
    iii. Measurement Frequency: Daily.
    iv. Applicability: All trading desks that rely on Sec.  44.4(a) 
or (b) to conduct underwriting activity or market-making-related 
activity, respectively.

Appendix B to Part 44--[Removed]

0
14. Appendix B to part 44 is removed.

0
15. Effective January 1. 2020 until December 31, 2020, appendix Z to 
part 44 is added to read as follows:

Appendix Z to Part 44--Proprietary Trading and Certain Interests in and 
Relationships With Covered Funds (Alternative Compliance)

    Note:  The content of this appendix reproduces the regulation 
implementing Section 13 of the Bank Holding Company Act as of 
November 13, 2019.

Subpart A--Authority and Definitions


Sec.  44.1   Authority, purpose, scope, and relationship to other 
authorities.

    (a) Authority. This part is issued by the OCC under section 13 of 
the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1851).
    (b) Purpose. Section 13 of the Bank Holding Company Act establishes 
prohibitions and restrictions on proprietary trading and on investments 
in or relationships with covered funds by certain banking entities, 
including national banks, Federal branches and agencies of foreign 
banks, Federal savings associations, and certain subsidiaries thereof. 
This part implements section 13 of the Bank Holding Company Act by 
defining terms used in the statute and related terms, establishing 
prohibitions and restrictions on proprietary trading and on investments 
in or relationships with covered funds, and explaining the statute's 
requirements.
    (c) Scope. This part implements section 13 of the Bank Holding 
Company Act with respect to banking entities for which the OCC is 
authorized to issue regulations under section 13(b)(2) of the Bank 
Holding Company Act (12 U.S.C. 1851(b)(2)) and take actions under 
section 13(e) of that Act (12 U.S.C. 1851(e)). These include national 
banks, Federal branches and Federal agencies of foreign banks, Federal 
savings associations, Federal savings banks, and any of their 
respective subsidiaries (except a subsidiary for which there is a 
different primary financial regulatory agency, as that term is defined 
in this part), but do not include such entities to the extent they are 
not within the definition of banking entity in Sec.  44.2(c).
    (d) Relationship to other authorities. Except as otherwise provided 
under section 13 of the Bank Holding Company Act or this part, and 
notwithstanding any other provision of law, the prohibitions and 
restrictions under section 13 of the Bank Holding Company Act and this 
part shall apply to the activities and investments of a banking entity 
identified in paragraph (c) of this section, even if such activities 
and investments are authorized for the banking entity under other 
applicable provisions of law.
    (e) Preservation of authority. Nothing in this part limits in any 
way the authority of the OCC to impose on a banking entity identified 
in paragraph (c) of this section additional requirements or 
restrictions with respect to any activity, investment, or relationship 
covered under section 13 of the Bank Holding Company Act or this part, 
or additional penalties for violation of this part provided under any 
other applicable provision of law


Sec.  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;
    (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:
    (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

[[Page 62105]]

commodity, for deferred shipment or delivery that is intended to be 
physically settled;
    (iii) Any foreign exchange forward (as that term is defined in 
section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)) or 
foreign exchange swap (as that term is defined in section 1a(25) of the 
Commodity Exchange Act (7 U.S.C. 1a(25));
    (iv) Any agreement, contract, or transaction in foreign currency 
described in section 2(c)(2)(C)(i) of the Commodity Exchange Act (7 
U.S.C. 2(c)(2)(C)(i));
    (v) Any agreement, contract, or transaction in a commodity other 
than foreign currency described in section 2(c)(2)(D)(i) of the 
Commodity Exchange Act (7 U.S.C. 2(c)(2)(D)(i)); and
    (vi) Any transaction authorized under section 19 of the Commodity 
Exchange Act (7 U.S.C. 23(a) or (b));
    (2) A derivative does not include:
    (i) Any consumer, commercial, or other agreement, contract, or 
transaction that the CFTC and SEC have further defined by joint 
regulation, interpretation, guidance, or other action as not within the 
definition of swap, as that term is defined in section 1a(47) of the 
Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as 
that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 
78c(a)(68)); or
    (ii) Any identified banking product, as defined in section 402(b) 
of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)), 
that is subject to section 403(a) of that Act (7 U.S.C. 27a(a)).
    (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, unless otherwise indicated, 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) Loan means any loan, lease, extension of credit, or secured or 
unsecured receivable that is not a security or derivative.
    (t) Primary financial regulatory agency has the same meaning as in 
section 2(12) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (12 U.S.C. 5301(12)).
    (u) 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.
    (v) 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)).
    (w) SEC means the Securities and Exchange Commission.
    (x) 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.
    (y) Security has the meaning specified in section 3(a)(10) of the 
Exchange Act (15 U.S.C. 78c(a)(10)).
    (z) 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)).
    (aa) Security future has the meaning specified in section 3(a)(55) 
of the Exchange Act (15 U.S.C. 78c(a)(55)).
    (bb) 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.
    (cc) 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.
    (dd) Subsidiary has the same meaning as in section 2(d) of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841(d)).
    (ee) 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.
    (ff) 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


Sec.  44.3   Prohibition on proprietary trading.

    (a) Prohibition. Except as otherwise provided in this subpart, a 
banking entity may not engage in proprietary trading. Proprietary 
trading means engaging as principal for the trading account of the 
banking entity in any

[[Page 62106]]

purchase or sale of one or more financial instruments.
    (b) Definition of trading account. (1) Trading account means any 
account that is used by a banking entity to:
    (i) Purchase or sell one or more financial instruments principally 
for the purpose of:
    (A) Short-term 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 described in paragraphs (b)(1)(i)(A), 
(B), or (C) of this section;
    (ii) Purchase or sell one or more financial instruments that are 
both market risk capital rule covered positions and trading positions 
(or hedges of other market risk capital rule covered positions), if the 
banking entity, or any affiliate of the banking entity, is an insured 
depository institution, bank holding company, or savings and loan 
holding company, and calculates risk-based capital ratios under the 
market risk capital rule; or
    (iii) 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.
    (2) Rebuttable presumption for certain purchases and sales. The 
purchase (or sale) of a financial instrument by a banking entity shall 
be presumed 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 fewer than sixty days or substantially 
transfers the risk of the financial instrument within sixty days of the 
purchase (or sale), unless the banking entity can demonstrate, 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 paragraph (b)(1)(i) of this section.
    (c) Financial instrument. (1) Financial instrument means:
    (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.
    (2) A financial instrument does not include:
    (i) A loan;
    (ii) A commodity that is not:
    (A) An excluded commodity (other than foreign exchange or 
currency);
    (B) A derivative;
    (C) A contract of sale of a commodity for future delivery; or
    (D) An option on a contract of sale of a commodity for future 
delivery; or
    (iii) Foreign exchange or currency.
    (d) Proprietary trading. Proprietary trading does not include:
    (1) Any purchase or sale of one or more financial instruments by a 
banking entity that arises under a repurchase or reverse repurchase 
agreement pursuant to which the banking entity has simultaneously 
agreed, in writing, to both purchase and sell a stated asset, at stated 
prices, and on stated dates or on demand with the same counterparty;
    (2) Any purchase or sale of one or more financial instruments by a 
banking entity that arises under a transaction in which the banking 
entity lends or borrows a security temporarily to or from another party 
pursuant to a written securities lending agreement under which the 
lender retains the economic interests of an owner of such security, and 
has the right to terminate the transaction and to recall the loaned 
security on terms agreed by the parties;
    (3) Any purchase or sale of a security by a banking entity for the 
purpose of liquidity management in accordance with a documented 
liquidity management plan of the banking entity that:
    (i) Specifically contemplates and authorizes the particular 
securities to be used for liquidity management purposes, the amount, 
types, and risks of these securities that are consistent with liquidity 
management, and the liquidity circumstances in which the particular 
securities may or must be used;
    (ii) Requires that any purchase or sale of securities 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 securities purchased or sold for liquidity 
management purposes be highly liquid and limited to securities 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 securities purchased or sold for liquidity 
management purposes, together with any other instruments purchased or 
sold for such purposes, to an amount that is consistent with the 
banking entity's near-term funding needs, including deviations from 
normal operations of the banking entity or any affiliate thereof, as 
estimated and documented pursuant to methods specified in the plan;
    (v) Includes written policies and procedures, internal controls, 
analysis, and independent testing to ensure that the purchase and sale 
of securities that are not permitted under Sec. Sec.  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 supervisory requirements, 
guidance, and expectations regarding liquidity management;
    (4) Any purchase or sale of one or more financial instruments by a 
banking entity that is a derivatives clearing organization or a 
clearing agency in connection with clearing financial instruments;
    (5) Any excluded clearing activities by a banking entity that is a 
member of a clearing agency, a member of a derivatives clearing 
organization, or a member of a designated financial market utility;
    (6) Any purchase or sale of one or more financial instruments by a 
banking entity, so long as:
    (i) The purchase (or sale) satisfies an existing delivery 
obligation of the banking entity or its customers, including to prevent 
or close out a failure to deliver, in connection with delivery, 
clearing, or settlement activity; or
    (ii) The purchase (or sale) satisfies an obligation of the banking 
entity in connection with a judicial, administrative, self-regulatory 
organization, or arbitration proceeding;
    (7) Any purchase or sale of one or more financial instruments by a 
banking entity that is acting solely as agent, broker, or custodian;
    (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

[[Page 62107]]

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; or
    (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.
    (e) Definition of other terms related to proprietary trading. For 
purposes of this subpart:
    (1) Anonymous means that each party to a purchase or sale is 
unaware of the identity of the other party(ies) to the purchase or 
sale.
    (2) Clearing agency has the same meaning as in section 3(a)(23) of 
the Exchange Act (15 U.S.C. 78c(a)(23)).
    (3) Commodity has the same meaning as in section 1a(9) of the 
Commodity Exchange Act (7 U.S.C. 1a(9)), except that a commodity does 
not include any security;
    (4) Contract of sale of a commodity for future delivery means a 
contract of sale (as that term is defined in section 1a(13) of the 
Commodity Exchange Act (7 U.S.C. 1a(13)) for future delivery (as that 
term is defined in section 1a(27) of the Commodity Exchange Act (7 
U.S.C. 1a(27))).
    (5) Derivatives clearing organization means:
    (i) A derivatives clearing organization registered under section 5b 
of the Commodity Exchange Act (7 U.S.C. 7a-1);
    (ii) A derivatives clearing organization that, pursuant to CFTC 
regulation, is exempt from the registration requirements under section 
5b of the Commodity Exchange Act (7 U.S.C. 7a-1); or
    (iii) A foreign derivatives clearing organization that, pursuant to 
CFTC regulation, is permitted to clear for a foreign board of trade 
that is registered with the CFTC.
    (6) Exchange, unless the context otherwise requires, means any 
designated contract market, swap execution facility, or foreign board 
of trade registered with the CFTC, or, for purposes of securities or 
security-based swaps, an exchange, as defined under section 3(a)(1) of 
the Exchange Act (15 U.S.C. 78c(a)(1)), or security-based swap 
execution facility, as defined under section 3(a)(77) of the Exchange 
Act (15 U.S.C. 78c(a)(77)).
    (7) Excluded clearing activities means:
    (i) With respect to customer transactions cleared on a derivatives 
clearing organization, a clearing agency, or a designated financial 
market utility, any purchase or sale necessary to correct trading 
errors made by or on behalf of a customer provided that such purchase 
or sale is conducted in accordance with, for transactions cleared on a 
derivatives clearing organization, the Commodity Exchange Act, CFTC 
regulations, and the rules or procedures of the derivatives clearing 
organization, or, for transactions cleared on a clearing agency, the 
rules or procedures of the clearing agency, or, for transactions 
cleared on a designated financial market utility that is neither a 
derivatives clearing organization nor a clearing agency, the rules or 
procedures of the designated financial market utility;
    (ii) Any purchase or sale in connection with and related to the 
management of a default or threatened imminent default of a customer 
provided that such purchase or sale is conducted in accordance with, 
for transactions cleared on a derivatives clearing organization, the 
Commodity Exchange Act, CFTC regulations, and the rules or procedures 
of the derivatives clearing organization, or, for transactions cleared 
on a clearing agency, the rules or procedures of the clearing agency, 
or, for transactions cleared on a designated financial market utility 
that is neither a derivatives clearing organization nor a clearing 
agency, the rules or procedures of the designated financial market 
utility;
    (iii) Any purchase or sale in connection with and related to the 
management of a default or threatened imminent default of a member of a 
clearing agency, a member of a derivatives clearing organization, or a 
member of a designated financial market utility;
    (iv) Any purchase or sale in connection with and related to the 
management of the default or threatened default of a clearing agency, a 
derivatives clearing organization, or a designated financial market 
utility; and
    (v) Any purchase or sale that is required by the rules or 
procedures of a clearing agency, a derivatives clearing organization, 
or a designated financial market utility to mitigate the risk to the 
clearing agency, derivatives clearing organization, or designated 
financial market utility that would result from the clearing by a 
member of security-based swaps that reference the member or an 
affiliate of the member.
    (8) Designated financial market utility has the same meaning as in 
section 803(4) of the Dodd-Frank Act (12 U.S.C. 5462(4)).
    (9) Issuer has the same meaning as in section 2(a)(4) of the 
Securities Act of 1933 (15 U.S.C. 77b(a)(4)).
    (10) Market risk capital rule covered position and trading position 
means a financial instrument that is both a covered position and a 
trading position, as those terms are respectively defined:
    (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.
    (11) Market risk capital rule means the market risk capital rule 
that is contained in subpart F of 12 CFR part 3, 12 CFR parts 208 and 
225, or 12 CFR part 324, as applicable.
    (12) Municipal security means a security that is a direct 
obligation of or issued by, or an obligation guaranteed as to principal 
or interest by, a State or any political subdivision thereof, or any 
agency or instrumentality of a State or any political subdivision 
thereof, or any municipal corporate instrumentality of one or more 
States or political subdivisions thereof.
    (13) Trading desk means 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.


Sec.  44.4   Permitted underwriting and market making-related 
activities.

    (a) Underwriting activities--(1) Permitted underwriting activities. 
The prohibition contained in Sec.  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) 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

[[Page 62108]]

counterparties, and reasonable efforts are made to sell or otherwise 
reduce the underwriting position within a reasonable period, taking 
into account the liquidity, maturity, and depth of the market for the 
relevant type of security;
    (iii) 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, based on the nature and amount of 
the trading desk's underwriting activities, including the reasonably 
expected near term demands of clients, customers, or counterparties, on 
the:
    (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;
    (C) Internal controls and ongoing monitoring and analysis of each 
trading desk's compliance with its limits; and
    (D) Authorization procedures, including escalation procedures that 
require review and approval of any trade that would exceed a trading 
desk's limit(s), demonstrable analysis of the basis for any temporary 
or permanent increase to a trading desk's limit(s), and independent 
review of such demonstrable analysis and approval;
    (iv) The compensation arrangements of persons performing the 
activities described in this paragraph (a) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (v) The banking entity is licensed or registered to engage in the 
activity described in this paragraph (a) in accordance with applicable 
law.
    (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 
paragraph (a), 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 Sec.  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 amount, types, and risks of the financial instruments in 
the trading desk's market-maker inventory are designed not to exceed, 
on an ongoing basis, the reasonably expected near term demands of 
clients, customers, or counterparties, based on:
    (A) The liquidity, maturity, and depth of the market for the 
relevant types of financial instrument(s); and
    (B) 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 financial 
instruments in which the trading desk makes a market, including through 
block trades;
    (iii) 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 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;
    (C) Limits for each trading desk, based on the nature and amount of 
the trading desk's market making-related activities, that address the 
factors prescribed by paragraph (b)(2)(ii) of this section, on:
    (1) The amount, types, and risks of its market-maker inventory;
    (2) The 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) The period of time a financial instrument may be held;

[[Page 62109]]

    (D) Internal controls and ongoing monitoring and analysis of each 
trading desk's compliance with its limits; and
    (E) Authorization procedures, including escalation procedures that 
require review and approval of any trade that would exceed a trading 
desk's limit(s), demonstrable analysis that the basis for any temporary 
or permanent increase to a trading desk's limit(s) is consistent with 
the requirements of this paragraph (b), and independent review of such 
demonstrable analysis and approval;
    (iv) To the extent that any limit identified pursuant to paragraph 
(b)(2)(iii)(C) of this section is exceeded, the trading desk takes 
action to bring the trading desk into compliance with the limits as 
promptly as possible after the limit is exceeded;
    (v) The compensation arrangements of persons performing the 
activities described in this paragraph (b) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (vi) The banking entity is licensed or registered to engage in 
activity described in this paragraph (b) in accordance with applicable 
law.
    (3) 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 Sec.  44.20(d)(1) of subpart D, 
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 
paragraph (b), 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 inventory. For the purposes of this 
paragraph (b), market-maker inventory 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.


Sec.  44.5   Permitted risk-mitigating hedging activities.

    (a) Permitted risk-mitigating hedging activities. The prohibition 
contained in Sec.  44.3(a) does not apply to the risk-mitigating 
hedging activities of a banking entity in connection with and related 
to individual or aggregated positions, contracts, or other holdings of 
the banking entity and designed to reduce the specific risks to the 
banking entity in connection with and related to such positions, 
contracts, or other holdings.
    (b) Requirements. The risk-mitigating hedging activities of a 
banking entity are permitted under paragraph (a) of this section only 
if:
    (1) 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:
    (i) 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;
    (ii) Internal controls and ongoing monitoring, management, and 
authorization procedures, including relevant escalation procedures; and
    (iii) The conduct of analysis, including correlation analysis, and 
independent testing designed to ensure 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, and such correlation 
analysis demonstrates that the hedging activity demonstrably reduces or 
otherwise significantly mitigates the specific, identifiable risk(s) 
being hedged;
    (2) The risk-mitigating hedging activity:
    (i) Is conducted in accordance with the written policies, 
procedures, and internal controls required under this section;
    (ii) At the inception of the hedging activity, including, without 
limitation, any adjustments to the hedging activity, is designed to 
reduce or otherwise significantly mitigate and demonstrably reduces or 
otherwise significantly mitigates 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;
    (iii) 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;
    (iv) Is subject to continuing review, monitoring and management by 
the banking entity that:
    (A) Is consistent with the written hedging policies and procedures 
required under paragraph (b)(1) of this section;
    (B) Is designed to reduce or otherwise significantly mitigate and 
demonstrably reduces or otherwise significantly mitigates 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
    (C) 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)(2) of this section and is not 
prohibited proprietary trading; and
    (3) The compensation arrangements of persons performing risk-
mitigating hedging activities are designed not to reward or incentivize 
prohibited proprietary trading.
    (c) Documentation requirement--(1) A banking entity must comply 
with the requirements of paragraphs (c)(2) and (3) of this section with 
respect to any purchase or sale of financial instruments made in 
reliance on this

[[Page 62110]]

section for risk-mitigating hedging purposes that is:
    (i) Not established by the specific trading desk establishing or 
responsible for the underlying positions, contracts, or other holdings 
the risks of which the hedging activity is designed to reduce;
    (ii) Established by the specific trading desk establishing or 
responsible for the underlying positions, contracts, or other holdings 
the risks of which the purchases or sales are designed to reduce, but 
that is effected through a financial instrument, exposure, technique, 
or strategy that is not specifically identified in the trading desk's 
written policies and procedures established under paragraph (b)(1) of 
this section or under Sec.  44.4(b)(2)(iii)(B) of this subpart as a 
product, instrument, exposure, technique, or strategy such trading desk 
may use for hedging; or
    (iii) Established to hedge aggregated positions across two or more 
trading desks.
    (2) In connection with any purchase or sale identified in paragraph 
(c)(1) of this section, a banking entity must, at a minimum, and 
contemporaneously with the purchase or sale, document:
    (i) The specific, identifiable risk(s) of the identified positions, 
contracts, or other holdings of the banking entity that the purchase or 
sale is designed to reduce;
    (ii) The specific risk-mitigating strategy that the purchase or 
sale is designed to fulfill; and
    (iii) The trading desk or other business unit that is establishing 
and responsible for the hedge.
    (3) A banking entity must create and retain records sufficient to 
demonstrate compliance with the requirements of this paragraph (c) for 
a period that is no less than five years in a form that allows the 
banking entity to promptly produce such records to the OCC on request, 
or such longer period as required under other law or this part.


Sec.  44.6   Other permitted proprietary trading activities.

    (a) Permitted trading in domestic government obligations. The 
prohibition contained in Sec.  44.3(a) does not apply to the purchase 
or sale by a banking entity of a financial instrument that is:
    (1) An obligation of, or issued or guaranteed by, the United 
States;
    (2) An obligation, participation, or other instrument of, or issued 
or guaranteed by, an agency of the United States, the Government 
National Mortgage Association, the Federal National Mortgage 
Association, the Federal Home Loan Mortgage Corporation, a Federal Home 
Loan Bank, the Federal Agricultural Mortgage Corporation or a Farm 
Credit System institution chartered under and subject to the provisions 
of the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.);
    (3) An obligation of any State or any political subdivision 
thereof, including any municipal security; or
    (4) An obligation of the FDIC, or any entity formed by or on behalf 
of the FDIC for purpose of facilitating the disposal of assets acquired 
or held by the FDIC 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.
    (b) Permitted trading in foreign government obligations--(1) 
Affiliates of foreign banking entities in the United States. The 
prohibition contained in Sec.  44.3(a) does not apply to the purchase 
or sale of a financial instrument that is an obligation of, or issued 
or guaranteed by, a foreign sovereign (including any multinational 
central bank of which the foreign sovereign is a member), or any agency 
or political subdivision of such foreign sovereign, by a banking 
entity, so long as:
    (i) The banking entity is organized under or is directly or 
indirectly controlled by a banking entity that is organized under the 
laws of a foreign sovereign and is not directly or indirectly 
controlled by a top-tier banking entity that is organized under the 
laws of the United States;
    (ii) The financial instrument is an obligation of, or issued or 
guaranteed by, the foreign sovereign under the laws of which the 
foreign banking entity referred to in paragraph (b)(1)(i) of this 
section is organized (including any multinational central bank of which 
the foreign sovereign is a member), or any agency or political 
subdivision of that foreign sovereign; and
    (iii) The purchase or sale as principal is not made by an insured 
depository institution.
    (2) Foreign affiliates of a U.S. banking entity. The prohibition 
contained in Sec.  44.3(a) does not apply to the purchase or sale of a 
financial instrument that is an obligation of, or issued or guaranteed 
by, a foreign sovereign (including any multinational central bank of 
which the foreign sovereign is a member), or any agency or political 
subdivision of that foreign sovereign, by a foreign entity that is 
owned or controlled by a banking entity organized or established under 
the laws of the United States or any State, so long as:
    (i) The foreign entity is a foreign bank, as defined in section 
211.2(j) of the Board's Regulation K (12 CFR 211.2(j)), or is regulated 
by the foreign sovereign as a securities dealer;
    (ii) The financial instrument is an obligation of, or issued or 
guaranteed by, the foreign sovereign under the laws of which the 
foreign entity is organized (including any multinational central bank 
of which the foreign sovereign is a member), or any agency or political 
subdivision of that foreign sovereign; and
    (iii) The financial instrument is owned by the foreign entity and 
is not financed by an affiliate that is located in the United States or 
organized under the laws of the United States or of any State.
    (c) Permitted trading on behalf of customers--(1) Fiduciary 
transactions. The prohibition contained in Sec.  44.3(a) does not apply 
to the purchase or sale of financial instruments by a banking entity 
acting as trustee or in a similar fiduciary capacity, so long as:
    (i) The transaction is conducted for the account of, or on behalf 
of, a customer; and
    (ii) The banking entity does not have or retain beneficial 
ownership of the financial instruments.
    (2) Riskless principal transactions. The prohibition contained in 
Sec.  44.3(a) does not apply to the purchase or sale of financial 
instruments by a banking entity acting as riskless principal in a 
transaction in which the banking entity, after receiving an order to 
purchase (or sell) a financial instrument from a customer, purchases 
(or sells) the financial instrument for its own account to offset a 
contemporaneous sale to (or purchase from) the customer.
    (d) Permitted trading by a regulated insurance company. The 
prohibition contained in Sec.  44.3(a) does not apply to the purchase 
or sale of financial instruments by a banking entity that is an 
insurance company or an affiliate of an insurance company if:
    (1) The insurance company or its affiliate purchases or sells the 
financial instruments solely for:
    (i) The general account of the insurance company; or
    (ii) A separate account established by the insurance company;
    (2) The purchase or sale is conducted in compliance with, and 
subject to, the insurance company investment laws, regulations, and 
written guidance 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, regulation, or written guidance described in 
paragraph (d)(2) of this

[[Page 62111]]

section is insufficient to protect the safety and soundness of the 
covered banking entity, or the financial stability of the United 
States.
    (e) Permitted trading activities of foreign banking entities. (1) 
The prohibition contained in Sec.  44.3(a) does not apply to the 
purchase or sale of financial instruments by a banking entity if:
    (i) The banking entity is not organized or directly or indirectly 
controlled by a banking entity that is organized under the laws of the 
United States or of any State;
    (ii) The purchase or sale by the banking entity is made pursuant to 
paragraph (9) or (13) of section 4(c) of the BHC Act; and
    (iii) The purchase or sale meets the requirements of paragraph 
(e)(3) of this section.
    (2) A purchase or sale of financial instruments by a banking entity 
is made pursuant to paragraph (9) or (13) of section 4(c) of the BHC 
Act for purposes of paragraph (e)(1)(ii) of this section only if:
    (i) The purchase or sale is conducted in accordance with the 
requirements of paragraph (e) of this section; and
    (ii)(A) With respect to a banking entity that is a foreign banking 
organization, the banking entity meets the qualifying foreign banking 
organization requirements of section 211.23(a), (c) or (e) of the 
Board's Regulation K (12 CFR 211.23(a), (c) or (e)), as applicable; or
    (B) With respect to a banking entity that is not a foreign banking 
organization, the banking entity is not organized under the laws of the 
United States or of any State and the banking entity, on a fully-
consolidated basis, meets at least two of the following requirements:
    (1) Total assets of the banking entity held outside of the United 
States exceed total assets of the banking entity held in the United 
States;
    (2) Total revenues derived from the business of the banking entity 
outside of the United States exceed total revenues derived from the 
business of the banking entity in the United States; or
    (3) Total net income derived from the business of the banking 
entity outside of the United States exceeds total net income derived 
from the business of the banking entity in the United States.
    (3) A purchase or sale by a banking entity is permitted for 
purposes of this paragraph (e) if:
    (i) The banking entity engaging as principal in the purchase or 
sale (including any personnel of the banking entity or its affiliate 
that arrange, negotiate or execute such purchase or sale) is not 
located in the United States or organized under the laws of the United 
States or of any State;
    (ii) The banking entity (including relevant personnel) that makes 
the decision to purchase or sell as principal 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 purchases or sales 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; and
    (v) The purchase or sale is not conducted with or through any U.S. 
entity, other than:
    (A) A purchase or sale with the foreign operations of a U.S. entity 
if no personnel of such U.S. entity that are located in the United 
States are involved in the arrangement, negotiation, or execution of 
such purchase or sale;
    (B) A purchase or sale with an unaffiliated market intermediary 
acting as principal, provided the purchase or sale is promptly cleared 
and settled through a clearing agency or derivatives clearing 
organization acting as a central counterparty; or
    (C) A purchase or sale through an unaffiliated market intermediary 
acting as agent, provided the purchase or sale is conducted anonymously 
on an exchange or similar trading facility and is promptly cleared and 
settled through a clearing agency or derivatives clearing organization 
acting as a central counterparty.
    (4) For purposes of this paragraph (e), a U.S. entity is 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.
    (5) For purposes of this paragraph (e), a U.S. branch, agency, or 
subsidiary of a foreign banking entity is considered to be 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.
    (6) For purposes of this paragraph (e), unaffiliated market 
intermediary means an unaffiliated entity, acting as an intermediary, 
that is:
    (i) A broker or dealer registered with the SEC under section 15 of 
the Exchange Act or exempt from registration or excluded from 
regulation as such;
    (ii) A swap dealer registered with the CFTC under section 4s of the 
Commodity Exchange Act or exempt from registration or excluded from 
regulation as such;
    (iii) A security-based swap dealer registered with the SEC under 
section 15F of the Exchange Act or exempt from registration or excluded 
from regulation as such; or
    (iv) A futures commission merchant registered with the CFTC under 
section 4f of the Commodity Exchange Act or exempt from registration or 
excluded from regulation as such.


Sec.  44.7   Limitations on permitted proprietary trading activities.

    (a) No transaction, class of transactions, or activity may be 
deemed permissible under Sec. Sec.  44.4 through 44.6 if the 
transaction, class of transactions, or activity would:
    (1) Involve or result in a material conflict of interest between 
the banking entity and its clients, customers, or counterparties;
    (2) Result, directly or indirectly, in a material exposure by the 
banking entity to a high-risk asset or a high-risk trading strategy; or
    (3) Pose a threat to the safety and soundness of the banking entity 
or to the financial stability of the United States.
    (b) Definition of material conflict of interest. (1) For purposes 
of this section, a material conflict of interest between a banking 
entity and its clients, customers, or counterparties exists if the 
banking entity engages in any transaction, class of transactions, or 
activity that would involve or result in the banking entity's interests 
being materially adverse to the interests of its client, customer, or 
counterparty with respect to such transaction, class of transactions, 
or activity, and the banking entity has not taken at least one of the 
actions in paragraph (b)(2) of this section.
    (2) Prior to effecting the specific transaction or class or type of 
transactions, or engaging in the specific activity, the banking entity:
    (i) Timely and effective disclosure. (A) Has made clear, timely, 
and effective disclosure of the conflict of interest, together with 
other necessary information, in reasonable detail and in a manner 
sufficient to permit a reasonable client, customer, or

[[Page 62112]]

counterparty to meaningfully understand the conflict of interest; and
    (B) Such disclosure is made in a manner that provides the client, 
customer, or counterparty the opportunity to negate, or substantially 
mitigate, any materially adverse effect on the client, customer, or 
counterparty created by the conflict of interest; or
    (ii) Information barriers. Has established, maintained, and 
enforced information barriers that are memorialized in written policies 
and procedures, such as physical separation of personnel, or functions, 
or limitations on types of activity, that are reasonably designed, 
taking into consideration the nature of the banking entity's business, 
to prevent the conflict of interest from involving or resulting in a 
materially adverse effect on a client, customer, or counterparty. A 
banking entity may not rely on such information barriers if, in the 
case of any specific transaction, class or type of transactions or 
activity, the banking entity knows or should reasonably know that, 
notwithstanding the banking entity's establishment of information 
barriers, the conflict of interest may involve or result in a 
materially adverse effect on a client, customer, or counterparty.
    (c) Definition of high-risk asset and high-risk trading strategy. 
For purposes of this section:
    (1) High-risk asset means an asset or group of related assets that 
would, if held by a banking entity, 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.
    (2) High-risk trading strategy means a trading strategy that would, 
if engaged in by a banking entity, 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.


Sec. Sec.  44.8-44.9  [Reserved]

Subpart C--Covered Funds Activities and Investments


Sec.  44.10   Prohibition on acquiring or retaining an ownership 
interest in and having certain relationships with a covered fund.

    (a) Prohibition. (1) Except as otherwise provided in this subpart, 
a banking entity may not, as principal, directly or indirectly, acquire 
or retain any ownership interest in or sponsor a covered fund.
    (2) Paragraph (a)(1) of this section does not include acquiring or 
retaining an ownership interest in a covered fund by a banking entity:
    (i) Acting solely as agent, broker, or custodian, so long as;
    (A) The activity is conducted for the account of, or on behalf of, 
a customer; and
    (B) The banking entity and its affiliates do not have or retain 
beneficial ownership of such ownership interest;
    (ii) Through a deferred compensation, stock-bonus, profit-sharing, 
or pension plan of the banking entity (or an affiliate thereof) that is 
established and administered in accordance with the law of the United 
States or a foreign sovereign, if the ownership interest is held or 
controlled directly or indirectly by the banking entity as trustee for 
the benefit of persons who are or were employees of the banking entity 
(or an affiliate thereof);
    (iii) In the ordinary course of collecting a debt previously 
contracted in good faith, provided that the banking entity divests the 
ownership interest as soon as practicable, and in no event may the 
banking entity retain such ownership interest for longer than such 
period permitted by the OCC; or
    (iv) On behalf of customers as trustee or in a similar fiduciary 
capacity for a customer that is not a covered fund, so long as:
    (A) The activity is conducted for the account of, or on behalf of, 
the customer; and
    (B) The banking entity and its affiliates do not have or retain 
beneficial ownership of such ownership interest.
    (b) Definition of covered fund. (1) Except as provided in paragraph 
(c) of this section, covered fund means:
    (i) An issuer that would be an investment company, as defined in 
the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), but for 
section 3(c)(1) or 3(c)(7) of that Act (15 U.S.C. 80a-3(c)(1) or (7));
    (ii) Any commodity pool under section 1a(10) of the Commodity 
Exchange Act (7 U.S.C. 1a(10)) for which:
    (A) The commodity pool operator has claimed an exemption under 17 
CFR 4.7; or
    (B)(1) A commodity pool operator is registered with the CFTC as a 
commodity pool operator in connection with the operation of the 
commodity pool;
    (2) Substantially all participation units of the commodity pool are 
owned by qualified eligible persons under 17 CFR 4.7(a)(2) and (3); and
    (3) Participation units of the commodity pool have not been 
publicly offered to persons who are not qualified eligible persons 
under 17 CFR 4.7(a)(2) and (3); or
    (iii) For any banking entity that is, or is controlled directly or 
indirectly by a banking entity that is, located in or organized under 
the laws of the United States or of any State, an entity that:
    (A) Is organized or established outside the United States and the 
ownership interests of which are offered and sold solely outside the 
United States;
    (B) Is, or holds itself out as being, an entity or arrangement that 
raises money from investors primarily for the purpose of investing in 
securities for resale or other disposition or otherwise trading in 
securities; and
    (C)(1) Has as its sponsor that banking entity (or an affiliate 
thereof); or
    (2) Has issued an ownership interest that is owned directly or 
indirectly by that banking entity (or an affiliate thereof).
    (2) An issuer shall not be deemed to be a covered fund under 
paragraph (b)(1)(iii) of this section if, were the issuer subject to 
U.S. securities laws, the issuer could rely on an exclusion or 
exemption from the definition of ``investment company'' under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) other than the 
exclusions contained in section 3(c)(1) and 3(c)(7) of that Act.
    (3) For purposes of paragraph (b)(1)(iii) of this section, a U.S. 
branch, agency, or subsidiary of a foreign 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.
    (c) Notwithstanding paragraph (b) of this section, unless the 
appropriate Federal banking agencies, the SEC, and the CFTC jointly 
determine otherwise, a covered fund does not include:
    (1) Foreign public funds. (i) Subject to paragraphs (ii) and (iii) 
below, an issuer that:
    (A) Is organized or established outside of the United States;
    (B) Is authorized to offer and sell ownership interests to retail 
investors in the issuer's home jurisdiction; and
    (C) Sells ownership interests predominantly through one or more 
public offerings outside of the United States.
    (ii) With respect to a banking entity that is, or is controlled 
directly or indirectly by a banking entity that is, located in or 
organized under the laws of the United States or of any State and any 
issuer for which such banking entity acts as sponsor, the sponsoring 
banking entity may not rely on the

[[Page 62113]]

exemption in paragraph (c)(1)(i) of this section for such issuer unless 
ownership interests in the issuer are sold predominantly to persons 
other than:
    (A) Such sponsoring banking entity;
    (B) Such issuer;
    (C) Affiliates of such sponsoring banking entity or such issuer; 
and
    (D) Directors and employees of such entities.
    (iii) For purposes of paragraph (c)(1)(i)(C) of this section, the 
term ``public offering'' means a distribution (as defined in Sec.  
44.4(a)(3) of subpart B) of securities in any jurisdiction outside the 
United States to investors, including retail investors, provided that:
    (A) The distribution complies with all applicable requirements in 
the jurisdiction in which such distribution is being made;
    (B) The distribution does not restrict availability to investors 
having a minimum level of net worth or net investment assets; and
    (C) The issuer has filed or submitted, with the appropriate 
regulatory authority in such jurisdiction, offering disclosure 
documents that are publicly available.
    (2) Wholly-owned subsidiaries. An entity, all of the outstanding 
ownership interests of which are owned directly or indirectly by the 
banking entity (or an affiliate thereof), except that:
    (i) Up to five percent of the entity's outstanding ownership 
interests, less any amounts outstanding under paragraph (c)(2)(ii) of 
this section, may be held by employees or directors of the banking 
entity or such affiliate (including former employees or directors if 
their ownership interest was acquired while employed by or in the 
service of the banking entity); and
    (ii) Up to 0.5 percent of the entity's outstanding ownership 
interests may be held by a third party if the ownership interest is 
acquired or retained by the third party for the purpose of establishing 
corporate separateness or addressing bankruptcy, insolvency, or similar 
concerns.
    (3) Joint ventures. A joint venture between a banking entity or any 
of its affiliates and one or more unaffiliated persons, provided that 
the joint venture:
    (i) Is comprised of no more than 10 unaffiliated co-venturers;
    (ii) Is in the business of engaging in activities that are 
permissible for the banking entity or affiliate, other than investing 
in securities for resale or other disposition; and
    (iii) Is not, and does not hold itself out as being, an entity or 
arrangement that raises money from investors primarily for the purpose 
of investing in securities for resale or other disposition or otherwise 
trading in securities.
    (4) Acquisition vehicles. An issuer:
    (i) Formed solely for the purpose of engaging in a bona fide merger 
or acquisition transaction; and
    (ii) That exists only for such period as necessary to effectuate 
the transaction.
    (5) Foreign pension or retirement funds. A plan, fund, or program 
providing pension, retirement, or similar benefits that is:
    (i) Organized and administered outside the United States;
    (ii) A broad-based plan for employees or citizens that is subject 
to regulation as a pension, retirement, or similar plan under the laws 
of the jurisdiction in which the plan, fund, or program is organized 
and administered; and
    (iii) Established for the benefit of citizens or residents of one 
or more foreign sovereigns or any political subdivision thereof.
    (6) Insurance company separate accounts. A separate account, 
provided that no banking entity other than the insurance company 
participates in the account's profits and losses.
    (7) Bank owned life insurance. A separate account that is used 
solely for the purpose of allowing one or more banking entities to 
purchase a life insurance policy for which the banking entity or 
entities is beneficiary, provided that no banking entity that purchases 
the policy:
    (i) Controls the investment decisions regarding the underlying 
assets or holdings of the separate account; or
    (ii) Participates in the profits and losses of the separate account 
other than in compliance with applicable supervisory guidance regarding 
bank owned life insurance.
    (8) Loan securitizations--(i) Scope. An issuing entity for asset-
backed securities that satisfies all the conditions of this paragraph 
(c)(8) and the assets or holdings of which are comprised solely of:
    (A) Loans as defined in Sec.  44.2(s) of subpart A;
    (B) Rights or other assets designed to assure the servicing or 
timely distribution of proceeds to holders of such securities and 
rights or other assets that are related or incidental to purchasing or 
otherwise acquiring and holding the loans, provided that each asset 
meets the requirements of paragraph (c)(8)(iii) of this section;
    (C) Interest rate or foreign exchange derivatives that meet the 
requirements of paragraph (c)(8)(iv) of this section; and
    (D) Special units of beneficial interest and collateral 
certificates that meet the requirements of paragraph (c)(8)(v) of this 
section.
    (ii) Impermissible assets. For purposes of this paragraph (c)(8), 
the assets or holdings of the issuing entity shall not include any of 
the following:
    (A) A security, including an asset-backed security, or an interest 
in an equity or debt security other than as permitted in paragraph 
(c)(8)(iii) of this section;
    (B) A derivative, other than a derivative that meets the 
requirements of paragraph (c)(8)(iv) of this section; or
    (C) A commodity forward contract.
    (iii) Permitted securities. Notwithstanding paragraph (c)(8)(ii)(A) 
of this section, the issuing entity may hold securities if those 
securities are:
    (A) Cash equivalents for purposes of the rights and assets in 
paragraph (c)(8)(i)(B) of this section; or
    (B) Securities received in lieu of debts previously contracted with 
respect to the loans supporting the asset-backed securities.
    (iv) Derivatives. The holdings of derivatives by the issuing entity 
shall be limited to interest rate or foreign exchange derivatives that 
satisfy all of the following conditions:
    (A) The written terms of the derivative directly relate to the 
loans, the asset-backed securities, or the contractual rights of other 
assets described in paragraph (c)(8)(i)(B) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign 
exchange risks related to the loans, the asset-backed securities, or 
the contractual rights or other assets described in paragraph 
(c)(8)(i)(B) of this section.
    (v) Special units of beneficial interest and collateral 
certificates. The assets or holdings of the issuing entity may include 
collateral certificates and special units of beneficial interest issued 
by a special purpose vehicle, provided that:
    (A) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate meets the requirements in 
this paragraph (c)(8);
    (B) The special unit of beneficial interest or collateral 
certificate is used for the sole purpose of transferring to the issuing 
entity for the loan securitization the economic risks and benefits of 
the assets that are permissible for loan securitizations under this 
paragraph (c)(8) and does not directly or indirectly transfer any 
interest in any other economic or financial exposure;
    (C) The special unit of beneficial interest or collateral 
certificate is created solely to satisfy legal requirements or 
otherwise facilitate the

[[Page 62114]]

structuring of the loan securitization; and
    (D) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate and the issuing entity 
are established under the direction of the same entity that initiated 
the loan securitization.
    (9) Qualifying asset-backed commercial paper conduits. (i) An 
issuing entity for asset-backed commercial paper that satisfies all of 
the following requirements:
    (A) The asset-backed commercial paper conduit holds only:
    (1) Loans and other assets permissible for a loan securitization 
under paragraph (c)(8)(i) of this section; and
    (2) Asset-backed securities supported solely by assets that are 
permissible for loan securitizations under paragraph (c)(8)(i) of this 
section and acquired by the asset-backed commercial paper conduit as 
part of an initial issuance either directly from the issuing entity of 
the asset-backed securities or directly from an underwriter in the 
distribution of the asset-backed securities;
    (B) The asset-backed commercial paper conduit issues only asset-
backed securities, comprised of a residual interest and securities with 
a legal maturity of 397 days or less; and
    (C) A regulated liquidity provider has entered into a legally 
binding commitment to provide full and unconditional liquidity coverage 
with respect to all of the outstanding asset-backed securities issued 
by the asset-backed commercial paper conduit (other than any residual 
interest) in the event that funds are required to redeem maturing 
asset-backed securities.
    (ii) For purposes of this paragraph (c)(9), a regulated liquidity 
provider means:
    (A) A depository institution, as defined in section 3(c) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(c));
    (B) A bank holding company, as defined in section 2(a) of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841(a)), or a subsidiary 
thereof;
    (C) A savings and loan holding company, as defined in section 10a 
of the Home Owners' Loan Act (12 U.S.C. 1467a), provided all or 
substantially all of the holding company's activities are permissible 
for a financial holding company under section 4(k) of the Bank Holding 
Company Act of 1956 (12 U.S.C. 1843(k)), or a subsidiary thereof;
    (D) A foreign bank whose home country supervisor, as defined in 
Sec.  211.21(q) of the Board's Regulation K (12 CFR 211.21(q)), has 
adopted capital standards consistent with the Capital Accord for the 
Basel Committee on banking Supervision, as amended, and that is subject 
to such standards, or a subsidiary thereof; or
    (E) The United States or a foreign sovereign.
    (10) Qualifying covered bonds--(i) Scope. An entity owning or 
holding a dynamic or fixed pool of loans or other assets as provided in 
paragraph (c)(8) of this section for the benefit of the holders of 
covered bonds, provided that the assets in the pool are comprised 
solely of assets that meet the conditions in paragraph (c)(8)(i) of 
this section.
    (ii) Covered bond. For purposes of this paragraph (c)(10), a 
covered bond means:
    (A) A debt obligation issued by an entity that meets the definition 
of foreign banking organization, the payment obligations of which are 
fully and unconditionally guaranteed by an entity that meets the 
conditions set forth in paragraph (c)(10)(i) of this section; or
    (B) A debt obligation of an entity that meets the conditions set 
forth in paragraph (c)(10)(i) of this section, provided that the 
payment obligations are fully and unconditionally guaranteed by an 
entity that meets the definition of foreign banking organization and 
the entity is a wholly-owned subsidiary, as defined in paragraph (c)(2) 
of this section, of such foreign banking organization.
    (11) SBICs and public welfare investment funds. An issuer:
    (i) That is a small business investment company, as defined in 
section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 
662), or that has received from the Small Business Administration 
notice to proceed to qualify for a license as a small business 
investment company, which notice or license has not been revoked; or
    (ii) The business of which is to make investments that are:
    (A) Designed primarily to promote the public welfare, of the type 
permitted under paragraph (11) of section 5136 of the Revised Statutes 
of the United States (12 U.S.C. 24), including the welfare of low- and 
moderate-income communities or families (such as providing housing, 
services, or jobs); or
    (B) Qualified rehabilitation expenditures with respect to a 
qualified rehabilitated building or certified historic structure, as 
such terms are defined in section 47 of the Internal Revenue Code of 
1986 or a similar State historic tax credit program.
    (12) Registered investment companies and excluded entities. An 
issuer:
    (i) That is registered as an investment company under section 8 of 
the Investment Company Act of 1940 (15 U.S.C. 80a-8), or that is formed 
and operated pursuant to a written plan to become a registered 
investment company as described in Sec.  44.20(e)(3) of subpart D and 
that complies with the requirements of section 18 of the Investment 
Company Act of 1940 (15 U.S.C. 80a-18);
    (ii) That may rely on an exclusion or exemption from the definition 
of ``investment company'' under the Investment Company Act of 1940 (15 
U.S.C. 80a-1 et seq.) other than the exclusions contained in section 
3(c)(1) and 3(c)(7) of that Act; or
    (iii) That has elected to be regulated as a business development 
company pursuant to section 54(a) of that Act (15 U.S.C. 80a-53) and 
has not withdrawn its election, or that is formed and operated pursuant 
to a written plan to become a business development company as described 
in Sec.  44.20(e)(3) of subpart D and that complies with the 
requirements of section 61 of the Investment Company Act of 1940 (15 
U.S.C. 80a-60).
    (13) Issuers in conjunction with the FDIC's receivership or 
conservatorship operations. An issuer that is an entity formed by or on 
behalf of the FDIC for the purpose of facilitating the disposal of 
assets acquired in the FDIC's capacity as conservator or receiver under 
the Federal Deposit Insurance Act or Title II of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act.
    (14) Other excluded issuers. (i) Any issuer that the appropriate 
Federal banking agencies, the SEC, and the CFTC jointly determine the 
exclusion of which is consistent with the purposes of section 13 of the 
BHC Act.
    (ii) A determination made under paragraph (c)(14)(i) of this 
section will be promptly made public.
    (d) Definition of other terms related to covered funds. For 
purposes of this subpart:
    (1) Applicable accounting standards means U.S. generally accepted 
accounting principles, or such other accounting standards applicable to 
a banking entity that the OCC determines are appropriate and that the 
banking entity uses in the ordinary course of its business in preparing 
its consolidated financial statements.
    (2) Asset-backed security has the meaning specified in Section 
3(a)(79) of the Exchange Act (15 U.S.C. 78c(a)(79)).
    (3) Director has the same meaning as provided in section 
215.2(d)(1) of the Board's Regulation O (12 CFR 215.2(d)(1)).
    (4) Issuer has the same meaning as in section 2(a)(22) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(22)).

[[Page 62115]]

    (5) Issuing entity means with respect to asset-backed securities 
the special purpose vehicle that owns or holds the pool assets 
underlying asset-backed securities and in whose name the asset-backed 
securities supported or serviced by the pool assets are issued.
    (6) Ownership interest--(i) Ownership interest means any equity, 
partnership, or other similar interest. An ``other similar interest'' 
means an interest that:
    (A) Has the right to participate in the selection or removal of a 
general partner, managing member, member of the board of directors or 
trustees, investment manager, investment adviser, or commodity trading 
advisor of the covered fund (excluding the rights of a creditor to 
exercise remedies upon the occurrence of an event of default or an 
acceleration event);
    (B) Has the right under the terms of the interest to receive a 
share of the income, gains or profits of the covered fund;
    (C) Has the right to receive the underlying assets of the covered 
fund after all other interests have been redeemed and/or paid in full 
(excluding the rights of a creditor to exercise remedies upon the 
occurrence of an event of default or an acceleration event);
    (D) Has the right to receive all or a portion of excess spread (the 
positive difference, if any, between the aggregate interest payments 
received from the underlying assets of the covered fund and the 
aggregate interest paid to the holders of other outstanding interests);
    (E) Provides under the terms of the interest that the amounts 
payable by the covered fund with respect to the interest could be 
reduced based on losses arising from the underlying assets of the 
covered fund, such as allocation of losses, write-downs or charge-offs 
of the outstanding principal balance, or reductions in the amount of 
interest due and payable on the interest;
    (F) Receives income on a pass-through basis from the covered fund, 
or has a rate of return that is determined by reference to the 
performance of the underlying assets of the covered fund; or
    (G) Any synthetic right to have, receive, or be allocated any of 
the rights in paragraphs (d)(6)(i)(A) through (F) of this section.
    (ii) Ownership interest does not include: Restricted profit 
interest. An interest held by an entity (or an employee or former 
employee thereof) in a covered fund for which the entity (or employee 
thereof) serves as investment manager, investment adviser, commodity 
trading advisor, or other service provider so long as:
    (A) The sole purpose and effect of the interest is to allow the 
entity (or employee or former employee thereof) to share in the profits 
of the covered fund as performance compensation for the investment 
management, investment advisory, commodity trading advisory, or other 
services provided to the covered fund by the entity (or employee or 
former employee thereof), provided that the entity (or employee or 
former employee thereof) may be obligated under the terms of such 
interest to return profits previously received;
    (B) All such profit, once allocated, is distributed to the entity 
(or employee or former employee thereof) promptly after being earned 
or, if not so distributed, is retained by the covered fund for the sole 
purpose of establishing a reserve amount to satisfy contractual 
obligations with respect to subsequent losses of the covered fund and 
such undistributed profit of the entity (or employee or former employee 
thereof) does not share in the subsequent investment gains of the 
covered fund;
    (C) Any amounts invested in the covered fund, including any amounts 
paid by the entity (or employee or former employee thereof) in 
connection with obtaining the restricted profit interest, are within 
the limits of Sec.  44.12 of this subpart; and
    (D) The interest is not transferable by the entity (or employee or 
former employee thereof) except to an affiliate thereof (or an employee 
of the banking entity or affiliate), to immediate family members, or 
through the intestacy, of the employee or former employee, or in 
connection with a sale of the business that gave rise to the restricted 
profit interest by the entity (or employee or former employee thereof) 
to an unaffiliated party that provides investment management, 
investment advisory, commodity trading advisory, or other services to 
the fund.
    (7) Prime brokerage transaction means any transaction that would be 
a covered transaction, as defined in section 23A(b)(7) of the Federal 
Reserve Act (12 U.S.C. 371c(b)(7)), that is provided in connection with 
custody, clearance and settlement, securities borrowing or lending 
services, trade execution, financing, or data, operational, and 
administrative support.
    (8) Resident of the United States means a person that is a ``U.S. 
person'' as defined in rule 902(k) of the SEC's Regulation S (17 CFR 
230.902(k)).
    (9) Sponsor means, with respect to a covered fund:
    (i) To serve as a general partner, managing member, or trustee of a 
covered fund, or to serve as a commodity pool operator with respect to 
a covered fund as defined in (b)(1)(ii) of this section;
    (ii) In any manner to select or to control (or to have employees, 
officers, or directors, or agents who constitute) a majority of the 
directors, trustees, or management of a covered fund; or
    (iii) To share with a covered fund, for corporate, marketing, 
promotional, or other purposes, the same name or a variation of the 
same name, except as permitted under Sec.  44.11(a)(6).
    (10) Trustee. (i) For purposes of paragraph (d)(9) of this section 
and Sec.  44.11 of subpart C, a trustee does not include:
    (A) A trustee that does not exercise investment discretion with 
respect to a covered fund, including a trustee that is subject to the 
direction of an unaffiliated named fiduciary who is not a trustee 
pursuant to section 403(a)(1) of the Employee's Retirement Income 
Security Act (29 U.S.C. 1103(a)(1)); or
    (B) A trustee that is subject to fiduciary standards imposed under 
foreign law that are substantially equivalent to those described in 
paragraph (d)(10)(i)(A) of this section;
    (ii) Any entity that directs a person described in paragraph 
(d)(10)(i) of this section, or that possesses authority and discretion 
to manage and control the investment decisions of a covered fund for 
which such person serves as trustee, shall be considered to be a 
trustee of such covered fund.


Sec.  44.11   Permitted organizing and offering, underwriting, and 
market making with respect to a covered fund.

    (a) Organizing and offering a covered fund in general. 
Notwithstanding Sec.  44.10(a) of this subpart, a banking entity is not 
prohibited from acquiring or retaining an ownership interest in, or 
acting as sponsor to, a covered fund in connection with, directly or 
indirectly, organizing and offering a covered fund, including serving 
as a general partner, managing member, trustee, or commodity pool 
operator of the covered fund and in any manner selecting or controlling 
(or having employees, officers, directors, or agents who constitute) a 
majority of the directors, trustees, or management of the covered fund, 
including any necessary expenses for the foregoing, only if:
    (1) The banking entity (or an affiliate thereof) provides bona fide 
trust, fiduciary, investment advisory, or commodity trading advisory 
services;
    (2) The covered fund is organized and offered only in connection 
with the provision of bona fide trust, fiduciary, investment advisory, 
or commodity trading advisory services and only to persons that are 
customers of such

[[Page 62116]]

services of the banking entity (or an affiliate thereof), pursuant to a 
written plan or similar documentation outlining how the banking entity 
or such affiliate intends to provide advisory or similar services to 
its customers through organizing and offering such fund;
    (3) The banking entity and its affiliates do not acquire or retain 
an ownership interest in the covered fund except as permitted under 
Sec.  44.12 of this subpart;
    (4) The banking entity and its affiliates comply with the 
requirements of Sec.  44.14 of this subpart;
    (5) The banking entity and its affiliates do 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;
    (6) The covered fund, for corporate, marketing, promotional, or 
other purposes:
    (i) Does not share the same name or a variation of the same name 
with the banking entity (or an affiliate thereof) except that a covered 
fund may share the same name or a variation of the same name with a 
banking entity that is an investment adviser to the covered fund if:
    (A) The investment adviser is not an insured depository 
institution, a company that controls an insured depository institution, 
or a company that is treated as a bank holding company for purposes of 
section 8 of the International Banking Act of 1978 (12 U.S.C. 3106); 
and
    (B) The investment adviser does not share the same name or a 
variation of the same name as an insured depository institution, a 
company that controls an insured depository institution, or a company 
that is treated as a bank holding company for purposes of section 8 of 
the International Banking Act of 1978 (12 U.S.C. 3106); and
    (ii) Does not use the word ``bank'' in its name;
    (7) No director or employee of the banking entity (or an affiliate 
thereof) takes or retains an ownership interest in the covered fund, 
except for any director or employee of the banking entity or such 
affiliate who is directly engaged in providing investment advisory, 
commodity trading advisory, or other services to the covered fund at 
the time the director or employee takes the ownership interest; and
    (8) The banking entity:
    (i) Clearly and conspicuously discloses, in writing, to any 
prospective and actual investor in the covered fund (such as through 
disclosure in the covered fund's offering documents):
    (A) That ``any losses in [such covered fund] will be borne solely 
by investors in [the covered fund] and not by [the banking entity] or 
its affiliates; therefore, [the banking entity's] losses in [such 
covered fund] will be limited to losses attributable to the ownership 
interests in the covered fund held by [the banking entity] and any 
affiliate in its capacity as investor in the [covered fund] or as 
beneficiary of a restricted profit interest held by [the banking 
entity] or any affiliate'';
    (B) That such investor should read the fund offering documents 
before investing in the covered fund;
    (C) That the ``ownership interests in the covered fund are not 
insured by the FDIC, and are not deposits, obligations of, or endorsed 
or guaranteed in any way, by any banking entity'' (unless that happens 
to be the case); and
    (D) The role of the banking entity and its affiliates and employees 
in sponsoring or providing any services to the covered fund; and
    (ii) Complies with any additional rules of the appropriate Federal 
banking agencies, the SEC, or the CFTC, as provided in section 13(b)(2) 
of the BHC Act, designed to ensure that losses in such covered fund are 
borne solely by investors in the covered fund and not by the covered 
banking entity and its affiliates.
    (b) Organizing and offering an issuing entity of asset-backed 
securities. (1) Notwithstanding Sec.  44.10(a) of this subpart, a 
banking entity is not prohibited from acquiring or retaining an 
ownership interest in, or acting as sponsor to, a covered fund that is 
an issuing entity of asset-backed securities in connection with, 
directly or indirectly, organizing and offering that issuing entity, so 
long as the banking entity and its affiliates comply with all of the 
requirements of paragraph (a)(3) through (8) of this section.
    (2) For purposes of this paragraph (b), organizing and offering a 
covered fund that is an issuing entity of asset-backed securities means 
acting as the securitizer, as that term is used in section 15G(a)(3) of 
the Exchange Act (15 U.S.C. 78o-11(a)(3)) of the issuing entity, or 
acquiring or retaining an ownership interest in the issuing entity as 
required by section 15G of that Act (15 U.S.C. 78o-11) and the 
implementing regulations issued thereunder.
    (c) Underwriting and market making in ownership interests of a 
covered fund. The prohibition contained in Sec.  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 Sec.  44.4(a) or Sec.  44.4(b) of subpart B, 
respectively;
    (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; acquires and retains an ownership interest in such 
covered fund and is either a securitizer, as that term is used in 
section 15G(a)(3) of the Exchange Act (15 U.S.C. 78o-11(a)(3)), or is 
acquiring and retaining an ownership interest in such covered fund in 
compliance with section 15G of that Act (15 U.S.C. 78o-11) and the 
implementing regulations issued thereunder each as permitted by 
paragraph (b) of this section; or, 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, 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 Sec.  
44.12(a)(2)(ii) and Sec.  44.12(d) of this subpart; and
    (3) With respect to any banking entity, the aggregate value of all 
ownership interests of the banking entity and its affiliates in all 
covered funds acquired and retained under Sec.  44.11 of this subpart, 
including all covered funds in which the banking entity holds an 
ownership interest in connection with underwriting and market making 
related activities permitted under this paragraph (c), are included in 
the calculation of all ownership interests under Sec.  44.12(a)(2)(iii) 
and Sec.  44.12(d) of this subpart.


Sec.  44.12   Permitted investment in a covered fund.

    (a) Authority and limitations on permitted investments in covered 
funds. (1) Notwithstanding the prohibition contained in Sec.  44.10(a) 
of this subpart, a banking entity may acquire and retain an ownership 
interest in a covered fund that the banking entity or an affiliate 
thereof organizes and offers pursuant to Sec.  44.11, for the purposes 
of:
    (i) Establishment. Establishing the fund and providing the fund 
with sufficient initial equity for investment to

[[Page 62117]]

permit the fund to attract unaffiliated investors, subject to the 
limits contained in paragraphs (a)(2)(i) and (iii) of this section; or
    (ii) De minimis investment. Making and retaining an investment in 
the covered fund subject to the limits contained in paragraphs 
(a)(2)(ii) and (iii) of this section.
    (2) Investment limits--(i) Seeding period. With respect to an 
investment in any covered fund made or held pursuant to paragraph 
(a)(1)(i) of this section, the banking entity and its affiliates:
    (A) Must actively seek unaffiliated investors to reduce, through 
redemption, sale, dilution, or other methods, the aggregate amount of 
all ownership interests of the banking entity in the covered fund to 
the amount permitted in paragraph (a)(2)(i)(B) of this section; and
    (B) Must, no later than 1 year after the date of establishment of 
the fund (or such longer period as may be provided by the Board 
pursuant to paragraph (e) of this section), conform its ownership 
interest in the covered fund to the limits in paragraph (a)(2)(ii) of 
this section;
    (ii) Per-fund limits. (A) Except as provided in paragraph 
(a)(2)(ii)(B) of this section, an investment by a banking entity and 
its affiliates in any covered fund made or held pursuant to paragraph 
(a)(1)(ii) of this section may not exceed 3 percent of the total number 
or value of the outstanding ownership interests of the fund.
    (B) An investment by a banking entity and its affiliates in a 
covered fund that is an issuing entity of asset-backed securities may 
not exceed 3 percent of the total fair market value of the ownership 
interests of the fund measured in accordance with paragraph (b)(3) of 
this section, unless a greater percentage is retained by the banking 
entity and its affiliates in compliance with the requirements of 
section 15G of the Exchange Act (15 U.S.C. 78o-11) and the implementing 
regulations issued thereunder, in which case the investment by the 
banking entity and its affiliates in the covered fund may not exceed 
the amount, number, or value of ownership interests of the fund 
required under section 15G of the Exchange Act and the implementing 
regulations issued thereunder.
    (iii) Aggregate limit. The aggregate value of all ownership 
interests of the banking entity and its affiliates in all covered funds 
acquired or retained under this section may not exceed 3 percent of the 
tier 1 capital of the banking entity, as provided under paragraph (c) 
of this section, and shall be calculated as of the last day of each 
calendar quarter.
    (iv) Date of establishment. For purposes of this section, the date 
of establishment of a covered fund shall be:
    (A) In general. The date on which the investment adviser or similar 
entity to the covered fund begins making investments pursuant to the 
written investment strategy for the fund;
    (B) Issuing entities of asset-backed securities. In the case of an 
issuing entity of asset-backed securities, the date on which the assets 
are initially transferred into the issuing entity of asset-backed 
securities.
    (b) Rules of construction--(1) Attribution of ownership interests 
to a covered banking entity. (i) For purposes of paragraph (a)(2) of 
this section, the amount and value of a banking entity's permitted 
investment in any single covered fund shall include any ownership 
interest held under Sec.  44.12 directly by the banking entity, 
including any affiliate of the banking entity.
    (ii) Treatment of registered investment companies, SEC-regulated 
business development companies and foreign public funds. For purposes 
of paragraph (b)(1)(i) of this section, a registered investment 
company, SEC-regulated business development companies or foreign public 
fund as described in Sec.  44.10(c)(1) of this subpart will not be 
considered to be an affiliate of the banking entity so long as the 
banking entity:
    (A) Does not own, control, or hold with the power to vote 25 
percent or more of the voting shares of the company or fund; and
    (B) Provides investment advisory, commodity trading advisory, 
administrative, and other services to the company or fund in compliance 
with the limitations under applicable regulation, order, or other 
authority.
    (iii) Covered funds. For purposes of paragraph (b)(1)(i) of this 
section, a covered fund will not be considered to be an affiliate of a 
banking entity so long as the covered fund is held in compliance with 
the requirements of this subpart.
    (iv) Treatment of employee and director investments financed by the 
banking entity. For purposes of paragraph (b)(1)(i) of this section, an 
investment by a director or employee of a banking entity who acquires 
an ownership interest in his or her personal capacity in a covered fund 
sponsored by the banking entity will be attributed to the banking 
entity if the banking entity, directly or indirectly, extends financing 
for the purpose of enabling the director or employee to acquire the 
ownership interest in the fund and the financing is used to acquire 
such ownership interest in the covered fund.
    (2) Calculation of permitted ownership interests in a single 
covered fund. Except as provided in paragraph (b)(3) or (4), for 
purposes of determining whether an investment in a single covered fund 
complies with the restrictions on ownership interests under paragraphs 
(a)(2)(i)(B) and (a)(2)(ii)(A) of this section:
    (i) The aggregate number of the outstanding ownership interests 
held by the banking entity shall be the total number of ownership 
interests held under this section by the banking entity in a covered 
fund divided by the total number of ownership interests held by all 
entities in that covered fund, as of the last day of each calendar 
quarter (both measured without regard to committed funds not yet called 
for investment);
    (ii) The aggregate value of the outstanding ownership interests 
held by the banking entity shall be the aggregate fair market value of 
all investments in and capital contributions made to the covered fund 
by the banking entity, divided by the value of all investments in and 
capital contributions made to that covered fund by all entities, as of 
the last day of each calendar quarter (all measured without regard to 
committed funds not yet called for investment). If fair market value 
cannot be determined, then the value shall be the historical cost basis 
of all investments in and contributions made by the banking entity to 
the covered fund;
    (iii) For purposes of the calculation under paragraph (b)(2)(ii) of 
this section, once a valuation methodology is chosen, the banking 
entity must calculate the value of its investment and the investments 
of all others in the covered fund in the same manner and according to 
the same standards.
    (3) Issuing entities of asset-backed securities. In the case of an 
ownership interest in an issuing entity of asset-backed securities, for 
purposes of determining whether an investment in a single covered fund 
complies with the restrictions on ownership interests under paragraphs 
(a)(2)(i)(B) and (a)(2)(ii)(B) of this section:
    (i) For securitizations subject to the requirements of section 15G 
of the Exchange Act (15 U.S.C. 78o-11), the calculations shall be made 
as of the date and according to the valuation methodology applicable 
pursuant to the requirements of section 15G of the Exchange Act (15 
U.S.C. 78o-11) and the implementing regulations issued thereunder; or

[[Page 62118]]

    (ii) For securitization transactions completed prior to the 
compliance date of such implementing regulations (or as to which such 
implementing regulations do not apply), the calculations shall be made 
as of the date of establishment as defined in paragraph (a)(2)(iv)(B) 
of this section or such earlier date on which the transferred assets 
have been valued for purposes of transfer to the covered fund, and 
thereafter only upon the date on which additional securities of the 
issuing entity of asset-backed securities are priced for purposes of 
the sales of ownership interests to unaffiliated investors.
    (iii) For securitization transactions completed prior to the 
compliance date of such implementing regulations (or as to which such 
implementing regulations do not apply), the aggregate value of the 
outstanding ownership interests in the covered fund shall be the fair 
market value of the assets transferred to the issuing entity of the 
securitization and any other assets otherwise held by the issuing 
entity at such time, determined in a manner that is consistent with its 
determination of the fair market value of those assets for financial 
statement purposes.
    (iv) For purposes of the calculation under paragraph (b)(3)(iii) of 
this section, the valuation methodology used to calculate the fair 
market value of the ownership interests must be the same for both the 
ownership interests held by a banking entity and the ownership 
interests held by all others in the covered fund in the same manner and 
according to the same standards.
    (4) Multi-tier fund investments--(i) Master-feeder fund 
investments. If the principal investment strategy of a covered fund 
(the ``feeder fund'') is to invest substantially all of its assets in 
another single covered fund (the ``master fund''), then for purposes of 
the investment limitations in paragraphs (a)(2)(i)(B) and (a)(2)(ii) of 
this section, the banking entity's permitted investment in such funds 
shall be measured only by reference to the value of the master fund. 
The banking entity's permitted investment in the master fund shall 
include any investment by the banking entity in the master fund, as 
well as the banking entity's pro-rata share of any ownership interest 
of the master fund that is held through the feeder fund; and
    (ii) Fund-of-funds investments. If a banking entity organizes and 
offers a covered fund pursuant to Sec.  44.11 of this subpart for the 
purpose of investing in other covered funds (a ``fund of funds'') and 
that fund of funds itself invests in another covered fund that the 
banking entity is permitted to own, then the banking entity's permitted 
investment in that other fund shall include any investment by the 
banking entity in that other fund, as well as the banking entity's pro-
rata share of any ownership interest of the fund that is held through 
the fund of funds. The investment of the banking entity may not 
represent more than 3 percent of the amount or value of any single 
covered fund.
    (c) Aggregate permitted investments in all covered funds. (1) For 
purposes of paragraph (a)(2)(iii) of this section, the aggregate value 
of all ownership interests held by a banking entity shall be the sum of 
all amounts paid or contributed by the banking entity in connection 
with acquiring or retaining an ownership interest in covered funds 
(together with any amounts paid by the entity (or employee thereof) in 
connection with obtaining a restricted profit interest under Sec.  
44.10(d)(6)(ii) of this subpart), on a historical cost basis.
    (2) Calculation of tier 1 capital. For purposes of paragraph 
(a)(2)(iii) of this section:
    (i) Entities that are required to hold and report tier 1 capital. 
If a banking entity is required to calculate and report tier 1 capital, 
the banking entity's tier 1 capital shall be equal to the amount of 
tier 1 capital of the banking entity as of the last day of the most 
recent calendar quarter, as reported to its primary financial 
regulatory agency; and
    (ii) If a banking entity is not required to calculate and report 
tier 1 capital, the banking entity's tier 1 capital shall be determined 
to be equal to:
    (A) In the case of a banking entity that is controlled, directly or 
indirectly, by a depository institution that calculates and reports 
tier 1 capital, be equal to the amount of tier 1 capital reported by 
such controlling depository institution in the manner described in 
paragraph (c)(2)(i) of this section;
    (B) In the case of a banking entity that is not controlled, 
directly or indirectly, by a depository institution that calculates and 
reports tier 1 capital:
    (1) Bank holding company subsidiaries. If the banking entity is a 
subsidiary of a bank holding company or company that is treated as a 
bank holding company, be equal to the amount of tier 1 capital reported 
by the top-tier affiliate of such covered banking entity that 
calculates and reports tier 1 capital in the manner described in 
paragraph (c)(2)(i) of this section; and
    (2) Other holding companies and any subsidiary or affiliate 
thereof. If the banking entity is not a subsidiary of a bank holding 
company or a company that is treated as a bank holding company, be 
equal to the total amount of shareholders' equity of the top-tier 
affiliate within such organization as of the last day of the most 
recent calendar quarter that has ended, as determined under applicable 
accounting standards.
    (iii) Treatment of foreign banking entities--(A) Foreign banking 
entities. Except as provided in paragraph (c)(2)(iii)(B) of this 
section, with respect to a banking entity that is not itself, and is 
not controlled directly or indirectly by, a banking entity that is 
located or organized under the laws of the United States or of any 
State, the tier 1 capital of the banking entity shall be the 
consolidated tier 1 capital of the entity as calculated under 
applicable home country standards.
    (B) U.S. affiliates of foreign banking entities. With respect to a 
banking entity that is located or organized under the laws of the 
United States or of any State and is controlled by a foreign banking 
entity identified under paragraph (c)(2)(iii)(A) of this section, the 
banking entity's tier 1 capital shall be as calculated under paragraphs 
(c)(2)(i) or (ii) of this section.
    (d) Capital treatment for a permitted investment in a covered fund. 
For purposes of calculating compliance with the applicable regulatory 
capital requirements, a banking entity shall deduct from the banking 
entity's tier 1 capital (as determined under paragraph (c)(2) of this 
section) the greater of:
    (1) The sum of all amounts paid or contributed by the banking 
entity in connection with acquiring or retaining an ownership interest 
(together with any amounts paid by the entity (or employee thereof) in 
connection with obtaining a restricted profit interest under Sec.  
44.10(d)(6)(ii) of subpart C), on a historical cost basis, plus any 
earnings received; and
    (2) The fair market value of the banking entity's ownership 
interests in the covered fund as determined under paragraph (b)(2)(ii) 
or (b)(3) of this section (together with any amounts paid by the entity 
(or employee thereof) in connection with obtaining a restricted profit 
interest under Sec.  44.10(d)(6)(ii) of subpart C), if the banking 
entity accounts for the profits (or losses) of the fund investment in 
its financial statements.
    (e) Extension of time to divest an ownership interest. (1) Upon 
application by a banking entity, the Board may extend the period under 
paragraph (a)(2)(i) of this section for up to 2 additional years if the 
Board finds that an extension would be consistent with safety and 
soundness and not detrimental to the public interest. An application 
for extension must:

[[Page 62119]]

    (i) Be submitted to the Board at least 90 days prior to the 
expiration of the applicable time period;
    (ii) Provide the reasons for application, including information 
that addresses the factors in paragraph (e)(2) of this section; and
    (iii) Explain the banking entity's plan for reducing the permitted 
investment in a covered fund through redemption, sale, dilution or 
other methods as required in paragraph (a)(2) of this section.
    (2) Factors governing Board determinations. In reviewing any 
application under paragraph (e)(1) of this section, the Board may 
consider all the facts and circumstances related to the permitted 
investment in a covered fund, including:
    (i) Whether the investment would result, directly or indirectly, in 
a material exposure by the banking entity to high-risk assets or high-
risk trading strategies;
    (ii) The contractual terms governing the banking entity's interest 
in the covered fund;
    (iii) The date on which the covered fund is expected to have 
attracted sufficient investments from investors unaffiliated with the 
banking entity to enable the banking entity to comply with the 
limitations in paragraph (a)(2)(i) of this section;
    (iv) The total exposure of the covered banking entity to the 
investment and the risks that disposing of, or maintaining, the 
investment in the covered fund may pose to the banking entity and the 
financial stability of the United States;
    (v) The cost to the banking entity of divesting or disposing of the 
investment within the applicable period;
    (vi) Whether the investment or the divestiture or conformance of 
the investment would involve or result in a material conflict of 
interest between the banking entity and unaffiliated parties, including 
clients, customers or counterparties to which it owes a duty;
    (vi) The banking entity's prior efforts to reduce through 
redemption, sale, dilution, or other methods its ownership interests in 
the covered fund, including activities related to the marketing of 
interests in such covered fund;
    (viii) Market conditions; and
    (ix) Any other factor that the Board believes appropriate.
    (3) Authority to impose restrictions on activities or investment 
during any extension period. The Board may impose such conditions on 
any extension approved under paragraph (e)(1) of this section as the 
Board determines are necessary or appropriate to protect the safety and 
soundness of the banking entity or the financial stability of the 
United States, address material conflicts of interest or other unsound 
banking practices, or otherwise further the purposes of section 13 of 
the BHC Act and this part.
    (4) Consultation. In the case of a banking entity that is primarily 
regulated by another Federal banking agency, the SEC, or the CFTC, the 
Board will consult with such agency prior to acting on an application 
by the banking entity for an extension under paragraph (e)(1) of this 
section.


Sec.  44.13   Other permitted covered fund activities and investments.

    (a) Permitted risk-mitigating hedging activities. (1) The 
prohibition contained in Sec.  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 demonstrably reduce or 
otherwise significantly mitigate the specific, identifiable risks to 
the banking entity in connection with 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.
    (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 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; 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 and demonstrably reduces or otherwise 
significantly mitigates one or more specific, identifiable risks 
arising 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) The compensation arrangement relates solely to the covered 
fund in which the banking entity or any affiliate has acquired an 
ownership interest pursuant to this paragraph 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) Certain permitted covered fund activities and investments 
outside of the United States. (1) The prohibition contained in Sec.  
44.10(a) of this subpart does not apply to the acquisition or retention 
of any ownership interest in, or the sponsorship of, a covered fund by 
a banking entity only if:
    (i) The banking entity is not organized or directly or indirectly 
controlled by a banking entity that is organized under the laws of the 
United States or of one or more States;
    (ii) The activity or investment by the banking entity is pursuant 
to paragraph (9) or (13) of section 4(c) of the BHC Act;
    (iii) No ownership interest in the covered fund is offered for sale 
or sold to a resident of the United States; and
    (iv) The activity or investment occurs solely outside of the United 
States.
    (2) An activity or investment by the banking entity is pursuant to 
paragraph (9) or (13) of section 4(c) of the BHC Act for purposes of 
paragraph (b)(1)(ii) of this section only if:
    (i) The activity or investment is conducted in accordance with the 
requirements of this section; and
    (ii)(A) With respect to a banking entity that is a foreign banking 
organization, the banking entity meets the qualifying foreign banking 
organization requirements of section 211.23(a), (c) or (e) of the 
Board's Regulation K (12 CFR 211.23(a), (c) or (e)), as applicable; or
    (B) With respect to a banking entity that is not a foreign banking 
organization, the banking entity is not organized under the laws of the 
United States or of one or more States and the banking entity, on a 
fully-consolidated basis, meets at least two of the following 
requirements:
    (1) Total assets of the banking entity held outside of the United 
States exceed total assets of the banking entity held in the United 
States;
    (2) Total revenues derived from the business of the banking entity 
outside of the United States exceed total revenues

[[Page 62120]]

derived from the business of the banking entity in the United States; 
or
    (3) Total net income derived from the business of the banking 
entity outside of the United States exceeds total net income derived 
from the business of the banking entity in the United States.
    (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 sold or has been sold 
pursuant to an offering that does not target residents of the United 
States.
    (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;
    (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; and
    (iv) 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.
    (5) For purposes of this section, a U.S. branch, agency, or 
subsidiary of a foreign bank, or any subsidiary thereof, is located in 
the United States; however, a foreign bank of which that branch, 
agency, or subsidiary is a part is not considered to be located in the 
United States solely by virtue of operation of the U.S. branch, agency, 
or subsidiary.
    (c) Permitted covered fund interests and activities by a regulated 
insurance company. The prohibition contained in Sec.  44.10(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, regulations, and written guidance 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, regulation, or written guidance 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.


Sec.  44.14   Limitations on relationships with a covered fund.

    (a) Relationships with a covered fund. (1) Except as provided for 
in paragraph (a)(2) of this section, no banking entity that serves, 
directly or indirectly, as the investment manager, investment adviser, 
commodity trading advisor, or sponsor to a covered fund, that organizes 
and offers a covered fund pursuant to Sec.  44.11 of this subpart, or 
that continues to hold an ownership interest in accordance with Sec.  
44.11(b) of this subpart, and no affiliate of such entity, may enter 
into a transaction with the covered fund, or with any other covered 
fund that is controlled by such covered fund, that would be a covered 
transaction as defined in section 23A of the Federal Reserve Act (12 
U.S.C. 371c(b)(7)), as if such banking entity and the affiliate thereof 
were a member bank and the covered fund were an affiliate thereof.
    (2) Notwithstanding paragraph (a)(1) of this section, a banking 
entity may:
    (i) Acquire and retain any ownership interest in a covered fund in 
accordance with the requirements of Sec.  44.11, Sec.  44.12, or Sec.  
44.13 of this subpart; and
    (ii) Enter into any prime brokerage transaction with any covered 
fund in which a covered fund managed, sponsored, or advised by such 
banking entity (or an affiliate thereof) has taken an ownership 
interest, if:
    (A) The banking entity is in compliance with each of the 
limitations set forth in Sec.  44.11 of this subpart with respect to a 
covered fund organized and offered by such banking entity (or an 
affiliate thereof);
    (B) The chief executive officer (or equivalent officer) of the 
banking entity certifies in writing annually 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
    (C) The Board has not determined that such transaction is 
inconsistent with the safe and sound operation and condition of the 
banking entity.
    (b) Restrictions on transactions with covered funds. A banking 
entity that serves, directly or indirectly, as the investment manager, 
investment adviser, commodity trading advisor, or sponsor to a covered 
fund, or that organizes and offers a covered fund pursuant to Sec.  
44.11 of this subpart, or that continues to hold an ownership interest 
in accordance with Sec.  44.11(b) of this subpart, shall be subject to 
section 23B of the Federal Reserve Act (12 U.S.C. 371c-1), as if such 
banking entity were a member bank and such covered fund were an 
affiliate thereof.
    (c) Restrictions on prime brokerage transactions. A prime brokerage 
transaction permitted under paragraph (a)(2)(ii) of this section shall 
be subject to section 23B of the Federal Reserve Act (12 U.S.C. 371c-1) 
as if the counterparty were an affiliate of the banking entity.


Sec.  44.15   Other limitations on permitted covered fund activities 
and investments.

    (a) No transaction, class of transactions, or activity may be 
deemed permissible under Sec. Sec.  44.11 through 44.13 of this subpart 
if the transaction, class of transactions, or activity would:
    (1) Involve or result in a material conflict of interest between 
the banking entity and its clients, customers, or counterparties;
    (2) Result, directly or indirectly, in a material exposure by the 
banking entity to a high-risk asset or a high-risk trading strategy; or
    (3) Pose a threat to the safety and soundness of the banking entity 
or to the financial stability of the United States.
    (b) Definition of material conflict of interest. (1) For purposes 
of this section, a material conflict of interest between a banking 
entity and its clients, customers, or counterparties exists if the 
banking entity engages in any transaction, class of transactions, or 
activity that would involve or result in the banking entity's interests 
being materially adverse to the interests of its client, customer, or 
counterparty with

[[Page 62121]]

respect to such transaction, class of transactions, or activity, and 
the banking entity has not taken at least one of the actions in 
paragraph (b)(2) of this section.
    (2) Prior to effecting the specific transaction or class or type of 
transactions, or engaging in the specific activity, the banking entity:
    (i) Timely and effective disclosure. (A) Has made clear, timely, 
and effective disclosure of the conflict of interest, together with 
other necessary information, in reasonable detail and in a manner 
sufficient to permit a reasonable client, customer, or counterparty to 
meaningfully understand the conflict of interest; and
    (B) Such disclosure is made in a manner that provides the client, 
customer, or counterparty the opportunity to negate, or substantially 
mitigate, any materially adverse effect on the client, customer, or 
counterparty created by the conflict of interest; or
    (ii) Information barriers. Has established, maintained, and 
enforced information barriers that are memorialized in written policies 
and procedures, such as physical separation of personnel, or functions, 
or limitations on types of activity, that are reasonably designed, 
taking into consideration the nature of the banking entity's business, 
to prevent the conflict of interest from involving or resulting in a 
materially adverse effect on a client, customer, or counterparty. A 
banking entity may not rely on such information barriers if, in the 
case of any specific transaction, class or type of transactions or 
activity, the banking entity knows or should reasonably know that, 
notwithstanding the banking entity's establishment of information 
barriers, the conflict of interest may involve or result in a 
materially adverse effect on a client, customer, or counterparty.
    (c) Definition of high-risk asset and high-risk trading strategy. 
For purposes of this section:
    (1) High-risk asset means an asset or group of related assets that 
would, if held by a banking entity, 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.
    (2) High-risk trading strategy means a trading strategy that would, 
if engaged in by a banking entity, 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.


Sec.  44.16   Ownership of interests in and sponsorship of issuers of 
certain collateralized debt obligations backed by trust-preferred 
securities.

    (a) The prohibition contained in Sec.  44.10(a)(1) does not apply 
to the ownership by a banking entity of an interest in, or sponsorship 
of, any issuer if:
    (1) The issuer was established, and the interest was issued, before 
May 19, 2010;
    (2) The banking entity reasonably believes that the offering 
proceeds received by the issuer were invested primarily in Qualifying 
TruPS Collateral; and
    (3) The banking entity acquired such interest on or before December 
10, 2013 (or acquired such interest in connection with a merger with or 
acquisition of a banking entity that acquired the interest on or before 
December 10, 2013).
    (b) For purposes of this Sec.  44.16, Qualifying TruPS Collateral 
shall mean any trust preferred security or subordinated debt instrument 
issued prior to May 19, 2010 by a depository institution holding 
company that, as of the end of any reporting period within 12 months 
immediately preceding the issuance of such trust preferred security or 
subordinated debt instrument, had total consolidated assets of less 
than $15,000,000,000 or issued prior to May 19, 2010 by a mutual 
holding company.
    (c) Notwithstanding paragraph (a)(3) of this section, a banking 
entity may act as a market maker with respect to the interests of an 
issuer described in paragraph (a) of this section in accordance with 
the applicable provisions of Sec. Sec.  44.4 and 44.11.
    (d) Without limiting the applicability of paragraph (a) of this 
section, the Board, the FDIC and the OCC will make public a non-
exclusive list of issuers that meet the requirements of paragraph (a). 
A banking entity may rely on the list published by the Board, the FDIC 
and the OCC.


Sec. Sec.  44.17-44.19   [Reserved]

Subpart D--Compliance Program Requirement; Violations


Sec.  44.20   Program for compliance; reporting.

    (a) Program requirement. Each banking entity 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) Contents of compliance program. Except as provided in paragraph 
(f) of this section, the compliance program required by paragraph (a) 
of this section, at a minimum, shall include:
    (1) Written policies and procedures reasonably designed to 
document, describe, monitor and limit trading activities subject to 
subpart B (including those permitted under Sec. Sec.  44.3 to 44.6 of 
subpart B), including setting, monitoring and managing required limits 
set out in Sec. Sec.  44.4 and 44.5, and activities and investments 
with respect to a covered fund subject to subpart C (including those 
permitted under Sec. Sec.  44.11 through 44.14 of subpart C) conducted 
by the banking entity to ensure that all activities and investments 
conducted by the banking entity that are subject to section 13 of the 
BHC Act and this part comply with section 13 of the BHC Act and this 
part;
    (2) A system of internal controls reasonably designed to monitor 
compliance with section 13 of the BHC Act and this part and to prevent 
the occurrence of activities or investments that are prohibited by 
section 13 of the BHC Act and this part;
    (3) A management framework that clearly delineates responsibility 
and accountability for compliance with section 13 of the BHC Act and 
this part and includes appropriate management review of trading limits, 
strategies, hedging activities, investments, incentive compensation and 
other matters identified in this part or by management as requiring 
attention;
    (4) 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;
    (5) Training for trading personnel and managers, as well as other 
appropriate personnel, to effectively implement and enforce the 
compliance program; and
    (6) Records sufficient to demonstrate compliance with section 13 of 
the BHC Act and this part, which a banking entity must promptly provide 
to the OCC upon request and retain for a period of no less than 5 years 
or such longer period as required by the OCC.
    (c) Additional standards. In addition to the requirements in 
paragraph (b) of this section, the compliance program of a banking 
entity must satisfy the requirements and other standards contained in 
appendix B, if:
    (1) The banking entity engages in proprietary trading permitted 
under subpart B and is required to comply

[[Page 62122]]

with the reporting requirements of paragraph (d) of this section;
    (2) The banking entity has reported total consolidated assets as of 
the previous calendar year end of $50 billion or more or, in the case 
of a foreign banking entity, has total U.S. assets as of the previous 
calendar year end of $50 billion or more (including all subsidiaries, 
affiliates, branches and agencies of the foreign banking entity 
operating, located or organized in the United States); or
    (3) The OCC notifies the banking entity in writing that it must 
satisfy the requirements and other standards contained in appendix B to 
this part.
    (d) Reporting requirements under appendix A to this part. (1) A 
banking entity engaged in proprietary trading activity permitted under 
subpart B shall comply with the reporting requirements described in 
appendix A, if:
    (i) The banking entity (other than a foreign banking entity as 
provided in paragraph (d)(1)(ii) of this section) has, together with 
its 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 or exceeds the 
threshold established in paragraph (d)(2) of this section;
    (ii) In the case of a foreign banking entity, the average gross sum 
of the trading assets and liabilities of the combined U.S. operations 
of the foreign banking entity (including all subsidiaries, affiliates, 
branches and agencies of the foreign banking entity operating, located 
or organized in the United States and excluding trading assets and 
liabilities involving obligations of or guaranteed by the United States 
or any agency of the United States) over the previous consecutive four 
quarters, as measured as of the last day of each of the four prior 
calendar quarters, equals or exceeds the threshold established in 
paragraph (d)(2) of this section; or
    (iii) The OCC notifies the banking entity in writing that it must 
satisfy the reporting requirements contained in appendix A.
    (2) The threshold for reporting under paragraph (d)(1) of this 
section shall be $50 billion beginning on June 30, 2014; $25 billion 
beginning on April 30, 2016; and $10 billion beginning on December 31, 
2016.
    (3) Frequency of reporting: Unless the OCC notifies the banking 
entity in writing that it must report on a different basis, a banking 
entity with $50 billion or more in trading assets and liabilities (as 
calculated in accordance with paragraph (d)(1) of this section) shall 
report the information required by appendix A for each calendar month 
within 30 days of the end of the relevant calendar month; beginning 
with information for the month of January 2015, such information shall 
be reported within 10 days of the end of each calendar month. Any other 
banking entity subject to appendix A shall report the information 
required by appendix A for each calendar quarter within 30 days of the 
end of that calendar quarter unless the OCC notifies the banking entity 
in writing that it must report on a different basis.
    (e) Additional documentation for covered funds. Any banking entity 
that has more than $10 billion in total consolidated assets as reported 
on December 31 of the previous two calendar years shall maintain 
records that include:
    (1) Documentation of the exclusions or exemptions other than 
sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 
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;
    (2) For each fund sponsored by the banking entity (including all 
subsidiaries and affiliates) for which the banking entity relies on one 
or more of the exclusions from the definition of covered fund provided 
by Sec.  44.10(c)(1), Sec.  44.10(c)(5), Sec.  44.10(c)(8), Sec.  
44.10(c)(9), or Sec.  44.10(c)(10) of subpart C, documentation 
supporting the banking entity's determination that the fund is not a 
covered fund pursuant to one or more of those exclusions;
    (3) For each seeding vehicle described in Sec.  44.10(c)(12)(i) or 
(iii) of subpart C 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 SEC-regulated business development company within the time 
period specified in Sec.  44.12(a)(2)(i)(B) of subpart C;
    (4) For any banking entity that is, or is controlled directly or 
indirectly by a banking entity that is, located in or organized under 
the laws of the United States or of any State, if the aggregate amount 
of ownership interests in foreign public funds that are described in 
Sec.  44.10(c)(1) of subpart C owned by such banking entity (including 
ownership interests owned by any affiliate that is controlled directly 
or indirectly by a banking entity that is located in or organized under 
the laws of the United States or of any State) exceeds $50 million at 
the end of two or more consecutive calendar quarters, beginning with 
the next succeeding calendar quarter, documentation of the value of the 
ownership interests owned by the banking entity (and such affiliates) 
in each foreign public fund and each jurisdiction in which any such 
foreign public fund is organized, calculated as of the end of each 
calendar quarter, which documentation must continue until the banking 
entity's aggregate amount of ownership interests in foreign public 
funds is below $50 million for two consecutive calendar quarters; and
    (5) For purposes of paragraph (e)(4) of this section, a U.S. 
branch, agency, or subsidiary of a foreign 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.
    (f) Simplified programs for less active banking entities--(1) 
Banking entities with no covered activities. A banking entity that does 
not engage in activities or investments pursuant to subpart B or 
subpart C (other than trading activities permitted pursuant to Sec.  
44.6(a) of subpart B) may satisfy the requirements of this section by 
establishing the required compliance program prior to becoming engaged 
in such activities or making such investments (other than trading 
activities permitted pursuant to Sec.  44.6(a) of subpart B).
    (2) Banking entities with modest activities. A banking entity with 
total consolidated assets of $10 billion or less as reported on 
December 31 of the previous two calendar years that engages in 
activities or investments pursuant to subpart B or subpart C (other 
than trading activities permitted under Sec.  44.6(a) of subpart B) 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.

[[Page 62123]]

Sec.  44.21   Termination of activities or investments; penalties for 
violations.

    (a) Any banking entity that engages in an activity or makes an 
investment in violation of section 13 of the BHC Act or this part, or 
acts in a manner that functions as an evasion of the requirements of 
section 13 of the BHC Act or this part, including through an abuse of 
any activity or investment permitted under subparts B or C, or 
otherwise violates the restrictions and requirements of section 13 of 
the BHC Act or this part, shall, upon discovery, promptly terminate the 
activity and, as relevant, dispose of the investment.
    (b) Whenever the OCC finds reasonable cause to believe any banking 
entity has engaged in an activity or made an investment in violation of 
section 13 of the BHC Act or this part, or engaged in any activity or 
made any investment that functions as an evasion of the requirements of 
section 13 of the BHC Act or this part, the OCC may take any action 
permitted by law to enforce compliance with section 13 of the BHC Act 
and this part, including directing the banking entity to restrict, 
limit, or terminate any or all activities under this part and dispose 
of any investment.

Appendix A to Part 44--Reporting and Recordkeeping Requirements for 
Covered Trading Activities

I. Purpose

    a. This appendix sets forth reporting and recordkeeping 
requirements that certain banking entities must satisfy in 
connection with the restrictions on proprietary trading set forth in 
subpart B (``proprietary trading restrictions''). Pursuant to Sec.  
44.20(d), this appendix generally 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 Sec.  44.20 and Appendix B.
    b. The purpose of this appendix is to assist banking entities 
and the OCC in:
    (i) Better understanding and evaluating the scope, type, and 
profile of the banking entity's covered trading activities;
    (ii) Monitoring the banking entity's covered trading activities;
    (iii) Identifying covered trading activities that warrant 
further review or examination by the banking entity to verify 
compliance with the proprietary trading restrictions;
    (iv) Evaluating whether the covered trading activities of 
trading desks engaged in market making-related activities subject to 
Sec.  44.4(b) are consistent with the requirements governing 
permitted market making-related activities;
    (v) Evaluating whether the covered trading activities of trading 
desks that are engaged in permitted trading activity subject to 
Sec. Sec.  44.4, 44.5, or 44.6(a)-(b) (i.e., underwriting and market 
making-related 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;
    (vi) Identifying the profile of particular covered trading 
activities of the banking entity, and the individual trading desks 
of the banking entity, to help establish the appropriate frequency 
and scope of examination by the OCC of such activities; and
    (vii) Assessing and addressing the risks associated with the 
banking entity's covered trading activities.
    c. The quantitative measurements that must be furnished pursuant 
to this appendix are not intended to serve as a dispositive tool for 
the identification of permissible or impermissible activities.
    d. In order to allow banking entities and the Agencies to 
evaluate the effectiveness of these metrics, banking entities must 
collect and report these metrics for all trading desks beginning on 
the dates established in Sec.  44.20 of the final rule. The Agencies 
will review the data collected and revise this collection 
requirement as appropriate based on a review of the data collected 
prior to September 30, 2015.
    e. 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 Sec.  44.20 and Appendix B to this part. 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.
    f. 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 Sec. Sec.  44.4 through 44.6(a) and (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 Sec. Sec.  44.2 and 44.3. In addition, for purposes of this 
appendix, the following definitions apply:
    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 Sec. Sec.  44.4, 44.5, 44.6(a), or 44.6(b). A banking 
entity may include trading under Sec. Sec.  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 desk means 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.

III. Reporting and Recordkeeping of Quantitative Measurements

a. Scope of Required Reporting

    General scope. Each banking entity made subject to this part by 
Sec.  44.20 must furnish the following quantitative measurements for 
each trading desk of the banking entity, calculated in accordance 
with this appendix:
     Risk and Position Limits and Usage;
     Risk Factor Sensitivities;
     Value-at-Risk and Stress VaR;
     Comprehensive Profit and Loss Attribution;
     Inventory Turnover;
     Inventory Aging; and
     Customer-Facing Trade Ratio.

b. Frequency of Required Calculation and Reporting

    A banking entity must calculate any applicable quantitative 
measurement for each trading day. A banking entity must report each 
applicable quantitative measurement to the OCC on the reporting 
schedule established in Sec.  44.20 unless otherwise requested by 
the OCC. All quantitative measurements for any calendar month must 
be reported within the time period required by Sec.  44.20.

c. Recordkeeping

    A banking entity must, for any quantitative measurement 
furnished to the OCC pursuant to this appendix and Sec.  44.20(d), 
create and maintain records documenting the preparation and content 
of these reports, as

[[Page 62124]]

well as such information as is necessary to permit the OCC to verify 
the accuracy of such reports, for a period of 5 years from the end 
of the calendar year for which the measurement was taken.

IV. Quantitative Measurements

a. Risk-Management Measurements

1. Risk and Position Limits and Usage

    i. Description: For purposes of this appendix, Risk and Position 
Limits are the constraints that define the amount of risk that a 
trading desk is permitted to take at a point in time, as defined by 
the banking entity for a specific trading desk. Usage represents the 
portion of the trading desk's limits that are accounted for by the 
current activity of the desk. Risk and position limits and their 
usage are key risk management tools used to control and monitor risk 
taking and include, but are not limited, to the limits set out in 
Sec.  44.4 and Sec.  44.5. A number of the metrics that are 
described below, including ``Risk Factor Sensitivities'' and 
``Value-at-Risk and Stress Value-at-Risk,'' relate to a trading 
desk's risk and position limits and are useful in evaluating and 
setting these limits in the broader context of the trading desk's 
overall activities, particularly for the market making activities 
under Sec.  44.4(b) and hedging activity under Sec.  44.5. 
Accordingly, the limits required under Sec.  44.4(b)(2)(iii) and 
Sec.  44.5(b)(1)(i) must meet the applicable requirements under 
Sec.  44.4(b)(2)(iii) and Sec.  44.5(b)(1)(i) and also must include 
appropriate metrics for the trading desk limits including, at a 
minimum, the ``Risk Factor Sensitivities'' and ``Value-at-Risk and 
Stress Value-at-Risk'' metrics except to the extent any of the 
``Risk Factor Sensitivities'' or ``Value-at-Risk and Stress Value-
at-Risk'' metrics are demonstrably ineffective for measuring and 
monitoring the risks of a trading desk based on the types of 
positions traded by, and risk exposures of, that desk.
    ii. General Calculation Guidance: Risk and Position Limits must 
be reported in the format used by the banking entity for the 
purposes of risk management of each trading desk. Risk and Position 
Limits are often expressed in terms of risk measures, such as VaR 
and Risk Factor Sensitivities, but may also be expressed in terms of 
other observable criteria, such as net open positions. When criteria 
other than VaR or Risk Factor Sensitivities are used to define the 
Risk and Position Limits, both the value of the Risk and Position 
Limits and the value of the variables used to assess whether these 
limits have been reached must be reported.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

2. Risk Factor Sensitivities

    i. Description: For purposes of this appendix, Risk Factor 
Sensitivities are changes in a trading desk's Comprehensive Profit 
and Loss that are expected to occur in the event of a change in one 
or more underlying variables that are significant sources of the 
trading desk's profitability and risk.
    ii. General Calculation Guidance: A banking entity must report 
the Risk Factor Sensitivities that are monitored and managed as part 
of the trading desk's overall risk management policy. The underlying 
data and methods used to compute a trading desk's Risk Factor 
Sensitivities will depend on the specific function of the trading 
desk and the internal risk management models employed. The number 
and type of Risk Factor Sensitivities that are monitored and managed 
by a trading desk, and furnished to the OCC, will depend on the 
explicit risks assumed by the trading desk. In general, however, 
reported Risk Factor Sensitivities must be sufficiently granular to 
account for a preponderance of the expected price variation in the 
trading desk's holdings.
    A. Trading desks must take into account any relevant factors in 
calculating Risk Factor Sensitivities, including, for example, the 
following with respect to particular asset classes:
     Commodity derivative positions: Risk factors with 
respect to the related commodities set out in 17 CFR 20.2, the 
maturity of the positions, volatility and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and the maturity profile of the 
positions;
     Credit positions: Risk factors with respect to credit 
spreads that are sufficiently granular to account for specific 
credit sectors and market segments, the maturity profile of the 
positions, and risk factors with respect to interest rates of all 
relevant maturities;
     Credit-related derivative positions: Risk factor 
sensitivities, for example credit spreads, shifts (parallel and non-
parallel) in credit spreads--volatility, and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and the maturity profile of the 
positions;
     Equity derivative positions: Risk factor sensitivities 
such as equity positions, volatility, and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and the maturity profile of the 
positions;
     Equity positions: Risk factors for equity prices and 
risk factors that differentiate between important equity market 
sectors and segments, such as a small capitalization equities and 
international equities;
     Foreign exchange derivative positions: Risk factors 
with respect to major currency pairs and maturities, exposure to 
interest rates at relevant maturities, volatility, and/or 
correlation sensitivities (expressed in a manner that demonstrates 
any significant non-linearities), as well as the maturity profile of 
the positions; and
     Interest rate positions, including interest rate 
derivative positions: Risk factors with respect to major interest 
rate categories and maturities and volatility and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and shifts (parallel and non-parallel) 
in the interest rate curve, as well as the maturity profile of the 
positions.
    B. The methods used by a banking entity to calculate 
sensitivities to a common factor shared by multiple trading desks, 
such as an equity price factor, must be applied consistently across 
its trading desks so that the sensitivities can be compared from one 
trading desk to another.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

3. Value-at-Risk and Stress Value-at-Risk

    i. Description: For purposes of this appendix, Value-at-Risk 
(``VaR'') is the commonly used percentile measurement of the risk of 
future financial loss in the value of a given set of aggregated 
positions over a specified period of time, based on current market 
conditions. For purposes of this appendix, Stress Value-at-Risk 
(``Stress VaR'') is the percentile measurement of the risk of future 
financial loss in the value of a given set of aggregated positions 
over a specified period of time, based on market conditions during a 
period of significant financial stress.
    ii. General Calculation Guidance: Banking entities must compute 
and report VaR and Stress VaR by employing generally accepted 
standards and methods of calculation. VaR should reflect a loss in a 
trading desk that is expected to be exceeded less than one percent 
of the time over a one-day period. For those banking entities that 
are subject to regulatory capital requirements imposed by a Federal 
banking agency, VaR and Stress VaR must be computed and reported in 
a manner that is consistent with such regulatory capital 
requirements. In cases where a trading desk does not have a 
standalone VaR or Stress VaR calculation but is part of a larger 
aggregation of positions for which a VaR or Stress VaR calculation 
is performed, a VaR or Stress VaR calculation that includes only the 
trading desk's holdings must be performed consistent with the VaR or 
Stress VaR model and methodology used for the larger aggregation of 
positions.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

b. Source-of-Revenue Measurements

1. Comprehensive Profit and Loss Attribution

    i. Description: For purposes of this appendix, Comprehensive 
Profit and Loss Attribution is an analysis that attributes the daily 
fluctuation in the value of a trading desk's positions to various 
sources. First, the daily profit and loss of the aggregated 
positions is divided into three categories: (i) Profit and loss 
attributable to a trading desk's existing positions that were also 
positions held by the trading desk as of the end of the prior day 
(``existing positions''); (ii) profit and loss attributable to new 
positions resulting from the current day's trading activity (``new 
positions''); and (iii) residual profit and loss that cannot be 
specifically attributed to existing positions or new positions. The 
sum of (i), (ii), and (iii) must equal the trading desk's 
comprehensive profit and loss at each point in time. In addition, 
profit and loss measurements must calculate volatility of 
comprehensive profit and loss (i.e., the standard deviation of the 
trading desk's one-day profit and loss, in dollar terms) for the 
reporting period for at least a 30-, 60- and 90-day lag period, from 
the end of the reporting period, and any other period that the 
banking entity deems necessary to meet the requirements of the rule.
    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

[[Page 62125]]

be further attributed, as applicable, to changes in (i) the specific 
Risk Factors and other factors that are monitored and managed as 
part of the trading desk's overall risk management policies and 
procedures; and (ii) any other applicable elements, such as cash 
flows, carry, changes in reserves, and the correction, cancellation, 
or exercise of a trade.
    B. 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.
    C. The portion of comprehensive profit and loss that cannot be 
specifically attributed to known sources must be allocated to a 
residual category identified as an unexplained portion of the 
comprehensive profit and loss. Significant unexplained profit and 
loss must be escalated for further investigation and analysis.
    ii. General Calculation Guidance: The specific categories used 
by a trading desk in the attribution analysis and amount of detail 
for the analysis should be tailored to the type and amount of 
trading activities undertaken by the trading desk. The new position 
attribution must be computed by calculating the difference between 
the prices at which instruments were bought and/or sold and the 
prices at which those instruments are marked to market at the close 
of business on that day multiplied by the notional or principal 
amount of each purchase or sale. Any fees, commissions, or other 
payments received (paid) that are associated with transactions 
executed on that day must be added (subtracted) from such 
difference. These factors must be measured consistently over time to 
facilitate historical comparisons.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

c. Customer-Facing Activity Measurements

1. Inventory Turnover

    i. Description: For purposes of this appendix, Inventory 
Turnover is a ratio that measures the turnover of a trading desk's 
inventory. The numerator of the ratio is the absolute value of all 
transactions over the reporting period. The denominator of the ratio 
is the value of the trading desk's inventory at the beginning of the 
reporting period.
    ii. General Calculation Guidance: For purposes of this appendix, 
for derivatives, other than options and interest rate derivatives, 
value means gross notional value, for options, value means delta 
adjusted notional value, and for interest rate derivatives, value 
means 10-year bond equivalent value.
    iii. Calculation Period: 30 days, 60 days, and 90 days.
    iv. Measurement Frequency: Daily.

2. Inventory Aging

    i. Description: For purposes of this appendix, Inventory Aging 
generally describes a schedule of the trading desk's aggregate 
assets and liabilities and the amount of time that those assets and 
liabilities have been held. Inventory Aging should measure the age 
profile of the trading desk's assets and liabilities.
    ii. General Calculation Guidance: In general, Inventory Aging 
must be computed using a trading desk's trading activity data and 
must identify the value of a trading desk's aggregate assets and 
liabilities. Inventory Aging must include two schedules, an asset-
aging schedule and a liability-aging schedule. Each schedule must 
record the value of assets or liabilities held over all holding 
periods. For derivatives, other than options, and interest rate 
derivatives, value means gross notional value, for options, value 
means delta adjusted notional value and, for interest rate 
derivatives, value means 10-year bond equivalent value.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

3. Customer-Facing Trade Ratio--Trade Count Based and Value Based

    i. Description: For purposes of this appendix, the Customer-
Facing Trade Ratio is a ratio comparing (i) the transactions 
involving a counterparty that is a customer of the trading desk to 
(ii) the transactions involving a counterparty that is not a 
customer of the trading desk. A trade count based ratio must be 
computed that records the number of transactions involving a 
counterparty that is a customer of the trading desk and the number 
of transactions involving a counterparty that is not a customer of 
the trading desk. A value based ratio must be computed that records 
the value of transactions involving a counterparty that is a 
customer of the trading desk and the value of transactions involving 
a counterparty that is not a customer of the trading desk.
    ii. General Calculation Guidance: For purposes of calculating 
the Customer-Facing Trade Ratio, a counterparty is considered to be 
a customer of the trading desk if the counterparty is a market 
participant that makes 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. However, a trading desk or other organizational 
unit of another banking entity would not be a client, customer, or 
counterparty of the trading desk if the other entity has trading 
assets and liabilities of $50 billion or more as measured in 
accordance with Sec.  44.20(d)(1) unless 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. Transactions conducted anonymously 
on an exchange or similar trading facility that permits trading on 
behalf of a broad range of market participants would be considered 
transactions with customers of the trading desk. For derivatives, 
other than options, and interest rate derivatives, value means gross 
notional value, for options, value means delta adjusted notional 
value, and for interest rate derivatives, value means 10-year bond 
equivalent value.
    iii. Calculation Period: 30 days, 60 days, and 90 days.
    iv. Measurement Frequency: Daily.

Appendix B to Part 44--Enhanced Minimum Standards for Compliance 
Programs

I. Overview

    Section 44.20(c) requires certain banking entities to establish, 
maintain, and enforce an enhanced compliance program that includes 
the requirements and standards in this Appendix as well as the 
minimum written policies and procedures, internal controls, 
management framework, independent testing, training, and 
recordkeeping provisions outlined in Sec.  44.20. This Appendix sets 
forth additional minimum standards with respect to the 
establishment, oversight, maintenance, and enforcement by these 
banking entities of an enhanced internal compliance program for 
ensuring and monitoring 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.
    a. This compliance program must:
    1. Be reasonably designed to identify, document, monitor, and 
report the permitted trading and covered fund activities and 
investments of the banking entity; identify, monitor and promptly 
address the risks of these covered activities and investments and 
potential areas of noncompliance; and prevent activities or 
investments prohibited by, or that do not comply with, section 13 of 
the BHC Act and this part;
    2. Establish and enforce appropriate limits on the covered 
activities and investments of the banking entity, including limits 
on the size, scope, complexity, and risks of the individual 
activities or investments consistent with the requirements of 
section 13 of the BHC Act and this part;
    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 chief executive 
officer (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 permitted trading and covered fund activities and 
investments.

II. Enhanced Compliance Program

    a. Proprietary Trading Activities. A banking entity must 
establish, maintain and enforce a compliance program that includes 
written policies and procedures that are appropriate for the types, 
size, and complexity of, and risks associated with, its permitted 
trading activities. The compliance program may be tailored to the 
types of trading activities conducted by the banking entity, and 
must include a detailed description of controls established by the

[[Page 62126]]

banking entity to reasonably ensure that its trading activities are 
conducted in accordance with the requirements and limitations 
applicable to those trading activities under section 13 of the BHC 
Act and this part, and provide for appropriate revision of the 
compliance program before expansion of the trading activities of the 
banking entity. A banking entity must devote adequate resources and 
use knowledgeable personnel in conducting, supervising and managing 
its trading activities, and promote consistency, independence and 
rigor in implementing its risk controls and compliance efforts. The 
compliance program must be updated with a frequency sufficient to 
account for changes in the activities of the banking entity, results 
of independent testing of the program, identification of weaknesses 
in the program, and changes in legal, regulatory or other 
requirements.
    1. Trading Desks: The banking entity must have written policies 
and procedures governing each trading desk that include a 
description of:
    i. The process for identifying, authorizing and documenting 
financial instruments each trading desk may purchase or sell, with 
separate documentation for market making-related activities 
conducted in reliance on Sec.  44.4(b) and for hedging activity 
conducted in reliance on Sec.  44.5;
    ii. A mapping for each trading desk to the division, business 
line, or other organizational structure that is responsible for 
managing and overseeing the trading desk's activities;
    iii. The mission (i.e., the type of trading activity, such as 
market-making, trading in sovereign debt, etc.) and strategy (i.e., 
methods for conducting authorized trading activities) of each 
trading desk;
    iv. The activities that the trading desk is authorized to 
conduct, including (i) authorized instruments and products, and (ii) 
authorized hedging strategies, techniques and instruments;
    v. The types and amount of risks allocated by the banking entity 
to each trading desk to implement the mission and strategy of the 
trading desk, including an enumeration of material risks resulting 
from the activities in which the trading desk is authorized to 
engage (including but not limited to price risks, such as basis, 
volatility and correlation risks, as well as counterparty credit 
risk). Risk assessments must take into account both the risks 
inherent in the trading activity and the strength and effectiveness 
of controls designed to mitigate those risks;
    vi. How the risks allocated to each trading desk will be 
measured;
    vii. Why the allocated risks levels are appropriate to the 
activities authorized for the trading desk;
    viii. The limits on the holding period of, and the risk 
associated with, financial instruments under the responsibility of 
the trading desk;
    ix. The process for setting new or revised limits, as well as 
escalation procedures for granting exceptions to any limits or to 
any policies or procedures governing the desk, the analysis that 
will be required to support revising limits or granting exceptions, 
and the process for independently reviewing and documenting those 
exceptions and the underlying analysis;
    x. The process for identifying, documenting and approving new 
products, trading strategies, and hedging strategies;
    xi. The types of clients, customers, and counterparties with 
whom the trading desk may trade; and
    xii. The compensation arrangements, including incentive 
arrangements, for employees associated with the trading desk, which 
may not be designed to reward or incentivize prohibited proprietary 
trading or excessive or imprudent risk-taking.
    2. Description of risks and risk management processes: The 
compliance program for the banking entity must include a 
comprehensive description of the risk management program for the 
trading activity of the banking entity. The compliance program must 
also include a description of the governance, approval, reporting, 
escalation, review and other processes the banking entity will use 
to reasonably ensure that trading activity is conducted in 
compliance with section 13 of the BHC Act and this part. Trading 
activity in similar financial instruments should be subject to 
similar governance, limits, testing, controls, and review, unless 
the banking entity specifically determines to establish different 
limits or processes and documents those differences. Descriptions 
must include, at a minimum, the following elements:
    i. A description of the supervisory and risk management 
structure governing all trading activity, including a description of 
processes for initial and senior-level review of new products and 
new strategies;
    ii. A description of the process for developing, documenting, 
testing, approving and reviewing all models used for valuing, 
identifying and monitoring the risks of trading activity and related 
positions, including the process for periodic independent testing of 
the reliability and accuracy of those models;
    iii. A description of the process for developing, documenting, 
testing, approving and reviewing the limits established for each 
trading desk;
    iv. A description of the process by which a security may be 
purchased or sold pursuant to the liquidity management plan, 
including the process for authorizing and monitoring such activity 
to ensure compliance with the banking entity's liquidity management 
plan and the restrictions on liquidity management activities in this 
part;
    v. A description of the management review process, including 
escalation procedures, for approving any temporary exceptions or 
permanent adjustments to limits on the activities, positions, 
strategies, or risks associated with each trading desk; and
    vi. The role of the audit, compliance, risk management and other 
relevant units for conducting independent testing of trading and 
hedging activities, techniques and strategies.
    3. Authorized risks, instruments, and products. The banking 
entity must implement and enforce limits and internal controls for 
each trading desk that are reasonably designed to ensure that 
trading activity is conducted in conformance with section 13 of the 
BHC Act and this part and with the banking entity's written policies 
and procedures. The banking entity must establish and enforce risk 
limits appropriate for the activity of each trading desk. These 
limits should be based on probabilistic and non-probabilistic 
measures of potential loss (e.g., Value-at-Risk and notional 
exposure, respectively), and measured under normal and stress market 
conditions. At a minimum, these internal controls must monitor, 
establish and enforce limits on:
    i. The financial instruments (including, at a minimum, by type 
and exposure) that the trading desk may trade;
    ii. The types and levels of risks that may be taken by each 
trading desk; and
    iii. The types of hedging instruments used, hedging strategies 
employed, and the amount of risk effectively hedged.
    4. Hedging policies and procedures. The banking entity must 
establish, maintain, and enforce written policies and procedures 
regarding the use of risk-mitigating hedging instruments and 
strategies that, at a minimum, describe:
    i. The positions, techniques and strategies that each trading 
desk may use to hedge the risk of its positions;
    ii. The manner in which the banking entity will identify the 
risks arising in connection with and related to the individual or 
aggregated positions, contracts or other holdings of the banking 
entity that are to be hedged and determine that those risks have 
been properly and effectively hedged;
    iii. The level of the organization at which hedging activity and 
management will occur;
    iv. The manner in which hedging strategies will be monitored and 
the personnel responsible for such monitoring;
    v. The risk management processes used to control unhedged or 
residual risks; and
    vi. The process for developing, documenting, testing, approving 
and reviewing all hedging positions, techniques and strategies 
permitted for each trading desk and for the banking entity in 
reliance on Sec.  44.5.
    5. Analysis and quantitative measurements. The banking entity 
must perform robust analysis and quantitative measurement of its 
trading activities that is reasonably designed to ensure that the 
trading activity of each trading desk is consistent with the banking 
entity's compliance program; monitor and assist in the 
identification of potential and actual prohibited proprietary 
trading activity; and prevent the occurrence of prohibited 
proprietary trading. Analysis and models used to determine, measure 
and limit risk must be rigorously tested and be reviewed by 
management responsible for trading activity to ensure that trading 
activities, limits, strategies, and hedging activities do not 
understate the risk and exposure to the banking entity or allow 
prohibited proprietary trading. This review should include periodic 
and independent back-testing and revision of activities, limits, 
strategies and hedging as appropriate to contain risk and ensure 
compliance. In addition to the quantitative measurements reported by 
any banking entity subject to Appendix A to this part, each banking 
entity

[[Page 62127]]

must develop and implement, to the extent appropriate to facilitate 
compliance with this part, additional quantitative measurements 
specifically tailored to the particular risks, practices, and 
strategies of its trading desks. The banking entity's analysis and 
quantitative measurements must incorporate the quantitative 
measurements reported by the banking entity pursuant to Appendix A 
(if applicable) and include, at a minimum, the following:
    i. Internal controls and written policies and procedures 
reasonably designed to ensure the accuracy and integrity of 
quantitative measurements;
    ii. Ongoing, timely monitoring and review of calculated 
quantitative measurements;
    iii. The establishment of numerical thresholds and appropriate 
trading measures for each trading desk and heightened review of 
trading activity not consistent with those thresholds to ensure 
compliance with section 13 of the BHC Act and this part, including 
analysis of the measurement results or other information, 
appropriate escalation procedures, and documentation related to the 
review; and
    iv. Immediate review and compliance investigation of the trading 
desk's activities, escalation to senior management with oversight 
responsibilities for the applicable trading desk, timely 
notification to the OCC, appropriate remedial action (e.g., 
divesting of impermissible positions, cessation of impermissible 
activity, disciplinary actions), and documentation of the 
investigation findings and remedial action taken when quantitative 
measurements or other information, considered together with the 
facts and circumstances, or findings of internal audit, independent 
testing or other review suggest a reasonable likelihood that the 
trading desk has violated any part of section 13 of the BHC Act or 
this part.
    6. Other Compliance Matters. In addition to the requirements 
specified above, the banking entity's compliance program must:
    i. Identify activities of each trading desk that will be 
conducted in reliance on exemptions contained in Sec. Sec.  44.4 
through 44.6, including an explanation of:
    A. How and where in the organization the activity occurs; and
    B. Which exemption is being relied on and how the activity meets 
the specific requirements for reliance on the applicable exemption;
    ii. Include an explanation of the process for documenting, 
approving and reviewing actions taken pursuant to the liquidity 
management plan, where in the organization this activity occurs, the 
securities permissible for liquidity management, the process for 
ensuring that liquidity management activities are not conducted for 
the purpose of prohibited proprietary trading, and the process for 
ensuring that securities purchased as part of the liquidity 
management plan are highly liquid and conform to the requirements of 
this part;
    iii. Describe how the banking entity monitors for and prohibits 
potential or actual material exposure to high-risk assets or high-
risk trading strategies presented by each trading desk that relies 
on the exemptions contained in Sec. Sec.  44.3(d)(3), and 44.4 
through 44.6, which must take into account potential or actual 
exposure to:
    A. Assets whose values cannot be externally priced or, where 
valuation is reliant on pricing models, whose model inputs cannot be 
externally validated;
    B. Assets whose changes in value cannot be adequately mitigated 
by effective hedging;
    C. New products with rapid growth, including those that do not 
have a market history;
    D. Assets or strategies that include significant embedded 
leverage;
    E. Assets or strategies that have demonstrated significant 
historical volatility;
    F. Assets or strategies for which the application of capital and 
liquidity standards would not adequately account for the risk; and
    G. Assets or strategies that result in large and significant 
concentrations to sectors, risk factors, or counterparties;
    iv. Establish responsibility for compliance with the reporting 
and recordkeeping requirements of subpart B and Sec.  44.20; and
    v. Establish policies for monitoring and prohibiting potential 
or actual material conflicts of interest between the banking entity 
and its clients, customers, or counterparties.
    7. Remediation of violations. The banking entity's compliance 
program must be reasonably designed and established to effectively 
monitor and identify for further analysis any trading activity that 
may indicate potential violations of section 13 of the BHC Act and 
this part and to prevent actual violations of section 13 of the BHC 
Act and this part. The compliance program must describe procedures 
for identifying and remedying violations of section 13 of the BHC 
Act and this part, and must include, at a minimum, a requirement to 
promptly document, address and remedy any violation of section 13 of 
the BHC Act or this part, and document all proposed and actual 
remediation efforts. The compliance program must include specific 
written policies and procedures that are reasonably designed to 
assess the extent to which any activity indicates that modification 
to the banking entity's compliance program is warranted and to 
ensure that appropriate modifications are implemented. The written 
policies and procedures must provide for prompt notification to 
appropriate management, including senior management and the board of 
directors, of any material weakness or significant deficiencies in 
the design or implementation of the compliance program of the 
banking entity.
    b. Covered Fund Activities or Investments. A banking entity must 
establish, maintain and enforce a compliance program that includes 
written policies and procedures that are appropriate for the types, 
size, complexity and risks of the covered fund and related 
activities conducted and investments made, by the banking entity.
    1. Identification of covered funds. The banking entity's 
compliance program must provide a process, which must include 
appropriate management review and independent testing, for 
identifying and documenting covered funds that each unit within the 
banking entity's organization sponsors or organizes and offers, and 
covered funds in which each such unit invests. In addition to the 
documentation requirements for covered funds, as specified under 
Sec.  44.20(e), the documentation must include information that 
identifies all pools that the banking entity sponsors or has an 
interest in and the type of exemption from the Commodity Exchange 
Act (whether or not the pool relies on section 4.7 of the 
regulations under the Commodity Exchange Act), and the amount of 
ownership interest the banking entity has in those pools.
    2. Identification of covered fund activities and investments. 
The banking entity's compliance program must identify, document and 
map each unit within the organization that is permitted to acquire 
or hold an interest in any covered fund or sponsor any covered fund 
and map each unit to the division, business line, or other 
organizational structure that will be responsible for managing and 
overseeing that unit's activities and investments.
    3. Explanation of compliance. The banking entity's compliance 
program must explain how:
    i. The banking entity monitors for and prohibits potential or 
actual material conflicts of interest between the banking entity and 
its clients, customers, or counterparties related to its covered 
fund activities and investments;
    ii. The banking entity monitors for and prohibits potential or 
actual transactions or activities that may threaten the safety and 
soundness of the banking entity related to its covered fund 
activities and investments; and
    iii. The banking entity monitors for and prohibits potential or 
actual material exposure to high-risk assets or high-risk trading 
strategies presented by its covered fund activities and investments, 
taking into account potential or actual exposure to:
    A. Assets whose values cannot be externally priced or, where 
valuation is reliant on pricing models, whose model inputs cannot be 
externally validated;
    B. Assets whose changes in values cannot be adequately mitigated 
by effective hedging;
    C. New products with rapid growth, including those that do not 
have a market history;
    D. Assets or strategies that include significant embedded 
leverage;
    E. Assets or strategies that have demonstrated significant 
historical volatility;
    F. Assets or strategies for which the application of capital and 
liquidity standards would not adequately account for the risk; and
    G. Assets or strategies that expose the banking entity to large 
and significant concentrations with respect to sectors, risk 
factors, or counterparties;
    4. Description and documentation of covered fund activities and 
investments. For each organizational unit engaged in covered fund 
activities and investments, the banking entity's compliance program 
must document:
    i. The covered fund activities and investments that the unit is 
authorized to conduct;
    ii. The banking entity's plan for actively seeking unaffiliated 
investors to ensure that any investment by the banking entity

[[Page 62128]]

conforms to the limits contained in Sec.  44.12 or registered in 
compliance with the securities laws and thereby exempt from those 
limits within the time periods allotted in Sec.  44.12; and
    iii. How it complies with the requirements of subpart C.
    5. Internal Controls. A banking entity must establish, maintain, 
and enforce internal controls that are reasonably designed to ensure 
that its covered fund activities or investments comply with the 
requirements of section 13 of the BHC Act and this part and are 
appropriate given the limits on risk established by the banking 
entity. These written internal controls must be reasonably designed 
and established to effectively monitor and identify for further 
analysis any covered fund activity or investment that may indicate 
potential violations of section 13 of the BHC Act or this part. The 
internal controls must, at a minimum require:
    i. Monitoring and limiting the banking entity's individual and 
aggregate investments in covered funds;
    ii. Monitoring the amount and timing of seed capital investments 
for compliance with the limitations under subpart C (including but 
not limited to the redemption, sale or disposition requirements) of 
Sec.  44.12, and the effectiveness of efforts to seek unaffiliated 
investors to ensure compliance with those limits;
    iii. Calculating the individual and aggregate levels of 
ownership interests in one or more covered fund required by Sec.  
44.12;
    iv. Attributing the appropriate instruments to the individual 
and aggregate ownership interest calculations above;
    v. Making disclosures to prospective and actual investors in any 
covered fund organized and offered or sponsored by the banking 
entity, as provided under Sec.  44.11(a)(8);
    vi. Monitoring for and preventing any relationship or 
transaction between the banking entity and a covered fund that is 
prohibited under Sec.  44.14, including where the banking entity has 
been designated as the sponsor, investment manager, investment 
adviser, or commodity trading advisor to a covered fund by another 
banking entity; and
    vii. Appropriate management review and supervision across legal 
entities of the banking entity to ensure that services and products 
provided by all affiliated entities comply with the limitation on 
services and products contained in Sec.  44.14.
    6. Remediation of violations. The banking entity's compliance 
program must be reasonably designed and established to effectively 
monitor and identify for further analysis any covered fund activity 
or investment that may indicate potential violations of section 13 
of the BHC Act or this part and to prevent actual violations of 
section 13 of the BHC Act and this part. The banking entity's 
compliance program must describe procedures for identifying and 
remedying violations of section 13 of the BHC Act and this part, and 
must include, at a minimum, a requirement to promptly document, 
address and remedy any violation of section 13 of the BHC Act or 
this part, including Sec.  44.21, and document all proposed and 
actual remediation efforts. The compliance program must include 
specific written policies and procedures that are reasonably 
designed to assess the extent to which any activity or investment 
indicates that modification to the banking entity's compliance 
program is warranted and to ensure that appropriate modifications 
are implemented. The written policies and procedures must provide 
for prompt notification to appropriate management, including senior 
management and the board of directors, of any material weakness or 
significant deficiencies in the design or implementation of the 
compliance program of the banking entity.

III. Responsibility and Accountability for the Compliance Program

    a. A banking entity must establish, maintain, and enforce a 
governance and management framework to manage its business and 
employees with a view to preventing violations of section 13 of the 
BHC Act and this part. A banking entity must have an appropriate 
management framework reasonably designed to ensure that: Appropriate 
personnel are responsible and accountable for the effective 
implementation and enforcement of the compliance program; a clear 
reporting line with a chain of responsibility is delineated; and the 
compliance program is reviewed periodically by senior management. 
The board of directors (or equivalent governance body) and senior 
management should have the appropriate authority and access to 
personnel and information within the organizations as well as 
appropriate resources to conduct their oversight activities 
effectively.
    1. Corporate governance. The banking entity must adopt a written 
compliance program approved by the board of directors, an 
appropriate committee of the board, or equivalent governance body, 
and senior management.
    2. Management procedures. The banking entity must establish, 
maintain, and enforce a governance framework that is reasonably 
designed to achieve compliance with section 13 of the BHC Act and 
this part, which, at a minimum, provides for:
    i. The designation of appropriate senior management or committee 
of senior management with authority to carry out the management 
responsibilities of the banking entity for each trading desk and for 
each organizational unit engaged in covered fund activities;
    ii. Written procedures addressing the management of the 
activities of the banking entity that are reasonably designed to 
achieve compliance with section 13 of the BHC Act and this part, 
including:
    A. A description of the management system, including the titles, 
qualifications, and locations of managers and the specific 
responsibilities of each person with respect to the banking entity's 
activities governed by section 13 of the BHC Act and this part; and
    B. Procedures for determining compensation arrangements for 
traders engaged in underwriting or market making-related activities 
under Sec.  44.4 or risk-mitigating hedging activities under Sec.  
44.5 so that such compensation arrangements are designed not to 
reward or incentivize prohibited proprietary trading and 
appropriately balance risk and financial results in a manner that 
does not encourage employees to expose the banking entity to 
excessive or imprudent risk.
    3. Business line managers. Managers with responsibility for one 
or more trading desks of the banking entity are accountable for the 
effective implementation and enforcement of the compliance program 
with respect to the applicable trading desk(s).
    4. Board of directors, or similar corporate body, and senior 
management. The board of directors, or similar corporate body, and 
senior management are responsible for setting and communicating an 
appropriate culture of compliance with section 13 of the BHC Act and 
this part and ensuring that appropriate policies regarding the 
management of trading activities and covered fund activities or 
investments are adopted to comply with section 13 of the BHC Act and 
this part. The board of directors or similar corporate body (such as 
a designated committee of the board or an equivalent governance 
body) must ensure that senior management is fully capable, 
qualified, and properly motivated to manage compliance with this 
part in light of the organization's business activities and the 
expectations of the board of directors. The board of directors or 
similar corporate body must also ensure that senior management has 
established appropriate incentives and adequate resources to support 
compliance with this part, including the implementation of a 
compliance program meeting the requirements of this appendix into 
management goals and compensation structures across the banking 
entity.
    5. Senior management. Senior management is responsible for 
implementing and enforcing the approved compliance program. Senior 
management must also ensure that effective corrective action is 
taken when failures in compliance with section 13 of the BHC Act and 
this part are identified. Senior management and control personnel 
charged with overseeing compliance with section 13 of the BHC Act 
and this part should review the compliance program for the banking 
entity periodically and report to the board, or an appropriate 
committee thereof, on the effectiveness of the compliance program 
and compliance matters with a frequency appropriate to the size, 
scope, and risk profile of the banking entity's trading activities 
and covered fund activities or investments, which shall be at least 
annually.
    6. CEO attestation. Based on a review by the CEO of the banking 
entity, the CEO of the banking entity must, annually, attest in 
writing to the OCC that the banking entity has in place processes to 
establish, maintain, enforce, review, test and modify the compliance 
program established under this Appendix and Sec.  44.20 of this part 
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 United States operations of the 
foreign banking entity who is located in the United States.

[[Page 62129]]

IV. Independent Testing

    a. Independent testing must occur with a frequency appropriate 
to the size, scope, and risk profile of the banking entity's trading 
and covered fund activities or investments, which shall be at least 
annually. This independent testing must include an evaluation of:
    1. The overall adequacy and effectiveness of the banking 
entity's compliance program, including an analysis of the extent to 
which the program contains all the required elements of this 
appendix;
    2. The effectiveness of the banking entity's internal controls, 
including an analysis and documentation of instances in which such 
internal controls have been breached, and how such breaches were 
addressed and resolved; and
    3. The effectiveness of the banking entity's management 
procedures.
    b. A banking entity must ensure that independent testing 
regarding the effectiveness of the banking entity's compliance 
program is conducted by a qualified independent party, such as the 
banking entity's internal audit department, compliance personnel or 
risk managers independent of the organizational unit being tested, 
outside auditors, consultants, or other qualified independent 
parties. A banking entity must promptly take appropriate action to 
remedy any significant deficiencies or material weaknesses in its 
compliance program and to terminate any violations of section 13 of 
the BHC Act or this part.

V. Training

    Banking entities must provide adequate training to personnel and 
managers of the banking entity engaged in activities or investments 
governed by section 13 of the BHC Act or this part, as well as other 
appropriate supervisory, risk, independent testing, and audit 
personnel, in order to effectively implement and enforce the 
compliance program. This training should occur with a frequency 
appropriate to the size and the risk profile of the banking entity's 
trading activities and covered fund activities or investments.

VI. Recordkeeping

    Banking entities must create and retain records sufficient to 
demonstrate compliance and support the operations and effectiveness 
of the compliance program. A banking entity must retain these 
records for a period that is no less than 5 years or such longer 
period as required by the OCC in a form that allows it to promptly 
produce such records to the OCC on request.

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)

0
16. 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

0
17. Section 248.2 is revised to read as follows:


Sec.  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 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 
paragraph (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 paragraph (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:
    (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.
    (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.

[[Page 62130]]

    (n) Foreign banking organization has the same meaning as in Sec.  
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:
    (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 means with respect to a 
banking entity that:
    (1)(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 Sec.  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 Sec.  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 (s)(3) of this section, 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 Sec.  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 
Sec.  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).
    (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 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 Sec.  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.
    (ee) Significant trading assets and liabilities means with respect 
to a banking entity that:
    (1)(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

[[Page 62131]]

    (ii) The Board has determined pursuant to Sec.  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 (ee)(3) of this section, trading assets and 
liabilities for purposes of this paragraph (ee) means trading assets 
and liabilities (excluding trading assets and liabilities attributable 
to trading activities permitted pursuant to Sec.  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 (ee) means the 
trading assets and liabilities (excluding trading assets and 
liabilities attributable to trading activities permitted pursuant to 
Sec.  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).
    (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

0
18. Section 248.3 is amended by:
0
a. Revising paragraphs (b) and (d)(3), (8), and (9);
0
b. Adding paragraphs (d)(10) through (13);
0
c. Redesignating paragraphs (e)(5) through (13) as paragraphs (e)(6) 
through (14);
0
d. Adding new paragraph (e)(5); and
0
e. Revising newly redesignated paragraphs (e)(11), (12), and (14).
    The revisions and additions read as follows:


Sec.  248.3   Prohibition on proprietary trading.

* * * * *
    (b) Definition of trading account. (1) Trading account. 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
    (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) Trading account application for certain banking entities. (i) A 
banking entity that is subject to paragraph (b)(1)(ii) of this section 
in determining the scope of its trading account is not subject to 
paragraph (b)(1)(i) of this section.
    (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 of this part.
    (ii) 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

[[Page 62132]]

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;
    (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 Sec.  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 this 
paragraph (d)(3); 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 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 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:
    (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 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
    (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.

0
19. Section 248.4 is revised to read as follows:

[[Page 62133]]

Sec.  248.4   Permitted underwriting and market making-related 
activities.

    (a) Underwriting activities--(1) Permitted underwriting activities. 
The prohibition contained in Sec.  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 
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.
    (iv) A banking entity with significant trading assets and 
liabilities may satisfy the requirements in paragraphs (a)(2)(iii)(B) 
and (C) of this section by complying with the requirements set forth in 
paragraph (c) of this section;
    (v) The compensation arrangements of persons performing the 
activities described in this paragraph (a) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (vi) 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 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 Sec.  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 this 
paragraph (b), 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

[[Page 62134]]

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.
    (iv) A banking entity with significant trading assets and 
liabilities may satisfy the requirements in paragraphs (b)(2)(iii)(C) 
and (D) of this section by complying with the requirements set forth in 
paragraph (c) of this section.
    (v) The compensation arrangements of persons performing the 
activities described in this paragraph (b) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (vi) The banking entity is licensed or registered to engage in 
activity described in this paragraph (b) in accordance with applicable 
law.
    (3) Definition of client, customer, and counterparty. For purposes 
of this paragraph (b), 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 
Sec.  248.2(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.
    (ii) [Reserved]
    (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.
    (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 should take into account the liquidity, maturity, and depth 
of the market for the relevant types of securities and 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.
    (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 should take into account the liquidity, maturity, and depth 
of the market for the relevant types of financial instruments and 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.
    (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 paragraph (c)(1)(ii)(A) or (B) of this section, a banking 
entity shall maintain and make available to the Board upon request 
records regarding:
    (A) Any limit that is exceeded; and
    (B) Any temporary or permanent increase to any limit(s), in each 
case in the form and manner as directed by the Board.
    (ii) In the event of a breach or increase of any limit set pursuant 
to paragraph (c)(1)(ii)(A) or (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:
    (A) Takes action as promptly as possible after a breach to bring 
the trading desk into compliance; and
    (B) 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 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 of this part.

0
20. Section 248.5 is amended by revising paragraphs (b) and (c)(1) 
introductory text and adding paragraph (c)(4) to read as follows:

[[Page 62135]]

Sec.  248.5   Permitted risk-mitigating hedging activities.

* * * * *
    (b) Requirements. (1) The risk-mitigating hedging activities of a 
banking entity that has significant trading assets and liabilities are 
permitted under paragraph (a) of this section only if:
    (i) The banking entity has established and implements, maintains 
and enforces an internal compliance program required by subpart D of 
this part that is reasonably designed to ensure the banking entity's 
compliance with the requirements of this section, including:
    (A) Reasonably designed written policies and procedures regarding 
the positions, techniques and strategies that may be used for hedging, 
including documentation indicating what positions, contracts or other 
holdings a particular trading desk may use in its risk-mitigating 
hedging activities, as well as position and aging limits with respect 
to such positions, contracts or other holdings;
    (B) Internal controls and ongoing monitoring, management, and 
authorization procedures, including relevant escalation procedures; and
    (C) The conduct of analysis and independent testing designed to 
ensure that the positions, techniques and strategies that may be used 
for hedging may reasonably be expected to reduce or otherwise 
significantly mitigate the specific, identifiable risk(s) being hedged;
    (ii) The risk-mitigating hedging activity:
    (A) Is conducted in accordance with the written policies, 
procedures, and internal controls required under this section;
    (B) At the inception of the hedging activity, including, without 
limitation, any adjustments to the hedging activity, is designed to 
reduce or otherwise significantly mitigate one or more specific, 
identifiable risks, including market risk, counterparty or other credit 
risk, currency or foreign exchange risk, interest rate risk, commodity 
price risk, basis risk, or similar risks, arising in connection with 
and related to identified positions, contracts, or other holdings of 
the banking entity, based upon the facts and circumstances of the 
identified underlying and hedging positions, contracts or other 
holdings and the risks and liquidity thereof;
    (C) Does not give rise, at the inception of the hedge, to any 
significant new or additional risk that is not itself hedged 
contemporaneously in accordance with this section;
    (D) Is subject to continuing review, monitoring and management by 
the banking entity that:
    (1) Is consistent with the written hedging policies and procedures 
required under paragraph (b)(1)(i) of this section;
    (2) Is designed to reduce or otherwise significantly mitigate the 
specific, identifiable risks that develop over time from the risk-
mitigating hedging activities undertaken under this section and the 
underlying positions, contracts, and other holdings of the banking 
entity, based upon the facts and circumstances of the underlying and 
hedging positions, contracts and other holdings of the banking entity 
and the risks and liquidity thereof; and
    (3) Requires ongoing recalibration of the hedging activity by the 
banking entity to ensure that the hedging activity satisfies the 
requirements set out in paragraph (b)(1)(ii) of this section and is not 
prohibited proprietary trading; and
    (iii) The compensation arrangements of persons performing risk-
mitigating hedging activities are designed not to reward or incentivize 
prohibited proprietary trading.
    (2) The risk-mitigating hedging activities of a banking entity that 
does not have significant trading assets and liabilities are permitted 
under paragraph (a) of this section only if the 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 sale of financial 
instruments made in reliance on this section for risk-mitigating 
hedging purposes that is:
* * * * *
    (4) The requirements of paragraphs (c)(2) and (3) of this section 
do not apply to the purchase or sale of a financial instrument 
described in paragraph (c)(1) of this section if:
    (i) The financial instrument purchased or sold is identified on a 
written list of pre-approved financial instruments that are commonly 
used by the trading desk for the specific type of hedging activity for 
which the financial instrument is being purchased or sold; and
    (ii) At the time the financial instrument is purchased or sold, the 
hedging activity (including the purchase or sale of the financial 
instrument) complies with written, pre-approved 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.

0
21. Section 248.6 is amended by revising paragraph (e)(3), removing 
paragraphs (e)(4) and (6), and redesignating paragraph (e)(5) as 
paragraph (e)(4).
    The revision reads as follows:


Sec.  248.6   Other permitted proprietary trading activities.

* * * * *
    (e) * * *
    (3) A purchase or sale by a banking entity is permitted for 
purposes of this paragraph (e) if:
    (i) The banking entity engaging as principal in the purchase or 
sale (including relevant personnel) is not located in the United States 
or organized under the laws of the United States or of any State;
    (ii) The banking entity (including relevant personnel) that makes 
the decision to purchase or sell as principal is not located in the 
United States or organized under the laws of the United States or of 
any State; and
    (iii) The purchase or sale, including any transaction arising from 
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

[[Page 62136]]

States or organized under the laws of the United States or of any 
State.
* * * * *

Subpart C--Covered Funds Activities and Investments

0
22. Section 248.10 is amended by revising paragraphs (c)(7)(ii) and 
(c)(8)(i)(A) to read as follows:


Sec.  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) * * *
    (i) * * *
    (A) Loans as defined in Sec.  248.2(t) of subpart A;
* * * * *

0
23. Section 248.11 is amended by revising paragraph (c) to read as 
follows:


Sec.  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 Sec.  248.10(a) 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 Sec.  248.4(a) or (b), respectively; and
    (2) With respect to any banking entity (or any affiliate thereof) 
that: Acts as a sponsor, investment adviser or commodity trading 
advisor to a particular covered fund or otherwise acquires and retains 
an ownership interest in such covered fund in reliance on paragraph (a) 
of this section; or acquires and retains an ownership interest in such 
covered fund and is either a securitizer, as that term is used in 
section 15G(a)(3) of the Exchange Act (15 U.S.C. 78o-11(a)(3)), or is 
acquiring and retaining an ownership interest in such covered fund in 
compliance with section 15G of that Act (15 U.S.C.78o-11) and the 
implementing regulations issued thereunder each as permitted by 
paragraph (b) of this section, then in each such case any ownership 
interests acquired or retained by the banking entity and its affiliates 
in connection with underwriting and market making related activities 
for that particular covered fund are included in the calculation of 
ownership interests permitted to be held by the banking entity and its 
affiliates under the limitations of Sec.  248.12(a)(2)(ii) and (iii) 
and (d).


Sec.  248.12   [Amended]

0
24. Section 248.12 is amended by redesignating the second instance of 
paragraph (e)(2)(vi) as paragraph (e)(2)(vii).

0
25. Section 248.13 is amended by revising paragraphs (a), (b)(3) and 
(4), and (c) to read as follows:


Sec.  248.13   Other permitted covered fund activities and investments.

    (a) Permitted risk-mitigating hedging activities. (1) The 
prohibition contained in Sec.  248.10(a) does not apply with respect to 
an ownership interest in a covered fund acquired or retained by a 
banking entity that is designed to reduce or otherwise significantly 
mitigate the specific, identifiable risks to the banking entity in 
connection with:
    (i) A compensation arrangement with an employee of the banking 
entity or an affiliate thereof that directly provides investment 
advisory, commodity trading advisory or other services to the covered 
fund; or
    (ii) A position taken by the banking entity when acting as 
intermediary on behalf of a customer that is not itself a banking 
entity to facilitate the exposure by the customer to the profits and 
losses of the covered fund.
    (2) Requirements. The risk-mitigating hedging activities of a 
banking entity are permitted under this paragraph (a) only if:
    (i) The banking entity has established and implements, maintains 
and enforces an internal compliance program in accordance with subpart 
D of this part that is reasonably designed to ensure the banking 
entity's compliance with the requirements of this section, including:
    (A) Reasonably designed written policies and procedures; and
    (B) Internal controls and ongoing monitoring, management, and 
authorization procedures, including relevant escalation procedures; and
    (ii) The acquisition or retention of the ownership interest:
    (A) Is made in accordance with the written policies, procedures, 
and internal controls required under this section;
    (B) At the inception of the hedge, is designed to reduce or 
otherwise significantly mitigate one or more specific, identifiable 
risks arising:
    (1) Out of a transaction conducted solely to accommodate a specific 
customer request with respect to the covered fund; or
    (2) In connection with the compensation arrangement with the 
employee that directly provides investment advisory, commodity trading 
advisory, or other services to the covered fund;
    (C) Does not give rise, at the inception of the hedge, to any 
significant new or additional risk that is not itself hedged 
contemporaneously in accordance with this section; and
    (D) Is subject to continuing review, monitoring and management by 
the banking entity.
    (iii) With respect to risk-mitigating hedging activity conducted 
pursuant to paragraph (a)(1)(i), the compensation arrangement relates 
solely to the covered fund in which the banking entity or any affiliate 
has acquired an ownership interest pursuant to paragraph (a)(1)(i) and 
such compensation arrangement provides that any losses incurred by the 
banking entity on such ownership interest will be offset by 
corresponding decreases in amounts payable under such compensation 
arrangement.
    (b) * * *
    (3) An ownership interest in a covered fund is not offered for sale 
or sold to a resident of the United States for purposes of paragraph 
(b)(1)(iii) of this section only if it is not sold and has not been 
sold pursuant to an offering that targets residents of the United 
States in which the banking entity or any affiliate of the banking 
entity participates. If the banking entity or an affiliate sponsors or 
serves, directly or indirectly, as the investment manager, investment 
adviser, commodity pool operator or commodity trading advisor to a 
covered fund, then the banking entity or affiliate will be deemed for 
purposes of this paragraph (b)(3) to participate in any offer or sale 
by the covered fund of ownership interests in the covered fund.
    (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

[[Page 62137]]

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 Sec.  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.

0
26. Section 248.14 is amended by revising paragraph (a)(2)(ii)(B) to 
read as follows:


Sec.  248.14   Limitations on relationships with a covered fund.

    (a) * * *
    (2) * * *
    (ii) * * *
    (B) The chief executive officer (or equivalent officer) of the 
banking entity certifies in writing annually no later than March 31 to 
the Board (with a duty to update the certification if the information 
in the certification materially changes) that the banking entity does 
not, directly or indirectly, guarantee, assume, or otherwise insure the 
obligations or performance of the covered fund or of any covered fund 
in which such covered fund invests; and
* * * * *

Subpart D--Compliance Program Requirement; Violations

0
27. Section 248.20 is amended by revising paragraphs (a), (b) 
introductory text, (c), (d), (e) introductory text, and (f)(2) and 
adding paragraphs (g), (h), and (i) to read as follows:


Sec.  248.20   Program for compliance; reporting.

    (a) Program requirement. Each banking entity (other than a banking 
entity with limited trading assets and liabilities) shall develop and 
provide for the continued administration of a compliance program 
reasonably designed to ensure and monitor compliance with the 
prohibitions and restrictions on proprietary trading and covered fund 
activities and investments set forth in section 13 of the BHC Act and 
this part. The terms, scope, and detail of the compliance program shall 
be appropriate for the types, size, scope, and complexity of activities 
and business structure of the banking entity.
    (b) Banking entities with significant trading assets and 
liabilities. With respect to a banking entity with significant trading 
assets and liabilities, the compliance program required by paragraph 
(a) of this section, at a minimum, shall include:
* * * * *
    (c) CEO attestation. 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 appendix A to this part. (1) A 
banking entity engaged in proprietary trading activity permitted under 
subpart B shall comply with the reporting requirements described in 
appendix A to this part, 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 appendix A to this 
part.
    (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 appendix A to this part shall report the information 
required by appendix A 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 of this part 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 of this part, 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 the presumption 
in this paragraph must be made in accordance with the notice and 
response procedures in paragraph (i) of this section.
    (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 of this part, does not warrant a presumption of 
compliance under paragraph (g) of this section or treatment

[[Page 62138]]

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 section.
    (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.
    (3) Waiver. 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) Decision. The Board will notify the banking entity of the 
decision in writing. The notice will include an explanation of the 
decision.

0
28. Revise appendix A to part 248 to read as follows:

Appendix A 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 Sec.  
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 Sec.  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;
    (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 Sec.  
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 
Sec.  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 Sec.  248.20. The effectiveness of particular 
quantitative measurements may differ based on the profile of the 
banking entity's businesses in general and, more specifically, of 
the particular trading desk, including types of instruments traded, 
trading activities and strategies, and history and experience (e.g., 
whether the trading desk is an established, successful market maker 
or a new entrant to a competitive market). In all cases, banking 
entities must ensure that they have robust measures in place to 
identify and monitor the risks taken in their trading activities, to 
ensure that the activities are within risk tolerances established by 
the banking entity, and to monitor and examine for compliance with 
the proprietary trading restrictions in this part.
    e. On an ongoing basis, banking entities must carefully monitor, 
review, and evaluate all furnished quantitative measurements, as 
well as any others that they choose to utilize in order to maintain 
compliance with section 13 of the BHC Act and this part. All 
measurement results that indicate a heightened risk of impermissible 
proprietary trading, including with respect to otherwise-permitted 
activities under Sec.  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 Sec.  248.2 and Sec.  248.3. In addition, for purposes of 
this appendix, the following definitions apply:
    Applicability identifies the trading desks for which a banking 
entity is required to calculate and report a particular quantitative 
measurement based on the type of covered trading activity conducted 
by the trading desk.
    Calculation period means the period of time for which a 
particular quantitative measurement must be calculated.
    Comprehensive profit and loss means the net profit or loss of a 
trading desk's material sources of trading revenue over a specific 
period of time, including, for example, any increase or decrease in 
the market value of a trading desk's holdings, dividend income, and 
interest income and expense.
    Covered trading activity means trading conducted by a trading 
desk under Sec.  248.4, Sec.  248.5, Sec.  248.6(a), or Sec.  
248.6(b). A banking entity may include in its covered trading 
activity trading conducted under Sec.  248.3(d), Sec.  248.6(c), 
Sec.  248.6(d) or Sec.  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 Sec.  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.
    2. Trading desk information. Each banking entity made subject to 
this appendix by Sec.  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 Sec.  248.20 must 
provide certain identifying and descriptive information, as further 
described in this appendix, regarding its quantitative measurements.

[[Page 62139]]

    4. Narrative statement. Each banking entity made subject to this 
appendix by Sec.  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 Sec.  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;
    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 Sec.  
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, 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 
Sec.  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 Sec.  
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 
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 Sec. Sec.  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 Sec.  248.4(b) and hedging activity under Sec.  248.5. 
Accordingly, the limits required under Sec. Sec.  
248.4(b)(2)(iii)(C) and 248.5(b)(1)(i)(A) must meet the applicable 
requirements under Sec. Sec.  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-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 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.

[[Page 62140]]

    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 Sec.  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.
---------------------------------------------------------------------------

    ii. Calculation Period: One trading day.
    iii. Measurement Frequency: Daily.
    iv. Applicability: All trading desks that rely on Sec.  248.4(a) 
or Sec.  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 Sec.  248.4(a) to conduct underwriting activity is a 
market participant identified in Sec.  248.4(a)(7), and a customer 
of a trading desk that relies on Sec.  248.4(b) to conduct market 
making-related activity is a market participant identified in Sec.  
248.4(b)(3).
---------------------------------------------------------------------------

    \2\ See Sec.  248.2(h), (aa).
---------------------------------------------------------------------------

    ii. Calculation Period: One trading day.
    iii. Measurement Frequency: Daily.
    iv. Applicability: All trading desks that rely on Sec.  248.4(a) 
or Sec.  248.4(b) to conduct underwriting activity or market-making-
related activity, respectively.

Appendix B to Part 248 [Removed]

0
29. Appendix B to part 248 is removed.

0
30. Effective January 1, 2020, until December 31, 2020, appendix Z to 
part 248 is added to read as follows:

Appendix Z to Part 248--Proprietary Trading and Certain Interests in 
and Relationships With Covered Funds (Alternative Compliance)

    Note: The content of this appendix reproduces the regulation 
implementing Section 13 of the Bank Holding Company Act as of 
November 13, 2019.

Subpart A--Authority and Definitions


Sec.  248.1   Authority, purpose, scope, and relationship to other 
authorities.

    (a) Authority. This part (Regulation VV) is issued by the Board 
under section 13 of the Bank Holding Company Act of 1956, as amended 
(12 U.S.C. 1851), as well as under the Federal Reserve Act, as amended 
(12 U.S.C. 221 et seq.); section 8 of the Federal Deposit Insurance 
Act, as amended (12 U.S.C. 1818); the Bank Holding Company Act of 1956, 
as amended (12 U.S.C. 1841 et seq.); and the International Banking Act 
of 1978, as amended (12 U.S.C. 3101 et seq.).
    (b) Purpose. Section 13 of the Bank Holding Company Act establishes 
prohibitions and restrictions on proprietary trading and on investments 
in or relationships with covered funds by certain banking entities, 
including state member banks, bank holding companies, savings and loan 
holding companies, other companies that control an insured depository 
institution, foreign banking organizations, and certain subsidiaries 
thereof. This part implements section 13 of the Bank Holding Company 
Act by defining terms used in the statute and related terms, 
establishing prohibitions and restrictions on proprietary trading and 
on investments in or relationships with covered funds, and explaining 
the statute's requirements.
    (c) Scope. This part implements section 13 of the Bank Holding 
Company Act with respect to banking entities for which the Board is 
authorized to issue regulations under section 13(b)(2) of the Bank 
Holding Company Act (12 U.S.C. 1851(b)(2)) and take actions under 
section 13(e) of that Act (12 U.S.C. 1851(e)). These include any state 
bank that is a member of the Federal Reserve System, any company that 
controls an insured depository institution (including a bank holding 
company and savings and loan holding company), any company that is 
treated as a bank holding company for purposes of section 8 of the 
International Banking Act (12 U.S.C. 3106), and any subsidiary of the 
foregoing other than a subsidiary for which the OCC, FDIC, CFTC, or SEC 
is the primary financial regulatory agency (as defined in section 2(12) 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 
2010 (12 U.S.C. 5301(12)), but do not include such entities to the 
extent they are not within the definition of banking entity in Sec.  
248.2(c).
    (d) Relationship to other authorities. Except as otherwise provided 
under section 13 of the BHC Act or this part, and notwithstanding any 
other provision of law, the prohibitions and restrictions under section 
13 of BHC Act and this part shall apply to the activities of a banking 
entity, even if such activities are authorized for the banking entity 
under other applicable provisions of law.
    (e) Preservation of authority. Nothing in this part limits in any 
way the authority of the Board to impose on a banking entity identified 
in paragraph (c) of this section additional requirements or 
restrictions with respect to any activity, investment, or relationship 
covered under section 13 of the Bank Holding Company Act or this part, 
or additional penalties for violation of this part provided under any 
other applicable provision of law.


Sec.  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 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:

[[Page 62141]]

    (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:
    (i) Any swap, as that term is defined in section 1a(47) of the 
Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as 
that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 
78c(a)(68));
    (ii) Any purchase or sale of a commodity, that is not an excluded 
commodity, for deferred shipment or delivery that is intended to be 
physically settled;
    (iii) Any foreign exchange forward (as that term is defined in 
section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)) or 
foreign exchange swap (as that term is defined in section 1a(25) of the 
Commodity Exchange Act (7 U.S.C. 1a(25));
    (iv) Any agreement, contract, or transaction in foreign currency 
described in section 2(c)(2)(C)(i) of the Commodity Exchange Act (7 
U.S.C. 2(c)(2)(C)(i));
    (v) Any agreement, contract, or transaction in a commodity other 
than foreign currency described in section 2(c)(2)(D)(i) of the 
Commodity Exchange Act (7 U.S.C. 2(c)(2)(D)(i)); and
    (vi) Any transaction authorized under section 19 of the Commodity 
Exchange Act (7 U.S.C. 23(a) or (b));
    (2) A derivative does not include:
    (i) Any consumer, commercial, or other agreement, contract, or 
transaction that the CFTC and SEC have further defined by joint 
regulation, interpretation, guidance, or other action as not within the 
definition of swap, as that term is defined in section 1a(47) of the 
Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as 
that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 
78c(a)(68)); or
    (ii) Any identified banking product, as defined in section 402(b) 
of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)), 
that is subject to section 403(a) of that Act (7 U.S.C. 27a(a)).
    (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, unless otherwise indicated, 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) Loan means any loan, lease, extension of credit, or secured or 
unsecured receivable that is not a security or derivative.
    (t) Primary financial regulatory agency has the same meaning as in 
section 2(12) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (12 U.S.C. 5301(12)).
    (u) 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.
    (v) 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)).
    (w) SEC means the Securities and Exchange Commission.
    (x) 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.
    (y) Security has the meaning specified in section 3(a)(10) of the 
Exchange Act (15 U.S.C. 78c(a)(10)).
    (z) 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)).
    (aa) Security future has the meaning specified in section 3(a)(55) 
of the Exchange Act (15 U.S.C. 78c(a)(55)).

[[Page 62142]]

    (bb) 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.
    (cc) 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.
    (dd) Subsidiary has the same meaning as in section 2(d) of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841(d)).
    (ee) 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.
    (ff) 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


Sec.  248.3   Prohibition on proprietary trading.

    (a) Prohibition. Except as otherwise provided in this subpart, a 
banking entity may not engage in proprietary trading. Proprietary 
trading means engaging as principal for the trading account of the 
banking entity in any purchase or sale of one or more financial 
instruments.
    (b) Definition of trading account. (1) Trading account means any 
account that is used by a banking entity to:
    (i) Purchase or sell one or more financial instruments principally 
for the purpose of:
    (A) Short-term 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 described in paragraphs (b)(1)(i)(A), 
(B), or (C) of this section;
    (ii) Purchase or sell one or more financial instruments that are 
both market risk capital rule covered positions and trading positions 
(or hedges of other market risk capital rule covered positions), if the 
banking entity, or any affiliate of the banking entity, is an insured 
depository institution, bank holding company, or savings and loan 
holding company, and calculates risk-based capital ratios under the 
market risk capital rule; or
    (iii) 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.
    (2) Rebuttable presumption for certain purchases and sales. The 
purchase (or sale) of a financial instrument by a banking entity shall 
be presumed 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 fewer than sixty days or substantially 
transfers the risk of the financial instrument within sixty days of the 
purchase (or sale), unless the banking entity can demonstrate, 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 paragraph (b)(1)(i) of this section.
    (c) Financial instrument. (1) Financial instrument means:
    (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.
    (2) A financial instrument does not include:
    (i) A loan;
    (ii) A commodity that is not:
    (A) An excluded commodity (other than foreign exchange or 
currency);
    (B) A derivative;
    (C) A contract of sale of a commodity for future delivery; or
    (D) An option on a contract of sale of a commodity for future 
delivery; or
    (iii) Foreign exchange or currency.
    (d) Proprietary trading. Proprietary trading does not include:
    (1) Any purchase or sale of one or more financial instruments by a 
banking entity that arises under a repurchase or reverse repurchase 
agreement pursuant to which the banking entity has simultaneously 
agreed, in writing, to both purchase and sell a stated asset, at stated 
prices, and on stated dates or on demand with the same counterparty;
    (2) Any purchase or sale of one or more financial instruments by a 
banking entity that arises under a transaction in which the banking 
entity lends or borrows a security temporarily to or from another party 
pursuant to a written securities lending agreement under which the 
lender retains the economic interests of an owner of such security, and 
has the right to terminate the transaction and to recall the loaned 
security on terms agreed by the parties;
    (3) Any purchase or sale of a security by a banking entity for the 
purpose of liquidity management in accordance with a documented 
liquidity management plan of the banking entity that:
    (i) Specifically contemplates and authorizes the particular 
securities to be used for liquidity management purposes, the amount, 
types, and risks of these securities that are consistent with liquidity 
management, and the liquidity circumstances in which the particular 
securities may or must be used;
    (ii) Requires that any purchase or sale of securities 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 securities purchased or sold for liquidity 
management purposes be highly liquid and limited to securities 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 securities purchased or sold for liquidity 
management purposes, together with any other instruments purchased or 
sold for such purposes, to an amount that is consistent with the 
banking entity's near-term funding needs, including deviations from 
normal operations of the banking entity or any affiliate thereof, as 
estimated and documented pursuant to methods specified in the plan;
    (v) Includes written policies and procedures, internal controls, 
analysis, and independent testing to ensure that the purchase and sale 
of securities that are not permitted under Sec. Sec.  248.6(a) or (b) 
of this subpart are for the purpose of liquidity management and in 
accordance with the liquidity

[[Page 62143]]

management plan described in paragraph (d)(3) of this section; and
    (vi) Is consistent with The Board's supervisory requirements, 
guidance, and expectations regarding liquidity management;
    (4) Any purchase or sale of one or more financial instruments by a 
banking entity that is a derivatives clearing organization or a 
clearing agency in connection with clearing financial instruments;
    (5) Any excluded clearing activities by a banking entity that is a 
member of a clearing agency, a member of a derivatives clearing 
organization, or a member of a designated financial market utility;
    (6) Any purchase or sale of one or more financial instruments by a 
banking entity, so long as:
    (i) The purchase (or sale) satisfies an existing delivery 
obligation of the banking entity or its customers, including to prevent 
or close out a failure to deliver, in connection with delivery, 
clearing, or settlement activity; or
    (ii) The purchase (or sale) satisfies an obligation of the banking 
entity in connection with a judicial, administrative, self-regulatory 
organization, or arbitration proceeding;
    (7) Any purchase or sale of one or more financial instruments by a 
banking entity that is acting solely as agent, broker, or custodian;
    (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; or
    (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 Board.
    (e) Definition of other terms related to proprietary trading. For 
purposes of this subpart:
    (1) Anonymous means that each party to a purchase or sale is 
unaware of the identity of the other party(ies) to the purchase or 
sale.
    (2) Clearing agency has the same meaning as in section 3(a)(23) of 
the Exchange Act (15 U.S.C. 78c(a)(23)).
    (3) Commodity has the same meaning as in section 1a(9) of the 
Commodity Exchange Act (7 U.S.C. 1a(9)), except that a commodity does 
not include any security;
    (4) Contract of sale of a commodity for future delivery means a 
contract of sale (as that term is defined in section 1a(13) of the 
Commodity Exchange Act (7 U.S.C. 1a(13)) for future delivery (as that 
term is defined in section 1a(27) of the Commodity Exchange Act (7 
U.S.C. 1a(27))).
    (5) Derivatives clearing organization means:
    (i) A derivatives clearing organization registered under section 5b 
of the Commodity Exchange Act (7 U.S.C. 7a-1);
    (ii) A derivatives clearing organization that, pursuant to CFTC 
regulation, is exempt from the registration requirements under section 
5b of the Commodity Exchange Act (7 U.S.C. 7a-1); or
    (iii) A foreign derivatives clearing organization that, pursuant to 
CFTC regulation, is permitted to clear for a foreign board of trade 
that is registered with the CFTC.
    (6) Exchange, unless the context otherwise requires, means any 
designated contract market, swap execution facility, or foreign board 
of trade registered with the CFTC, or, for purposes of securities or 
security-based swaps, an exchange, as defined under section 3(a)(1) of 
the Exchange Act (15 U.S.C. 78c(a)(1)), or security-based swap 
execution facility, as defined under section 3(a)(77) of the Exchange 
Act (15 U.S.C. 78c(a)(77)).
    (7) Excluded clearing activities means:
    (i) With respect to customer transactions cleared on a derivatives 
clearing organization, a clearing agency, or a designated financial 
market utility, any purchase or sale necessary to correct trading 
errors made by or on behalf of a customer provided that such purchase 
or sale is conducted in accordance with, for transactions cleared on a 
derivatives clearing organization, the Commodity Exchange Act, CFTC 
regulations, and the rules or procedures of the derivatives clearing 
organization, or, for transactions cleared on a clearing agency, the 
rules or procedures of the clearing agency, or, for transactions 
cleared on a designated financial market utility that is neither a 
derivatives clearing organization nor a clearing agency, the rules or 
procedures of the designated financial market utility;
    (ii) Any purchase or sale in connection with and related to the 
management of a default or threatened imminent default of a customer 
provided that such purchase or sale is conducted in accordance with, 
for transactions cleared on a derivatives clearing organization, the 
Commodity Exchange Act, CFTC regulations, and the rules or procedures 
of the derivatives clearing organization, or, for transactions cleared 
on a clearing agency, the rules or procedures of the clearing agency, 
or, for transactions cleared on a designated financial market utility 
that is neither a derivatives clearing organization nor a clearing 
agency, the rules or procedures of the designated financial market 
utility;
    (iii) Any purchase or sale in connection with and related to the 
management of a default or threatened imminent default of a member of a 
clearing agency, a member of a derivatives clearing organization, or a 
member of a designated financial market utility;
    (iv) Any purchase or sale in connection with and related to the 
management of the default or threatened default of a clearing agency, a 
derivatives clearing organization, or a designated financial market 
utility; and
    (v) Any purchase or sale that is required by the rules or 
procedures of a clearing agency, a derivatives clearing organization, 
or a designated financial market utility to mitigate the risk to the 
clearing agency, derivatives clearing organization, or designated 
financial market utility that would result from the clearing by a 
member of security-based swaps that reference the member or an 
affiliate of the member.
    (8) Designated financial market utility has the same meaning as in 
section 803(4) of the Dodd-Frank Act (12 U.S.C. 5462(4)).
    (9) Issuer has the same meaning as in section 2(a)(4) of the 
Securities Act of 1933 (15 U.S.C. 77b(a)(4)).
    (10) Market risk capital rule covered position and trading position 
means a financial instrument that is both a covered position and a 
trading position, as those terms are respectively defined:
    (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

[[Page 62144]]

bank holding company or savings and loan holding company.
    (11) Market risk capital rule means the market risk capital rule 
that is contained in subpart F of 12 CFR part 3, 12 CFR parts 208 and 
225, or 12 CFR part 324, as applicable.
    (12) Municipal security means a security that is a direct 
obligation of or issued by, or an obligation guaranteed as to principal 
or interest by, a State or any political subdivision thereof, or any 
agency or instrumentality of a State or any political subdivision 
thereof, or any municipal corporate instrumentality of one or more 
States or political subdivisions thereof.
    (13) Trading desk means 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.


Sec.  248.4   Permitted underwriting and market making-related 
activities.

    (a) Underwriting activities--(1) Permitted underwriting activities. 
The prohibition contained in Sec.  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) 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, 
and reasonable efforts are made to sell or otherwise reduce the 
underwriting position within a reasonable period, taking into account 
the liquidity, maturity, and depth of the market for the relevant type 
of security;
    (iii) 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, based on the nature and amount of 
the trading desk's underwriting activities, including the reasonably 
expected near term demands of clients, customers, or counterparties, on 
the:
    (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;
    (C) Internal controls and ongoing monitoring and analysis of each 
trading desk's compliance with its limits; and
    (D) Authorization procedures, including escalation procedures that 
require review and approval of any trade that would exceed a trading 
desk's limit(s), demonstrable analysis of the basis for any temporary 
or permanent increase to a trading desk's limit(s), and independent 
review of such demonstrable analysis and approval;
    (iv) The compensation arrangements of persons performing the 
activities described in this paragraph (a) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (v) The banking entity is licensed or registered to engage in the 
activity described in this paragraph (a) in accordance with applicable 
law.
    (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 
paragraph (a), 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 Sec.  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 amount, types, and risks of the financial instruments in 
the trading desk's market-maker inventory are designed not to exceed, 
on an ongoing basis, the reasonably expected near term demands of 
clients, customers, or counterparties, based on:
    (A) The liquidity, maturity, and depth of the market for the 
relevant types of financial instrument(s); and
    (B) 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 financial 
instruments in which the trading desk makes a market, including through 
block trades;
    (iii) The banking entity has established and implements, maintains, 
and enforces an internal compliance

[[Page 62145]]

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 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;
    (C) Limits for each trading desk, based on the nature and amount of 
the trading desk's market making-related activities, that address the 
factors prescribed by paragraph (b)(2)(ii) of this section, on:
    (1) The amount, types, and risks of its market-maker inventory;
    (2) The 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) The period of time a financial instrument may be held;
    (D) Internal controls and ongoing monitoring and analysis of each 
trading desk's compliance with its limits; and
    (E) Authorization procedures, including escalation procedures that 
require review and approval of any trade that would exceed a trading 
desk's limit(s), demonstrable analysis that the basis for any temporary 
or permanent increase to a trading desk's limit(s) is consistent with 
the requirements of this paragraph (b), and independent review of such 
demonstrable analysis and approval;
    (iv) To the extent that any limit identified pursuant to paragraph 
(b)(2)(iii)(C) of this section is exceeded, the trading desk takes 
action to bring the trading desk into compliance with the limits as 
promptly as possible after the limit is exceeded;
    (v) The compensation arrangements of persons performing the 
activities described in this paragraph (b) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (vi) The banking entity is licensed or registered to engage in 
activity described in this paragraph (b) in accordance with applicable 
law.
    (3) 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 Sec.  248.20(d)(1) of subpart D, 
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 
paragraph (b), 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 inventory. For the purposes of this 
paragraph (b), market-maker inventory 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.


Sec.  248.5   Permitted risk-mitigating hedging activities.

    (a) Permitted risk-mitigating hedging activities. The prohibition 
contained in Sec.  248.3(a) does not apply to the risk-mitigating 
hedging activities of a banking entity in connection with and related 
to individual or aggregated positions, contracts, or other holdings of 
the banking entity and designed to reduce the specific risks to the 
banking entity in connection with and related to such positions, 
contracts, or other holdings.
    (b) Requirements. The risk-mitigating hedging activities of a 
banking entity are permitted under paragraph (a) of this section only 
if:
    (1) 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:
    (i) 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;
    (ii) Internal controls and ongoing monitoring, management, and 
authorization procedures, including relevant escalation procedures; and
    (iii) The conduct of analysis, including correlation analysis, and 
independent testing designed to ensure 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, and such correlation 
analysis demonstrates that the hedging activity demonstrably reduces or 
otherwise significantly mitigates the specific, identifiable risk(s) 
being hedged;
    (2) The risk-mitigating hedging activity:
    (i) Is conducted in accordance with the written policies, 
procedures, and internal controls required under this section;
    (ii) At the inception of the hedging activity, including, without 
limitation, any adjustments to the hedging activity, is designed to 
reduce or otherwise significantly mitigate and demonstrably reduces or 
otherwise significantly mitigates 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

[[Page 62146]]

positions, contracts or other holdings and the risks and liquidity 
thereof;
    (iii) 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;
    (iv) Is subject to continuing review, monitoring and management by 
the banking entity that:
    (A) Is consistent with the written hedging policies and procedures 
required under paragraph (b)(1) of this section;
    (B) Is designed to reduce or otherwise significantly mitigate and 
demonstrably reduces or otherwise significantly mitigates 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
    (C) 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)(2) of this section and is not 
prohibited proprietary trading; and
    (3) The compensation arrangements of persons performing risk-
mitigating hedging activities are designed not to reward or incentivize 
prohibited proprietary trading.
    (c) Documentation requirement. (1) A banking entity must comply 
with the requirements of paragraphs (c)(2) and (3) of this section with 
respect to any purchase or sale of financial instruments made in 
reliance on this section for risk-mitigating hedging purposes that is:
    (i) Not established by the specific trading desk establishing or 
responsible for the underlying positions, contracts, or other holdings 
the risks of which the hedging activity is designed to reduce;
    (ii) Established by the specific trading desk establishing or 
responsible for the underlying positions, contracts, or other holdings 
the risks of which the purchases or sales are designed to reduce, but 
that is effected through a financial instrument, exposure, technique, 
or strategy that is not specifically identified in the trading desk's 
written policies and procedures established under paragraph (b)(1) of 
this section or under Sec.  248.4(b)(2)(iii)(B) of this subpart as a 
product, instrument, exposure, technique, or strategy such trading desk 
may use for hedging; or
    (iii) Established to hedge aggregated positions across two or more 
trading desks.
    (2) In connection with any purchase or sale identified in paragraph 
(c)(1) of this section, a banking entity must, at a minimum, and 
contemporaneously with the purchase or sale, document:
    (i) The specific, identifiable risk(s) of the identified positions, 
contracts, or other holdings of the banking entity that the purchase or 
sale is designed to reduce;
    (ii) The specific risk-mitigating strategy that the purchase or 
sale is designed to fulfill; and
    (iii) The trading desk or other business unit that is establishing 
and responsible for the hedge.
    (3) A banking entity must create and retain records sufficient to 
demonstrate compliance with the requirements of this paragraph (c) for 
a period that is no less than five years in a form that allows the 
banking entity to promptly produce such records to the Board on 
request, or such longer period as required under other law or this 
part.


Sec.  248.6   Other permitted proprietary trading activities.

    (a) Permitted trading in domestic government obligations. The 
prohibition contained in Sec.  248.3(a) does not apply to the purchase 
or sale by a banking entity of a financial instrument that is:
    (1) An obligation of, or issued or guaranteed by, the United 
States;
    (2) An obligation, participation, or other instrument of, or issued 
or guaranteed by, an agency of the United States, the Government 
National Mortgage Association, the Federal National Mortgage 
Association, the Federal Home Loan Mortgage Corporation, a Federal Home 
Loan Bank, the Federal Agricultural Mortgage Corporation or a Farm 
Credit System institution chartered under and subject to the provisions 
of the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.);
    (3) An obligation of any State or any political subdivision 
thereof, including any municipal security; or
    (4) An obligation of the FDIC, or any entity formed by or on behalf 
of the FDIC for purpose of facilitating the disposal of assets acquired 
or held by the FDIC 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.
    (b) Permitted trading in foreign government obligations--(1) 
Affiliates of foreign banking entities in the United States. The 
prohibition contained in Sec.  248.3(a) does not apply to the purchase 
or sale of a financial instrument that is an obligation of, or issued 
or guaranteed by, a foreign sovereign (including any multinational 
central bank of which the foreign sovereign is a member), or any agency 
or political subdivision of such foreign sovereign, by a banking 
entity, so long as:
    (i) The banking entity is organized under or is directly or 
indirectly controlled by a banking entity that is organized under the 
laws of a foreign sovereign and is not directly or indirectly 
controlled by a top-tier banking entity that is organized under the 
laws of the United States;
    (ii) The financial instrument is an obligation of, or issued or 
guaranteed by, the foreign sovereign under the laws of which the 
foreign banking entity referred to in paragraph (b)(1)(i) of this 
section is organized (including any multinational central bank of which 
the foreign sovereign is a member), or any agency or political 
subdivision of that foreign sovereign; and
    (iii) The purchase or sale as principal is not made by an insured 
depository institution.
    (2) Foreign affiliates of a U.S. banking entity. The prohibition 
contained in Sec.  248.3(a) does not apply to the purchase or sale of a 
financial instrument that is an obligation of, or issued or guaranteed 
by, a foreign sovereign (including any multinational central bank of 
which the foreign sovereign is a member), or any agency or political 
subdivision of that foreign sovereign, by a foreign entity that is 
owned or controlled by a banking entity organized or established under 
the laws of the United States or any State, so long as:
    (i) The foreign entity is a foreign bank, as defined in section 
211.2(j) of the Board's Regulation K (12 CFR 211.2(j)), or is regulated 
by the foreign sovereign as a securities dealer;
    (ii) The financial instrument is an obligation of, or issued or 
guaranteed by, the foreign sovereign under the laws of which the 
foreign entity is organized (including any multinational central bank 
of which the foreign sovereign is a member), or any agency or political 
subdivision of that foreign sovereign; and
    (iii) The financial instrument is owned by the foreign entity and 
is not financed by an affiliate that is located in the United States or 
organized under the laws of the United States or of any State.
    (c) Permitted trading on behalf of customers--(1) Fiduciary 
transactions. The prohibition contained in Sec.  248.3(a) does not 
apply to the purchase or sale of financial instruments by a banking

[[Page 62147]]

entity acting as trustee or in a similar fiduciary capacity, so long 
as:
    (i) The transaction is conducted for the account of, or on behalf 
of, a customer; and
    (ii) The banking entity does not have or retain beneficial 
ownership of the financial instruments.
    (2) Riskless principal transactions. The prohibition contained in 
Sec.  248.3(a) does not apply to the purchase or sale of financial 
instruments by a banking entity acting as riskless principal in a 
transaction in which the banking entity, after receiving an order to 
purchase (or sell) a financial instrument from a customer, purchases 
(or sells) the financial instrument for its own account to offset a 
contemporaneous sale to (or purchase from) the customer.
    (d) Permitted trading by a regulated insurance company. The 
prohibition contained in Sec.  248.3(a) does not apply to the purchase 
or sale of financial instruments by a banking entity that is an 
insurance company or an affiliate of an insurance company if:
    (1) The insurance company or its affiliate purchases or sells the 
financial instruments solely for:
    (i) The general account of the insurance company; or
    (ii) A separate account established by the insurance company;
    (2) The purchase or sale is conducted in compliance with, and 
subject to, the insurance company investment laws, regulations, and 
written guidance 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, regulation, or written guidance described in 
paragraph (d)(2) of this section is insufficient to protect the safety 
and soundness of the covered banking entity, or the financial stability 
of the United States.
    (e) Permitted trading activities of foreign banking entities. (1) 
The prohibition contained in Sec.  248.3(a) does not apply to the 
purchase or sale of financial instruments by a banking entity if:
    (i) The banking entity is not organized or directly or indirectly 
controlled by a banking entity that is organized under the laws of the 
United States or of any State;
    (ii) The purchase or sale by the banking entity is made pursuant to 
paragraph (9) or (13) of section 4(c) of the BHC Act; and
    (iii) The purchase or sale meets the requirements of paragraph 
(e)(3) of this section.
    (2) A purchase or sale of financial instruments by a banking entity 
is made pursuant to paragraph (9) or (13) of section 4(c) of the BHC 
Act for purposes of paragraph (e)(1)(ii) of this section only if:
    (i) The purchase or sale is conducted in accordance with the 
requirements of paragraph (e) of this section; and
    (ii)(A) With respect to a banking entity that is a foreign banking 
organization, the banking entity meets the qualifying foreign banking 
organization requirements of section 211.23(a), (c) or (e) of the 
Board's Regulation K (12 CFR 211.23(a), (c) or (e)), as applicable; or
    (B) With respect to a banking entity that is not a foreign banking 
organization, the banking entity is not organized under the laws of the 
United States or of any State and the banking entity, on a fully-
consolidated basis, meets at least two of the following requirements:
    (1) Total assets of the banking entity held outside of the United 
States exceed total assets of the banking entity held in the United 
States;
    (2) Total revenues derived from the business of the banking entity 
outside of the United States exceed total revenues derived from the 
business of the banking entity in the United States; or
    (3) Total net income derived from the business of the banking 
entity outside of the United States exceeds total net income derived 
from the business of the banking entity in the United States.
    (3) A purchase or sale by a banking entity is permitted for 
purposes of this paragraph (e) if:
    (i) The banking entity engaging as principal in the purchase or 
sale (including any personnel of the banking entity or its affiliate 
that arrange, negotiate or execute such purchase or sale) is not 
located in the United States or organized under the laws of the United 
States or of any State;
    (ii) The banking entity (including relevant personnel) that makes 
the decision to purchase or sell as principal 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 purchases or sales 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; and
    (v) The purchase or sale is not conducted with or through any U.S. 
entity, other than:
    (A) A purchase or sale with the foreign operations of a U.S. entity 
if no personnel of such U.S. entity that are located in the United 
States are involved in the arrangement, negotiation, or execution of 
such purchase or sale;
    (B) A purchase or sale with an unaffiliated market intermediary 
acting as principal, provided the purchase or sale is promptly cleared 
and settled through a clearing agency or derivatives clearing 
organization acting as a central counterparty; or
    (C) A purchase or sale through an unaffiliated market intermediary 
acting as agent, provided the purchase or sale is conducted anonymously 
on an exchange or similar trading facility and is promptly cleared and 
settled through a clearing agency or derivatives clearing organization 
acting as a central counterparty.
    (4) For purposes of this paragraph (e), a U.S. entity is 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.
    (5) For purposes of this paragraph (e), a U.S. branch, agency, or 
subsidiary of a foreign banking entity is considered to be 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.
    (6) For purposes of this paragraph (e), unaffiliated market 
intermediary means an unaffiliated entity, acting as an intermediary, 
that is:
    (i) A broker or dealer registered with the SEC under section 15 of 
the Exchange Act or exempt from registration or excluded from 
regulation as such;
    (ii) A swap dealer registered with the CFTC under section 4s of the 
Commodity Exchange Act or exempt from registration or excluded from 
regulation as such;
    (iii) A security-based swap dealer registered with the SEC under 
section 15F of the Exchange Act or exempt from registration or excluded 
from regulation as such; or

[[Page 62148]]

    (iv) A futures commission merchant registered with the CFTC under 
section 4f of the Commodity Exchange Act or exempt from registration or 
excluded from regulation as such.


Sec.  248.7   Limitations on permitted proprietary trading activities.

    (a) No transaction, class of transactions, or activity may be 
deemed permissible under Sec. Sec.  248.4 through 248.6 if the 
transaction, class of transactions, or activity would:
    (1) Involve or result in a material conflict of interest between 
the banking entity and its clients, customers, or counterparties;
    (2) Result, directly or indirectly, in a material exposure by the 
banking entity to a high-risk asset or a high-risk trading strategy; or
    (3) Pose a threat to the safety and soundness of the banking entity 
or to the financial stability of the United States.
    (b) Definition of material conflict of interest. (1) For purposes 
of this section, a material conflict of interest between a banking 
entity and its clients, customers, or counterparties exists if the 
banking entity engages in any transaction, class of transactions, or 
activity that would involve or result in the banking entity's interests 
being materially adverse to the interests of its client, customer, or 
counterparty with respect to such transaction, class of transactions, 
or activity, and the banking entity has not taken at least one of the 
actions in paragraph (b)(2) of this section.
    (2) Prior to effecting the specific transaction or class or type of 
transactions, or engaging in the specific activity, the banking entity:
    (i) Timely and effective disclosure. (A) Has made clear, timely, 
and effective disclosure of the conflict of interest, together with 
other necessary information, in reasonable detail and in a manner 
sufficient to permit a reasonable client, customer, or counterparty to 
meaningfully understand the conflict of interest; and
    (B) Such disclosure is made in a manner that provides the client, 
customer, or counterparty the opportunity to negate, or substantially 
mitigate, any materially adverse effect on the client, customer, or 
counterparty created by the conflict of interest; or
    (ii) Information barriers. Has established, maintained, and 
enforced information barriers that are memorialized in written policies 
and procedures, such as physical separation of personnel, or functions, 
or limitations on types of activity, that are reasonably designed, 
taking into consideration the nature of the banking entity's business, 
to prevent the conflict of interest from involving or resulting in a 
materially adverse effect on a client, customer, or counterparty. A 
banking entity may not rely on such information barriers if, in the 
case of any specific transaction, class or type of transactions or 
activity, the banking entity knows or should reasonably know that, 
notwithstanding the banking entity's establishment of information 
barriers, the conflict of interest may involve or result in a 
materially adverse effect on a client, customer, or counterparty.
    (c) Definition of high-risk asset and high-risk trading strategy. 
For purposes of this section:
    (1) High-risk asset means an asset or group of related assets that 
would, if held by a banking entity, 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.
    (2) High-risk trading strategy means a trading strategy that would, 
if engaged in by a banking entity, 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.


Sec. Sec.  248.8-248.9   [Reserved]

Subpart C--Covered Funds Activities and Investments


Sec.  248.10   Prohibition on acquiring or retaining an ownership 
interest in and having certain relationships with a covered fund.

    (a) Prohibition. (1) Except as otherwise provided in this subpart, 
a banking entity may not, as principal, directly or indirectly, acquire 
or retain any ownership interest in or sponsor a covered fund.
    (2) Paragraph (a)(1) of this section does not include acquiring or 
retaining an ownership interest in a covered fund by a banking entity:
    (i) Acting solely as agent, broker, or custodian, so long as;
    (A) The activity is conducted for the account of, or on behalf of, 
a customer; and
    (B) The banking entity and its affiliates do not have or retain 
beneficial ownership of such ownership interest;
    (ii) Through a deferred compensation, stock-bonus, profit-sharing, 
or pension plan of the banking entity (or an affiliate thereof) that is 
established and administered in accordance with the law of the United 
States or a foreign sovereign, if the ownership interest is held or 
controlled directly or indirectly by the banking entity as trustee for 
the benefit of persons who are or were employees of the banking entity 
(or an affiliate thereof);
    (iii) In the ordinary course of collecting a debt previously 
contracted in good faith, provided that the banking entity divests the 
ownership interest as soon as practicable, and in no event may the 
banking entity retain such ownership interest for longer than such 
period permitted by the Board; or
    (iv) On behalf of customers as trustee or in a similar fiduciary 
capacity for a customer that is not a covered fund, so long as:
    (A) The activity is conducted for the account of, or on behalf of, 
the customer; and
    (B) The banking entity and its affiliates do not have or retain 
beneficial ownership of such ownership interest.
    (b) Definition of covered fund. (1) Except as provided in paragraph 
(c) of this section, covered fund means:
    (i) An issuer that would be an investment company, as defined in 
the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), but for 
section 3(c)(1) or 3(c)(7) of that Act (15 U.S.C. 80a-3(c)(1) or (7));
    (ii) Any commodity pool under section 1a(10) of the Commodity 
Exchange Act (7 U.S.C. 1a(10)) for which:
    (A) The commodity pool operator has claimed an exemption under 17 
CFR 4.7; or
    (B)(1) A commodity pool operator is registered with the CFTC as a 
commodity pool operator in connection with the operation of the 
commodity pool;
    (2) Substantially all participation units of the commodity pool are 
owned by qualified eligible persons under 17 CFR 4.7(a)(2) and (3); and
    (3) Participation units of the commodity pool have not been 
publicly offered to persons who are not qualified eligible persons 
under 17 CFR 4.7(a)(2) and (3); or
    (iii) For any banking entity that is, or is controlled directly or 
indirectly by a banking entity that is, located in or organized under 
the laws of the United States or of any State, an entity that:
    (A) Is organized or established outside the United States and the 
ownership interests of which are offered and sold solely outside the 
United States;
    (B) Is, or holds itself out as being, an entity or arrangement that 
raises money from investors primarily for the purpose of investing in 
securities for resale or other disposition or otherwise trading in 
securities; and
    (C)(1) Has as its sponsor that banking entity (or an affiliate 
thereof); or

[[Page 62149]]

    (2) Has issued an ownership interest that is owned directly or 
indirectly by that banking entity (or an affiliate thereof).
    (2) An issuer shall not be deemed to be a covered fund under 
paragraph (b)(1)(iii) of this section if, were the issuer subject to 
U.S. securities laws, the issuer could rely on an exclusion or 
exemption from the definition of ``investment company'' under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) other than the 
exclusions contained in section 3(c)(1) and 3(c)(7) of that Act.
    (3) For purposes of paragraph (b)(1)(iii) of this section, a U.S. 
branch, agency, or subsidiary of a foreign 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.
    (c) Notwithstanding paragraph (b) of this section, unless the 
appropriate Federal banking agencies, the SEC, and the CFTC jointly 
determine otherwise, a covered fund does not include:
    (1) Foreign public funds. (i) Subject to paragraphs (ii) and (iii) 
below, an issuer that:
    (A) Is organized or established outside of the United States;
    (B) Is authorized to offer and sell ownership interests to retail 
investors in the issuer's home jurisdiction; and
    (C) Sells ownership interests predominantly through one or more 
public offerings outside of the United States.
    (ii) With respect to a banking entity that is, or is controlled 
directly or indirectly by a banking entity that is, located in or 
organized under the laws of the United States or of any State and any 
issuer for which such banking entity acts as sponsor, the sponsoring 
banking entity may not rely on the exemption in paragraph (c)(1)(i) of 
this section for such issuer unless ownership interests in the issuer 
are sold predominantly to persons other than:
    (A) Such sponsoring banking entity;
    (B) Such issuer;
    (C) Affiliates of such sponsoring banking entity or such issuer; 
and
    (D) Directors and employees of such entities.
    (iii) For purposes of paragraph (c)(1)(i)(C) of this section, the 
term ``public offering'' means a distribution (as defined in Sec.  
248.4(a)(3) of subpart B) of securities in any jurisdiction outside the 
United States to investors, including retail investors, provided that:
    (A) The distribution complies with all applicable requirements in 
the jurisdiction in which such distribution is being made;
    (B) The distribution does not restrict availability to investors 
having a minimum level of net worth or net investment assets; and
    (C) The issuer has filed or submitted, with the appropriate 
regulatory authority in such jurisdiction, offering disclosure 
documents that are publicly available.
    (2) Wholly-owned subsidiaries. An entity, all of the outstanding 
ownership interests of which are owned directly or indirectly by the 
banking entity (or an affiliate thereof), except that:
    (i) Up to five percent of the entity's outstanding ownership 
interests, less any amounts outstanding under paragraph (c)(2)(ii) of 
this section, may be held by employees or directors of the banking 
entity or such affiliate (including former employees or directors if 
their ownership interest was acquired while employed by or in the 
service of the banking entity); and
    (ii) Up to 0.5 percent of the entity's outstanding ownership 
interests may be held by a third party if the ownership interest is 
acquired or retained by the third party for the purpose of establishing 
corporate separateness or addressing bankruptcy, insolvency, or similar 
concerns.
    (3) Joint ventures. A joint venture between a banking entity or any 
of its affiliates and one or more unaffiliated persons, provided that 
the joint venture:
    (i) Is comprised of no more than 10 unaffiliated co-venturers;
    (ii) Is in the business of engaging in activities that are 
permissible for the banking entity or affiliate, other than investing 
in securities for resale or other disposition; and
    (iii) Is not, and does not hold itself out as being, an entity or 
arrangement that raises money from investors primarily for the purpose 
of investing in securities for resale or other disposition or otherwise 
trading in securities.
    (4) Acquisition vehicles. An issuer:
    (i) Formed solely for the purpose of engaging in a bona fide merger 
or acquisition transaction; and
    (ii) That exists only for such period as necessary to effectuate 
the transaction.
    (5) Foreign pension or retirement funds. A plan, fund, or program 
providing pension, retirement, or similar benefits that is:
    (i) Organized and administered outside the United States;
    (ii) A broad-based plan for employees or citizens that is subject 
to regulation as a pension, retirement, or similar plan under the laws 
of the jurisdiction in which the plan, fund, or program is organized 
and administered; and
    (iii) Established for the benefit of citizens or residents of one 
or more foreign sovereigns or any political subdivision thereof.
    (6) Insurance company separate accounts. A separate account, 
provided that no banking entity other than the insurance company 
participates in the account's profits and losses.
    (7) Bank owned life insurance. A separate account that is used 
solely for the purpose of allowing one or more banking entities to 
purchase a life insurance policy for which the banking entity or 
entities is beneficiary, provided that no banking entity that purchases 
the policy:
    (i) Controls the investment decisions regarding the underlying 
assets or holdings of the separate account; or
    (ii) Participates in the profits and losses of the separate account 
other than in compliance with applicable supervisory guidance regarding 
bank owned life insurance.
    (8) Loan securitizations--(i) Scope. An issuing entity for asset-
backed securities that satisfies all the conditions of this paragraph 
(c)(8) and the assets or holdings of which are comprised solely of:
    (A) Loans as defined in Sec.  248.2(s) of subpart A;
    (B) Rights or other assets designed to assure the servicing or 
timely distribution of proceeds to holders of such securities and 
rights or other assets that are related or incidental to purchasing or 
otherwise acquiring and holding the loans, provided that each asset 
meets the requirements of paragraph (c)(8)(iii) of this section;
    (C) Interest rate or foreign exchange derivatives that meet the 
requirements of paragraph (c)(8)(iv) of this section; and
    (D) Special units of beneficial interest and collateral 
certificates that meet the requirements of paragraph (c)(8)(v) of this 
section.
    (ii) Impermissible assets. For purposes of this paragraph (c)(8), 
the assets or holdings of the issuing entity shall not include any of 
the following:
    (A) A security, including an asset-backed security, or an interest 
in an equity or debt security other than as permitted in paragraph 
(c)(8)(iii) of this section;
    (B) A derivative, other than a derivative that meets the 
requirements of paragraph (c)(8)(iv) of this section; or
    (C) A commodity forward contract.
    (iii) Permitted securities. Notwithstanding paragraph (c)(8)(ii)(A) 
of this section, the issuing entity may hold securities if those 
securities are:

[[Page 62150]]

    (A) Cash equivalents for purposes of the rights and assets in 
paragraph (c)(8)(i)(B) of this section; or
    (B) Securities received in lieu of debts previously contracted with 
respect to the loans supporting the asset-backed securities.
    (iv) Derivatives. The holdings of derivatives by the issuing entity 
shall be limited to interest rate or foreign exchange derivatives that 
satisfy all of the following conditions:
    (A) The written terms of the derivative directly relate to the 
loans, the asset-backed securities, or the contractual rights of other 
assets described in paragraph (c)(8)(i)(B) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign 
exchange risks related to the loans, the asset-backed securities, or 
the contractual rights or other assets described in paragraph 
(c)(8)(i)(B) of this section.
    (v) Special units of beneficial interest and collateral 
certificates. The assets or holdings of the issuing entity may include 
collateral certificates and special units of beneficial interest issued 
by a special purpose vehicle, provided that:
    (A) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate meets the requirements in 
this paragraph (c)(8);
    (B) The special unit of beneficial interest or collateral 
certificate is used for the sole purpose of transferring to the issuing 
entity for the loan securitization the economic risks and benefits of 
the assets that are permissible for loan securitizations under this 
paragraph (c)(8) and does not directly or indirectly transfer any 
interest in any other economic or financial exposure;
    (C) The special unit of beneficial interest or collateral 
certificate is created solely to satisfy legal requirements or 
otherwise facilitate the structuring of the loan securitization; and
    (D) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate and the issuing entity 
are established under the direction of the same entity that initiated 
the loan securitization.
    (9) Qualifying asset-backed commercial paper conduits. (i) An 
issuing entity for asset-backed commercial paper that satisfies all of 
the following requirements:
    (A) The asset-backed commercial paper conduit holds only:
    (1) Loans and other assets permissible for a loan securitization 
under paragraph (c)(8)(i) of this section; and
    (2) Asset-backed securities supported solely by assets that are 
permissible for loan securitizations under paragraph (c)(8)(i) of this 
section and acquired by the asset-backed commercial paper conduit as 
part of an initial issuance either directly from the issuing entity of 
the asset-backed securities or directly from an underwriter in the 
distribution of the asset-backed securities;
    (B) The asset-backed commercial paper conduit issues only asset-
backed securities, comprised of a residual interest and securities with 
a legal maturity of 397 days or less; and
    (C) A regulated liquidity provider has entered into a legally 
binding commitment to provide full and unconditional liquidity coverage 
with respect to all of the outstanding asset-backed securities issued 
by the asset-backed commercial paper conduit (other than any residual 
interest) in the event that funds are required to redeem maturing 
asset-backed securities.
    (ii) For purposes of this paragraph (c)(9), a regulated liquidity 
provider means:
    (A) A depository institution, as defined in section 3(c) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(c));
    (B) A bank holding company, as defined in section 2(a) of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841(a)), or a subsidiary 
thereof;
    (C) A savings and loan holding company, as defined in section 10a 
of the Home Owners' Loan Act (12 U.S.C. 1467a), provided all or 
substantially all of the holding company's activities are permissible 
for a financial holding company under section 4(k) of the Bank Holding 
Company Act of 1956 (12 U.S.C. 1843(k)), or a subsidiary thereof;
    (D) A foreign bank whose home country supervisor, as defined in 
Sec.  211.21(q) of the Board's Regulation K (12 CFR 211.21(q)), has 
adopted capital standards consistent with the Capital Accord for the 
Basel Committee on banking Supervision, as amended, and that is subject 
to such standards, or a subsidiary thereof; or
    (E) The United States or a foreign sovereign.
    (10) Qualifying covered bonds--(i) Scope. An entity owning or 
holding a dynamic or fixed pool of loans or other assets as provided in 
paragraph (c)(8) of this section for the benefit of the holders of 
covered bonds, provided that the assets in the pool are comprised 
solely of assets that meet the conditions in paragraph (c)(8)(i) of 
this section.
    (ii) Covered bond. For purposes of this paragraph (c)(10), a 
covered bond means:
    (A) A debt obligation issued by an entity that meets the definition 
of foreign banking organization, the payment obligations of which are 
fully and unconditionally guaranteed by an entity that meets the 
conditions set forth in paragraph (c)(10)(i) of this section; or
    (B) A debt obligation of an entity that meets the conditions set 
forth in paragraph (c)(10)(i) of this section, provided that the 
payment obligations are fully and unconditionally guaranteed by an 
entity that meets the definition of foreign banking organization and 
the entity is a wholly-owned subsidiary, as defined in paragraph (c)(2) 
of this section, of such foreign banking organization.
    (11) SBICs and public welfare investment funds. An issuer:
    (i) That is a small business investment company, as defined in 
section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 
662), or that has received from the Small Business Administration 
notice to proceed to qualify for a license as a small business 
investment company, which notice or license has not been revoked; or
    (ii) The business of which is to make investments that are:
    (A) Designed primarily to promote the public welfare, of the type 
permitted under paragraph (11) of section 5136 of the Revised Statutes 
of the United States (12 U.S.C. 24), including the welfare of low- and 
moderate-income communities or families (such as providing housing, 
services, or jobs); or
    (B) Qualified rehabilitation expenditures with respect to a 
qualified rehabilitated building or certified historic structure, as 
such terms are defined in section 47 of the Internal Revenue Code of 
1986 or a similar State historic tax credit program.
    (12) Registered investment companies and excluded entities. An 
issuer:
    (i) That is registered as an investment company under section 8 of 
the Investment Company Act of 1940 (15 U.S.C. 80a-8), or that is formed 
and operated pursuant to a written plan to become a registered 
investment company as described in Sec.  248.20(e)(3) of subpart D and 
that complies with the requirements of section 18 of the Investment 
Company Act of 1940 (15 U.S.C. 80a-18);
    (ii) That may rely on an exclusion or exemption from the definition 
of ``investment company'' under the Investment Company Act of 1940 (15 
U.S.C. 80a-1 et seq.) other than the exclusions contained in section 
3(c)(1) and 3(c)(7) of that Act; or
    (iii) That has elected to be regulated as a business development 
company pursuant to section 54(a) of that Act (15

[[Page 62151]]

U.S.C. 80a-53) and has not withdrawn its election, or that is formed 
and operated pursuant to a written plan to become a business 
development company as described in Sec.  248.20(e)(3) of subpart D and 
that complies with the requirements of section 61 of the Investment 
Company Act of 1940 (15 U.S.C. 80a-60).
    (13) Issuers in conjunction with the FDIC's receivership or 
conservatorship operations. An issuer that is an entity formed by or on 
behalf of the FDIC for the purpose of facilitating the disposal of 
assets acquired in the FDIC's capacity as conservator or receiver under 
the Federal Deposit Insurance Act or Title II of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act.
    (14) Other excluded issuers. (i) Any issuer that the appropriate 
Federal banking agencies, the SEC, and the CFTC jointly determine the 
exclusion of which is consistent with the purposes of section 13 of the 
BHC Act.
    (ii) A determination made under paragraph (c)(14)(i) of this 
section will be promptly made public.
    (d) Definition of other terms related to covered funds. For 
purposes of this subpart:
    (1) Applicable accounting standards means U.S. generally accepted 
accounting principles, or such other accounting standards applicable to 
a banking entity that the Board determines are appropriate and that the 
banking entity uses in the ordinary course of its business in preparing 
its consolidated financial statements.
    (2) Asset-backed security has the meaning specified in Section 
3(a)(79) of the Exchange Act (15 U.S.C. 78c(a)(79)).
    (3) Director has the same meaning as provided in section 
215.2(d)(1) of the Board's Regulation O (12 CFR 215.2(d)(1)).
    (4) Issuer has the same meaning as in section 2(a)(22) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(22)).
    (5) Issuing entity means with respect to asset-backed securities 
the special purpose vehicle that owns or holds the pool assets 
underlying asset-backed securities and in whose name the asset-backed 
securities supported or serviced by the pool assets are issued.
    (6) Ownership interest--(i) Ownership interest means any equity, 
partnership, or other similar interest. An ``other similar interest'' 
means an interest that:
    (A) Has the right to participate in the selection or removal of a 
general partner, managing member, member of the board of directors or 
trustees, investment manager, investment adviser, or commodity trading 
advisor of the covered fund (excluding the rights of a creditor to 
exercise remedies upon the occurrence of an event of default or an 
acceleration event);
    (B) Has the right under the terms of the interest to receive a 
share of the income, gains or profits of the covered fund;
    (C) Has the right to receive the underlying assets of the covered 
fund after all other interests have been redeemed and/or paid in full 
(excluding the rights of a creditor to exercise remedies upon the 
occurrence of an event of default or an acceleration event);
    (D) Has the right to receive all or a portion of excess spread (the 
positive difference, if any, between the aggregate interest payments 
received from the underlying assets of the covered fund and the 
aggregate interest paid to the holders of other outstanding interests);
    (E) Provides under the terms of the interest that the amounts 
payable by the covered fund with respect to the interest could be 
reduced based on losses arising from the underlying assets of the 
covered fund, such as allocation of losses, write-downs or charge-offs 
of the outstanding principal balance, or reductions in the amount of 
interest due and payable on the interest;
    (F) Receives income on a pass-through basis from the covered fund, 
or has a rate of return that is determined by reference to the 
performance of the underlying assets of the covered fund; or
    (G) Any synthetic right to have, receive, or be allocated any of 
the rights in paragraphs (d)(6)(i)(A) through (F) of this section.
    (ii) Ownership interest does not include: Restricted profit 
interest. An interest held by an entity (or an employee or former 
employee thereof) in a covered fund for which the entity (or employee 
thereof) serves as investment manager, investment adviser, commodity 
trading advisor, or other service provider so long as:
    (A) The sole purpose and effect of the interest is to allow the 
entity (or employee or former employee thereof) to share in the profits 
of the covered fund as performance compensation for the investment 
management, investment advisory, commodity trading advisory, or other 
services provided to the covered fund by the entity (or employee or 
former employee thereof), provided that the entity (or employee or 
former employee thereof) may be obligated under the terms of such 
interest to return profits previously received;
    (B) All such profit, once allocated, is distributed to the entity 
(or employee or former employee thereof) promptly after being earned 
or, if not so distributed, is retained by the covered fund for the sole 
purpose of establishing a reserve amount to satisfy contractual 
obligations with respect to subsequent losses of the covered fund and 
such undistributed profit of the entity (or employee or former employee 
thereof) does not share in the subsequent investment gains of the 
covered fund;
    (C) Any amounts invested in the covered fund, including any amounts 
paid by the entity (or employee or former employee thereof) in 
connection with obtaining the restricted profit interest, are within 
the limits of Sec.  248.12 of this subpart; and
    (D) The interest is not transferable by the entity (or employee or 
former employee thereof) except to an affiliate thereof (or an employee 
of the banking entity or affiliate), to immediate family members, or 
through the intestacy, of the employee or former employee, or in 
connection with a sale of the business that gave rise to the restricted 
profit interest by the entity (or employee or former employee thereof) 
to an unaffiliated party that provides investment management, 
investment advisory, commodity trading advisory, or other services to 
the fund.
    (7) Prime brokerage transaction means any transaction that would be 
a covered transaction, as defined in section 23A(b)(7) of the Federal 
Reserve Act (12 U.S.C. 371c(b)(7)), that is provided in connection with 
custody, clearance and settlement, securities borrowing or lending 
services, trade execution, financing, or data, operational, and 
administrative support.
    (8) Resident of the United States means a person that is a ``U.S. 
person'' as defined in rule 902(k) of the SEC's Regulation S (17 CFR 
230.902(k)).
    (9) Sponsor means, with respect to a covered fund:
    (i) To serve as a general partner, managing member, or trustee of a 
covered fund, or to serve as a commodity pool operator with respect to 
a covered fund as defined in (b)(1)(ii) of this section;
    (ii) In any manner to select or to control (or to have employees, 
officers, or directors, or agents who constitute) a majority of the 
directors, trustees, or management of a covered fund; or
    (iii) To share with a covered fund, for corporate, marketing, 
promotional, or other purposes, the same name or a variation of the 
same name, except as permitted under Sec.  248.11(a)(6).
    (10) Trustee. (i) For purposes of paragraph (d)(9) of this section 
and Sec.  248.11 of subpart C, a trustee does not include:
    (A) A trustee that does not exercise investment discretion with 
respect to a

[[Page 62152]]

covered fund, including a trustee that is subject to the direction of 
an unaffiliated named fiduciary who is not a trustee pursuant to 
section 403(a)(1) of the Employee's Retirement Income Security Act (29 
U.S.C. 1103(a)(1)); or
    (B) A trustee that is subject to fiduciary standards imposed under 
foreign law that are substantially equivalent to those described in 
paragraph (d)(10)(i)(A) of this section;
    (ii) Any entity that directs a person described in paragraph 
(d)(10)(i) of this section, or that possesses authority and discretion 
to manage and control the investment decisions of a covered fund for 
which such person serves as trustee, shall be considered to be a 
trustee of such covered fund.


Sec.  248.11   Permitted organizing and offering, underwriting, and 
market making with respect to a covered fund.

    (a) Organizing and offering a covered fund in general. 
Notwithstanding Sec.  248.10(a) of this subpart, a banking entity is 
not prohibited from acquiring or retaining an ownership interest in, or 
acting as sponsor to, a covered fund in connection with, directly or 
indirectly, organizing and offering a covered fund, including serving 
as a general partner, managing member, trustee, or commodity pool 
operator of the covered fund and in any manner selecting or controlling 
(or having employees, officers, directors, or agents who constitute) a 
majority of the directors, trustees, or management of the covered fund, 
including any necessary expenses for the foregoing, only if:
    (1) The banking entity (or an affiliate thereof) provides bona fide 
trust, fiduciary, investment advisory, or commodity trading advisory 
services;
    (2) The covered fund is organized and offered only in connection 
with the provision of bona fide trust, fiduciary, investment advisory, 
or commodity trading advisory services and only to persons that are 
customers of such services of the banking entity (or an affiliate 
thereof), pursuant to a written plan or similar documentation outlining 
how the banking entity or such affiliate intends to provide advisory or 
similar services to its customers through organizing and offering such 
fund;
    (3) The banking entity and its affiliates do not acquire or retain 
an ownership interest in the covered fund except as permitted under 
Sec.  248.12 of this subpart;
    (4) The banking entity and its affiliates comply with the 
requirements of Sec.  248.14 of this subpart;
    (5) The banking entity and its affiliates do 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;
    (6) The covered fund, for corporate, marketing, promotional, or 
other purposes:
    (i) Does not share the same name or a variation of the same name 
with the banking entity (or an affiliate thereof) except that a covered 
fund may share the same name or a variation of the same name with a 
banking entity that is an investment adviser to the covered fund if:
    (A) The investment adviser is not an insured depository 
institution, a company that controls an insured depository institution, 
or a company that is treated as a bank holding company for purposes of 
section 8 of the International Banking Act of 1978 (12 U.S.C. 3106); 
and
    (B) The investment adviser does not share the same name or a 
variation of the same name as an insured depository institution, a 
company that controls an insured depository institution, or a company 
that is treated as a bank holding company for purposes of section 8 of 
the International Banking Act of 1978 (12 U.S.C. 3106); and
    (ii) Does not use the word ``bank'' in its name;
    (7) No director or employee of the banking entity (or an affiliate 
thereof) takes or retains an ownership interest in the covered fund, 
except for any director or employee of the banking entity or such 
affiliate who is directly engaged in providing investment advisory, 
commodity trading advisory, or other services to the covered fund at 
the time the director or employee takes the ownership interest; and
    (8) The banking entity:
    (i) Clearly and conspicuously discloses, in writing, to any 
prospective and actual investor in the covered fund (such as through 
disclosure in the covered fund's offering documents):
    (A) That ``any losses in [such covered fund] will be borne solely 
by investors in [the covered fund] and not by [the banking entity] or 
its affiliates; therefore, [the banking entity's] losses in [such 
covered fund] will be limited to losses attributable to the ownership 
interests in the covered fund held by [the banking entity] and any 
affiliate in its capacity as investor in the [covered fund] or as 
beneficiary of a restricted profit interest held by [the banking 
entity] or any affiliate'';
    (B) That such investor should read the fund offering documents 
before investing in the covered fund;
    (C) That the ``ownership interests in the covered fund are not 
insured by the FDIC, and are not deposits, obligations of, or endorsed 
or guaranteed in any way, by any banking entity'' (unless that happens 
to be the case); and
    (D) The role of the banking entity and its affiliates and employees 
in sponsoring or providing any services to the covered fund; and
    (ii) Complies with any additional rules of the appropriate Federal 
banking agencies, the SEC, or the CFTC, as provided in section 13(b)(2) 
of the BHC Act, designed to ensure that losses in such covered fund are 
borne solely by investors in the covered fund and not by the covered 
banking entity and its affiliates.
    (b) Organizing and offering an issuing entity of asset-backed 
securities. (1) Notwithstanding Sec.  248.10(a) of this subpart, a 
banking entity is not prohibited from acquiring or retaining an 
ownership interest in, or acting as sponsor to, a covered fund that is 
an issuing entity of asset-backed securities in connection with, 
directly or indirectly, organizing and offering that issuing entity, so 
long as the banking entity and its affiliates comply with all of the 
requirements of paragraph (a)(3) through (8) of this section.
    (2) For purposes of this paragraph (b), organizing and offering a 
covered fund that is an issuing entity of asset-backed securities means 
acting as the securitizer, as that term is used in section 15G(a)(3) of 
the Exchange Act (15 U.S.C. 78o-11(a)(3)) of the issuing entity, or 
acquiring or retaining an ownership interest in the issuing entity as 
required by section 15G of that Act (15 U.S.C. 78o-11) and the 
implementing regulations issued thereunder.
    (c) Underwriting and market making in ownership interests of a 
covered fund. The prohibition contained in Sec.  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 Sec.  248.4(a) or Sec.  248.4(b) of subpart B, 
respectively;
    (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; 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

[[Page 62153]]

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; or, 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, 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 Sec.  248.12(a)(2)(ii) and Sec.  248.12(d) of this 
subpart; and
    (3) With respect to any banking entity, the aggregate value of all 
ownership interests of the banking entity and its affiliates in all 
covered funds acquired and retained under Sec.  248.11 of this subpart, 
including all covered funds in which the banking entity holds an 
ownership interest in connection with underwriting and market making 
related activities permitted under this paragraph (c), are included in 
the calculation of all ownership interests under Sec.  
248.12(a)(2)(iii) and Sec.  248.12(d) of this subpart.


Sec.  248.12   Permitted investment in a covered fund.

    (a) Authority and limitations on permitted investments in covered 
funds. (1) Notwithstanding the prohibition contained in Sec.  248.10(a) 
of this subpart, a banking entity may acquire and retain an ownership 
interest in a covered fund that the banking entity or an affiliate 
thereof organizes and offers pursuant to Sec.  248.11, for the purposes 
of:
    (i) Establishment. Establishing the fund and providing the fund 
with sufficient initial equity for investment to permit the fund to 
attract unaffiliated investors, subject to the limits contained in 
paragraphs (a)(2)(i) and (iii) of this section; or
    (ii) De minimis investment. Making and retaining an investment in 
the covered fund subject to the limits contained in paragraphs 
(a)(2)(ii) and (iii) of this section.
    (2) Investment limits--(i) Seeding period. With respect to an 
investment in any covered fund made or held pursuant to paragraph 
(a)(1)(i) of this section, the banking entity and its affiliates:
    (A) Must actively seek unaffiliated investors to reduce, through 
redemption, sale, dilution, or other methods, the aggregate amount of 
all ownership interests of the banking entity in the covered fund to 
the amount permitted in paragraph (a)(2)(i)(B) of this section; and
    (B) Must, no later than 1 year after the date of establishment of 
the fund (or such longer period as may be provided by the Board 
pursuant to paragraph (e) of this section), conform its ownership 
interest in the covered fund to the limits in paragraph (a)(2)(ii) of 
this section;
    (ii) Per-fund limits. (A) Except as provided in paragraph 
(a)(2)(ii)(B) of this section, an investment by a banking entity and 
its affiliates in any covered fund made or held pursuant to paragraph 
(a)(1)(ii) of this section may not exceed 3 percent of the total number 
or value of the outstanding ownership interests of the fund.
    (B) An investment by a banking entity and its affiliates in a 
covered fund that is an issuing entity of asset-backed securities may 
not exceed 3 percent of the total fair market value of the ownership 
interests of the fund measured in accordance with paragraph (b)(3) of 
this section, unless a greater percentage is retained by the banking 
entity and its affiliates in compliance with the requirements of 
section 15G of the Exchange Act (15 U.S.C. 78o-11) and the implementing 
regulations issued thereunder, in which case the investment by the 
banking entity and its affiliates in the covered fund may not exceed 
the amount, number, or value of ownership interests of the fund 
required under section 15G of the Exchange Act and the implementing 
regulations issued thereunder.
    (iii) Aggregate limit. The aggregate value of all ownership 
interests of the banking entity and its affiliates in all covered funds 
acquired or retained under this section may not exceed 3 percent of the 
tier 1 capital of the banking entity, as provided under paragraph (c) 
of this section, and shall be calculated as of the last day of each 
calendar quarter.
    (iv) Date of establishment. For purposes of this section, the date 
of establishment of a covered fund shall be:
    (A) In general. The date on which the investment adviser or similar 
entity to the covered fund begins making investments pursuant to the 
written investment strategy for the fund;
    (B) Issuing entities of asset-backed securities. In the case of an 
issuing entity of asset-backed securities, the date on which the assets 
are initially transferred into the issuing entity of asset-backed 
securities.
    (b) Rules of construction--(1) Attribution of ownership interests 
to a covered banking entity. (i) For purposes of paragraph (a)(2) of 
this section, the amount and value of a banking entity's permitted 
investment in any single covered fund shall include any ownership 
interest held under Sec.  248.12 directly by the banking entity, 
including any affiliate of the banking entity.
    (ii) Treatment of registered investment companies, SEC-regulated 
business development companies and foreign public funds. For purposes 
of paragraph (b)(1)(i) of this section, a registered investment 
company, SEC-regulated business development companies or foreign public 
fund as described in Sec.  248.10(c)(1) of this subpart will not be 
considered to be an affiliate of the banking entity so long as the 
banking entity:
    (A) Does not own, control, or hold with the power to vote 25 
percent or more of the voting shares of the company or fund; and
    (B) Provides investment advisory, commodity trading advisory, 
administrative, and other services to the company or fund in compliance 
with the limitations under applicable regulation, order, or other 
authority.
    (iii) Covered funds. For purposes of paragraph (b)(1)(i) of this 
section, a covered fund will not be considered to be an affiliate of a 
banking entity so long as the covered fund is held in compliance with 
the requirements of this subpart.
    (iv) Treatment of employee and director investments financed by the 
banking entity. For purposes of paragraph (b)(1)(i) of this section, an 
investment by a director or employee of a banking entity who acquires 
an ownership interest in his or her personal capacity in a covered fund 
sponsored by the banking entity will be attributed to the banking 
entity if the banking entity, directly or indirectly, extends financing 
for the purpose of enabling the director or employee to acquire the 
ownership interest in the fund and the financing is used to acquire 
such ownership interest in the covered fund.
    (2) Calculation of permitted ownership interests in a single 
covered fund. Except as provided in paragraph (b)(3) or (4), for 
purposes of determining whether an investment in a single covered fund 
complies with the restrictions on ownership interests under paragraphs 
(a)(2)(i)(B) and (a)(2)(ii)(A) of this section:
    (i) The aggregate number of the outstanding ownership interests 
held by the banking entity shall be the total number of ownership 
interests held under this section by the banking entity in a covered 
fund divided by the total number of ownership interests held by all 
entities in that covered fund, as of

[[Page 62154]]

the last day of each calendar quarter (both measured without regard to 
committed funds not yet called for investment);
    (ii) The aggregate value of the outstanding ownership interests 
held by the banking entity shall be the aggregate fair market value of 
all investments in and capital contributions made to the covered fund 
by the banking entity, divided by the value of all investments in and 
capital contributions made to that covered fund by all entities, as of 
the last day of each calendar quarter (all measured without regard to 
committed funds not yet called for investment). If fair market value 
cannot be determined, then the value shall be the historical cost basis 
of all investments in and contributions made by the banking entity to 
the covered fund;
    (iii) For purposes of the calculation under paragraph (b)(2)(ii) of 
this section, once a valuation methodology is chosen, the banking 
entity must calculate the value of its investment and the investments 
of all others in the covered fund in the same manner and according to 
the same standards.
    (3) Issuing entities of asset-backed securities. In the case of an 
ownership interest in an issuing entity of asset-backed securities, for 
purposes of determining whether an investment in a single covered fund 
complies with the restrictions on ownership interests under paragraphs 
(a)(2)(i)(B) and (a)(2)(ii)(B) of this section:
    (i) For securitizations subject to the requirements of section 15G 
of the Exchange Act (15 U.S.C. 78o-11), the calculations shall be made 
as of the date and according to the valuation methodology applicable 
pursuant to the requirements of section 15G of the Exchange Act (15 
U.S.C. 78o-11) and the implementing regulations issued thereunder; or
    (ii) For securitization transactions completed prior to the 
compliance date of such implementing regulations (or as to which such 
implementing regulations do not apply), the calculations shall be made 
as of the date of establishment as defined in paragraph (a)(2)(iv)(B) 
of this section or such earlier date on which the transferred assets 
have been valued for purposes of transfer to the covered fund, and 
thereafter only upon the date on which additional securities of the 
issuing entity of asset-backed securities are priced for purposes of 
the sales of ownership interests to unaffiliated investors.
    (iii) For securitization transactions completed prior to the 
compliance date of such implementing regulations (or as to which such 
implementing regulations do not apply), the aggregate value of the 
outstanding ownership interests in the covered fund shall be the fair 
market value of the assets transferred to the issuing entity of the 
securitization and any other assets otherwise held by the issuing 
entity at such time, determined in a manner that is consistent with its 
determination of the fair market value of those assets for financial 
statement purposes.
    (iv) For purposes of the calculation under paragraph (b)(3)(iii) of 
this section, the valuation methodology used to calculate the fair 
market value of the ownership interests must be the same for both the 
ownership interests held by a banking entity and the ownership 
interests held by all others in the covered fund in the same manner and 
according to the same standards.
    (4) Multi-tier fund investments--(i) Master-feeder fund 
investments. If the principal investment strategy of a covered fund 
(the ``feeder fund'') is to invest substantially all of its assets in 
another single covered fund (the ``master fund''), then for purposes of 
the investment limitations in paragraphs (a)(2)(i)(B) and (a)(2)(ii) of 
this section, the banking entity's permitted investment in such funds 
shall be measured only by reference to the value of the master fund. 
The banking entity's permitted investment in the master fund shall 
include any investment by the banking entity in the master fund, as 
well as the banking entity's pro-rata share of any ownership interest 
of the master fund that is held through the feeder fund; and
    (ii) Fund-of-funds investments. If a banking entity organizes and 
offers a covered fund pursuant to Sec.  248.11 of this subpart for the 
purpose of investing in other covered funds (a ``fund of funds'') and 
that fund of funds itself invests in another covered fund that the 
banking entity is permitted to own, then the banking entity's permitted 
investment in that other fund shall include any investment by the 
banking entity in that other fund, as well as the banking entity's pro-
rata share of any ownership interest of the fund that is held through 
the fund of funds. The investment of the banking entity may not 
represent more than 3 percent of the amount or value of any single 
covered fund.
    (c) Aggregate permitted investments in all covered funds. (1) For 
purposes of paragraph (a)(2)(iii) of this section, the aggregate value 
of all ownership interests held by a banking entity shall be the sum of 
all amounts paid or contributed by the banking entity in connection 
with acquiring or retaining an ownership interest in covered funds 
(together with any amounts paid by the entity (or employee thereof) in 
connection with obtaining a restricted profit interest under Sec.  
248.10(d)(6)(ii) of this subpart), on a historical cost basis.
    (2) Calculation of tier 1 capital. For purposes of paragraph 
(a)(2)(iii) of this section:
    (i) Entities that are required to hold and report tier 1 capital. 
If a banking entity is required to calculate and report tier 1 capital, 
the banking entity's tier 1 capital shall be equal to the amount of 
tier 1 capital of the banking entity as of the last day of the most 
recent calendar quarter, as reported to its primary financial 
regulatory agency; and
    (ii) If a banking entity is not required to calculate and report 
tier 1 capital, the banking entity's tier 1 capital shall be determined 
to be equal to:
    (A) In the case of a banking entity that is controlled, directly or 
indirectly, by a depository institution that calculates and reports 
tier 1 capital, be equal to the amount of tier 1 capital reported by 
such controlling depository institution in the manner described in 
paragraph (c)(2)(i) of this section;
    (B) In the case of a banking entity that is not controlled, 
directly or indirectly, by a depository institution that calculates and 
reports tier 1 capital:
    (1) Bank holding company subsidiaries. If the banking entity is a 
subsidiary of a bank holding company or company that is treated as a 
bank holding company, be equal to the amount of tier 1 capital reported 
by the top-tier affiliate of such covered banking entity that 
calculates and reports tier 1 capital in the manner described in 
paragraph (c)(2)(i) of this section; and
    (2) Other holding companies and any subsidiary or affiliate 
thereof. If the banking entity is not a subsidiary of a bank holding 
company or a company that is treated as a bank holding company, be 
equal to the total amount of shareholders' equity of the top-tier 
affiliate within such organization as of the last day of the most 
recent calendar quarter that has ended, as determined under applicable 
accounting standards.
    (iii) Treatment of foreign banking entities--(A) Foreign banking 
entities. Except as provided in paragraph (c)(2)(iii)(B) of this 
section, with respect to a banking entity that is not itself, and is 
not controlled directly or indirectly by, a banking entity that is 
located or organized under the laws of the United States or of any 
State, the tier 1 capital of the banking entity shall be the 
consolidated tier 1 capital of the entity as calculated under 
applicable home country standards.
    (B) U.S. affiliates of foreign banking entities. With respect to a 
banking entity that is located or organized under the

[[Page 62155]]

laws of the United States or of any State and is controlled by a 
foreign banking entity identified under paragraph (c)(2)(iii)(A) of 
this section, the banking entity's tier 1 capital shall be as 
calculated under paragraphs (c)(2)(i) or (ii) of this section.
    (d) Capital treatment for a permitted investment in a covered fund. 
For purposes of calculating compliance with the applicable regulatory 
capital requirements, a banking entity shall deduct from the banking 
entity's tier 1 capital (as determined under paragraph (c)(2) of this 
section) the greater of:
    (1) The sum of all amounts paid or contributed by the banking 
entity in connection with acquiring or retaining an ownership interest 
(together with any amounts paid by the entity (or employee thereof) in 
connection with obtaining a restricted profit interest under Sec.  
248.10(d)(6)(ii) of subpart C), on a historical cost basis, plus any 
earnings received; and
    (2) The fair market value of the banking entity's ownership 
interests in the covered fund as determined under paragraph (b)(2)(ii) 
or (b)(3) of this section (together with any amounts paid by the entity 
(or employee thereof) in connection with obtaining a restricted profit 
interest under Sec.  248.10(d)(6)(ii) of subpart C), if the banking 
entity accounts for the profits (or losses) of the fund investment in 
its financial statements.
    (e) Extension of time to divest an ownership interest. (1) Upon 
application by a banking entity, the Board may extend the period under 
paragraph (a)(2)(i) of this section for up to 2 additional years if the 
Board finds that an extension would be consistent with safety and 
soundness and not detrimental to the public interest. An application 
for extension must:
    (i) Be submitted to the Board at least 90 days prior to the 
expiration of the applicable time period;
    (ii) Provide the reasons for application, including information 
that addresses the factors in paragraph (e)(2) of this section; and
    (iii) Explain the banking entity's plan for reducing the permitted 
investment in a covered fund through redemption, sale, dilution or 
other methods as required in paragraph (a)(2) of this section.
    (2) Factors governing the Board determinations. In reviewing any 
application under paragraph (e)(1) of this section, the Board may 
consider all the facts and circumstances related to the permitted 
investment in a covered fund, including:
    (i) Whether the investment would result, directly or indirectly, in 
a material exposure by the banking entity to high-risk assets or high-
risk trading strategies;
    (ii) The contractual terms governing the banking entity's interest 
in the covered fund;
    (iii) The date on which the covered fund is expected to have 
attracted sufficient investments from investors unaffiliated with the 
banking entity to enable the banking entity to comply with the 
limitations in paragraph (a)(2)(i) of this section;
    (iv) The total exposure of the covered banking entity to the 
investment and the risks that disposing of, or maintaining, the 
investment in the covered fund may pose to the banking entity and the 
financial stability of the United States;
    (v) The cost to the banking entity of divesting or disposing of the 
investment within the applicable period;
    (vi) Whether the investment or the divestiture or conformance of 
the investment would involve or result in a material conflict of 
interest between the banking entity and unaffiliated parties, including 
clients, customers or counterparties to which it owes a duty;
    (vi) The banking entity's prior efforts to reduce through 
redemption, sale, dilution, or other methods its ownership interests in 
the covered fund, including activities related to the marketing of 
interests in such covered fund;
    (vii) [Reserved]
    (viii) Market conditions; and
    (ix) Any other factor that the Board believes appropriate.
    (3) Authority to impose restrictions on activities or investment 
during any extension period. The Board may impose such conditions on 
any extension approved under paragraph (e)(1) of this section as the 
Board determines are necessary or appropriate to protect the safety and 
soundness of the banking entity or the financial stability of the 
United States, address material conflicts of interest or other unsound 
banking practices, or otherwise further the purposes of section 13 of 
the BHC Act and this part.
    (4) Consultation. In the case of a banking entity that is primarily 
regulated by another Federal banking agency, the SEC, or the CFTC, the 
Board will consult with such agency prior to acting on an application 
by the banking entity for an extension under paragraph (e)(1) of this 
section.


Sec.  248.13   Other permitted covered fund activities and investments.

    (a) Permitted risk-mitigating hedging activities. (1) The 
prohibition contained in Sec.  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 demonstrably reduce or 
otherwise significantly mitigate the specific, identifiable risks to 
the banking entity in connection with 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.
    (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 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; 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 and demonstrably reduces or otherwise 
significantly mitigates one or more specific, identifiable risks 
arising 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) The compensation arrangement relates solely to the covered 
fund in which the banking entity or any affiliate has acquired an 
ownership interest pursuant to this paragraph 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) Certain permitted covered fund activities and investments 
outside of the United States. (1) The prohibition contained in Sec.  
248.10(a) of this subpart does not apply to the acquisition or

[[Page 62156]]

retention of any ownership interest in, or the sponsorship of, a 
covered fund by a banking entity only if:
    (i) The banking entity is not organized or directly or indirectly 
controlled by a banking entity that is organized under the laws of the 
United States or of one or more States;
    (ii) The activity or investment by the banking entity is pursuant 
to paragraph (9) or (13) of section 4(c) of the BHC Act;
    (iii) No ownership interest in the covered fund is offered for sale 
or sold to a resident of the United States; and
    (iv) The activity or investment occurs solely outside of the United 
States.
    (2) An activity or investment by the banking entity is pursuant to 
paragraph (9) or (13) of section 4(c) of the BHC Act for purposes of 
paragraph (b)(1)(ii) of this section only if:
    (i) The activity or investment is conducted in accordance with the 
requirements of this section; and
    (ii)(A) With respect to a banking entity that is a foreign banking 
organization, the banking entity meets the qualifying foreign banking 
organization requirements of section 211.23(a), (c) or (e) of the 
Board's Regulation K (12 CFR 211.23(a), (c) or (e)), as applicable; or
    (B) With respect to a banking entity that is not a foreign banking 
organization, the banking entity is not organized under the laws of the 
United States or of one or more States and the banking entity, on a 
fully-consolidated basis, meets at least two of the following 
requirements:
    (1) Total assets of the banking entity held outside of the United 
States exceed total assets of the banking entity held in the United 
States;
    (2) Total revenues derived from the business of the banking entity 
outside of the United States exceed total revenues derived from the 
business of the banking entity in the United States; or
    (3) Total net income derived from the business of the banking 
entity outside of the United States exceeds total net income derived 
from the business of the banking entity in the United States.
    (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 sold or has been sold 
pursuant to an offering that does not target residents of the United 
States.
    (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;
    (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; and
    (iv) 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.
    (5) For purposes of this section, a U.S. branch, agency, or 
subsidiary of a foreign bank, or any subsidiary thereof, is located in 
the United States; however, a foreign bank of which that branch, 
agency, or subsidiary is a part is not considered to be located in the 
United States solely by virtue of operation of the U.S. branch, agency, 
or subsidiary.
    (c) Permitted covered fund interests and activities by a regulated 
insurance company. The prohibition contained in Sec.  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, regulations, and written guidance 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, regulation, or written guidance 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.


Sec.  248.14   Limitations on relationships with a covered fund.

    (a) Relationships with a covered fund. (1) Except as provided for 
in paragraph (a)(2) of this section, no banking entity that serves, 
directly or indirectly, as the investment manager, investment adviser, 
commodity trading advisor, or sponsor to a covered fund, that organizes 
and offers a covered fund pursuant to Sec.  248.11 of this subpart, or 
that continues to hold an ownership interest in accordance with Sec.  
248.11(b) of this subpart, and no affiliate of such entity, may enter 
into a transaction with the covered fund, or with any other covered 
fund that is controlled by such covered fund, that would be a covered 
transaction as defined in section 23A of the Federal Reserve Act (12 
U.S.C. 371c(b)(7)), as if such banking entity and the affiliate thereof 
were a member bank and the covered fund were an affiliate thereof.
    (2) Notwithstanding paragraph (a)(1) of this section, a banking 
entity may:
    (i) Acquire and retain any ownership interest in a covered fund in 
accordance with the requirements of Sec.  248.11, Sec.  248.12, or 
Sec.  248.13 of this subpart; and
    (ii) Enter into any prime brokerage transaction with any covered 
fund in which a covered fund managed, sponsored, or advised by such 
banking entity (or an affiliate thereof) has taken an ownership 
interest, if:
    (A) The banking entity is in compliance with each of the 
limitations set forth in Sec.  248.11 of this subpart with respect to a 
covered fund organized and offered by such banking entity (or an 
affiliate thereof);
    (B) The chief executive officer (or equivalent officer) of the 
banking entity certifies in writing annually 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
    (C) The Board has not determined that such transaction is 
inconsistent with the safe and sound operation and condition of the 
banking entity.
    (b) Restrictions on transactions with covered funds. A banking 
entity that serves, directly or indirectly, as the investment manager, 
investment adviser, commodity trading advisor, or sponsor to a covered 
fund, or that organizes and offers a covered fund

[[Page 62157]]

pursuant to Sec.  248.11 of this subpart, or that continues to hold an 
ownership interest in accordance with Sec.  248.11(b) of this subpart, 
shall be subject to section 23B of the Federal Reserve Act (12 U.S.C. 
371c-1), as if such banking entity were a member bank and such covered 
fund were an affiliate thereof.
    (c) Restrictions on prime brokerage transactions. A prime brokerage 
transaction permitted under paragraph (a)(2)(ii) of this section shall 
be subject to section 23B of the Federal Reserve Act (12 U.S.C. 371c-1) 
as if the counterparty were an affiliate of the banking entity.


Sec.  248.15   Other limitations on permitted covered fund activities.

    (a) No transaction, class of transactions, or activity may be 
deemed permissible under Sec. Sec.  248.11 through 248.13 of this 
subpart if the transaction, class of transactions, or activity would:
    (1) Involve or result in a material conflict of interest between 
the banking entity and its clients, customers, or counterparties;
    (2) Result, directly or indirectly, in a material exposure by the 
banking entity to a high-risk asset or a high-risk trading strategy; or
    (3) Pose a threat to the safety and soundness of the banking entity 
or to the financial stability of the United States.
    (b) Definition of material conflict of interest. (1) For purposes 
of this section, a material conflict of interest between a banking 
entity and its clients, customers, or counterparties exists if the 
banking entity engages in any transaction, class of transactions, or 
activity that would involve or result in the banking entity's interests 
being materially adverse to the interests of its client, customer, or 
counterparty with respect to such transaction, class of transactions, 
or activity, and the banking entity has not taken at least one of the 
actions in paragraph (b)(2) of this section.
    (2) Prior to effecting the specific transaction or class or type of 
transactions, or engaging in the specific activity, the banking entity:
    (i) Timely and effective disclosure. (A) Has made clear, timely, 
and effective disclosure of the conflict of interest, together with 
other necessary information, in reasonable detail and in a manner 
sufficient to permit a reasonable client, customer, or counterparty to 
meaningfully understand the conflict of interest; and
    (B) Such disclosure is made in a manner that provides the client, 
customer, or counterparty the opportunity to negate, or substantially 
mitigate, any materially adverse effect on the client, customer, or 
counterparty created by the conflict of interest; or
    (ii) Information barriers. Has established, maintained, and 
enforced information barriers that are memorialized in written policies 
and procedures, such as physical separation of personnel, or functions, 
or limitations on types of activity, that are reasonably designed, 
taking into consideration the nature of the banking entity's business, 
to prevent the conflict of interest from involving or resulting in a 
materially adverse effect on a client, customer, or counterparty. A 
banking entity may not rely on such information barriers if, in the 
case of any specific transaction, class or type of transactions or 
activity, the banking entity knows or should reasonably know that, 
notwithstanding the banking entity's establishment of information 
barriers, the conflict of interest may involve or result in a 
materially adverse effect on a client, customer, or counterparty.
    (c) Definition of high-risk asset and high-risk trading strategy. 
For purposes of this section:
    (1) High-risk asset means an asset or group of related assets that 
would, if held by a banking entity, 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.
    (2) High-risk trading strategy means a trading strategy that would, 
if engaged in by a banking entity, 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.


Sec.  248.16   Ownership of interests in and sponsorship of issuers of 
certain collateralized debt obligations backed by trust-preferred 
securities.

    (a) The prohibition contained in Sec.  248.10(a)(1) does not apply 
to the ownership by a banking entity of an interest in, or sponsorship 
of, any issuer if:
    (1) The issuer was established, and the interest was issued, before 
May 19, 2010;
    (2) The banking entity reasonably believes that the offering 
proceeds received by the issuer were invested primarily in Qualifying 
TruPS Collateral; and
    (3) The banking entity acquired such interest on or before December 
10, 2013 (or acquired such interest in connection with a merger with or 
acquisition of a banking entity that acquired the interest on or before 
December 10, 2013).
    (b) For purposes of this Sec.  248.16, Qualifying TruPS Collateral 
shall mean any trust preferred security or subordinated debt instrument 
issued prior to May 19, 2010 by a depository institution holding 
company that, as of the end of any reporting period within 12 months 
immediately preceding the issuance of such trust preferred security or 
subordinated debt instrument, had total consolidated assets of less 
than $15,000,000,000 or issued prior to May 19, 2010 by a mutual 
holding company.
    (c) Notwithstanding paragraph (a)(3) of this section, a banking 
entity may act as a market maker with respect to the interests of an 
issuer described in paragraph (a) of this section in accordance with 
the applicable provisions of Sec. Sec.  248.4 and 248.11.
    (d) Without limiting the applicability of paragraph (a) of this 
section, the Board, the FDIC and the OCC will make public a non-
exclusive list of issuers that meet the requirements of paragraph (a). 
A banking entity may rely on the list published by the Board, the FDIC 
and the OCC.


Sec. Sec.  248.17-248.19   [Reserved]

Subpart D--Compliance Program Requirement; Violations


Sec.  248.20   Program for compliance; reporting.

    (a) Program requirement. Each banking entity 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) Contents of compliance program. Except as provided in paragraph 
(f) of this section, the compliance program required by paragraph (a) 
of this section, at a minimum, shall include:
    (1) Written policies and procedures reasonably designed to 
document, describe, monitor and limit trading activities subject to 
subpart B (including those permitted under Sec. Sec.  248.3 to 248.6 of 
subpart B), including setting, monitoring and managing required limits 
set out in Sec. Sec.  248.4 and 248.5, and activities and investments 
with respect to a covered fund subject to subpart C (including those 
permitted under Sec. Sec.  248.11 through 248.14 of subpart C) 
conducted by the banking entity to ensure that all activities and

[[Page 62158]]

investments conducted by the banking entity that are subject to section 
13 of the BHC Act and this part comply with section 13 of the BHC Act 
and this part;
    (2) A system of internal controls reasonably designed to monitor 
compliance with section 13 of the BHC Act and this part and to prevent 
the occurrence of activities or investments that are prohibited by 
section 13 of the BHC Act and this part;
    (3) A management framework that clearly delineates responsibility 
and accountability for compliance with section 13 of the BHC Act and 
this part and includes appropriate management review of trading limits, 
strategies, hedging activities, investments, incentive compensation and 
other matters identified in this part or by management as requiring 
attention;
    (4) 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;
    (5) Training for trading personnel and managers, as well as other 
appropriate personnel, to effectively implement and enforce the 
compliance program; and
    (6) Records sufficient to demonstrate compliance with section 13 of 
the BHC Act and this part, which a banking entity must promptly provide 
to the Board upon request and retain for a period of no less than 5 
years or such longer period as required by the Board.
    (c) Additional standards. In addition to the requirements in 
paragraph (b) of this section, the compliance program of a banking 
entity must satisfy the requirements and other standards contained in 
appendix B, if:
    (1) The banking entity engages in proprietary trading permitted 
under subpart B and is required to comply with the reporting 
requirements of paragraph (d) of this section;
    (2) The banking entity has reported total consolidated assets as of 
the previous calendar year end of $50 billion or more or, in the case 
of a foreign banking entity, has total U.S. assets as of the previous 
calendar year end of $50 billion or more (including all subsidiaries, 
affiliates, branches and agencies of the foreign banking entity 
operating, located or organized in the United States); or
    (3) The Board notifies the banking entity in writing that it must 
satisfy the requirements and other standards contained in appendix B to 
this part.
    (d) Reporting requirements under appendix A to this part. (1) A 
banking entity engaged in proprietary trading activity permitted under 
subpart B shall comply with the reporting requirements described in 
appendix A, if:
    (i) The banking entity (other than a foreign banking entity as 
provided in paragraph (d)(1)(ii) of this section) has, together with 
its 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 or exceeds the 
threshold established in paragraph (d)(2) of this section;
    (ii) In the case of a foreign banking entity, the average gross sum 
of the trading assets and liabilities of the combined U.S. operations 
of the foreign banking entity (including all subsidiaries, affiliates, 
branches and agencies of the foreign banking entity operating, located 
or organized in the United States and excluding trading assets and 
liabilities involving obligations of or guaranteed by the United States 
or any agency of the United States) over the previous consecutive four 
quarters, as measured as of the last day of each of the four prior 
calendar quarters, equals or exceeds the threshold established in 
paragraph (d)(2) of this section; or
    (iii) The Board notifies the banking entity in writing that it must 
satisfy the reporting requirements contained in appendix A.
    (2) The threshold for reporting under paragraph (d)(1) of this 
section shall be $50 billion beginning on June 30, 2014; $25 billion 
beginning on April 30, 2016; and $10 billion beginning on December 31, 
2016.
    (3) Frequency of reporting: Unless the Board notifies the banking 
entity in writing that it must report on a different basis, a banking 
entity with $50 billion or more in trading assets and liabilities (as 
calculated in accordance with paragraph (d)(1) of this section) shall 
report the information required by appendix A for each calendar month 
within 30 days of the end of the relevant calendar month; beginning 
with information for the month of January 2015, such information shall 
be reported within 10 days of the end of each calendar month. Any other 
banking entity subject to appendix A shall report the information 
required by appendix A for each calendar quarter within 30 days of the 
end of that calendar quarter unless the Board notifies the banking 
entity in writing that it must report on a different basis.
    (e) Additional documentation for covered funds. Any banking entity 
that has more than $10 billion in total consolidated assets as reported 
on December 31 of the previous two calendar years shall maintain 
records that include:
    (1) Documentation of the exclusions or exemptions other than 
sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 
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;
    (2) For each fund sponsored by the banking entity (including all 
subsidiaries and affiliates) for which the banking entity relies on one 
or more of the exclusions from the definition of covered fund provided 
by Sec. Sec.  248.10(c)(1), 248.10(c)(5), 248.10(c)(8), 248.10(c)(9), 
or 248.10(c)(10) of subpart C, documentation supporting the banking 
entity's determination that the fund is not a covered fund pursuant to 
one or more of those exclusions;
    (3) For each seeding vehicle described in Sec.  248.10(c)(12)(i) or 
(iii) of subpart C 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 SEC-regulated business development company within the time 
period specified in Sec.  248.12(a)(2)(i)(B) of subpart C;
    (4) For any banking entity that is, or is controlled directly or 
indirectly by a banking entity that is, located in or organized under 
the laws of the United States or of any State, if the aggregate amount 
of ownership interests in foreign public funds that are described in 
Sec.  248.10(c)(1) of subpart C owned by such banking entity (including 
ownership interests owned by any affiliate that is controlled directly 
or indirectly by a banking entity that is located in or organized under 
the laws of the United States or of any State) exceeds $50 million at 
the end of two or more consecutive calendar quarters, beginning with 
the next succeeding calendar quarter, documentation of the value of the 
ownership interests owned by the banking entity (and such affiliates) 
in each foreign public fund and each jurisdiction in which any such 
foreign public fund is organized, calculated as of the end of each 
calendar quarter, which documentation must

[[Page 62159]]

continue until the banking entity's aggregate amount of ownership 
interests in foreign public funds is below $50 million for two 
consecutive calendar quarters; and
    (5) For purposes of paragraph (e)(4) of this section, a U.S. 
branch, agency, or subsidiary of a foreign 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.
    (f) Simplified programs for less active banking entities--(1) 
Banking entities with no covered activities. A banking entity that does 
not engage in activities or investments pursuant to subpart B or 
subpart C (other than trading activities permitted pursuant to Sec.  
248.6(a) of subpart B) may satisfy the requirements of this section by 
establishing the required compliance program prior to becoming engaged 
in such activities or making such investments (other than trading 
activities permitted pursuant to Sec.  248.6(a) of subpart B).
    (2) Banking entities with modest activities. A banking entity with 
total consolidated assets of $10 billion or less as reported on 
December 31 of the previous two calendar years that engages in 
activities or investments pursuant to subpart B or subpart C (other 
than trading activities permitted under Sec.  248.6(a) of subpart B) 
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.


Sec.  248.21   Termination of activities or investments; penalties for 
violations.

    (a) Any banking entity that engages in an activity or makes an 
investment in violation of section 13 of the BHC Act or this part, or 
acts in a manner that functions as an evasion of the requirements of 
section 13 of the BHC Act or this part, including through an abuse of 
any activity or investment permitted under subparts B or C, or 
otherwise violates the restrictions and requirements of section 13 of 
the BHC Act or this part, shall, upon discovery, promptly terminate the 
activity and, as relevant, dispose of the investment.
    (b) Whenever the Board finds reasonable cause to believe any 
banking entity has engaged in an activity or made an investment in 
violation of section 13 of the BHC Act or this part, or engaged in any 
activity or made any investment that functions as an evasion of the 
requirements of section 13 of the BHC Act or this part, the Board may 
take any action permitted by law to enforce compliance with section 13 
of the BHC Act and this part, including directing the banking entity to 
restrict, limit, or terminate any or all activities under this part and 
dispose of any investment.

Appendix A 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 Sec.  
248.20(d), this appendix generally 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 Sec.  248.20 and Appendix B.
    b. The purpose of this appendix is to assist banking entities 
and the Board in:
    (i) Better understanding and evaluating the scope, type, and 
profile of the banking entity's covered trading activities;
    (ii) Monitoring the banking entity's covered trading activities;
    (iii) Identifying covered trading activities that warrant 
further review or examination by the banking entity to verify 
compliance with the proprietary trading restrictions;
    (iv) Evaluating whether the covered trading activities of 
trading desks engaged in market making-related activities subject to 
Sec.  248.4(b) are consistent with the requirements governing 
permitted market making-related activities;
    (v) Evaluating whether the covered trading activities of trading 
desks that are engaged in permitted trading activity subject to 
Sec. Sec.  248.4, 248.5, or 248.6(a)-(b) (i.e., underwriting and 
market making-related 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;
    (vi) Identifying the profile of particular covered trading 
activities of the banking entity, and the individual trading desks 
of the banking entity, to help establish the appropriate frequency 
and scope of examination by the Board of such activities; and
    (vii) Assessing and addressing the risks associated with the 
banking entity's covered trading activities.
    c. The quantitative measurements that must be furnished pursuant 
to this appendix are not intended to serve as a dispositive tool for 
the identification of permissible or impermissible activities.
    d. In order to allow banking entities and the Agencies to 
evaluate the effectiveness of these metrics, banking entities must 
collect and report these metrics for all trading desks beginning on 
the dates established in Sec.  248.20 of the final rule. The 
Agencies will review the data collected and revise this collection 
requirement as appropriate based on a review of the data collected 
prior to September 30, 2015.
    e. 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 Sec.  248.20 and Appendix B to this part. 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.
    f. 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 Sec. Sec.  248.4 through 248.6(a) and (b), or that 
result in a material exposure to high-risk assets or high-risk 
trading strategies, must be escalated within the banking entity for 
review, further analysis, explanation to the Board, and remediation, 
where appropriate. The quantitative measurements discussed in this 
appendix should be helpful to banking entities in identifying and 
managing the risks related to their covered trading activities.

II. Definitions

    The terms used in this appendix have the same meanings as set 
forth in Sec. Sec.  248.2 and 248.3. In addition, for purposes of 
this appendix, the following definitions apply:
    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

[[Page 62160]]

a trading desk's holdings, dividend income, and interest income and 
expense.
    Covered trading activity means trading conducted by a trading 
desk under Sec. Sec.  248.4, 248.5, 248.6(a), or 248.6(b). A banking 
entity may include trading under Sec. Sec.  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 desk means 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.

III. Reporting and Recordkeeping of Quantitative Measurements

a. Scope of Required Reporting

    General scope. Each banking entity made subject to this part by 
Sec.  248.20 must furnish the following quantitative measurements 
for each trading desk of the banking entity, calculated in 
accordance with this appendix:
     Risk and Position Limits and Usage;
     Risk Factor Sensitivities;
     Value-at-Risk and Stress VaR;
     Comprehensive Profit and Loss Attribution;
     Inventory Turnover;
     Inventory Aging; and
     Customer-Facing Trade Ratio

b. Frequency of Required Calculation and Reporting

    A banking entity must calculate any applicable quantitative 
measurement for each trading day. A banking entity must report each 
applicable quantitative measurement to the Board on the reporting 
schedule established in Sec.  248.20 unless otherwise requested by 
the Board. All quantitative measurements for any calendar month must 
be reported within the time period required by Sec.  248.20.

c. Recordkeeping

    A banking entity must, for any quantitative measurement 
furnished to the Board pursuant to this appendix and Sec.  
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 5 years from the end of the calendar year 
for which the measurement was taken.

IV. Quantitative Measurements

a. Risk-Management Measurements

1. Risk and Position Limits and Usage

    i. Description: For purposes of this appendix, Risk and Position 
Limits are the constraints that define the amount of risk that a 
trading desk is permitted to take at a point in time, as defined by 
the banking entity for a specific trading desk. Usage represents the 
portion of the trading desk's limits that are accounted for by the 
current activity of the desk. Risk and position limits and their 
usage are key risk management tools used to control and monitor risk 
taking and include, but are not limited, to the limits set out in 
Sec.  248.4 and Sec.  248.5. A number of the metrics that are 
described below, including ``Risk Factor Sensitivities'' and 
``Value-at-Risk and Stress Value-at-Risk,'' relate to a trading 
desk's risk and position limits and are useful in evaluating and 
setting these limits in the broader context of the trading desk's 
overall activities, particularly for the market making activities 
under Sec.  248.4(b) and hedging activity under Sec.  248.5. 
Accordingly, the limits required under Sec.  248.4(b)(2)(iii) and 
Sec.  248.5(b)(1)(i) must meet the applicable requirements under 
Sec.  248.4(b)(2)(iii) and Sec.  248.5(b)(1)(i) and also must 
include appropriate metrics for the trading desk limits including, 
at a minimum, the ``Risk Factor Sensitivities'' and ``Value-at-Risk 
and Stress Value-at-Risk'' metrics except to the extent any of the 
``Risk Factor Sensitivities'' or ``Value-at-Risk and Stress Value-
at-Risk'' metrics are demonstrably ineffective for measuring and 
monitoring the risks of a trading desk based on the types of 
positions traded by, and risk exposures of, that desk.
    ii. General Calculation Guidance: Risk and Position Limits must 
be reported in the format used by the banking entity for the 
purposes of risk management of each trading desk. Risk and Position 
Limits are often expressed in terms of risk measures, such as VaR 
and Risk Factor Sensitivities, but may also be expressed in terms of 
other observable criteria, such as net open positions. When criteria 
other than VaR or Risk Factor Sensitivities are used to define the 
Risk and Position Limits, both the value of the Risk and Position 
Limits and the value of the variables used to assess whether these 
limits have been reached must be reported.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

2. Risk Factor Sensitivities

    i. Description: For purposes of this appendix, Risk Factor 
Sensitivities are changes in a trading desk's Comprehensive Profit 
and Loss that are expected to occur in the event of a change in one 
or more underlying variables that are significant sources of the 
trading desk's profitability and risk.
    ii. General Calculation Guidance: A banking entity must report 
the Risk Factor Sensitivities that are monitored and managed as part 
of the trading desk's overall risk management policy. The underlying 
data and methods used to compute a trading desk's Risk Factor 
Sensitivities will depend on the specific function of the trading 
desk and the internal risk management models employed. The number 
and type of Risk Factor Sensitivities that are monitored and managed 
by a trading desk, and furnished to the Board, will depend on the 
explicit risks assumed by the trading desk. In general, however, 
reported Risk Factor Sensitivities must be sufficiently granular to 
account for a preponderance of the expected price variation in the 
trading desk's holdings.
    A. Trading desks must take into account any relevant factors in 
calculating Risk Factor Sensitivities, including, for example, the 
following with respect to particular asset classes:
     Commodity derivative positions: Risk factors with 
respect to the related commodities set out in 17 CFR 20.2, the 
maturity of the positions, volatility and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and the maturity profile of the 
positions;
     Credit positions: Risk factors with respect to credit 
spreads that are sufficiently granular to account for specific 
credit sectors and market segments, the maturity profile of the 
positions, and risk factors with respect to interest rates of all 
relevant maturities;
     Credit-related derivative positions: Risk factor 
sensitivities, for example credit spreads, shifts (parallel and non-
parallel) in credit spreads--volatility, and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and the maturity profile of the 
positions;
     Equity derivative positions: Risk factor sensitivities 
such as equity positions, volatility, and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and the maturity profile of the 
positions;
     Equity positions: Risk factors for equity prices and 
risk factors that differentiate between important equity market 
sectors and segments, such as a small capitalization equities and 
international equities;
     Foreign exchange derivative positions: Risk factors 
with respect to major currency pairs and maturities, exposure to 
interest rates at relevant maturities, volatility, and/or 
correlation sensitivities (expressed in a manner that demonstrates 
any significant non-linearities), as well as the maturity profile of 
the positions; and
     Interest rate positions, including interest rate 
derivative positions: Risk factors with respect to major interest 
rate categories and maturities and volatility and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and shifts (parallel and non-parallel) 
in the interest rate curve, as well as the maturity profile of the 
positions.
    B. The methods used by a banking entity to calculate 
sensitivities to a common factor shared by multiple trading desks, 
such as an equity price factor, must be applied consistently across 
its trading desks so that the sensitivities can be compared from one 
trading desk to another.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

3. Value-at-Risk and Stress Value-at-Risk

    i. Description: For purposes of this appendix, Value-at-Risk 
(``VaR'') is the commonly used percentile measurement of the risk of 
future financial loss in the value of a given set of aggregated 
positions over a specified period of time, based on current market 
conditions. For purposes of this appendix, Stress Value-at-Risk 
(``Stress VaR'') is the percentile measurement of the risk of future 
financial loss in the value of a given set of aggregated positions 
over a specified period of time, based on market conditions during a 
period of significant financial stress.
    ii. General Calculation Guidance: Banking entities must compute 
and report VaR and Stress VaR by employing generally accepted 
standards and methods of calculation. VaR should reflect a loss in a 
trading desk that is expected to be exceeded less than one percent 
of the time over a one-day period. For those banking entities that 
are subject to

[[Page 62161]]

regulatory capital requirements imposed by a Federal banking agency, 
VaR and Stress VaR must be computed and reported in a manner that is 
consistent with such regulatory capital requirements. In cases where 
a trading desk does not have a standalone VaR or Stress VaR 
calculation but is part of a larger aggregation of positions for 
which a VaR or Stress VaR calculation is performed, a VaR or Stress 
VaR calculation that includes only the trading desk's holdings must 
be performed consistent with the VaR or Stress VaR model and 
methodology used for the larger aggregation of positions.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

b. Source-of-Revenue Measurements

1. Comprehensive Profit and Loss Attribution

    i. Description: For purposes of this appendix, Comprehensive 
Profit and Loss Attribution is an analysis that attributes the daily 
fluctuation in the value of a trading desk's positions to various 
sources. First, the daily profit and loss of the aggregated 
positions is divided into three categories: (i) Profit and loss 
attributable to a trading desk's existing positions that were also 
positions held by the trading desk as of the end of the prior day 
(``existing positions''); (ii) profit and loss attributable to new 
positions resulting from the current day's trading activity (``new 
positions''); and (iii) residual profit and loss that cannot be 
specifically attributed to existing positions or new positions. The 
sum of (i), (ii), and (iii) must equal the trading desk's 
comprehensive profit and loss at each point in time. In addition, 
profit and loss measurements must calculate volatility of 
comprehensive profit and loss (i.e., the standard deviation of the 
trading desk's one-day profit and loss, in dollar terms) for the 
reporting period for at least a 30-, 60- and 90-day lag period, from 
the end of the reporting period, and any other period that the 
banking entity deems necessary to meet the requirements of the rule.
    A. The comprehensive profit and loss associated with existing 
positions must reflect changes in the value of these positions on 
the applicable day. The comprehensive profit and loss from existing 
positions must be further attributed, as applicable, to changes in 
(i) the specific Risk Factors and other factors that are monitored 
and managed as part of the trading desk's overall risk management 
policies and procedures; and (ii) any other applicable elements, 
such as cash flows, carry, changes in reserves, and the correction, 
cancellation, or exercise of a trade.
    B. 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.
    C. The portion of comprehensive profit and loss that cannot be 
specifically attributed to known sources must be allocated to a 
residual category identified as an unexplained portion of the 
comprehensive profit and loss. Significant unexplained profit and 
loss must be escalated for further investigation and analysis.
    ii. General Calculation Guidance: The specific categories used 
by a trading desk in the attribution analysis and amount of detail 
for the analysis should be tailored to the type and amount of 
trading activities undertaken by the trading desk. The new position 
attribution must be computed by calculating the difference between 
the prices at which instruments were bought and/or sold and the 
prices at which those instruments are marked to market at the close 
of business on that day multiplied by the notional or principal 
amount of each purchase or sale. Any fees, commissions, or other 
payments received (paid) that are associated with transactions 
executed on that day must be added (subtracted) from such 
difference. These factors must be measured consistently over time to 
facilitate historical comparisons.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

c. Customer-Facing Activity Measurements

1. Inventory Turnover

    i. Description: For purposes of this appendix, Inventory 
Turnover is a ratio that measures the turnover of a trading desk's 
inventory. The numerator of the ratio is the absolute value of all 
transactions over the reporting period. The denominator of the ratio 
is the value of the trading desk's inventory at the beginning of the 
reporting period.
    ii. General Calculation Guidance: For purposes of this appendix, 
for derivatives, other than options and interest rate derivatives, 
value means gross notional value, for options, value means delta 
adjusted notional value, and for interest rate derivatives, value 
means 10-year bond equivalent value.
    iii. Calculation Period: 30 days, 60 days, and 90 days.
    iv. Measurement Frequency: Daily.

2. Inventory Aging

    i. Description: For purposes of this appendix, Inventory Aging 
generally describes a schedule of the trading desk's aggregate 
assets and liabilities and the amount of time that those assets and 
liabilities have been held. Inventory Aging should measure the age 
profile of the trading desk's assets and liabilities.
    ii. General Calculation Guidance: In general, Inventory Aging 
must be computed using a trading desk's trading activity data and 
must identify the value of a trading desk's aggregate assets and 
liabilities. Inventory Aging must include two schedules, an asset-
aging schedule and a liability-aging schedule. Each schedule must 
record the value of assets or liabilities held over all holding 
periods. For derivatives, other than options, and interest rate 
derivatives, value means gross notional value, for options, value 
means delta adjusted notional value and, for interest rate 
derivatives, value means 10-year bond equivalent value.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

3. Customer-Facing Trade Ratio--Trade Count Based and Value Based

    i. Description: For purposes of this appendix, the Customer-
Facing Trade Ratio is a ratio comparing (i) the transactions 
involving a counterparty that is a customer of the trading desk to 
(ii) the transactions involving a counterparty that is not a 
customer of the trading desk. A trade count based ratio must be 
computed that records the number of transactions involving a 
counterparty that is a customer of the trading desk and the number 
of transactions involving a counterparty that is not a customer of 
the trading desk. A value based ratio must be computed that records 
the value of transactions involving a counterparty that is a 
customer of the trading desk and the value of transactions involving 
a counterparty that is not a customer of the trading desk.
    ii. General Calculation Guidance: For purposes of calculating 
the Customer-Facing Trade Ratio, a counterparty is considered to be 
a customer of the trading desk if the counterparty is a market 
participant that makes 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. However, a trading desk or other organizational 
unit of another banking entity would not be a client, customer, or 
counterparty of the trading desk if the other entity has trading 
assets and liabilities of $50 billion or more as measured in 
accordance with Sec.  248.20(d)(1) unless 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. Transactions conducted anonymously 
on an exchange or similar trading facility that permits trading on 
behalf of a broad range of market participants would be considered 
transactions with customers of the trading desk. For derivatives, 
other than options, and interest rate derivatives, value means gross 
notional value, for options, value means delta adjusted notional 
value, and for interest rate derivatives, value means 10-year bond 
equivalent value.
    iii. Calculation Period: 30 days, 60 days, and 90 days.
    iv. Measurement Frequency: Daily.

Appendix B to Part 248--Enhanced Minimum Standards for Compliance 
Programs

I. Overview

    Section 248.20(c) requires certain banking entities to 
establish, maintain, and enforce an enhanced compliance program that 
includes the requirements and standards in this Appendix as well as 
the minimum written policies and procedures, internal controls, 
management framework, independent testing, training, and 
recordkeeping provisions outlined in Sec.  248.20. This Appendix 
sets forth additional minimum standards with respect to the 
establishment, oversight, maintenance, and enforcement by these 
banking entities of an enhanced internal compliance program for 
ensuring and monitoring compliance with the

[[Page 62162]]

prohibitions and restrictions on proprietary trading and covered 
fund activities and investments set forth in section 13 of the BHC 
Act and this part.
    a. This compliance program must:
    1. Be reasonably designed to identify, document, monitor, and 
report the permitted trading and covered fund activities and 
investments of the banking entity; identify, monitor and promptly 
address the risks of these covered activities and investments and 
potential areas of noncompliance; and prevent activities or 
investments prohibited by, or that do not comply with, section 13 of 
the BHC Act and this part;
    2. Establish and enforce appropriate limits on the covered 
activities and investments of the banking entity, including limits 
on the size, scope, complexity, and risks of the individual 
activities or investments consistent with the requirements of 
section 13 of the BHC Act and this part;
    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 chief executive 
officer (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 permitted trading and covered fund activities and 
investments.

II. Enhanced Compliance Program

    a. Proprietary Trading Activities. A banking entity must 
establish, maintain and enforce a compliance program that includes 
written policies and procedures that are appropriate for the types, 
size, and complexity of, and risks associated with, its permitted 
trading activities. The compliance program may be tailored to the 
types of trading activities conducted by the banking entity, and 
must include a detailed description of controls established by the 
banking entity to reasonably ensure that its trading activities are 
conducted in accordance with the requirements and limitations 
applicable to those trading activities under section 13 of the BHC 
Act and this part, and provide for appropriate revision of the 
compliance program before expansion of the trading activities of the 
banking entity. A banking entity must devote adequate resources and 
use knowledgeable personnel in conducting, supervising and managing 
its trading activities, and promote consistency, independence and 
rigor in implementing its risk controls and compliance efforts. The 
compliance program must be updated with a frequency sufficient to 
account for changes in the activities of the banking entity, results 
of independent testing of the program, identification of weaknesses 
in the program, and changes in legal, regulatory or other 
requirements.
    1. Trading Desks: The banking entity must have written policies 
and procedures governing each trading desk that include a 
description of:
    i. The process for identifying, authorizing and documenting 
financial instruments each trading desk may purchase or sell, with 
separate documentation for market making-related activities 
conducted in reliance on Sec.  248.4(b) and for hedging activity 
conducted in reliance on Sec.  248.5;
    ii. A mapping for each trading desk to the division, business 
line, or other organizational structure that is responsible for 
managing and overseeing the trading desk's activities;
    iii. The mission (i.e., the type of trading activity, such as 
market-making, trading in sovereign debt, etc.) and strategy (i.e., 
methods for conducting authorized trading activities) of each 
trading desk;
    iv. The activities that the trading desk is authorized to 
conduct, including (i) authorized instruments and products, and (ii) 
authorized hedging strategies, techniques and instruments;
    v. The types and amount of risks allocated by the banking entity 
to each trading desk to implement the mission and strategy of the 
trading desk, including an enumeration of material risks resulting 
from the activities in which the trading desk is authorized to 
engage (including but not limited to price risks, such as basis, 
volatility and correlation risks, as well as counterparty credit 
risk). Risk assessments must take into account both the risks 
inherent in the trading activity and the strength and effectiveness 
of controls designed to mitigate those risks;
    vi. How the risks allocated to each trading desk will be 
measured;
    vii. Why the allocated risks levels are appropriate to the 
activities authorized for the trading desk;
    viii. The limits on the holding period of, and the risk 
associated with, financial instruments under the responsibility of 
the trading desk;
    ix. The process for setting new or revised limits, as well as 
escalation procedures for granting exceptions to any limits or to 
any policies or procedures governing the desk, the analysis that 
will be required to support revising limits or granting exceptions, 
and the process for independently reviewing and documenting those 
exceptions and the underlying analysis;
    x. The process for identifying, documenting and approving new 
products, trading strategies, and hedging strategies;
    xi. The types of clients, customers, and counterparties with 
whom the trading desk may trade; and
    xii. The compensation arrangements, including incentive 
arrangements, for employees associated with the trading desk, which 
may not be designed to reward or incentivize prohibited proprietary 
trading or excessive or imprudent risk-taking.
    2. Description of risks and risk management processes: The 
compliance program for the banking entity must include a 
comprehensive description of the risk management program for the 
trading activity of the banking entity. The compliance program must 
also include a description of the governance, approval, reporting, 
escalation, review and other processes the banking entity will use 
to reasonably ensure that trading activity is conducted in 
compliance with section 13 of the BHC Act and this part. Trading 
activity in similar financial instruments should be subject to 
similar governance, limits, testing, controls, and review, unless 
the banking entity specifically determines to establish different 
limits or processes and documents those differences. Descriptions 
must include, at a minimum, the following elements:
    i. A description of the supervisory and risk management 
structure governing all trading activity, including a description of 
processes for initial and senior-level review of new products and 
new strategies;
    ii. A description of the process for developing, documenting, 
testing, approving and reviewing all models used for valuing, 
identifying and monitoring the risks of trading activity and related 
positions, including the process for periodic independent testing of 
the reliability and accuracy of those models;
    iii. A description of the process for developing, documenting, 
testing, approving and reviewing the limits established for each 
trading desk;
    iv. A description of the process by which a security may be 
purchased or sold pursuant to the liquidity management plan, 
including the process for authorizing and monitoring such activity 
to ensure compliance with the banking entity's liquidity management 
plan and the restrictions on liquidity management activities in this 
part;
    v. A description of the management review process, including 
escalation procedures, for approving any temporary exceptions or 
permanent adjustments to limits on the activities, positions, 
strategies, or risks associated with each trading desk; and
    vi. The role of the audit, compliance, risk management and other 
relevant units for conducting independent testing of trading and 
hedging activities, techniques and strategies.
    3. Authorized risks, instruments, and products. The banking 
entity must implement and enforce limits and internal controls for 
each trading desk that are reasonably designed to ensure that 
trading activity is conducted in conformance with section 13 of the 
BHC Act and this part and with the banking entity's written policies 
and procedures. The banking entity must establish and enforce risk 
limits appropriate for the activity of each trading desk. These 
limits should be based on probabilistic and non-probabilistic 
measures of potential loss (e.g., Value-at-Risk and notional 
exposure, respectively), and measured under normal and stress market 
conditions. At a minimum, these internal controls must monitor, 
establish and enforce limits on:
    i. The financial instruments (including, at a minimum, by type 
and exposure) that the trading desk may trade;
    ii. The types and levels of risks that may be taken by each 
trading desk; and
    iii. The types of hedging instruments used, hedging strategies 
employed, and the amount of risk effectively hedged.
    4. Hedging policies and procedures. The banking entity must 
establish, maintain, and enforce written policies and procedures

[[Page 62163]]

regarding the use of risk-mitigating hedging instruments and 
strategies that, at a minimum, describe:
    i. The positions, techniques and strategies that each trading 
desk may use to hedge the risk of its positions;
    ii. The manner in which the banking entity will identify the 
risks arising in connection with and related to the individual or 
aggregated positions, contracts or other holdings of the banking 
entity that are to be hedged and determine that those risks have 
been properly and effectively hedged;
    iii. The level of the organization at which hedging activity and 
management will occur;
    iv. The manner in which hedging strategies will be monitored and 
the personnel responsible for such monitoring;
    v. The risk management processes used to control unhedged or 
residual risks; and
    vi. The process for developing, documenting, testing, approving 
and reviewing all hedging positions, techniques and strategies 
permitted for each trading desk and for the banking entity in 
reliance on Sec.  248.5.
    5. Analysis and quantitative measurements. The banking entity 
must perform robust analysis and quantitative measurement of its 
trading activities that is reasonably designed to ensure that the 
trading activity of each trading desk is consistent with the banking 
entity's compliance program; monitor and assist in the 
identification of potential and actual prohibited proprietary 
trading activity; and prevent the occurrence of prohibited 
proprietary trading. Analysis and models used to determine, measure 
and limit risk must be rigorously tested and be reviewed by 
management responsible for trading activity to ensure that trading 
activities, limits, strategies, and hedging activities do not 
understate the risk and exposure to the banking entity or allow 
prohibited proprietary trading. This review should include periodic 
and independent back-testing and revision of activities, limits, 
strategies and hedging as appropriate to contain risk and ensure 
compliance. In addition to the quantitative measurements reported by 
any banking entity subject to Appendix A to this part, each banking 
entity must develop and implement, to the extent appropriate to 
facilitate compliance with this part, additional quantitative 
measurements specifically tailored to the particular risks, 
practices, and strategies of its trading desks. The banking entity's 
analysis and quantitative measurements must incorporate the 
quantitative measurements reported by the banking entity pursuant to 
Appendix A (if applicable) and include, at a minimum, the following:
    i. Internal controls and written policies and procedures 
reasonably designed to ensure the accuracy and integrity of 
quantitative measurements;
    ii. Ongoing, timely monitoring and review of calculated 
quantitative measurements;
    iii. The establishment of numerical thresholds and appropriate 
trading measures for each trading desk and heightened review of 
trading activity not consistent with those thresholds to ensure 
compliance with section 13 of the BHC Act and this part, including 
analysis of the measurement results or other information, 
appropriate escalation procedures, and documentation related to the 
review; and
    iv. Immediate review and compliance investigation of the trading 
desk's activities, escalation to senior management with oversight 
responsibilities for the applicable trading desk, timely 
notification to the Board, appropriate remedial action (e.g., 
divesting of impermissible positions, cessation of impermissible 
activity, disciplinary actions), and documentation of the 
investigation findings and remedial action taken when quantitative 
measurements or other information, considered together with the 
facts and circumstances, or findings of internal audit, independent 
testing or other review suggest a reasonable likelihood that the 
trading desk has violated any part of section 13 of the BHC Act or 
this part.
    6. Other Compliance Matters. In addition to the requirements 
specified above, the banking entity's compliance program must:
    i. Identify activities of each trading desk that will be 
conducted in reliance on exemptions contained in Sec. Sec.  248.4 
through 248.6, including an explanation of:
    A. How and where in the organization the activity occurs; and
    B. Which exemption is being relied on and how the activity meets 
the specific requirements for reliance on the applicable exemption;
    ii. Include an explanation of the process for documenting, 
approving and reviewing actions taken pursuant to the liquidity 
management plan, where in the organization this activity occurs, the 
securities permissible for liquidity management, the process for 
ensuring that liquidity management activities are not conducted for 
the purpose of prohibited proprietary trading, and the process for 
ensuring that securities purchased as part of the liquidity 
management plan are highly liquid and conform to the requirements of 
this part;
    iii. Describe how the banking entity monitors for and prohibits 
potential or actual material exposure to high-risk assets or high-
risk trading strategies presented by each trading desk that relies 
on the exemptions contained in Sec. Sec.  248.3(d)(3), and 248.4 
through 248.6, which must take into account potential or actual 
exposure to:
    A. Assets whose values cannot be externally priced or, where 
valuation is reliant on pricing models, whose model inputs cannot be 
externally validated;
    B. Assets whose changes in value cannot be adequately mitigated 
by effective hedging;
    C. New products with rapid growth, including those that do not 
have a market history;
    D. Assets or strategies that include significant embedded 
leverage;
    E. Assets or strategies that have demonstrated significant 
historical volatility;
    F. Assets or strategies for which the application of capital and 
liquidity standards would not adequately account for the risk; and
    G. Assets or strategies that result in large and significant 
concentrations to sectors, risk factors, or counterparties;
    iv. Establish responsibility for compliance with the reporting 
and recordkeeping requirements of subpart B and Sec.  248.20; and
    v. Establish policies for monitoring and prohibiting potential 
or actual material conflicts of interest between the banking entity 
and its clients, customers, or counterparties.
    7. Remediation of violations. The banking entity's compliance 
program must be reasonably designed and established to effectively 
monitor and identify for further analysis any trading activity that 
may indicate potential violations of section 13 of the BHC Act and 
this part and to prevent actual violations of section 13 of the BHC 
Act and this part. The compliance program must describe procedures 
for identifying and remedying violations of section 13 of the BHC 
Act and this part, and must include, at a minimum, a requirement to 
promptly document, address and remedy any violation of section 13 of 
the BHC Act or this part, and document all proposed and actual 
remediation efforts. The compliance program must include specific 
written policies and procedures that are reasonably designed to 
assess the extent to which any activity indicates that modification 
to the banking entity's compliance program is warranted and to 
ensure that appropriate modifications are implemented. The written 
policies and procedures must provide for prompt notification to 
appropriate management, including senior management and the board of 
directors, of any material weakness or significant deficiencies in 
the design or implementation of the compliance program of the 
banking entity.
    b. Covered Fund Activities or Investments. A banking entity must 
establish, maintain and enforce a compliance program that includes 
written policies and procedures that are appropriate for the types, 
size, complexity and risks of the covered fund and related 
activities conducted and investments made, by the banking entity.
    1. Identification of covered funds. The banking entity's 
compliance program must provide a process, which must include 
appropriate management review and independent testing, for 
identifying and documenting covered funds that each unit within the 
banking entity's organization sponsors or organizes and offers, and 
covered funds in which each such unit invests. In addition to the 
documentation requirements for covered funds, as specified under 
Sec.  248.20(e), the documentation must include information that 
identifies all pools that the banking entity sponsors or has an 
interest in and the type of exemption from the Commodity Exchange 
Act (whether or not the pool relies on section 4.7 of the 
regulations under the Commodity Exchange Act), and the amount of 
ownership interest the banking entity has in those pools.
    2. Identification of covered fund activities and investments. 
The banking entity's compliance program must identify, document and 
map each unit within the organization that is permitted to acquire 
or hold an interest in any covered fund or sponsor any covered fund 
and map each unit to the division, business line, or other 
organizational structure that will be

[[Page 62164]]

responsible for managing and overseeing that unit's activities and 
investments.
    3. Explanation of compliance. The banking entity's compliance 
program must explain how:
    i. The banking entity monitors for and prohibits potential or 
actual material conflicts of interest between the banking entity and 
its clients, customers, or counterparties related to its covered 
fund activities and investments;
    ii. The banking entity monitors for and prohibits potential or 
actual transactions or activities that may threaten the safety and 
soundness of the banking entity related to its covered fund 
activities and investments; and
    iii. The banking entity monitors for and prohibits potential or 
actual material exposure to high-risk assets or high-risk trading 
strategies presented by its covered fund activities and investments, 
taking into account potential or actual exposure to:
    A. Assets whose values cannot be externally priced or, where 
valuation is reliant on pricing models, whose model inputs cannot be 
externally validated;
    B. Assets whose changes in values cannot be adequately mitigated 
by effective hedging;
    C. New products with rapid growth, including those that do not 
have a market history;
    D. Assets or strategies that include significant embedded 
leverage;
    E. Assets or strategies that have demonstrated significant 
historical volatility;
    F. Assets or strategies for which the application of capital and 
liquidity standards would not adequately account for the risk; and
    G. Assets or strategies that expose the banking entity to large 
and significant concentrations with respect to sectors, risk 
factors, or counterparties;
    4. Description and documentation of covered fund activities and 
investments. For each organizational unit engaged in covered fund 
activities and investments, the banking entity's compliance program 
must document:
    i. The covered fund activities and investments that the unit is 
authorized to conduct;
    ii. The banking entity's plan for actively seeking unaffiliated 
investors to ensure that any investment by the banking entity 
conforms to the limits contained in Sec.  248.12 or registered in 
compliance with the securities laws and thereby exempt from those 
limits within the time periods allotted inSec.  248.12; and
    iii. How it complies with the requirements of subpart C.
    5. Internal Controls. A banking entity must establish, maintain, 
and enforce internal controls that are reasonably designed to ensure 
that its covered fund activities or investments comply with the 
requirements of section 13 of the BHC Act and this part and are 
appropriate given the limits on risk established by the banking 
entity. These written internal controls must be reasonably designed 
and established to effectively monitor and identify for further 
analysis any covered fund activity or investment that may indicate 
potential violations of section 13 of the BHC Act or this part. The 
internal controls must, at a minimum require:
    i. Monitoring and limiting the banking entity's individual and 
aggregate investments in covered funds;
    ii. Monitoring the amount and timing of seed capital investments 
for compliance with the limitations under subpart C (including but 
not limited to the redemption, sale or disposition requirements) of 
Sec.  248.12, and the effectiveness of efforts to seek unaffiliated 
investors to ensure compliance with those limits;
    iii. Calculating the individual and aggregate levels of 
ownership interests in one or more covered fund required by Sec.  
248.12;
    iv. Attributing the appropriate instruments to the individual 
and aggregate ownership interest calculations above;
    v. Making disclosures to prospective and actual investors in any 
covered fund organized and offered or sponsored by the banking 
entity, as provided under Sec.  248.11(a)(8);
    vi. Monitoring for and preventing any relationship or 
transaction between the banking entity and a covered fund that is 
prohibited under Sec.  248.14, including where the banking entity 
has been designated as the sponsor, investment manager, investment 
adviser, or commodity trading advisor to a covered fund by another 
banking entity; and
    vii. Appropriate management review and supervision across legal 
entities of the banking entity to ensure that services and products 
provided by all affiliated entities comply with the limitation on 
services and products contained in Sec.  248.14.
    6. Remediation of violations. The banking entity's compliance 
program must be reasonably designed and established to effectively 
monitor and identify for further analysis any covered fund activity 
or investment that may indicate potential violations of section 13 
of the BHC Act or this part and to prevent actual violations of 
section 13 of the BHC Act and this part. The banking entity's 
compliance program must describe procedures for identifying and 
remedying violations of section 13 of the BHC Act and this part, and 
must include, at a minimum, a requirement to promptly document, 
address and remedy any violation of section 13 of the BHC Act or 
this part, including Sec.  248.21, and document all proposed and 
actual remediation efforts. The compliance program must include 
specific written policies and procedures that are reasonably 
designed to assess the extent to which any activity or investment 
indicates that modification to the banking entity's compliance 
program is warranted and to ensure that appropriate modifications 
are implemented. The written policies and procedures must provide 
for prompt notification to appropriate management, including senior 
management and the board of directors, of any material weakness or 
significant deficiencies in the design or implementation of the 
compliance program of the banking entity.

III. Responsibility and Accountability for the Compliance Program

    a. A banking entity must establish, maintain, and enforce a 
governance and management framework to manage its business and 
employees with a view to preventing violations of section 13 of the 
BHC Act and this part. A banking entity must have an appropriate 
management framework reasonably designed to ensure that: Appropriate 
personnel are responsible and accountable for the effective 
implementation and enforcement of the compliance program; a clear 
reporting line with a chain of responsibility is delineated; and the 
compliance program is reviewed periodically by senior management. 
The board of directors (or equivalent governance body) and senior 
management should have the appropriate authority and access to 
personnel and information within the organizations as well as 
appropriate resources to conduct their oversight activities 
effectively.
    1. Corporate governance. The banking entity must adopt a written 
compliance program approved by the board of directors, an 
appropriate committee of the board, or equivalent governance body, 
and senior management.
    2. Management procedures. The banking entity must establish, 
maintain, and enforce a governance framework that is reasonably 
designed to achieve compliance with section 13 of the BHC Act and 
this part, which, at a minimum, provides for:
    i. The designation of appropriate senior management or committee 
of senior management with authority to carry out the management 
responsibilities of the banking entity for each trading desk and for 
each organizational unit engaged in covered fund activities;
    ii. Written procedures addressing the management of the 
activities of the banking entity that are reasonably designed to 
achieve compliance with section 13 of the BHC Act and this part, 
including:
    A. A description of the management system, including the titles, 
qualifications, and locations of managers and the specific 
responsibilities of each person with respect to the banking entity's 
activities governed by section 13 of the BHC Act and this part; and
    B. Procedures for determining compensation arrangements for 
traders engaged in underwriting or market making-related activities 
under Sec.  248.4 or risk-mitigating hedging activities under Sec.  
248.5 so that such compensation arrangements are designed not to 
reward or incentivize prohibited proprietary trading and 
appropriately balance risk and financial results in a manner that 
does not encourage employees to expose the banking entity to 
excessive or imprudent risk.
    3. Business line managers. Managers with responsibility for one 
or more trading desks of the banking entity are accountable for the 
effective implementation and enforcement of the compliance program 
with respect to the applicable trading desk(s).
    4. The Board of directors, or similar corporate body, and senior 
management. The board of directors, or similar corporate body, and 
senior management are responsible for setting and communicating an 
appropriate culture of compliance with section 13 of the BHC Act and 
this part and ensuring that appropriate policies regarding the 
management of trading activities and covered fund activities or 
investments are adopted to comply with section 13 of the BHC Act and

[[Page 62165]]

this part. The board of directors or similar corporate body (such as 
a designated committee of the board or an equivalent governance 
body) must ensure that senior management is fully capable, 
qualified, and properly motivated to manage compliance with this 
part in light of the organization's business activities and the 
expectations of the board of directors. The board of directors or 
similar corporate body must also ensure that senior management has 
established appropriate incentives and adequate resources to support 
compliance with this part, including the implementation of a 
compliance program meeting the requirements of this appendix into 
management goals and compensation structures across the banking 
entity.
    5. Senior management. Senior management is responsible for 
implementing and enforcing the approved compliance program. Senior 
management must also ensure that effective corrective action is 
taken when failures in compliance with section 13 of the BHC Act and 
this part are identified. Senior management and control personnel 
charged with overseeing compliance with section 13 of the BHC Act 
and this part should review the compliance program for the banking 
entity periodically and report to the board, or an appropriate 
committee thereof, on the effectiveness of the compliance program 
and compliance matters with a frequency appropriate to the size, 
scope, and risk profile of the banking entity's trading activities 
and covered fund activities or investments, which shall be at least 
annually.
    6. CEO attestation. Based on a review by the CEO of the banking 
entity, the CEO of the banking entity must, annually, attest in 
writing to the Board that the banking entity has in place processes 
to establish, maintain, enforce, review, test and modify the 
compliance program established under this Appendix and Sec.  248.20 
of this part 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 United States 
operations of the foreign banking entity who is located in the 
United States.

IV. Independent Testing

    a. Independent testing must occur with a frequency appropriate 
to the size, scope, and risk profile of the banking entity's trading 
and covered fund activities or investments, which shall be at least 
annually. This independent testing must include an evaluation of:
    1. The overall adequacy and effectiveness of the banking 
entity's compliance program, including an analysis of the extent to 
which the program contains all the required elements of this 
appendix;
    2. The effectiveness of the banking entity's internal controls, 
including an analysis and documentation of instances in which such 
internal controls have been breached, and how such breaches were 
addressed and resolved; and
    3. The effectiveness of the banking entity's management 
procedures.
    b. A banking entity must ensure that independent testing 
regarding the effectiveness of the banking entity's compliance 
program is conducted by a qualified independent party, such as the 
banking entity's internal audit department, compliance personnel or 
risk managers independent of the organizational unit being tested, 
outside auditors, consultants, or other qualified independent 
parties. A banking entity must promptly take appropriate action to 
remedy any significant deficiencies or material weaknesses in its 
compliance program and to terminate any violations of section 13 of 
the BHC Act or this part.

V. Training

    Banking entities must provide adequate training to personnel and 
managers of the banking entity engaged in activities or investments 
governed by section 13 of the BHC Act or this part, as well as other 
appropriate supervisory, risk, independent testing, and audit 
personnel, in order to effectively implement and enforce the 
compliance program. This training should occur with a frequency 
appropriate to the size and the risk profile of the banking entity's 
trading activities and covered fund activities or investments.

VI. Recordkeeping

    Banking entities must create and retain records sufficient to 
demonstrate compliance and support the operations and effectiveness 
of the compliance program. A banking entity must retain these 
records for a period that is no less than 5 years or such longer 
period as required by the Board in a form that allows it to promptly 
produce such records to the Board on request.

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

0
31. 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

0
32. Section 351.2 is revised to read as follows:


Sec.  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
    (iv) Any affiliate or subsidiary of any entity described in 
paragraph (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 
paragraph (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 paragraph (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:
    (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

[[Page 62166]]

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.
    (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 Sec.  
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:
    (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 means with respect to a 
banking entity that:
    (1)(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 Sec.  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 Sec.  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 (s)(3) of this section, 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 Sec.  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 this paragraph (s) means the 
trading assets and liabilities (excluding trading assets and 
liabilities attributable to trading activities permitted pursuant to 
Sec.  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 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 Sec.  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

[[Page 62167]]

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.
    (ee) Significant trading assets and liabilities means with respect 
to a banking entity that:
    (1)(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 Sec.  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 (ee)(3) of this section, trading assets and 
liabilities for purposes of this paragraph (ee) means trading assets 
and liabilities (excluding trading assets and liabilities attributable 
to trading activities permitted pursuant to Sec.  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 this paragraph (ee) means the 
trading assets and liabilities (excluding trading assets and 
liabilities attributable to trading activities permitted pursuant to 
Sec.  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.
    (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

0
33. Section 351.3 is amended by:
0
a. Revising paragraphs (b) and (d)(3), (8), and (9);
0
b. Adding paragraphs (d)(10) through (13);
0
c. Redesignating paragraphs (e)(5) through (13) as paragraphs (e)(6) 
through (14);
0
d. Adding new paragraph (e)(5); and
0
e. Revising redesignated paragraphs (e)(11), (12), and (14).
    The revisions and additions read as follows:


Sec.  351.3   Prohibition on proprietary trading.

* * * * *
    (b) Definition of trading account. (1) Trading account. 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
    (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) Trading account application for certain banking entities. (i) A 
banking entity that is subject to paragraph (b)(1)(ii) of this section 
in determining the scope of its trading account is not subject to 
paragraph (b)(1)(i) of this section.
    (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

[[Page 62168]]

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 of this part.
    (ii) 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) of this section 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 
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 Sec.  351.6(a) or 
(b) of this subpart are for the purpose of liquidity management and in 
accordance with the liquidity management plan described in this 
paragraph (d)(3); 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
    (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
    (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 12 CFR part 3, subpart F, with respect to a 
banking entity for which the OCC is the primary financial regulatory 
agency, 12 CFR part 217 with

[[Page 62169]]

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
    (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.

0
34. Section 351.4 is revised to read as follows:


Sec.  351.4   Permitted underwriting and market making-related 
activities.

    (a) Underwriting activities--(1) Permitted underwriting activities. 
The prohibition contained in Sec.  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;
    (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 this 
paragraph (a), 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.
    (iv) A banking entity with significant trading assets and 
liabilities may satisfy the requirements in paragraphs (a)(2)(iii)(B) 
and (C) of this section by complying with the requirements set forth in 
paragraph (c) of this section;
    (v) The compensation arrangements of persons performing the 
activities described in this paragraph (a) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (vi) 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 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 Sec.  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

[[Page 62170]]

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;
    (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; and
    (iv) A banking entity with significant trading assets and 
liabilities may satisfy the requirements in paragraphs (b)(2)(iii)(C) 
and (D) of this section by complying with the requirements set forth in 
paragraph (c) of this section;
    (v) The compensation arrangements of persons performing the 
activities described in this paragraph (b) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (vi) The banking entity is licensed or registered to engage in 
activity described in this paragraph (b) in accordance with applicable 
law.
    (3) 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 
Sec.  351.2(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.
    (ii) [Reserved]
    (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.
    (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 should take into account the liquidity, maturity, and depth 
of the market for the relevant types of securities and 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.
    (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 should take into account the liquidity, maturity, and depth 
of the market for the relevant types of financial instruments and 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.
    (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 paragraph (c)(1)(ii)(A) or (B) of this section, a banking 
entity shall maintain and make available to the FDIC upon request 
records regarding:
    (A) Any limit that is exceeded; and

[[Page 62171]]

    (B) 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 paragraph (c)(1)(ii)(A) or (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:
    (A) Takes action as promptly as possible after a breach to bring 
the trading desk into compliance; and
    (B) 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 of this part.

0
35. Section 351.5 is amended by revising paragraphs (b) and (c)(1) and 
adding paragraph (c)(4) to read as follows:


Sec.  351.5   Permitted risk-mitigating hedging activities.

* * * * *
    (b) * * *
    (1) The risk-mitigating hedging activities of a banking entity that 
has significant trading assets and liabilities are permitted under 
paragraph (a) of this section only if:
    (i) The banking entity has established and implements, maintains 
and enforces an internal compliance program required by subpart D of 
this part that is reasonably designed to ensure the banking entity's 
compliance with the requirements of this section, including:
    (A) Reasonably designed written policies and procedures regarding 
the positions, techniques and strategies that may be used for hedging, 
including documentation indicating what positions, contracts or other 
holdings a particular trading desk may use in its risk-mitigating 
hedging activities, as well as position and aging limits with respect 
to such positions, contracts or other holdings;
    (B) Internal controls and ongoing monitoring, management, and 
authorization procedures, including relevant escalation procedures; and
    (C) The conduct of analysis and independent testing designed to 
ensure that the positions, techniques and strategies that may be used 
for hedging may reasonably be expected to reduce or otherwise 
significantly mitigate the specific, identifiable risk(s) being hedged;
    (ii) The risk-mitigating hedging activity:
    (A) Is conducted in accordance with the written policies, 
procedures, and internal controls required under this section;
    (B) At the inception of the hedging activity, including, without 
limitation, any adjustments to the hedging activity, is designed to 
reduce or otherwise significantly mitigate one or more specific, 
identifiable risks, including market risk, counterparty or other credit 
risk, currency or foreign exchange risk, interest rate risk, commodity 
price risk, basis risk, or similar risks, arising in connection with 
and related to identified positions, contracts, or other holdings of 
the banking entity, based upon the facts and circumstances of the 
identified underlying and hedging positions, contracts or other 
holdings and the risks and liquidity thereof;
    (C) Does not give rise, at the inception of the hedge, to any 
significant new or additional risk that is not itself hedged 
contemporaneously in accordance with this section;
    (D) Is subject to continuing review, monitoring and management by 
the banking entity that:
    (1) Is consistent with the written hedging policies and procedures 
required under paragraph (b)(1)(i) of this section;
    (2) Is designed to reduce or otherwise significantly mitigate the 
specific, identifiable risks that develop over time from the risk-
mitigating hedging activities undertaken under this section and the 
underlying positions, contracts, and other holdings of the banking 
entity, based upon the facts and circumstances of the underlying and 
hedging positions, contracts and other holdings of the banking entity 
and the risks and liquidity thereof; and
    (3) Requires ongoing recalibration of the hedging activity by the 
banking entity to ensure that the hedging activity satisfies the 
requirements set out in paragraph (b)(1)(ii) of this section and is not 
prohibited proprietary trading; and
    (iii) The compensation arrangements of persons performing risk-
mitigating hedging activities are designed not to reward or incentivize 
prohibited proprietary trading.
    (2) The risk-mitigating hedging activities of a banking entity that 
does not have significant trading assets and liabilities are permitted 
under paragraph (a) of this section only if the 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 sale of financial 
instruments made in reliance on this section for risk-mitigating 
hedging purposes that is:
* * * * *
    (4) The requirements of paragraphs (c)(2) and (3) of this section 
do not apply to the purchase or sale of a financial instrument 
described in paragraph (c)(1) of this section if:
    (i) The financial instrument purchased or sold is identified on a 
written list of pre-approved financial instruments that are commonly 
used by the trading desk for the specific type of hedging activity for 
which the financial instrument is being purchased or sold; and
    (ii) At the time the financial instrument is purchased or sold, the 
hedging activity (including the purchase or sale of the financial 
instrument) complies with written, pre-approved 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:

[[Page 62172]]

    (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.

0
36. Section 351.6 is amended by revising paragraph (e)(3); removing 
paragraphs (e)(4) and (6); and redesignating paragraph (e)(5) as 
paragraph (e)(4).
    The revisions reads as follows:


Sec.  351.6   Other permitted proprietary trading activities.

* * * * *
    (e) * * *
    (3) A purchase or sale by a banking entity is permitted for 
purposes of this paragraph (e) if:
    (i) The banking entity engaging as principal in the purchase or 
sale (including relevant personnel) is not located in the United States 
or organized under the laws of the United States or of any State;
    (ii) The banking entity (including relevant personnel) that makes 
the decision to purchase or sell as principal is not located in the 
United States or organized under the laws of the United States or of 
any State; and
    (iii) The purchase or sale, including any transaction arising from 
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

0
37. Section 351.10 is amended by revising paragraphs (c)(7)(ii) and 
(c)(8)(i)(A) to read as follows:


Sec.  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 Sec.  351.2(t) of subpart A;
* * * * *

0
38. Section 351.11 is amended by revising paragraph (c) to read as 
follows:


Sec.  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 Sec.  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 Sec.  351.4(a) or (b) of subpart B, respectively; and
    (2) With respect to any banking entity (or any affiliate thereof) 
that: Acts as a sponsor, investment adviser or commodity trading 
advisor to a particular covered fund or otherwise acquires and retains 
an ownership interest in such covered fund in reliance on paragraph (a) 
of this section; or acquires and retains an ownership interest in such 
covered fund and is either a securitizer, as that term is used in 
section 15G(a)(3) of the Exchange Act (15 U.S.C. 78o-11(a)(3)), or is 
acquiring and retaining an ownership interest in such covered fund in 
compliance with section 15G of that Act (15 U.S.C.78o-11) and the 
implementing regulations issued thereunder each as permitted by 
paragraph (b) of this section, then in each such case any ownership 
interests acquired or retained by the banking entity and its affiliates 
in connection with underwriting and market making related activities 
for that particular covered fund are included in the calculation of 
ownership interests permitted to be held by the banking entity and its 
affiliates under the limitations of Sec.  351.12(a)(2)(ii) and (iii) 
and (d) of this subpart.


Sec.  351.12   [Amended]

0
39. Section 351.12 is amended by redesignating the second instance of 
paragraph (e)(2)(vi) as paragraph (e)(2)(vii).

0
40. Section 351.13 is amended by revising paragraphs (a), (b)(3) and 
(4), and (c) to read as follows:


Sec.  351.13   Other permitted covered fund activities and investments.

    (a) Permitted risk-mitigating hedging activities. (1) The 
prohibition contained in Sec.  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) The risk-mitigating hedging activities of a banking entity are 
permitted under this paragraph (a) only if:
    (i) The banking entity has established and implements, maintains 
and enforces an internal compliance program in accordance with subpart 
D of this part that is reasonably designed to ensure the banking 
entity's compliance with the requirements of this section, including:
    (A) Reasonably designed written policies and procedures; and
    (B) Internal controls and ongoing monitoring, management, and 
authorization procedures, including relevant escalation procedures; and
    (ii) The acquisition or retention of the ownership interest:
    (A) Is made in accordance with the written policies, procedures, 
and internal controls required under this section;
    (B) At the inception of the hedge, is designed to reduce or 
otherwise significantly mitigate one or more specific, identifiable 
risks arising:
    (1) Out of a transaction conducted solely to accommodate a specific 
customer request with respect to the covered fund; or
    (2) In connection with the compensation arrangement with the 
employee that directly provides investment advisory, commodity trading 
advisory, or other services to the covered fund;
    (C) Does not give rise, at the inception of the hedge, to any 
significant new or additional risk that is not itself hedged 
contemporaneously in accordance with this section; and
    (D) Is subject to continuing review, monitoring and management by 
the banking entity.
    (iii) With respect to risk-mitigating hedging activity conducted 
pursuant to paragraph (a)(1)(i) of this section, 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

[[Page 62173]]

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 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 Sec.  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.

0
41. Section 351.14 is amended by revising paragraph (a)(2)(ii)(B) to 
read as follows:


Sec.  351.14   Limitations on relationships with a covered fund.

    (a) * * *
    (2) * * *
    (ii) * * *
    (B) The chief executive officer (or equivalent officer) of the 
banking entity certifies in writing annually no later than March 31 to 
the FDIC (with a duty to update the certification if the information in 
the certification materially changes) that the banking entity does not, 
directly or indirectly, guarantee, assume, or otherwise insure the 
obligations or performance of the covered fund or of any covered fund 
in which such covered fund invests; and
* * * * *

Subpart D--Compliance Program Requirement; Violations

0
42. Section 351.20 is amended by revising paragraphs (a), (b) 
introductory text, (c), (d), (e) introductory text, and (f)(2) and 
adding paragraphs (g), (h), and (i) to read as follows:


Sec.  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 
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 appendix A to this part. (1) A 
banking entity engaged in proprietary trading activity permitted under 
subpart B shall comply with the reporting requirements described in 
appendix A to this part, 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 appendix A to this 
part.
    (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 appendix A to this part shall report the information 
required by appendix A 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.

[[Page 62174]]

    (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 of this part 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 of this part, the FDIC may require the banking entity to 
be treated under this part as if it did not have limited trading assets 
and 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 section.
    (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 of this part, 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 
section.
    (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 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) Waiver. 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) Decision. The FDIC will notify the banking entity of the 
decision in writing. The notice will include an explanation of the 
decision.

0
43. Revise appendix A to part 351 to read as follows:

Appendix A 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 Sec.  
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 Sec.  351.20.
    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 Sec.  
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 
Sec.  351.4, Sec.  351.5, or Sec.  351.6(a) and (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 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 Sec.  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 Sec. Sec.  351.4 through 351.6(a) and (b), or that 
result in a material exposure to high-risk assets or high-risk 
trading strategies, must be escalated within the banking entity for 
review, further analysis, explanation to the FDIC, and remediation, 
where appropriate. The quantitative measurements discussed in this 
appendix should be helpful to banking entities in identifying and 
managing the risks related to their covered trading activities.

II. Definitions

    The terms used in this appendix have the same meanings as set 
forth in Sec. Sec.  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

[[Page 62175]]

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 Sec.  351.4, Sec.  351.5, Sec.  351.6(a), or Sec.  
351.6(b). A banking entity may include in its covered trading 
activity trading conducted under Sec.  351.3(d), Sec.  351.6(c), 
Sec.  351.6(d) or Sec.  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 Sec.  351.20 must furnish the following 
quantitative measurements, as applicable, for each trading desk of 
the banking entity engaged in covered trading activities and 
calculate these quantitative measurements in accordance with this 
appendix:
    i. 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 Sec.  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 Sec.  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 Sec.  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 Sec.  351.20 must provide file 
identifying information in each submission to the FDIC pursuant to 
this appendix, including the name of the banking entity, the RSSD ID 
assigned to the top-tier banking entity by the Board, and 
identification of the reporting period and creation date and time.

b. Trading Desk Information

    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
    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 Sec.  
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 
Sec.  351.20 unless otherwise requested by the FDIC. A banking 
entity must report the Trading Desk Information, the Quantitative 
Measurements Identifying Information, and each applicable 
quantitative measurement to the FDIC in accordance with the XML 
Schema specified and published on the FDIC's website.

f. Recordkeeping

    A banking entity must, for any quantitative measurement 
furnished to the FDIC pursuant to this appendix and Sec.  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 Sec. Sec.  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 Sec.  351.4(b) and hedging activity under Sec.  351.5. 
Accordingly, the limits required under Sec. Sec.  
351.4(b)(2)(iii)(C) and 351.5(b)(1)(i)(A) must meet the applicable 
requirements under Sec. Sec.  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

    i. Description: For purposes of this appendix, Comprehensive 
Profit and Loss Attribution is an analysis that attributes the

[[Page 62176]]

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 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.'' \1225\ A banking entity must 
separately report the trading desk's market value of long securities 
positions, short securities positions, derivatives receivables, and 
derivatives payables.
---------------------------------------------------------------------------

    \1225\ See Sec.  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.
---------------------------------------------------------------------------

    ii. Calculation Period: One trading day.
    iii. Measurement Frequency: Daily.
    iv. Applicability: All trading desks that rely on Sec.  351.4(a) 
or Sec.  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.'' \1226\ Further, for purposes of the Transaction 
Volumes quantitative measurement, a customer of a trading desk that 
relies on Sec.  351.4(a) to conduct underwriting activity is a 
market participant identified in Sec.  351.4(a)(7), and a customer 
of a trading desk that relies on Sec.  351.4(b) to conduct market 
making-related activity is a market participant identified in Sec.  
351.4(b)(3).
---------------------------------------------------------------------------

    \1226\ See Sec.  351.2(h), (aa).
---------------------------------------------------------------------------

    ii. Calculation Period: One trading day.
    iii. Measurement Frequency: Daily.
    iv. Applicability: All trading desks that rely on Sec.  351.4(a) 
or Sec.  351.4(b) to conduct underwriting activity or market-making-
related activity, respectively.

Appendix B to Part 351 [Removed]

0
44. Appendix B to part 351 is removed.

0
45. Effective January 1, 2020 until December 31, 2020, appendix Z to 
part 351 is added to read as follows:

Appendix Z to Part 351--Proprietary Trading and Certain Interests in 
and Relationships With Covered Funds (Alternative Compliance)

    Note:  The content of this appendix reproduces the regulation 
implementing Section 13 of the Bank Holding Company Act as of 
November 13, 2019.

Subpart A--Authority and Definitions


Sec.  351.1   Authority, purpose, scope, and relationship to other 
authorities.

    (a) Authority. This part is issued by the FDIC under section 13 of 
the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1851).
    (b) Purpose. Section 13 of the Bank Holding Company Act establishes 
prohibitions and restrictions on proprietary trading and investments in 
or relationships with covered funds by certain banking entities, 
including any insured depository institution as defined in section 
3(c)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)(2)) and 
certain subsidiaries thereof for which the FDIC is the appropriate 
Federal banking agency as defined in section 3(q) of the Federal 
Deposit Insurance Act (12 U.S.C. 1813(q)). This part implements section 
13 of the Bank Holding Company Act by defining terms used in the 
statute and related terms, establishing prohibitions and restrictions 
on proprietary trading and investments in or relationships with covered 
funds, and explaining the statute's requirements.
    (c) Scope. This part implements section 13 of the Bank Holding 
Company Act with respect to insured depository institutions for which 
the FDIC is the appropriate Federal banking agency, as defined in 
section 3(q) of the Federal Deposit Insurance Act, and certain 
subsidiaries of the foregoing, but does not include such entities to 
the extent they are not within the definition of banking entity in 
Sec.  351.2(c).
    (d) Relationship to other authorities. Except as otherwise provided 
in under section 13 of the Bank Holding Company Act, and 
notwithstanding any other provision of law, the prohibitions and 
restrictions under section 13 of Bank Holding Company Act shall apply 
to the activities and investments of a banking entity, even if such 
activities and investments are authorized for a banking entity under 
other applicable provisions of law.
    (e) Preservation of authority. Nothing in this part limits in any 
way the authority of the FDIC to impose on a banking entity identified 
in paragraph (c) of this section additional requirements or 
restrictions with respect to any activity, investment, or relationship 
covered under section 13 of the Bank Holding Company Act or this part, 
or additional penalties for violation of this part provided under any 
other applicable provision of law.


Sec.  351.2   Definitions.

    Unless otherwise specified, for purposes of this part:

[[Page 62177]]

    (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
    (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:
    (i) Any swap, as that term is defined in section 1a(47) of the 
Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as 
that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 
78c(a)(68));
    (ii) Any purchase or sale of a commodity, that is not an excluded 
commodity, for deferred shipment or delivery that is intended to be 
physically settled;
    (iii) Any foreign exchange forward (as that term is defined in 
section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)) or 
foreign exchange swap (as that term is defined in section 1a(25) of the 
Commodity Exchange Act (7 U.S.C. 1a(25));
    (iv) Any agreement, contract, or transaction in foreign currency 
described in section 2(c)(2)(C)(i) of the Commodity Exchange Act (7 
U.S.C. 2(c)(2)(C)(i));
    (v) Any agreement, contract, or transaction in a commodity other 
than foreign currency described in section 2(c)(2)(D)(i) of the 
Commodity Exchange Act (7 U.S.C. 2(c)(2)(D)(i)); and
    (vi) Any transaction authorized under section 19 of the Commodity 
Exchange Act (7 U.S.C. 23(a) or (b));
    (2) A derivative does not include:
    (i) Any consumer, commercial, or other agreement, contract, or 
transaction that the CFTC and SEC have further defined by joint 
regulation, interpretation, guidance, or other action as not within the 
definition of swap, as that term is defined in section 1a(47) of the 
Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as 
that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 
78c(a)(68)); or
    (ii) Any identified banking product, as defined in section 402(b) 
of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)), 
that is subject to section 403(a) of that Act (7 U.S.C. 27a(a)).
    (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, unless otherwise indicated, 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 Bank Holding Company Act of 1956 (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) Loan means any loan, lease, extension of credit, or secured or 
unsecured receivable that is not a security or derivative.
    (t) Primary financial regulatory agency has the same meaning as in 
section 2(12) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (12 U.S.C. 5301(12)).
    (u) 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.
    (v) 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)).
    (w) SEC means the Securities and Exchange Commission.
    (x) Sale and sell each include any contract to sell or otherwise 
dispose of. For security futures products, such terms include any 
contract, agreement,

[[Page 62178]]

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.
    (y) Security has the meaning specified in section 3(a)(10) of the 
Exchange Act (15 U.S.C. 78c(a)(10)).
    (z) 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)).
    (aa) Security future has the meaning specified in section 3(a)(55) 
of the Exchange Act (15 U.S.C. 78c(a)(55)).
    (bb) 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.
    (cc) 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.
    (dd) Subsidiary has the same meaning as in section 2(d) of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841(d)).
    (ee) 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.
    (ff) 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


Sec.  351.3   Prohibition on proprietary trading.

    (a) Prohibition. Except as otherwise provided in this subpart, a 
banking entity may not engage in proprietary trading. Proprietary 
trading means engaging as principal for the trading account of the 
banking entity in any purchase or sale of one or more financial 
instruments.
    (b) Definition of trading account. (1) Trading account means any 
account that is used by a banking entity to:
    (i) Purchase or sell one or more financial instruments principally 
for the purpose of:
    (A) Short-term 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 described in paragraphs (b)(1)(i)(A), 
(B), or (C) of this section;
    (ii) Purchase or sell one or more financial instruments that are 
both market risk capital rule covered positions and trading positions 
(or hedges of other market risk capital rule covered positions), if the 
banking entity, or any affiliate of the banking entity, is an insured 
depository institution, bank holding company, or savings and loan 
holding company, and calculates risk-based capital ratios under the 
market risk capital rule; or
    (iii) 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.
    (2) Rebuttable presumption for certain purchases and sales. The 
purchase (or sale) of a financial instrument by a banking entity shall 
be presumed 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 fewer than sixty days or substantially 
transfers the risk of the financial instrument within sixty days of the 
purchase (or sale), unless the banking entity can demonstrate, 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 paragraph (b)(1)(i) of this section.
    (c) Financial instrument. (1) Financial instrument means:
    (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.
    (2) A financial instrument does not include:
    (i) A loan;
    (ii) A commodity that is not:
    (A) An excluded commodity (other than foreign exchange or 
currency);
    (B) A derivative;
    (C) A contract of sale of a commodity for future delivery; or
    (D) An option on a contract of sale of a commodity for future 
delivery; or
    (iii) Foreign exchange or currency.
    (d) Proprietary trading. Proprietary trading does not include:
    (1) Any purchase or sale of one or more financial instruments by a 
banking entity that arises under a repurchase or reverse repurchase 
agreement pursuant to which the banking entity has simultaneously 
agreed, in writing, to both purchase and sell a stated asset, at stated 
prices, and on stated dates or on demand with the same counterparty;
    (2) Any purchase or sale of one or more financial instruments by a 
banking entity that arises under a transaction in which the banking 
entity lends or borrows a security temporarily to or from another party 
pursuant to a written securities lending agreement under which the 
lender retains the economic interests of an owner of such security, and 
has the right to terminate the transaction and to recall the loaned 
security on terms agreed by the parties;
    (3) Any purchase or sale of a security by a banking entity for the 
purpose of liquidity management in accordance with a documented 
liquidity management plan of the banking entity that:
    (i) Specifically contemplates and authorizes the particular 
securities to be used for liquidity management purposes, the amount, 
types, and risks of these securities that are consistent with liquidity 
management, and the liquidity circumstances in which the particular 
securities may or must be used;
    (ii) Requires that any purchase or sale of securities 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 securities purchased or sold for liquidity 
management purposes be highly liquid and limited to securities the 
market, credit, and other risks of which the banking entity does not 
reasonably expect to give rise to appreciable profits

[[Page 62179]]

or losses as a result of short-term price movements;
    (iv) Limits any securities purchased or sold for liquidity 
management purposes, together with any other instruments purchased or 
sold for such purposes, to an amount that is consistent with the 
banking entity's near-term funding needs, including deviations from 
normal operations of the banking entity or any affiliate thereof, as 
estimated and documented pursuant to methods specified in the plan;
    (v) Includes written policies and procedures, internal controls, 
analysis, and independent testing to ensure that the purchase and sale 
of securities that are not permitted under Sec. Sec.  351.6(a) or (b) 
of this subpart are for the purpose of liquidity management and in 
accordance with the liquidity management plan described in paragraph 
(d)(3) of this section; and
    (vi) Is consistent with the FDIC's supervisory requirements, 
guidance, and expectations regarding liquidity management;
    (4) Any purchase or sale of one or more financial instruments by a 
banking entity that is a derivatives clearing organization or a 
clearing agency in connection with clearing financial instruments;
    (5) Any excluded clearing activities by a banking entity that is a 
member of a clearing agency, a member of a derivatives clearing 
organization, or a member of a designated financial market utility;
    (6) Any purchase or sale of one or more financial instruments by a 
banking entity, so long as:
    (i) The purchase (or sale) satisfies an existing delivery 
obligation of the banking entity or its customers, including to prevent 
or close out a failure to deliver, in connection with delivery, 
clearing, or settlement activity; or
    (ii) The purchase (or sale) satisfies an obligation of the banking 
entity in connection with a judicial, administrative, self-regulatory 
organization, or arbitration proceeding;
    (7) Any purchase or sale of one or more financial instruments by a 
banking entity that is acting solely as agent, broker, or custodian;
    (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; or
    (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.
    (e) Definition of other terms related to proprietary trading. For 
purposes of this subpart:
    (1) Anonymous means that each party to a purchase or sale is 
unaware of the identity of the other party(ies) to the purchase or 
sale.
    (2) Clearing agency has the same meaning as in section 3(a)(23) of 
the Exchange Act (15 U.S.C. 78c(a)(23)).
    (3) Commodity has the same meaning as in section 1a(9) of the 
Commodity Exchange Act (7 U.S.C. 1a(9)), except that a commodity does 
not include any security;
    (4) Contract of sale of a commodity for future delivery means a 
contract of sale (as that term is defined in section 1a(13) of the 
Commodity Exchange Act (7 U.S.C. 1a(13)) for future delivery (as that 
term is defined in section 1a(27) of the Commodity Exchange Act (7 
U.S.C. 1a(27))).
    (5) Derivatives clearing organization means:
    (i) A derivatives clearing organization registered under section 5b 
of the Commodity Exchange Act (7 U.S.C. 7a-1);
    (ii) A derivatives clearing organization that, pursuant to CFTC 
regulation, is exempt from the registration requirements under section 
5b of the Commodity Exchange Act (7 U.S.C. 7a-1); or
    (iii) A foreign derivatives clearing organization that, pursuant to 
CFTC regulation, is permitted to clear for a foreign board of trade 
that is registered with the CFTC.
    (6) Exchange, unless the context otherwise requires, means any 
designated contract market, swap execution facility, or foreign board 
of trade registered with the CFTC, or, for purposes of securities or 
security-based swaps, an exchange, as defined under section 3(a)(1) of 
the Exchange Act (15 U.S.C. 78c(a)(1)), or security-based swap 
execution facility, as defined under section 3(a)(77) of the Exchange 
Act (15 U.S.C. 78c(a)(77)).
    (7) Excluded clearing activities means:
    (i) With respect to customer transactions cleared on a derivatives 
clearing organization, a clearing agency, or a designated financial 
market utility, any purchase or sale necessary to correct trading 
errors made by or on behalf of a customer provided that such purchase 
or sale is conducted in accordance with, for transactions cleared on a 
derivatives clearing organization, the Commodity Exchange Act, CFTC 
regulations, and the rules or procedures of the derivatives clearing 
organization, or, for transactions cleared on a clearing agency, the 
rules or procedures of the clearing agency, or, for transactions 
cleared on a designated financial market utility that is neither a 
derivatives clearing organization nor a clearing agency, the rules or 
procedures of the designated financial market utility;
    (ii) Any purchase or sale in connection with and related to the 
management of a default or threatened imminent default of a customer 
provided that such purchase or sale is conducted in accordance with, 
for transactions cleared on a derivatives clearing organization, the 
Commodity Exchange Act, CFTC regulations, and the rules or procedures 
of the derivatives clearing organization, or, for transactions cleared 
on a clearing agency, the rules or procedures of the clearing agency, 
or, for transactions cleared on a designated financial market utility 
that is neither a derivatives clearing organization nor a clearing 
agency, the rules or procedures of the designated financial market 
utility;
    (iii) Any purchase or sale in connection with and related to the 
management of a default or threatened imminent default of a member of a 
clearing agency, a member of a derivatives clearing organization, or a 
member of a designated financial market utility;
    (iv) Any purchase or sale in connection with and related to the 
management of the default or threatened default of a clearing agency, a 
derivatives clearing organization, or a designated financial market 
utility; and
    (v) Any purchase or sale that is required by the rules or 
procedures of a clearing agency, a derivatives clearing organization, 
or a designated financial market utility to mitigate the risk to the 
clearing agency, derivatives clearing organization, or designated 
financial market utility that would result from the clearing by a 
member of security-based swaps that reference the member or an 
affiliate of the member.
    (8) Designated financial market utility has the same meaning as in 
section 803(4) of the Dodd-Frank Act (12 U.S.C. 5462(4)).
    (9) Issuer has the same meaning as in section 2(a)(4) of the 
Securities Act of 1933 (15 U.S.C. 77b(a)(4)).

[[Page 62180]]

    (10) Market risk capital rule covered position and trading position 
means a financial instrument that is both a covered position and a 
trading position, as those terms are respectively defined:
    (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.
    (11) Market risk capital rule means the market risk capital rule 
that is contained in subpart F of 12 CFR part 3, 12 CFR parts 208 and 
225, or 12 CFR part 324, as applicable.
    (12) Municipal security means a security that is a direct 
obligation of or issued by, or an obligation guaranteed as to principal 
or interest by, a State or any political subdivision thereof, or any 
agency or instrumentality of a State or any political subdivision 
thereof, or any municipal corporate instrumentality of one or more 
States or political subdivisions thereof.
    (13) Trading desk means 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.


Sec.  351.4   Permitted underwriting and market making-related 
activities.

    (a) Underwriting activities--(1) Permitted underwriting activities. 
The prohibition contained in Sec.  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) 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, 
and reasonable efforts are made to sell or otherwise reduce the 
underwriting position within a reasonable period, taking into account 
the liquidity, maturity, and depth of the market for the relevant type 
of security;
    (iii) 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, based on the nature and amount of 
the trading desk's underwriting activities, including the reasonably 
expected near term demands of clients, customers, or counterparties, on 
the:
    (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;
    (C) Internal controls and ongoing monitoring and analysis of each 
trading desk's compliance with its limits; and
    (D) Authorization procedures, including escalation procedures that 
require review and approval of any trade that would exceed a trading 
desk's limit(s), demonstrable analysis of the basis for any temporary 
or permanent increase to a trading desk's limit(s), and independent 
review of such demonstrable analysis and approval;
    (iv) The compensation arrangements of persons performing the 
activities described in this paragraph (a) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (v) The banking entity is licensed or registered to engage in the 
activity described in this paragraph (a) in accordance with applicable 
law.
    (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 
paragraph (a), 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 Sec.  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 amount, types, and risks of the financial instruments in 
the trading

[[Page 62181]]

desk's market-maker inventory are designed not to exceed, on an ongoing 
basis, the reasonably expected near term demands of clients, customers, 
or counterparties, based on:
    (A) The liquidity, maturity, and depth of the market for the 
relevant types of financial instrument(s); and
    (B) 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 financial 
instruments in which the trading desk makes a market, including through 
block trades;
    (iii) 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 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;
    (C) Limits for each trading desk, based on the nature and amount of 
the trading desk's market making-related activities, that address the 
factors prescribed by paragraph (b)(2)(ii) of this section, on:
    (1) The amount, types, and risks of its market-maker inventory;
    (2) The 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) The period of time a financial instrument may be held;
    (D) Internal controls and ongoing monitoring and analysis of each 
trading desk's compliance with its limits; and
    (E) Authorization procedures, including escalation procedures that 
require review and approval of any trade that would exceed a trading 
desk's limit(s), demonstrable analysis that the basis for any temporary 
or permanent increase to a trading desk's limit(s) is consistent with 
the requirements of this paragraph (b), and independent review of such 
demonstrable analysis and approval;
    (iv) To the extent that any limit identified pursuant to paragraph 
(b)(2)(iii)(C) of this section is exceeded, the trading desk takes 
action to bring the trading desk into compliance with the limits as 
promptly as possible after the limit is exceeded;
    (v) The compensation arrangements of persons performing the 
activities described in this paragraph (b) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (vi) The banking entity is licensed or registered to engage in 
activity described in this paragraph (b) in accordance with applicable 
law.
    (3) 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 Sec.  351.20(d)(1) of subpart D, 
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 
paragraph (b), 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 inventory. For the purposes of this 
paragraph (b), market-maker inventory 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.


Sec.  351.5   Permitted risk-mitigating hedging activities.

    (a) Permitted risk-mitigating hedging activities. The prohibition 
contained in Sec.  351.3(a) does not apply to the risk-mitigating 
hedging activities of a banking entity in connection with and related 
to individual or aggregated positions, contracts, or other holdings of 
the banking entity and designed to reduce the specific risks to the 
banking entity in connection with and related to such positions, 
contracts, or other holdings.
    (b) Requirements. The risk-mitigating hedging activities of a 
banking entity are permitted under paragraph (a) of this section only 
if:
    (1) 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:
    (i) 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;
    (ii) Internal controls and ongoing monitoring, management, and 
authorization procedures, including relevant escalation procedures; and
    (iii) The conduct of analysis, including correlation analysis, and 
independent testing designed to ensure 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, and such correlation 
analysis demonstrates that the hedging activity demonstrably reduces or 
otherwise significantly mitigates the specific, identifiable risk(s) 
being hedged;
    (2) The risk-mitigating hedging activity:

[[Page 62182]]

    (i) Is conducted in accordance with the written policies, 
procedures, and internal controls required under this section;
    (ii) At the inception of the hedging activity, including, without 
limitation, any adjustments to the hedging activity, is designed to 
reduce or otherwise significantly mitigate and demonstrably reduces or 
otherwise significantly mitigates 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;
    (iii) 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;
    (iv) Is subject to continuing review, monitoring and management by 
the banking entity that:
    (A) Is consistent with the written hedging policies and procedures 
required under paragraph (b)(1) of this section;
    (B) Is designed to reduce or otherwise significantly mitigate and 
demonstrably reduces or otherwise significantly mitigates 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
    (C) 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)(2) of this section and is not 
prohibited proprietary trading; and
    (3) The compensation arrangements of persons performing risk-
mitigating hedging activities are designed not to reward or incentivize 
prohibited proprietary trading.
    (c) Documentation requirement--(1) A banking entity must comply 
with the requirements of paragraphs (c)(2) and (3) of this section with 
respect to any purchase or sale of financial instruments made in 
reliance on this section for risk-mitigating hedging purposes that is:
    (i) Not established by the specific trading desk establishing or 
responsible for the underlying positions, contracts, or other holdings 
the risks of which the hedging activity is designed to reduce;
    (ii) Established by the specific trading desk establishing or 
responsible for the underlying positions, contracts, or other holdings 
the risks of which the purchases or sales are designed to reduce, but 
that is effected through a financial instrument, exposure, technique, 
or strategy that is not specifically identified in the trading desk's 
written policies and procedures established under paragraph (b)(1) of 
this section or under Sec.  351.4(b)(2)(iii)(B) of this subpart as a 
product, instrument, exposure, technique, or strategy such trading desk 
may use for hedging; or
    (iii) Established to hedge aggregated positions across two or more 
trading desks.
    (2) In connection with any purchase or sale identified in paragraph 
(c)(1) of this section, a banking entity must, at a minimum, and 
contemporaneously with the purchase or sale, document:
    (i) The specific, identifiable risk(s) of the identified positions, 
contracts, or other holdings of the banking entity that the purchase or 
sale is designed to reduce;
    (ii) The specific risk-mitigating strategy that the purchase or 
sale is designed to fulfill; and
    (iii) The trading desk or other business unit that is establishing 
and responsible for the hedge.
    (3) A banking entity must create and retain records sufficient to 
demonstrate compliance with the requirements of this paragraph (c) for 
a period that is no less than five years in a form that allows the 
banking entity to promptly produce such records to the FDIC on request, 
or such longer period as required under other law or this part.


Sec.  351.6   Other permitted proprietary trading activities.

    (a) Permitted trading in domestic government obligations. The 
prohibition contained in Sec.  351.3(a) does not apply to the purchase 
or sale by a banking entity of a financial instrument that is:
    (1) An obligation of, or issued or guaranteed by, the United 
States;
    (2) An obligation, participation, or other instrument of, or issued 
or guaranteed by, an agency of the United States, the Government 
National Mortgage Association, the Federal National Mortgage 
Association, the Federal Home Loan Mortgage Corporation, a Federal Home 
Loan Bank, the Federal Agricultural Mortgage Corporation or a Farm 
Credit System institution chartered under and subject to the provisions 
of the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.);
    (3) An obligation of any State or any political subdivision 
thereof, including any municipal security; or
    (4) An obligation of the FDIC, or any entity formed by or on behalf 
of the FDIC for purpose of facilitating the disposal of assets acquired 
or held by the FDIC 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.
    (b) Permitted trading in foreign government obligations--(1) 
Affiliates of foreign banking entities in the United States. The 
prohibition contained in Sec.  351.3(a) does not apply to the purchase 
or sale of a financial instrument that is an obligation of, or issued 
or guaranteed by, a foreign sovereign (including any multinational 
central bank of which the foreign sovereign is a member), or any agency 
or political subdivision of such foreign sovereign, by a banking 
entity, so long as:
    (i) The banking entity is organized under or is directly or 
indirectly controlled by a banking entity that is organized under the 
laws of a foreign sovereign and is not directly or indirectly 
controlled by a top-tier banking entity that is organized under the 
laws of the United States;
    (ii) The financial instrument is an obligation of, or issued or 
guaranteed by, the foreign sovereign under the laws of which the 
foreign banking entity referred to in paragraph (b)(1)(i) of this 
section is organized (including any multinational central bank of which 
the foreign sovereign is a member), or any agency or political 
subdivision of that foreign sovereign; and
    (iii) The purchase or sale as principal is not made by an insured 
depository institution.
    (2) Foreign affiliates of a U.S. banking entity. The prohibition 
contained in Sec.  351.3(a) does not apply to the purchase or sale of a 
financial instrument that is an obligation of, or issued or guaranteed 
by, a foreign sovereign (including any multinational central bank of 
which the foreign sovereign is a member), or any agency or political 
subdivision of that foreign sovereign, by a foreign entity that is 
owned or controlled by a banking entity organized or established under 
the laws of the United States or any State, so long as:
    (i) The foreign entity is a foreign bank, as defined in section 
211.2(j) of the Board's Regulation K (12 CFR 211.2(j)), or is regulated 
by the foreign sovereign as a securities dealer;

[[Page 62183]]

    (ii) The financial instrument is an obligation of, or issued or 
guaranteed by, the foreign sovereign under the laws of which the 
foreign entity is organized (including any multinational central bank 
of which the foreign sovereign is a member), or any agency or political 
subdivision of that foreign sovereign; and
    (iii) The financial instrument is owned by the foreign entity and 
is not financed by an affiliate that is located in the United States or 
organized under the laws of the United States or of any State.
    (c) Permitted trading on behalf of customers--(1) Fiduciary 
transactions. The prohibition contained in Sec.  351.3(a) does not 
apply to the purchase or sale of financial instruments by a banking 
entity acting as trustee or in a similar fiduciary capacity, so long 
as:
    (i) The transaction is conducted for the account of, or on behalf 
of, a customer; and
    (ii) The banking entity does not have or retain beneficial 
ownership of the financial instruments.
    (2) Riskless principal transactions. The prohibition contained in 
Sec.  351.3(a) does not apply to the purchase or sale of financial 
instruments by a banking entity acting as riskless principal in a 
transaction in which the banking entity, after receiving an order to 
purchase (or sell) a financial instrument from a customer, purchases 
(or sells) the financial instrument for its own account to offset a 
contemporaneous sale to (or purchase from) the customer.
    (d) Permitted trading by a regulated insurance company. The 
prohibition contained in Sec.  351.3(a) does not apply to the purchase 
or sale of financial instruments by a banking entity that is an 
insurance company or an affiliate of an insurance company if:
    (1) The insurance company or its affiliate purchases or sells the 
financial instruments solely for:
    (i) The general account of the insurance company; or
    (ii) A separate account established by the insurance company;
    (2) The purchase or sale is conducted in compliance with, and 
subject to, the insurance company investment laws, regulations, and 
written guidance 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, regulation, or written guidance described in 
paragraph (d)(2) of this section is insufficient to protect the safety 
and soundness of the covered banking entity, or the financial stability 
of the United States.
    (e) Permitted trading activities of foreign banking entities. (1) 
The prohibition contained in Sec.  351.3(a) does not apply to the 
purchase or sale of financial instruments by a banking entity if:
    (i) The banking entity is not organized or directly or indirectly 
controlled by a banking entity that is organized under the laws of the 
United States or of any State;
    (ii) The purchase or sale by the banking entity is made pursuant to 
paragraph (9) or (13) of section 4(c) of the BHC Act; and
    (iii) The purchase or sale meets the requirements of paragraph 
(e)(3) of this section.
    (2) A purchase or sale of financial instruments by a banking entity 
is made pursuant to paragraph (9) or (13) of section 4(c) of the BHC 
Act for purposes of paragraph (e)(1)(ii) of this section only if:
    (i) The purchase or sale is conducted in accordance with the 
requirements of paragraph (e) of this section; and
    (ii)(A) With respect to a banking entity that is a foreign banking 
organization, the banking entity meets the qualifying foreign banking 
organization requirements of section 211.23(a), (c) or (e) of the 
Board's Regulation K (12 CFR 211.23(a), (c) or (e)), as applicable; or
    (B) With respect to a banking entity that is not a foreign banking 
organization, the banking entity is not organized under the laws of the 
United States or of any State and the banking entity, on a fully-
consolidated basis, meets at least two of the following requirements:
    (1) Total assets of the banking entity held outside of the United 
States exceed total assets of the banking entity held in the United 
States;
    (2) Total revenues derived from the business of the banking entity 
outside of the United States exceed total revenues derived from the 
business of the banking entity in the United States; or
    (3) Total net income derived from the business of the banking 
entity outside of the United States exceeds total net income derived 
from the business of the banking entity in the United States.
    (3) A purchase or sale by a banking entity is permitted for 
purposes of this paragraph (e) if:
    (i) The banking entity engaging as principal in the purchase or 
sale (including any personnel of the banking entity or its affiliate 
that arrange, negotiate or execute such purchase or sale) is not 
located in the United States or organized under the laws of the United 
States or of any State;
    (ii) The banking entity (including relevant personnel) that makes 
the decision to purchase or sell as principal 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 purchases or sales 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; and
    (v) The purchase or sale is not conducted with or through any U.S. 
entity, other than:
    (A) A purchase or sale with the foreign operations of a U.S. entity 
if no personnel of such U.S. entity that are located in the United 
States are involved in the arrangement, negotiation, or execution of 
such purchase or sale;
    (B) A purchase or sale with an unaffiliated market intermediary 
acting as principal, provided the purchase or sale is promptly cleared 
and settled through a clearing agency or derivatives clearing 
organization acting as a central counterparty; or
    (C) A purchase or sale through an unaffiliated market intermediary 
acting as agent, provided the purchase or sale is conducted anonymously 
on an exchange or similar trading facility and is promptly cleared and 
settled through a clearing agency or derivatives clearing organization 
acting as a central counterparty.
    (4) For purposes of this paragraph (e), a U.S. entity is 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.
    (5) For purposes of this paragraph (e), a U.S. branch, agency, or 
subsidiary of a foreign banking entity is considered to be 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.
    (6) For purposes of this paragraph (e), unaffiliated market 
intermediary means

[[Page 62184]]

an unaffiliated entity, acting as an intermediary, that is:
    (i) A broker or dealer registered with the SEC under section 15 of 
the Exchange Act or exempt from registration or excluded from 
regulation as such;
    (ii) A swap dealer registered with the CFTC under section 4s of the 
Commodity Exchange Act or exempt from registration or excluded from 
regulation as such;
    (iii) A security-based swap dealer registered with the SEC under 
section 15F of the Exchange Act or exempt from registration or excluded 
from regulation as such; or
    (iv) A futures commission merchant registered with the CFTC under 
section 4f of the Commodity Exchange Act or exempt from registration or 
excluded from regulation as such.


Sec.  351.7   Limitations on permitted proprietary trading activities.

    (a) No transaction, class of transactions, or activity may be 
deemed permissible under Sec. Sec.  351.4 through 351.6 if the 
transaction, class of transactions, or activity would:
    (1) Involve or result in a material conflict of interest between 
the banking entity and its clients, customers, or counterparties;
    (2) Result, directly or indirectly, in a material exposure by the 
banking entity to a high-risk asset or a high-risk trading strategy; or
    (3) Pose a threat to the safety and soundness of the banking entity 
or to the financial stability of the United States.
    (b) Definition of material conflict of interest. (1) For purposes 
of this section, a material conflict of interest between a banking 
entity and its clients, customers, or counterparties exists if the 
banking entity engages in any transaction, class of transactions, or 
activity that would involve or result in the banking entity's interests 
being materially adverse to the interests of its client, customer, or 
counterparty with respect to such transaction, class of transactions, 
or activity, and the banking entity has not taken at least one of the 
actions in paragraph (b)(2) of this section.
    (2) Prior to effecting the specific transaction or class or type of 
transactions, or engaging in the specific activity, the banking entity:
    (i) Timely and effective disclosure. (A) Has made clear, timely, 
and effective disclosure of the conflict of interest, together with 
other necessary information, in reasonable detail and in a manner 
sufficient to permit a reasonable client, customer, or counterparty to 
meaningfully understand the conflict of interest; and
    (B) Such disclosure is made in a manner that provides the client, 
customer, or counterparty the opportunity to negate, or substantially 
mitigate, any materially adverse effect on the client, customer, or 
counterparty created by the conflict of interest; or
    (ii) Information barriers. Has established, maintained, and 
enforced information barriers that are memorialized in written policies 
and procedures, such as physical separation of personnel, or functions, 
or limitations on types of activity, that are reasonably designed, 
taking into consideration the nature of the banking entity's business, 
to prevent the conflict of interest from involving or resulting in a 
materially adverse effect on a client, customer, or counterparty. A 
banking entity may not rely on such information barriers if, in the 
case of any specific transaction, class or type of transactions or 
activity, the banking entity knows or should reasonably know that, 
notwithstanding the banking entity's establishment of information 
barriers, the conflict of interest may involve or result in a 
materially adverse effect on a client, customer, or counterparty.
    (c) Definition of high-risk asset and high-risk trading strategy. 
For purposes of this section:
    (1) High-risk asset means an asset or group of related assets that 
would, if held by a banking entity, 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.
    (2) High-risk trading strategy means a trading strategy that would, 
if engaged in by a banking entity, 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.


Sec. Sec.  351.8-351.9   [Reserved]

Subpart C--Covered Funds Activities and Investments


Sec.  351.10   Prohibition on acquiring or retaining an ownership 
interest in and having certain relationships with a covered fund.

    (a) Prohibition. (1) Except as otherwise provided in this subpart, 
a banking entity may not, as principal, directly or indirectly, acquire 
or retain any ownership interest in or sponsor a covered fund.
    (2) Paragraph (a)(1) of this section does not include acquiring or 
retaining an ownership interest in a covered fund by a banking entity:
    (i) Acting solely as agent, broker, or custodian, so long as;
    (A) The activity is conducted for the account of, or on behalf of, 
a customer; and
    (B) The banking entity and its affiliates do not have or retain 
beneficial ownership of such ownership interest;
    (ii) Through a deferred compensation, stock-bonus, profit-sharing, 
or pension plan of the banking entity (or an affiliate thereof) that is 
established and administered in accordance with the law of the United 
States or a foreign sovereign, if the ownership interest is held or 
controlled directly or indirectly by the banking entity as trustee for 
the benefit of persons who are or were employees of the banking entity 
(or an affiliate thereof);
    (iii) In the ordinary course of collecting a debt previously 
contracted in good faith, provided that the banking entity divests the 
ownership interest as soon as practicable, and in no event may the 
banking entity retain such ownership interest for longer than such 
period permitted by the FDIC; or
    (iv) On behalf of customers as trustee or in a similar fiduciary 
capacity for a customer that is not a covered fund, so long as:
    (A) The activity is conducted for the account of, or on behalf of, 
the customer; and
    (B) The banking entity and its affiliates do not have or retain 
beneficial ownership of such ownership interest.
    (b) Definition of covered fund. (1) Except as provided in paragraph 
(c) of this section, covered fund means:
    (i) An issuer that would be an investment company, as defined in 
the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), but for 
section 3(c)(1) or 3(c)(7) of that Act (15 U.S.C. 80a-3(c)(1) or (7));
    (ii) Any commodity pool under section 1a(10) of the Commodity 
Exchange Act (7 U.S.C. 1a(10)) for which:
    (A) The commodity pool operator has claimed an exemption under 17 
CFR 4.7; or
    (B)(1) A commodity pool operator is registered with the CFTC as a 
commodity pool operator in connection with the operation of the 
commodity pool;
    (2) Substantially all participation units of the commodity pool are 
owned by qualified eligible persons under 17 CFR 4.7(a)(2) and (3); and
    (3) Participation units of the commodity pool have not been 
publicly offered to persons who are not qualified

[[Page 62185]]

eligible persons under 17 CFR 4.7(a)(2) and (3); or
    (iii) For any banking entity that is, or is controlled directly or 
indirectly by a banking entity that is, located in or organized under 
the laws of the United States or of any State, an entity that:
    (A) Is organized or established outside the United States and the 
ownership interests of which are offered and sold solely outside the 
United States;
    (B) Is, or holds itself out as being, an entity or arrangement that 
raises money from investors primarily for the purpose of investing in 
securities for resale or other disposition or otherwise trading in 
securities; and
    (C)(1) Has as its sponsor that banking entity (or an affiliate 
thereof); or
    (2) Has issued an ownership interest that is owned directly or 
indirectly by that banking entity (or an affiliate thereof).
    (2) An issuer shall not be deemed to be a covered fund under 
paragraph (b)(1)(iii) of this section if, were the issuer subject to 
U.S. securities laws, the issuer could rely on an exclusion or 
exemption from the definition of ``investment company'' under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) other than the 
exclusions contained in section 3(c)(1) and 3(c)(7) of that Act.
    (3) For purposes of paragraph (b)(1)(iii) of this section, a U.S. 
branch, agency, or subsidiary of a foreign 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.
    (c) Notwithstanding paragraph (b) of this section, unless the 
appropriate Federal banking agencies, the SEC, and the CFTC jointly 
determine otherwise, a covered fund does not include:
    (1) Foreign public funds. (i) Subject to paragraphs (ii) and (iii) 
below, an issuer that:
    (A) Is organized or established outside of the United States;
    (B) Is authorized to offer and sell ownership interests to retail 
investors in the issuer's home jurisdiction; and
    (C) Sells ownership interests predominantly through one or more 
public offerings outside of the United States.
    (ii) With respect to a banking entity that is, or is controlled 
directly or indirectly by a banking entity that is, located in or 
organized under the laws of the United States or of any State and any 
issuer for which such banking entity acts as sponsor, the sponsoring 
banking entity may not rely on the exemption in paragraph (c)(1)(i) of 
this section for such issuer unless ownership interests in the issuer 
are sold predominantly to persons other than:
    (A) Such sponsoring banking entity;
    (B) Such issuer;
    (C) Affiliates of such sponsoring banking entity or such issuer; 
and
    (D) Directors and employees of such entities.
    (iii) For purposes of paragraph (c)(1)(i)(C) of this section, the 
term ``public offering'' means a distribution (as defined in Sec.  
351.4(a)(3) of subpart B) of securities in any jurisdiction outside the 
United States to investors, including retail investors, provided that:
    (A) The distribution complies with all applicable requirements in 
the jurisdiction in which such distribution is being made;
    (B) The distribution does not restrict availability to investors 
having a minimum level of net worth or net investment assets; and
    (C) The issuer has filed or submitted, with the appropriate 
regulatory authority in such jurisdiction, offering disclosure 
documents that are publicly available.
    (2) Wholly-owned subsidiaries. An entity, all of the outstanding 
ownership interests of which are owned directly or indirectly by the 
banking entity (or an affiliate thereof), except that:
    (i) Up to five percent of the entity's outstanding ownership 
interests, less any amounts outstanding under paragraph (c)(2)(ii) of 
this section, may be held by employees or directors of the banking 
entity or such affiliate (including former employees or directors if 
their ownership interest was acquired while employed by or in the 
service of the banking entity); and
    (ii) Up to 0.5 percent of the entity's outstanding ownership 
interests may be held by a third party if the ownership interest is 
acquired or retained by the third party for the purpose of establishing 
corporate separateness or addressing bankruptcy, insolvency, or similar 
concerns.
    (3) Joint ventures. A joint venture between a banking entity or any 
of its affiliates and one or more unaffiliated persons, provided that 
the joint venture:
    (i) Is comprised of no more than 10 unaffiliated co-venturers;
    (ii) Is in the business of engaging in activities that are 
permissible for the banking entity or affiliate, other than investing 
in securities for resale or other disposition; and
    (iii) Is not, and does not hold itself out as being, an entity or 
arrangement that raises money from investors primarily for the purpose 
of investing in securities for resale or other disposition or otherwise 
trading in securities.
    (4) Acquisition vehicles. An issuer:
    (i) Formed solely for the purpose of engaging in a bona fide merger 
or acquisition transaction; and
    (ii) That exists only for such period as necessary to effectuate 
the transaction.
    (5) Foreign pension or retirement funds. A plan, fund, or program 
providing pension, retirement, or similar benefits that is:
    (i) Organized and administered outside the United States;
    (ii) A broad-based plan for employees or citizens that is subject 
to regulation as a pension, retirement, or similar plan under the laws 
of the jurisdiction in which the plan, fund, or program is organized 
and administered; and
    (iii) Established for the benefit of citizens or residents of one 
or more foreign sovereigns or any political subdivision thereof.
    (6) Insurance company separate accounts. A separate account, 
provided that no banking entity other than the insurance company 
participates in the account's profits and losses.
    (7) Bank owned life insurance. A separate account that is used 
solely for the purpose of allowing one or more banking entities to 
purchase a life insurance policy for which the banking entity or 
entities is beneficiary, provided that no banking entity that purchases 
the policy:
    (i) Controls the investment decisions regarding the underlying 
assets or holdings of the separate account; or
    (ii) Participates in the profits and losses of the separate account 
other than in compliance with applicable supervisory guidance regarding 
bank owned life insurance.
    (8) Loan securitizations. (i) Scope. An issuing entity for asset-
backed securities that satisfies all the conditions of this paragraph 
(c)(8) and the assets or holdings of which are comprised solely of:
    (A) Loans as defined in Sec.  351.2(s) of subpart A;
    (B) Rights or other assets designed to assure the servicing or 
timely distribution of proceeds to holders of such securities and 
rights or other assets that are related or incidental to purchasing or 
otherwise acquiring and holding the loans, provided that each asset 
meets the requirements of paragraph (c)(8)(iii) of this section;
    (C) Interest rate or foreign exchange derivatives that meet the 
requirements of paragraph (c)(8)(iv) of this section; and
    (D) Special units of beneficial interest and collateral 
certificates that meet the requirements of paragraph (c)(8)(v) of this 
section.

[[Page 62186]]

    (ii) Impermissible assets. For purposes of this paragraph (c)(8), 
the assets or holdings of the issuing entity shall not include any of 
the following:
    (A) A security, including an asset-backed security, or an interest 
in an equity or debt security other than as permitted in paragraph 
(c)(8)(iii) of this section;
    (B) A derivative, other than a derivative that meets the 
requirements of paragraph (c)(8)(iv) of this section; or
    (C) A commodity forward contract.
    (iii) Permitted securities. Notwithstanding paragraph (c)(8)(ii)(A) 
of this section, the issuing entity may hold securities if those 
securities are:
    (A) Cash equivalents for purposes of the rights and assets in 
paragraph (c)(8)(i)(B) of this section; or
    (B) Securities received in lieu of debts previously contracted with 
respect to the loans supporting the asset-backed securities.
    (iv) Derivatives. The holdings of derivatives by the issuing entity 
shall be limited to interest rate or foreign exchange derivatives that 
satisfy all of the following conditions:
    (A) The written terms of the derivative directly relate to the 
loans, the asset-backed securities, or the contractual rights of other 
assets described in paragraph (c)(8)(i)(B) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign 
exchange risks related to the loans, the asset-backed securities, or 
the contractual rights or other assets described in paragraph 
(c)(8)(i)(B) of this section.
    (v) Special units of beneficial interest and collateral 
certificates. The assets or holdings of the issuing entity may include 
collateral certificates and special units of beneficial interest issued 
by a special purpose vehicle, provided that:
    (A) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate meets the requirements in 
this paragraph (c)(8);
    (B) The special unit of beneficial interest or collateral 
certificate is used for the sole purpose of transferring to the issuing 
entity for the loan securitization the economic risks and benefits of 
the assets that are permissible for loan securitizations under this 
paragraph (c)(8) and does not directly or indirectly transfer any 
interest in any other economic or financial exposure;
    (C) The special unit of beneficial interest or collateral 
certificate is created solely to satisfy legal requirements or 
otherwise facilitate the structuring of the loan securitization; and
    (D) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate and the issuing entity 
are established under the direction of the same entity that initiated 
the loan securitization.
    (9) Qualifying asset-backed commercial paper conduits. (i) An 
issuing entity for asset-backed commercial paper that satisfies all of 
the following requirements:
    (A) The asset-backed commercial paper conduit holds only:
    (1) Loans and other assets permissible for a loan securitization 
under paragraph (c)(8)(i) of this section; and
    (2) Asset-backed securities supported solely by assets that are 
permissible for loan securitizations under paragraph (c)(8)(i) of this 
section and acquired by the asset-backed commercial paper conduit as 
part of an initial issuance either directly from the issuing entity of 
the asset-backed securities or directly from an underwriter in the 
distribution of the asset-backed securities;
    (B) The asset-backed commercial paper conduit issues only asset-
backed securities, comprised of a residual interest and securities with 
a legal maturity of 397 days or less; and
    (C) A regulated liquidity provider has entered into a legally 
binding commitment to provide full and unconditional liquidity coverage 
with respect to all of the outstanding asset-backed securities issued 
by the asset-backed commercial paper conduit (other than any residual 
interest) in the event that funds are required to redeem maturing 
asset-backed securities.
    (ii) For purposes of this paragraph (c)(9), a regulated liquidity 
provider means:
    (A) A depository institution, as defined in section 3(c) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(c));
    (B) A bank holding company, as defined in section 2(a) of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841(a)), or a subsidiary 
thereof;
    (C) A savings and loan holding company, as defined in section 10a 
of the Home Owners' Loan Act (12 U.S.C. 1467a), provided all or 
substantially all of the holding company's activities are permissible 
for a financial holding company under section 4(k) of the Bank Holding 
Company Act of 1956 (12 U.S.C. 1843(k)), or a subsidiary thereof;
    (D) A foreign bank whose home country supervisor, as defined in 
Sec.  211.21(q) of the Board's Regulation K (12 CFR 211.21(q)), has 
adopted capital standards consistent with the Capital Accord for the 
Basel Committee on banking Supervision, as amended, and that is subject 
to such standards, or a subsidiary thereof; or
    (E) The United States or a foreign sovereign.
    (10) Qualifying covered bonds--(i) Scope. An entity owning or 
holding a dynamic or fixed pool of loans or other assets as provided in 
paragraph (c)(8) of this section for the benefit of the holders of 
covered bonds, provided that the assets in the pool are comprised 
solely of assets that meet the conditions in paragraph (c)(8)(i) of 
this section.
    (ii) Covered bond. For purposes of this paragraph (c)(10), a 
covered bond means:
    (A) A debt obligation issued by an entity that meets the definition 
of foreign banking organization, the payment obligations of which are 
fully and unconditionally guaranteed by an entity that meets the 
conditions set forth in paragraph (c)(10)(i) of this section; or
    (B) A debt obligation of an entity that meets the conditions set 
forth in paragraph (c)(10)(i) of this section, provided that the 
payment obligations are fully and unconditionally guaranteed by an 
entity that meets the definition of foreign banking organization and 
the entity is a wholly-owned subsidiary, as defined in paragraph (c)(2) 
of this section, of such foreign banking organization.
    (11) SBICs and public welfare investment funds. An issuer:
    (i) That is a small business investment company, as defined in 
section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 
662), or that has received from the Small Business Administration 
notice to proceed to qualify for a license as a small business 
investment company, which notice or license has not been revoked; or
    (ii) The business of which is to make investments that are:
    (A) Designed primarily to promote the public welfare, of the type 
permitted under paragraph (11) of section 5136 of the Revised Statutes 
of the United States (12 U.S.C. 24), including the welfare of low- and 
moderate-income communities or families (such as providing housing, 
services, or jobs); or
    (B) Qualified rehabilitation expenditures with respect to a 
qualified rehabilitated building or certified historic structure, as 
such terms are defined in section 47 of the Internal Revenue Code of 
1986 or a similar State historic tax credit program.
    (12) Registered investment companies and excluded entities. An 
issuer:
    (i) That is registered as an investment company under section 8 of 
the Investment Company Act of 1940 (15 U.S.C. 80a-8), or that is formed 
and

[[Page 62187]]

operated pursuant to a written plan to become a registered investment 
company as described in Sec.  351.20(e)(3) of subpart D and that 
complies with the requirements of section 18 of the Investment Company 
Act of 1940 (15 U.S.C. 80a-18);
    (ii) That may rely on an exclusion or exemption from the definition 
of ``investment company'' under the Investment Company Act of 1940 (15 
U.S.C. 80a-1 et seq.) other than the exclusions contained in section 
3(c)(1) and 3(c)(7) of that Act; or
    (iii) That has elected to be regulated as a business development 
company pursuant to section 54(a) of that Act (15 U.S.C. 80a-53) and 
has not withdrawn its election, or that is formed and operated pursuant 
to a written plan to become a business development company as described 
in Sec.  351.20(e)(3) of subpart D and that complies with the 
requirements of section 61 of the Investment Company Act of 1940 (15 
U.S.C. 80a-60).
    (13) Issuers in conjunction with the FDIC's receivership or 
conservatorship operations. An issuer that is an entity formed by or on 
behalf of the FDIC for the purpose of facilitating the disposal of 
assets acquired in the FDIC's capacity as conservator or receiver under 
the Federal Deposit Insurance Act or Title II of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act.
    (14) Other excluded issuers. (i) Any issuer that the appropriate 
Federal banking agencies, the SEC, and the CFTC jointly determine the 
exclusion of which is consistent with the purposes of section 13 of the 
BHC Act.
    (ii) A determination made under paragraph (c)(14)(i) of this 
section will be promptly made public.
    (d) Definition of other terms related to covered funds. For 
purposes of this subpart:
    (1) Applicable accounting standards means U.S. generally accepted 
accounting principles, or such other accounting standards applicable to 
a banking entity that the FDIC determines are appropriate and that the 
banking entity uses in the ordinary course of its business in preparing 
its consolidated financial statements.
    (2) Asset-backed security has the meaning specified in Section 
3(a)(79) of the Exchange Act (15 U.S.C. 78c(a)(79)).
    (3) Director has the same meaning as provided in section 
215.2(d)(1) of the Board's Regulation O (12 CFR 215.2(d)(1)).
    (4) Issuer has the same meaning as in section 2(a)(22) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(22)).
    (5) Issuing entity means with respect to asset-backed securities 
the special purpose vehicle that owns or holds the pool assets 
underlying asset-backed securities and in whose name the asset-backed 
securities supported or serviced by the pool assets are issued.
    (6) Ownership interest--(i) Ownership interest means any equity, 
partnership, or other similar interest. An ``other similar interest'' 
means an interest that:
    (A) Has the right to participate in the selection or removal of a 
general partner, managing member, member of the board of directors or 
trustees, investment manager, investment adviser, or commodity trading 
advisor of the covered fund (excluding the rights of a creditor to 
exercise remedies upon the occurrence of an event of default or an 
acceleration event);
    (B) Has the right under the terms of the interest to receive a 
share of the income, gains or profits of the covered fund;
    (C) Has the right to receive the underlying assets of the covered 
fund after all other interests have been redeemed and/or paid in full 
(excluding the rights of a creditor to exercise remedies upon the 
occurrence of an event of default or an acceleration event);
    (D) Has the right to receive all or a portion of excess spread (the 
positive difference, if any, between the aggregate interest payments 
received from the underlying assets of the covered fund and the 
aggregate interest paid to the holders of other outstanding interests);
    (E) Provides under the terms of the interest that the amounts 
payable by the covered fund with respect to the interest could be 
reduced based on losses arising from the underlying assets of the 
covered fund, such as allocation of losses, write-downs or charge-offs 
of the outstanding principal balance, or reductions in the amount of 
interest due and payable on the interest;
    (F) Receives income on a pass-through basis from the covered fund, 
or has a rate of return that is determined by reference to the 
performance of the underlying assets of the covered fund; or
    (G) Any synthetic right to have, receive, or be allocated any of 
the rights in paragraphs (d)(6)(i)(A) through (F) of this section.
    (ii) Ownership interest does not include: Restricted profit 
interest. An interest held by an entity (or an employee or former 
employee thereof) in a covered fund for which the entity (or employee 
thereof) serves as investment manager, investment adviser, commodity 
trading advisor, or other service provider so long as:
    (A) The sole purpose and effect of the interest is to allow the 
entity (or employee or former employee thereof) to share in the profits 
of the covered fund as performance compensation for the investment 
management, investment advisory, commodity trading advisory, or other 
services provided to the covered fund by the entity (or employee or 
former employee thereof), provided that the entity (or employee or 
former employee thereof) may be obligated under the terms of such 
interest to return profits previously received;
    (B) All such profit, once allocated, is distributed to the entity 
(or employee or former employee thereof) promptly after being earned 
or, if not so distributed, is retained by the covered fund for the sole 
purpose of establishing a reserve amount to satisfy contractual 
obligations with respect to subsequent losses of the covered fund and 
such undistributed profit of the entity (or employee or former employee 
thereof) does not share in the subsequent investment gains of the 
covered fund;
    (C) Any amounts invested in the covered fund, including any amounts 
paid by the entity (or employee or former employee thereof) in 
connection with obtaining the restricted profit interest, are within 
the limits of Sec.  351.12 of this subpart; and
    (D) The interest is not transferable by the entity (or employee or 
former employee thereof) except to an affiliate thereof (or an employee 
of the banking entity or affiliate), to immediate family members, or 
through the intestacy, of the employee or former employee, or in 
connection with a sale of the business that gave rise to the restricted 
profit interest by the entity (or employee or former employee thereof) 
to an unaffiliated party that provides investment management, 
investment advisory, commodity trading advisory, or other services to 
the fund.
    (7) Prime brokerage transaction means any transaction that would be 
a covered transaction, as defined in section 23A(b)(7) of the Federal 
Reserve Act (12 U.S.C. 371c(b)(7)), that is provided in connection with 
custody, clearance and settlement, securities borrowing or lending 
services, trade execution, financing, or data, operational, and 
administrative support.
    (8) Resident of the United States means a person that is a ``U.S. 
person'' as defined in rule 902(k) of the SEC's Regulation S (17 CFR 
230.902(k)).
    (9) Sponsor means, with respect to a covered fund:
    (i) To serve as a general partner, managing member, or trustee of a 
covered fund, or to serve as a commodity pool operator with respect

[[Page 62188]]

to a covered fund as defined in (b)(1)(ii) of this section;
    (ii) In any manner to select or to control (or to have employees, 
officers, or directors, or agents who constitute) a majority of the 
directors, trustees, or management of a covered fund; or
    (iii) To share with a covered fund, for corporate, marketing, 
promotional, or other purposes, the same name or a variation of the 
same name, except as permitted under Sec.  351.11(a)(6).
    (10) Trustee. (i) For purposes of paragraph (d)(9) of this section 
and Sec.  351.11 of subpart C, a trustee does not include:
    (A) A trustee that does not exercise investment discretion with 
respect to a covered fund, including a trustee that is subject to the 
direction of an unaffiliated named fiduciary who is not a trustee 
pursuant to section 403(a)(1) of the Employee's Retirement Income 
Security Act (29 U.S.C. 1103(a)(1)); or
    (B) A trustee that is subject to fiduciary standards imposed under 
foreign law that are substantially equivalent to those described in 
paragraph (d)(10)(i)(A) of this section;
    (ii) Any entity that directs a person described in paragraph 
(d)(10)(i) of this section, or that possesses authority and discretion 
to manage and control the investment decisions of a covered fund for 
which such person serves as trustee, shall be considered to be a 
trustee of such covered fund.


Sec.  351.11   Permitted organizing and offering, underwriting, and 
market making with respect to a covered fund.

    (a) Organizing and offering a covered fund in general. 
Notwithstanding Sec.  351.10(a) of this subpart, a banking entity is 
not prohibited from acquiring or retaining an ownership interest in, or 
acting as sponsor to, a covered fund in connection with, directly or 
indirectly, organizing and offering a covered fund, including serving 
as a general partner, managing member, trustee, or commodity pool 
operator of the covered fund and in any manner selecting or controlling 
(or having employees, officers, directors, or agents who constitute) a 
majority of the directors, trustees, or management of the covered fund, 
including any necessary expenses for the foregoing, only if:
    (1) The banking entity (or an affiliate thereof) provides bona fide 
trust, fiduciary, investment advisory, or commodity trading advisory 
services;
    (2) The covered fund is organized and offered only in connection 
with the provision of bona fide trust, fiduciary, investment advisory, 
or commodity trading advisory services and only to persons that are 
customers of such services of the banking entity (or an affiliate 
thereof), pursuant to a written plan or similar documentation outlining 
how the banking entity or such affiliate intends to provide advisory or 
similar services to its customers through organizing and offering such 
fund;
    (3) The banking entity and its affiliates do not acquire or retain 
an ownership interest in the covered fund except as permitted under 
Sec.  351.12 of this subpart;
    (4) The banking entity and its affiliates comply with the 
requirements of Sec.  351.14 of this subpart;
    (5) The banking entity and its affiliates do 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;
    (6) The covered fund, for corporate, marketing, promotional, or 
other purposes:
    (i) Does not share the same name or a variation of the same name 
with the banking entity (or an affiliate thereof), except that a 
covered fund may share the same name or a variation of the same name 
with a banking entity that is an investment adviser to the covered fund 
if:
    (A) The investment adviser is not an insured depository 
institution, a company that controls an insured depository institution, 
or a company that is treated as a bank holding company for purposes of 
section 8 of the International Banking Act of 1978 (12 U.S.C. 3106); 
and
    (B) The investment adviser does not share the same name or a 
variation of the same name as an insured depository institution, a 
company that controls an insured depository institution, or a company 
that is treated as a bank holding company for purposes of section 8 of 
the International Banking Act of 1978 (12 U.S.C. 3106); and
    (ii) Does not use the word ``bank'' in its name;
    (7) No director or employee of the banking entity (or an affiliate 
thereof) takes or retains an ownership interest in the covered fund, 
except for any director or employee of the banking entity or such 
affiliate who is directly engaged in providing investment advisory, 
commodity trading advisory, or other services to the covered fund at 
the time the director or employee takes the ownership interest; and
    (8) The banking entity:
    (i) Clearly and conspicuously discloses, in writing, to any 
prospective and actual investor in the covered fund (such as through 
disclosure in the covered fund's offering documents):
    (A) That ``any losses in [such covered fund] will be borne solely 
by investors in [the covered fund] and not by [the banking entity] or 
its affiliates; therefore, [the banking entity's] losses in [such 
covered fund] will be limited to losses attributable to the ownership 
interests in the covered fund held by [the banking entity] and any 
affiliate in its capacity as investor in the [covered fund] or as 
beneficiary of a restricted profit interest held by [the banking 
entity] or any affiliate'';
    (B) That such investor should read the fund offering documents 
before investing in the covered fund;
    (C) That the ``ownership interests in the covered fund are not 
insured by the FDIC, and are not deposits, obligations of, or endorsed 
or guaranteed in any way, by any banking entity'' (unless that happens 
to be the case); and
    (D) The role of the banking entity and its affiliates and employees 
in sponsoring or providing any services to the covered fund; and
    (ii) Complies with any additional rules of the appropriate Federal 
banking agencies, the SEC, or the CFTC, as provided in section 13(b)(2) 
of the BHC Act, designed to ensure that losses in such covered fund are 
borne solely by investors in the covered fund and not by the covered 
banking entity and its affiliates.
    (b) Organizing and offering an issuing entity of asset-backed 
securities. (1) Notwithstanding Sec.  351.10(a) of this subpart, a 
banking entity is not prohibited from acquiring or retaining an 
ownership interest in, or acting as sponsor to, a covered fund that is 
an issuing entity of asset-backed securities in connection with, 
directly or indirectly, organizing and offering that issuing entity, so 
long as the banking entity and its affiliates comply with all of the 
requirements of paragraph (a)(3) through (8) of this section.
    (2) For purposes of this paragraph (b), organizing and offering a 
covered fund that is an issuing entity of asset-backed securities means 
acting as the securitizer, as that term is used in section 15G(a)(3) of 
the Exchange Act (15 U.S.C. 78o-11(a)(3)) of the issuing entity, or 
acquiring or retaining an ownership interest in the issuing entity as 
required by section 15G of that Act (15 U.S.C. 78o-11) and the 
implementing regulations issued thereunder.
    (c) Underwriting and market making in ownership interests of a 
covered fund. The prohibition contained in Sec.  351.10(a) of this 
subpart does not apply to a banking entity's underwriting activities or 
market making-related

[[Page 62189]]

activities involving a covered fund so long as:
    (1) Those activities are conducted in accordance with the 
requirements of Sec.  351.4(a) or Sec.  351.4(b) of subpart B, 
respectively;
    (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; acquires and retains an ownership interest in such 
covered fund and is either a securitizer, as that term is used in 
section 15G(a)(3) of the Exchange Act (15 U.S.C. 78o-11(a)(3)), or is 
acquiring and retaining an ownership interest in such covered fund in 
compliance with section 15G of that Act (15 U.S.C. 78o-11) and the 
implementing regulations issued thereunder each as permitted by 
paragraph (b) of this section; or, 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, 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 Sec.  
351.12(a)(2)(ii) and Sec.  351.12(d) of this subpart; and
    (3) With respect to any banking entity, the aggregate value of all 
ownership interests of the banking entity and its affiliates in all 
covered funds acquired and retained under Sec.  351.11 of this subpart, 
including all covered funds in which the banking entity holds an 
ownership interest in connection with underwriting and market making 
related activities permitted under this paragraph (c), are included in 
the calculation of all ownership interests under Sec.  
351.12(a)(2)(iii) and Sec.  351.12(d) of this subpart.


Sec.  351.12   Permitted investment in a covered fund.

    (a) Authority and limitations on permitted investments in covered 
funds. (1) Notwithstanding the prohibition contained in Sec.  351.10(a) 
of this subpart, a banking entity may acquire and retain an ownership 
interest in a covered fund that the banking entity or an affiliate 
thereof organizes and offers pursuant to Sec.  351.11, for the purposes 
of:
    (i) Establishment. Establishing the fund and providing the fund 
with sufficient initial equity for investment to permit the fund to 
attract unaffiliated investors, subject to the limits contained in 
paragraphs (a)(2)(i) and (iii) of this section; or
    (ii) De minimis investment. Making and retaining an investment in 
the covered fund subject to the limits contained in paragraphs 
(a)(2)(ii) and (iii) of this section.
    (2) Investment limits--(i) Seeding period. With respect to an 
investment in any covered fund made or held pursuant to paragraph 
(a)(1)(i) of this section, the banking entity and its affiliates:
    (A) Must actively seek unaffiliated investors to reduce, through 
redemption, sale, dilution, or other methods, the aggregate amount of 
all ownership interests of the banking entity in the covered fund to 
the amount permitted in paragraph (a)(2)(i)(B) of this section; and
    (B) Must, no later than 1 year after the date of establishment of 
the fund (or such longer period as may be provided by the Board 
pursuant to paragraph (e) of this section), conform its ownership 
interest in the covered fund to the limits in paragraph (a)(2)(ii) of 
this section;
    (ii) Per-fund limits. (A) Except as provided in paragraph 
(a)(2)(ii)(B) of this section, an investment by a banking entity and 
its affiliates in any covered fund made or held pursuant to paragraph 
(a)(1)(ii) of this section may not exceed 3 percent of the total number 
or value of the outstanding ownership interests of the fund.
    (B) An investment by a banking entity and its affiliates in a 
covered fund that is an issuing entity of asset-backed securities may 
not exceed 3 percent of the total fair market value of the ownership 
interests of the fund measured in accordance with paragraph (b)(3) of 
this section, unless a greater percentage is retained by the banking 
entity and its affiliates in compliance with the requirements of 
section 15G of the Exchange Act (15 U.S.C. 78o-11) and the implementing 
regulations issued thereunder, in which case the investment by the 
banking entity and its affiliates in the covered fund may not exceed 
the amount, number, or value of ownership interests of the fund 
required under section 15G of the Exchange Act and the implementing 
regulations issued thereunder.
    (iii) Aggregate limit. The aggregate value of all ownership 
interests of the banking entity and its affiliates in all covered funds 
acquired or retained under this section may not exceed 3 percent of the 
tier 1 capital of the banking entity, as provided under paragraph (c) 
of this section, and shall be calculated as of the last day of each 
calendar quarter.
    (iv) Date of establishment. For purposes of this section, the date 
of establishment of a covered fund shall be:
    (A) In general. The date on which the investment adviser or similar 
entity to the covered fund begins making investments pursuant to the 
written investment strategy for the fund;
    (B) Issuing entities of asset-backed securities. In the case of an 
issuing entity of asset-backed securities, the date on which the assets 
are initially transferred into the issuing entity of asset-backed 
securities.
    (b) Rules of construction--(1) Attribution of ownership interests 
to a covered banking entity. (i) For purposes of paragraph (a)(2) of 
this section, the amount and value of a banking entity's permitted 
investment in any single covered fund shall include any ownership 
interest held under Sec.  351.12 directly by the banking entity, 
including any affiliate of the banking entity.
    (ii) Treatment of registered investment companies, SEC-regulated 
business development companies and foreign public funds. For purposes 
of paragraph (b)(1)(i) of this section, a registered investment 
company, SEC-regulated business development companies or foreign public 
fund as described in Sec.  351.10(c)(1) of this subpart will not be 
considered to be an affiliate of the banking entity so long as the 
banking entity:
    (A) Does not own, control, or hold with the power to vote 25 
percent or more of the voting shares of the company or fund; and
    (B) Provides investment advisory, commodity trading advisory, 
administrative, and other services to the company or fund in compliance 
with the limitations under applicable regulation, order, or other 
authority.
    (iii) Covered funds. For purposes of paragraph (b)(1)(i) of this 
section, a covered fund will not be considered to be an affiliate of a 
banking entity so long as the covered fund is held in compliance with 
the requirements of this subpart.
    (iv) Treatment of employee and director investments financed by the 
banking entity. For purposes of paragraph (b)(1)(i) of this section, an 
investment by a director or employee of a banking entity who acquires 
an ownership interest in his or her personal capacity in a covered fund 
sponsored by the banking entity will be attributed to the banking 
entity if the banking entity, directly or indirectly, extends financing 
for the purpose of enabling the director or employee to

[[Page 62190]]

acquire the ownership interest in the fund and the financing is used to 
acquire such ownership interest in the covered fund.
    (2) Calculation of permitted ownership interests in a single 
covered fund. Except as provided in paragraph (b)(3) or (4), for 
purposes of determining whether an investment in a single covered fund 
complies with the restrictions on ownership interests under paragraphs 
(a)(2)(i)(B) and (a)(2)(ii)(A) of this section:
    (i) The aggregate number of the outstanding ownership interests 
held by the banking entity shall be the total number of ownership 
interests held under this section by the banking entity in a covered 
fund divided by the total number of ownership interests held by all 
entities in that covered fund, as of the last day of each calendar 
quarter (both measured without regard to committed funds not yet called 
for investment);
    (ii) The aggregate value of the outstanding ownership interests 
held by the banking entity shall be the aggregate fair market value of 
all investments in and capital contributions made to the covered fund 
by the banking entity, divided by the value of all investments in and 
capital contributions made to that covered fund by all entities, as of 
the last day of each calendar quarter (all measured without regard to 
committed funds not yet called for investment). If fair market value 
cannot be determined, then the value shall be the historical cost basis 
of all investments in and contributions made by the banking entity to 
the covered fund;
    (iii) For purposes of the calculation under paragraph (b)(2)(ii) of 
this section, once a valuation methodology is chosen, the banking 
entity must calculate the value of its investment and the investments 
of all others in the covered fund in the same manner and according to 
the same standards.
    (3) Issuing entities of asset-backed securities. In the case of an 
ownership interest in an issuing entity of asset-backed securities, for 
purposes of determining whether an investment in a single covered fund 
complies with the restrictions on ownership interests under paragraphs 
(a)(2)(i)(B) and (a)(2)(ii)(B) of this section:
    (i) For securitizations subject to the requirements of section 15G 
of the Exchange Act (15 U.S.C. 78o-11), the calculations shall be made 
as of the date and according to the valuation methodology applicable 
pursuant to the requirements of section 15G of the Exchange Act (15 
U.S.C. 78o-11) and the implementing regulations issued thereunder; or
    (ii) For securitization transactions completed prior to the 
compliance date of such implementing regulations (or as to which such 
implementing regulations do not apply), the calculations shall be made 
as of the date of establishment as defined in paragraph (a)(2)(iv)(B) 
of this section or such earlier date on which the transferred assets 
have been valued for purposes of transfer to the covered fund, and 
thereafter only upon the date on which additional securities of the 
issuing entity of asset-backed securities are priced for purposes of 
the sales of ownership interests to unaffiliated investors.
    (iii) For securitization transactions completed prior to the 
compliance date of such implementing regulations (or as to which such 
implementing regulations do not apply), the aggregate value of the 
outstanding ownership interests in the covered fund shall be the fair 
market value of the assets transferred to the issuing entity of the 
securitization and any other assets otherwise held by the issuing 
entity at such time, determined in a manner that is consistent with its 
determination of the fair market value of those assets for financial 
statement purposes.
    (iv) For purposes of the calculation under paragraph (b)(3)(iii) of 
this section, the valuation methodology used to calculate the fair 
market value of the ownership interests must be the same for both the 
ownership interests held by a banking entity and the ownership 
interests held by all others in the covered fund in the same manner and 
according to the same standards.
    (4) Multi-tier fund investments--(i) Master-feeder fund 
investments. If the principal investment strategy of a covered fund 
(the ``feeder fund'') is to invest substantially all of its assets in 
another single covered fund (the ``master fund''), then for purposes of 
the investment limitations in paragraphs (a)(2)(i)(B) and (a)(2)(ii) of 
this section, the banking entity's permitted investment in such funds 
shall be measured only by reference to the value of the master fund. 
The banking entity's permitted investment in the master fund shall 
include any investment by the banking entity in the master fund, as 
well as the banking entity's pro-rata share of any ownership interest 
of the master fund that is held through the feeder fund; and
    (ii) Fund-of-funds investments. If a banking entity organizes and 
offers a covered fund pursuant to Sec.  351.11 of this subpart for the 
purpose of investing in other covered funds (a ``fund of funds'') and 
that fund of funds itself invests in another covered fund that the 
banking entity is permitted to own, then the banking entity's permitted 
investment in that other fund shall include any investment by the 
banking entity in that other fund, as well as the banking entity's pro-
rata share of any ownership interest of the fund that is held through 
the fund of funds. The investment of the banking entity may not 
represent more than 3 percent of the amount or value of any single 
covered fund.
    (c) Aggregate permitted investments in all covered funds. (1) For 
purposes of paragraph (a)(2)(iii) of this section, the aggregate value 
of all ownership interests held by a banking entity shall be the sum of 
all amounts paid or contributed by the banking entity in connection 
with acquiring or retaining an ownership interest in covered funds 
(together with any amounts paid by the entity (or employee thereof) in 
connection with obtaining a restricted profit interest under Sec.  
351.10(d)(6)(ii) of this subpart), on a historical cost basis.
    (2) Calculation of tier 1 capital. For purposes of paragraph 
(a)(2)(iii) of this section:
    (i) Entities that are required to hold and report tier 1 capital. 
If a banking entity is required to calculate and report tier 1 capital, 
the banking entity's tier 1 capital shall be equal to the amount of 
tier 1 capital of the banking entity as of the last day of the most 
recent calendar quarter, as reported to its primary financial 
regulatory agency; and
    (ii) If a banking entity is not required to calculate and report 
tier 1 capital, the banking entity's tier 1 capital shall be determined 
to be equal to:
    (A) In the case of a banking entity that is controlled, directly or 
indirectly, by a depository institution that calculates and reports 
tier 1 capital, be equal to the amount of tier 1 capital reported by 
such controlling depository institution in the manner described in 
paragraph (c)(2)(i) of this section;
    (B) In the case of a banking entity that is not controlled, 
directly or indirectly, by a depository institution that calculates and 
reports tier 1 capital:
    (1) Bank holding company subsidiaries. If the banking entity is a 
subsidiary of a bank holding company or company that is treated as a 
bank holding company, be equal to the amount of tier 1 capital reported 
by the top-tier affiliate of such covered banking entity that 
calculates and reports tier 1 capital in the manner described in 
paragraph (c)(2)(i) of this section; and
    (2) Other holding companies and any subsidiary or affiliate 
thereof. If the banking entity is not a subsidiary of a bank holding 
company or a company that is treated as a bank holding company, be 
equal to the total amount

[[Page 62191]]

of shareholders' equity of the top-tier affiliate within such 
organization as of the last day of the most recent calendar quarter 
that has ended, as determined under applicable accounting standards.
    (iii) Treatment of foreign banking entities--(A) Foreign banking 
entities. Except as provided in paragraph (c)(2)(iii)(B) of this 
section, with respect to a banking entity that is not itself, and is 
not controlled directly or indirectly by, a banking entity that is 
located or organized under the laws of the United States or of any 
State, the tier 1 capital of the banking entity shall be the 
consolidated tier 1 capital of the entity as calculated under 
applicable home country standards.
    (B) U.S. affiliates of foreign banking entities. With respect to a 
banking entity that is located or organized under the laws of the 
United States or of any State and is controlled by a foreign banking 
entity identified under paragraph (c)(2)(iii)(A) of this section, the 
banking entity's tier 1 capital shall be as calculated under paragraphs 
(c)(2)(i) or (ii) of this section.
    (d) Capital treatment for a permitted investment in a covered fund. 
For purposes of calculating compliance with the applicable regulatory 
capital requirements, a banking entity shall deduct from the banking 
entity's tier 1 capital (as determined under paragraph (c)(2) of this 
section) the greater of:
    (1) The sum of all amounts paid or contributed by the banking 
entity in connection with acquiring or retaining an ownership interest 
(together with any amounts paid by the entity (or employee thereof) in 
connection with obtaining a restricted profit interest under Sec.  
351.10(d)(6)(ii) of subpart C), on a historical cost basis, plus any 
earnings received; and
    (2) The fair market value of the banking entity's ownership 
interests in the covered fund as determined under paragraph (b)(2)(ii) 
or (b)(3) of this section (together with any amounts paid by the entity 
(or employee thereof) in connection with obtaining a restricted profit 
interest under Sec.  351.10(d)(6)(ii) of subpart C), if the banking 
entity accounts for the profits (or losses) of the fund investment in 
its financial statements.
    (e) Extension of time to divest an ownership interest. (1) Upon 
application by a banking entity, the Board may extend the period under 
paragraph (a)(2)(i) of this section for up to 2 additional years if the 
Board finds that an extension would be consistent with safety and 
soundness and not detrimental to the public interest. An application 
for extension must:
    (i) Be submitted to the Board at least 90 days prior to the 
expiration of the applicable time period;
    (ii) Provide the reasons for application, including information 
that addresses the factors in paragraph (e)(2) of this section; and
    (iii) Explain the banking entity's plan for reducing the permitted 
investment in a covered fund through redemption, sale, dilution or 
other methods as required in paragraph (a)(2) of this section.
    (2) Factors governing Board determinations. In reviewing any 
application under paragraph (e)(1) of this section, the Board may 
consider all the facts and circumstances related to the permitted 
investment in a covered fund, including:
    (i) Whether the investment would result, directly or indirectly, in 
a material exposure by the banking entity to high-risk assets or high-
risk trading strategies;
    (ii) The contractual terms governing the banking entity's interest 
in the covered fund;
    (iii) The date on which the covered fund is expected to have 
attracted sufficient investments from investors unaffiliated with the 
banking entity to enable the banking entity to comply with the 
limitations in paragraph (a)(2)(i) of this section;
    (iv) The total exposure of the covered banking entity to the 
investment and the risks that disposing of, or maintaining, the 
investment in the covered fund may pose to the banking entity and the 
financial stability of the United States;
    (v) The cost to the banking entity of divesting or disposing of the 
investment within the applicable period;
    (vi) Whether the investment or the divestiture or conformance of 
the investment would involve or result in a material conflict of 
interest between the banking entity and unaffiliated parties, including 
clients, customers or counterparties to which it owes a duty;
    (vi) The banking entity's prior efforts to reduce through 
redemption, sale, dilution, or other methods its ownership interests in 
the covered fund, including activities related to the marketing of 
interests in such covered fund;
    (viii) Market conditions; and
    (ix) Any other factor that the Board believes appropriate.
    (3) Authority to impose restrictions on activities or investment 
during any extension period. The Board may impose such conditions on 
any extension approved under paragraph (e)(1) of this section as the 
Board determines are necessary or appropriate to protect the safety and 
soundness of the banking entity or the financial stability of the 
United States, address material conflicts of interest or other unsound 
banking practices, or otherwise further the purposes of section 13 of 
the BHC Act and this part.
    (4) Consultation. In the case of a banking entity that is primarily 
regulated by another Federal banking agency, the SEC, or the CFTC, the 
Board will consult with such agency prior to acting on an application 
by the banking entity for an extension under paragraph (e)(1) of this 
section.


Sec.  351.13   Other permitted covered fund activities and investments.

    (a) Permitted risk-mitigating hedging activities. (1) The 
prohibition contained in Sec.  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 demonstrably reduce or 
otherwise significantly mitigate the specific, identifiable risks to 
the banking entity in connection with 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.
    (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 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; 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 and demonstrably reduces or otherwise 
significantly mitigates one or more specific, identifiable risks 
arising 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

[[Page 62192]]

contemporaneously in accordance with this section; and
    (D) Is subject to continuing review, monitoring and management by 
the banking entity.
    (iii) The compensation arrangement relates solely to the covered 
fund in which the banking entity or any affiliate has acquired an 
ownership interest pursuant to this paragraph 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) Certain permitted covered fund activities and investments 
outside of the United States. (1) The prohibition contained in Sec.  
351.10(a) of this subpart does not apply to the acquisition or 
retention of any ownership interest in, or the sponsorship of, a 
covered fund by a banking entity only if:
    (i) The banking entity is not organized or directly or indirectly 
controlled by a banking entity that is organized under the laws of the 
United States or of one or more States;
    (ii) The activity or investment by the banking entity is pursuant 
to paragraph (9) or (13) of section 4(c) of the BHC Act;
    (iii) No ownership interest in the covered fund is offered for sale 
or sold to a resident of the United States; and
    (iv) The activity or investment occurs solely outside of the United 
States.
    (2) An activity or investment by the banking entity is pursuant to 
paragraph (9) or (13) of section 4(c) of the BHC Act for purposes of 
paragraph (b)(1)(ii) of this section only if:
    (i) The activity or investment is conducted in accordance with the 
requirements of this section; and
    (ii)(A) With respect to a banking entity that is a foreign banking 
organization, the banking entity meets the qualifying foreign banking 
organization requirements of section 211.23(a), (c) or (e) of the 
Board's Regulation K (12 CFR 211.23(a), (c) or (e)), as applicable; or
    (B) With respect to a banking entity that is not a foreign banking 
organization, the banking entity is not organized under the laws of the 
United States or of one or more States and the banking entity, on a 
fully-consolidated basis, meets at least two of the following 
requirements:
    (1) Total assets of the banking entity held outside of the United 
States exceed total assets of the banking entity held in the United 
States;
    (2) Total revenues derived from the business of the banking entity 
outside of the United States exceed total revenues derived from the 
business of the banking entity in the United States; or
    (3) Total net income derived from the business of the banking 
entity outside of the United States exceeds total net income derived 
from the business of the banking entity in the United States.
    (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 sold or has been sold 
pursuant to an offering that does not target residents of the United 
States.
    (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;
    (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; and
    (iv) 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.
    (5) For purposes of this section, a U.S. branch, agency, or 
subsidiary of a foreign bank, or any subsidiary thereof, is located in 
the United States; however, a foreign bank of which that branch, 
agency, or subsidiary is a part is not considered to be located in the 
United States solely by virtue of operation of the U.S. branch, agency, 
or subsidiary.
    (c) Permitted covered fund interests and activities by a regulated 
insurance company. The prohibition contained in Sec.  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, regulations, and written guidance 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, regulation, or written guidance 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.


Sec.  351.14   Limitations on relationships with a covered fund.

    (a) Relationships with a covered fund. (1) Except as provided for 
in paragraph (a)(2) of this section, no banking entity that serves, 
directly or indirectly, as the investment manager, investment adviser, 
commodity trading advisor, or sponsor to a covered fund, that organizes 
and offers a covered fund pursuant to Sec.  351.11 of this subpart, or 
that continues to hold an ownership interest in accordance with Sec.  
351.11(b) of this subpart, and no affiliate of such entity, may enter 
into a transaction with the covered fund, or with any other covered 
fund that is controlled by such covered fund, that would be a covered 
transaction as defined in section 23A of the Federal Reserve Act (12 
U.S.C. 371c(b)(7)), as if such banking entity and the affiliate thereof 
were a member bank and the covered fund were an affiliate thereof.
    (2) Notwithstanding paragraph (a)(1) of this section, a banking 
entity may:
    (i) Acquire and retain any ownership interest in a covered fund in 
accordance with the requirements of Sec.  351.11, Sec.  351.12, or 
Sec.  351.13 of this subpart; and
    (ii) Enter into any prime brokerage transaction with any covered 
fund in which a covered fund managed, sponsored, or advised by such 
banking entity (or an affiliate thereof) has taken an ownership 
interest, if:
    (A) The banking entity is in compliance with each of the 
limitations set forth in Sec.  351.11 of this subpart with respect to a 
covered fund organized and offered by such banking entity (or an 
affiliate thereof);

[[Page 62193]]

    (B) The chief executive officer (or equivalent officer) of the 
banking entity certifies in writing annually 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
    (C) The Board has not determined that such transaction is 
inconsistent with the safe and sound operation and condition of the 
banking entity.
    (b) Restrictions on transactions with covered funds. A banking 
entity that serves, directly or indirectly, as the investment manager, 
investment adviser, commodity trading advisor, or sponsor to a covered 
fund, or that organizes and offers a covered fund pursuant to Sec.  
351.11 of this subpart, or that continues to hold an ownership interest 
in accordance with Sec.  351.11(b) of this subpart, shall be subject to 
section 23B of the Federal Reserve Act (12 U.S.C. 371c-1), as if such 
banking entity were a member bank and such covered fund were an 
affiliate thereof.
    (c) Restrictions on prime brokerage transactions. A prime brokerage 
transaction permitted under paragraph (a)(2)(ii) of this section shall 
be subject to section 23B of the Federal Reserve Act (12 U.S.C. 371c-1) 
as if the counterparty were an affiliate of the banking entity.


Sec.  351.15   Other limitations on permitted covered fund activities.

    (a) No transaction, class of transactions, or activity may be 
deemed permissible under Sec. Sec.  351.11 through 351.13 of this 
subpart if the transaction, class of transactions, or activity would:
    (1) Involve or result in a material conflict of interest between 
the banking entity and its clients, customers, or counterparties;
    (2) Result, directly or indirectly, in a material exposure by the 
banking entity to a high-risk asset or a high-risk trading strategy; or
    (3) Pose a threat to the safety and soundness of the banking entity 
or to the financial stability of the United States.
    (b) Definition of material conflict of interest. (1) For purposes 
of this section, a material conflict of interest between a banking 
entity and its clients, customers, or counterparties exists if the 
banking entity engages in any transaction, class of transactions, or 
activity that would involve or result in the banking entity's interests 
being materially adverse to the interests of its client, customer, or 
counterparty with respect to such transaction, class of transactions, 
or activity, and the banking entity has not taken at least one of the 
actions in paragraph (b)(2) of this section.
    (2) Prior to effecting the specific transaction or class or type of 
transactions, or engaging in the specific activity, the banking entity:
    (i) Timely and effective disclosure. (A) Has made clear, timely, 
and effective disclosure of the conflict of interest, together with 
other necessary information, in reasonable detail and in a manner 
sufficient to permit a reasonable client, customer, or counterparty to 
meaningfully understand the conflict of interest; and
    (B) Such disclosure is made in a manner that provides the client, 
customer, or counterparty the opportunity to negate, or substantially 
mitigate, any materially adverse effect on the client, customer, or 
counterparty created by the conflict of interest; or
    (ii) Information barriers. Has established, maintained, and 
enforced information barriers that are memorialized in written policies 
and procedures, such as physical separation of personnel, or functions, 
or limitations on types of activity, that are reasonably designed, 
taking into consideration the nature of the banking entity's business, 
to prevent the conflict of interest from involving or resulting in a 
materially adverse effect on a client, customer, or counterparty. A 
banking entity may not rely on such information barriers if, in the 
case of any specific transaction, class or type of transactions or 
activity, the banking entity knows or should reasonably know that, 
notwithstanding the banking entity's establishment of information 
barriers, the conflict of interest may involve or result in a 
materially adverse effect on a client, customer, or counterparty.
    (c) Definition of high-risk asset and high-risk trading strategy. 
For purposes of this section:
    (1) High-risk asset means an asset or group of related assets that 
would, if held by a banking entity, 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.
    (2) High-risk trading strategy means a trading strategy that would, 
if engaged in by a banking entity, 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.


Sec.  351.16   Ownership of Interests in and Sponsorship of Issuers of 
Certain Collateralized Debt Obligations Backed by Trust-Preferred 
Securities.

    (a) The prohibition contained in Sec.  351.10(a)(1) does not apply 
to the ownership by a banking entity of an interest in, or sponsorship 
of, any issuer if:
    (1) The issuer was established, and the interest was issued, before 
May 19, 2010;
    (2) The banking entity reasonably believes that the offering 
proceeds received by the issuer were invested primarily in Qualifying 
TruPS Collateral; and
    (3) The banking entity acquired such interest on or before December 
10, 2013 (or acquired such interest in connection with a merger with or 
acquisition of a banking entity that acquired the interest on or before 
December 10, 2013).
    (b) For purposes of this Sec.  351.16, Qualifying TruPS Collateral 
shall mean any trust preferred security or subordinated debt instrument 
issued prior to May 19, 2010 by a depository institution holding 
company that, as of the end of any reporting period within 12 months 
immediately preceding the issuance of such trust preferred security or 
subordinated debt instrument, had total consolidated assets of less 
than $15,000,000,000 or issued prior to May 19, 2010 by a mutual 
holding company.
    (c) Notwithstanding paragraph (a)(3) of this section, a banking 
entity may act as a market maker with respect to the interests of an 
issuer described in paragraph (a) of this section in accordance with 
the applicable provisions of Sec. Sec.  351.4 and 351.11.
    (d) Without limiting the applicability of paragraph (a) of this 
section, the Board, the FDIC and the OCC will make public a non-
exclusive list of issuers that meet the requirements of paragraph (a). 
A banking entity may rely on the list published by the Board, the FDIC 
and the OCC.


Sec. Sec.  351.17-351.19   [Reserved]

Subpart D--Compliance Program Requirement; Violations


Sec.  351.20   Program for compliance; reporting.

    (a) Program requirement. Each banking entity 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

[[Page 62194]]

compliance program shall be appropriate for the types, size, scope and 
complexity of activities and business structure of the banking entity.
    (b) Contents of compliance program. Except as provided in paragraph 
(f) of this section, the compliance program required by paragraph (a) 
of this section, at a minimum, shall include:
    (1) Written policies and procedures reasonably designed to 
document, describe, monitor and limit trading activities subject to 
subpart B (including those permitted under Sec. Sec.  351.3 to 351.6 of 
subpart B), including setting, monitoring and managing required limits 
set out in Sec.  351.4 and Sec.  351.5, and activities and investments 
with respect to a covered fund subject to subpart C (including those 
permitted under Sec. Sec.  351.11 through 351.14 of subpart C) 
conducted by the banking entity to ensure that all activities and 
investments conducted by the banking entity that are subject to section 
13 of the BHC Act and this part comply with section 13 of the BHC Act 
and this part;
    (2) A system of internal controls reasonably designed to monitor 
compliance with section 13 of the BHC Act and this part and to prevent 
the occurrence of activities or investments that are prohibited by 
section 13 of the BHC Act and this part;
    (3) A management framework that clearly delineates responsibility 
and accountability for compliance with section 13 of the BHC Act and 
this part and includes appropriate management review of trading limits, 
strategies, hedging activities, investments, incentive compensation and 
other matters identified in this part or by management as requiring 
attention;
    (4) 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;
    (5) Training for trading personnel and managers, as well as other 
appropriate personnel, to effectively implement and enforce the 
compliance program; and
    (6) Records sufficient to demonstrate compliance with section 13 of 
the BHC Act and this part, which a banking entity must promptly provide 
to the FDIC upon request and retain for a period of no less than 5 
years or such longer period as required by the FDIC.
    (c) Additional standards. In addition to the requirements in 
paragraph (b) of this section, the compliance program of a banking 
entity must satisfy the requirements and other standards contained in 
Appendix B, if:
    (1) The banking entity engages in proprietary trading permitted 
under subpart B and is required to comply with the reporting 
requirements of paragraph (d) of this section;
    (2) The banking entity has reported total consolidated assets as of 
the previous calendar year end of $50 billion or more or, in the case 
of a foreign banking entity, has total U.S. assets as of the previous 
calendar year end of $50 billion or more (including all subsidiaries, 
affiliates, branches and agencies of the foreign banking entity 
operating, located or organized in the United States); or
    (3) The FDIC notifies the banking entity in writing that it must 
satisfy the requirements and other standards contained in Appendix B to 
this part.
    (d) Reporting requirements under Appendix A to this part. (1) A 
banking entity engaged in proprietary trading activity permitted under 
subpart B shall comply with the reporting requirements described in 
Appendix A, if:
    (i) The banking entity (other than a foreign banking entity as 
provided in paragraph (d)(1)(ii) of this section) has, together with 
its 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 or exceeds the 
threshold established in paragraph (d)(2) of this section;
    (ii) In the case of a foreign banking entity, the average gross sum 
of the trading assets and liabilities of the combined U.S. operations 
of the foreign banking entity (including all subsidiaries, affiliates, 
branches and agencies of the foreign banking entity operating, located 
or organized in the United States and excluding trading assets and 
liabilities involving obligations of or guaranteed by the United States 
or any agency of the United States) over the previous consecutive four 
quarters, as measured as of the last day of each of the four prior 
calendar quarters, equals or exceeds the threshold established in 
paragraph (d)(2) of this section; or
    (iii) The FDIC notifies the banking entity in writing that it must 
satisfy the reporting requirements contained in Appendix A.
    (2) The threshold for reporting under paragraph (d)(1) of this 
section shall be $50 billion beginning on June 30, 2014; $25 billion 
beginning on April 30, 2016; and $10 billion beginning on December 31, 
2016.
    (3) Frequency of reporting: Unless the FDIC notifies the banking 
entity in writing that it must report on a different basis, a banking 
entity with $50 billion or more in trading assets and liabilities (as 
calculated in accordance with paragraph (d)(1) of this section) shall 
report the information required by Appendix A for each calendar month 
within 30 days of the end of the relevant calendar month; beginning 
with information for the month of January 2015, such information shall 
be reported within 10 days of the end of each calendar month. Any other 
banking entity subject to Appendix A shall report the information 
required by Appendix A for each calendar quarter within 30 days of the 
end of that calendar quarter unless the FDIC notifies the banking 
entity in writing that it must report on a different basis.
    (e) Additional documentation for covered funds. Any banking entity 
that has more than $10 billion in total consolidated assets as reported 
on December 31 of the previous two calendar years shall maintain 
records that include:
    (1) Documentation of the exclusions or exemptions other than 
sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 
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;
    (2) For each fund sponsored by the banking entity (including all 
subsidiaries and affiliates) for which the banking entity relies on one 
or more of the exclusions from the definition of covered fund provided 
by Sec. Sec.  351.10(c)(1), 351.10(c)(5), 351.10(c)(8), 351.10(c)(9), 
or 351.10(c)(10) of subpart C, documentation supporting the banking 
entity's determination that the fund is not a covered fund pursuant to 
one or more of those exclusions;
    (3) For each seeding vehicle described in Sec.  351.10(c)(12)(i) or 
(iii) of subpart C 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 SEC-regulated business development company within the time 
period specified in Sec.  351.12(a)(2)(i)(B) of subpart C;
    (4) For any banking entity that is, or is controlled directly or 
indirectly by a

[[Page 62195]]

banking entity that is, located in or organized under the laws of the 
United States or of any State, if the aggregate amount of ownership 
interests in foreign public funds that are described in Sec.  
351.10(c)(1) of subpart C owned by such banking entity (including 
ownership interests owned by any affiliate that is controlled directly 
or indirectly by a banking entity that is located in or organized under 
the laws of the United States or of any State) exceeds $50 million at 
the end of two or more consecutive calendar quarters, beginning with 
the next succeeding calendar quarter, documentation of the value of the 
ownership interests owned by the banking entity (and such affiliates) 
in each foreign public fund and each jurisdiction in which any such 
foreign public fund is organized, calculated as of the end of each 
calendar quarter, which documentation must continue until the banking 
entity's aggregate amount of ownership interests in foreign public 
funds is below $50 million for two consecutive calendar quarters; and
    (5) For purposes of paragraph (e)(4) of this section, a U.S. 
branch, agency, or subsidiary of a foreign 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.
    (f) Simplified programs for less active banking entities--(1) 
Banking entities with no covered activities. A banking entity that does 
not engage in activities or investments pursuant to subpart B or 
subpart C (other than trading activities permitted pursuant to Sec.  
351.6(a) of subpart B) may satisfy the requirements of this section by 
establishing the required compliance program prior to becoming engaged 
in such activities or making such investments (other than trading 
activities permitted pursuant to Sec.  351.6(a) of subpart B).
    (2) Banking entities with modest activities. A banking entity with 
total consolidated assets of $10 billion or less as reported on 
December 31 of the previous two calendar years that engages in 
activities or investments pursuant to subpart B or subpart C (other 
than trading activities permitted under Sec.  351.6(a) of subpart B) 
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.


Sec.  351.21  Termination of activities or investments; penalties for 
violations.

    (a) Any banking entity that engages in an activity or makes an 
investment in violation of section 13 of the BHC Act or this part, or 
acts in a manner that functions as an evasion of the requirements of 
section 13 of the BHC Act or this part, including through an abuse of 
any activity or investment permitted under subparts B or C, or 
otherwise violates the restrictions and requirements of section 13 of 
the BHC Act or this part, shall, upon discovery, promptly terminate the 
activity and, as relevant, dispose of the investment.
    (b) Whenever the FDIC finds reasonable cause to believe any banking 
entity has engaged in an activity or made an investment in violation of 
section 13 of the BHC Act or this part, or engaged in any activity or 
made any investment that functions as an evasion of the requirements of 
section 13 of the BHC Act or this part, the FDIC may take any action 
permitted by law to enforce compliance with section 13 of the BHC Act 
and this part, including directing the banking entity to restrict, 
limit, or terminate any or all activities under this part and dispose 
of any investment.

Appendix A 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 Sec.  
351.20(d), this appendix generally 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 Sec.  351.20 and Appendix B.
    b. The purpose of this appendix is to assist banking entities 
and the FDIC in:
    (i) Better understanding and evaluating the scope, type, and 
profile of the banking entity's covered trading activities;
    (ii) Monitoring the banking entity's covered trading activities;
    (iii) Identifying covered trading activities that warrant 
further review or examination by the banking entity to verify 
compliance with the proprietary trading restrictions;
    (iv) Evaluating whether the covered trading activities of 
trading desks engaged in market making-related activities subject to 
Sec.  351.4(b) are consistent with the requirements governing 
permitted market making-related activities;
    (v) Evaluating whether the covered trading activities of trading 
desks that are engaged in permitted trading activity subject to 
Sec. Sec.  351.4, 351.5, or 351.6(a)-(b) (i.e., underwriting and 
market making-related 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;
    (vi) Identifying the profile of particular covered trading 
activities of the banking entity, and the individual trading desks 
of the banking entity, to help establish the appropriate frequency 
and scope of examination by the FDIC of such activities; and
    (vii) Assessing and addressing the risks associated with the 
banking entity's covered trading activities.
    c. The quantitative measurements that must be furnished pursuant 
to this appendix are not intended to serve as a dispositive tool for 
the identification of permissible or impermissible activities.
    d. In order to allow banking entities and the Agencies to 
evaluate the effectiveness of these metrics, banking entities must 
collect and report these metrics for all trading desks beginning on 
the dates established in Sec.  351.20 of the final rule. The 
Agencies will review the data collected and revise this collection 
requirement as appropriate based on a review of the data collected 
prior to September 30, 2015.
    e. 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 Sec.  351.20 and Appendix B to this part. 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.
    f. 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 Sec. Sec.  351.4 through 351.6(a) and (b), or that 
result in a material

[[Page 62196]]

exposure to high-risk assets or high-risk trading strategies, must 
be escalated within the banking entity for review, further analysis, 
explanation to the FDIC, and remediation, where appropriate. The 
quantitative measurements discussed in this appendix should be 
helpful to banking entities in identifying and managing the risks 
related to their covered trading activities.

II. Definitions

    The terms used in this appendix have the same meanings as set 
forth in Sec. Sec.  351.2 and 351.3. In addition, for purposes of 
this appendix, the following definitions apply:
    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 Sec. Sec.  351.4, 351.5, 351.6(a), or 351.6(b). A banking 
entity may include trading under Sec. Sec.  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 desk means 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.

III. Reporting and Recordkeeping of Quantitative Measurements

a. Scope of Required Reporting

    General scope. Each banking entity made subject to this part by 
Sec.  351.20 must furnish the following quantitative measurements 
for each trading desk of the banking entity, calculated in 
accordance with this appendix:
     Risk and Position Limits and Usage;
     Risk Factor Sensitivities;
     Value-at-Risk and Stress VaR;
     Comprehensive Profit and Loss Attribution;
     Inventory Turnover;
     Inventory Aging; and
     Customer-Facing Trade Ratio

b. Frequency of Required Calculation and Reporting

    A banking entity must calculate any applicable quantitative 
measurement for each trading day. A banking entity must report each 
applicable quantitative measurement to the FDIC on the reporting 
schedule established in Sec.  351.20 unless otherwise requested by 
the FDIC. All quantitative measurements for any calendar month must 
be reported within the time period required by Sec.  351.20.

c. Recordkeeping

    A banking entity must, for any quantitative measurement 
furnished to the FDIC pursuant to this appendix and Sec.  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 5 years from the end of the calendar year for which the 
measurement was taken.

IV. Quantitative Measurements

a. Risk-Management Measurements

1. Risk and Position Limits and Usage

    i. Description: For purposes of this appendix, Risk and Position 
Limits are the constraints that define the amount of risk that a 
trading desk is permitted to take at a point in time, as defined by 
the banking entity for a specific trading desk. Usage represents the 
portion of the trading desk's limits that are accounted for by the 
current activity of the desk. Risk and position limits and their 
usage are key risk management tools used to control and monitor risk 
taking and include, but are not limited, to the limits set out in 
Sec.  351.4 and Sec.  351.5. A number of the metrics that are 
described below, including ``Risk Factor Sensitivities'' and 
``Value-at-Risk and Stress Value-at-Risk,'' relate to a trading 
desk's risk and position limits and are useful in evaluating and 
setting these limits in the broader context of the trading desk's 
overall activities, particularly for the market making activities 
under Sec.  351.4(b) and hedging activity under Sec.  351.5. 
Accordingly, the limits required under Sec.  351.4(b)(2)(iii) and 
Sec.  351.5(b)(1)(i) must meet the applicable requirements under 
Sec.  351.4(b)(2)(iii) and Sec.  351.5(b)(1)(i) and also must 
include appropriate metrics for the trading desk limits including, 
at a minimum, the ``Risk Factor Sensitivities'' and ``Value-at-Risk 
and Stress Value-at-Risk'' metrics except to the extent any of the 
``Risk Factor Sensitivities'' or ``Value-at-Risk and Stress Value-
at-Risk'' metrics are demonstrably ineffective for measuring and 
monitoring the risks of a trading desk based on the types of 
positions traded by, and risk exposures of, that desk.
    ii. General Calculation Guidance: Risk and Position Limits must 
be reported in the format used by the banking entity for the 
purposes of risk management of each trading desk. Risk and Position 
Limits are often expressed in terms of risk measures, such as VaR 
and Risk Factor Sensitivities, but may also be expressed in terms of 
other observable criteria, such as net open positions. When criteria 
other than VaR or Risk Factor Sensitivities are used to define the 
Risk and Position Limits, both the value of the Risk and Position 
Limits and the value of the variables used to assess whether these 
limits have been reached must be reported.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

2. Risk Factor Sensitivities

    i. Description: For purposes of this appendix, Risk Factor 
Sensitivities are changes in a trading desk's Comprehensive Profit 
and Loss that are expected to occur in the event of a change in one 
or more underlying variables that are significant sources of the 
trading desk's profitability and risk.
    ii. General Calculation Guidance: A banking entity must report 
the Risk Factor Sensitivities that are monitored and managed as part 
of the trading desk's overall risk management policy. The underlying 
data and methods used to compute a trading desk's Risk Factor 
Sensitivities will depend on the specific function of the trading 
desk and the internal risk management models employed. The number 
and type of Risk Factor Sensitivities that are monitored and managed 
by a trading desk, and furnished to the FDIC, will depend on the 
explicit risks assumed by the trading desk. In general, however, 
reported Risk Factor Sensitivities must be sufficiently granular to 
account for a preponderance of the expected price variation in the 
trading desk's holdings.
    A. Trading desks must take into account any relevant factors in 
calculating Risk Factor Sensitivities, including, for example, the 
following with respect to particular asset classes:
     Commodity derivative positions: Risk factors with 
respect to the related commodities set out in 17 CFR 20.2, the 
maturity of the positions, volatility and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and the maturity profile of the 
positions;
     Credit positions: Risk factors with respect to credit 
spreads that are sufficiently granular to account for specific 
credit sectors and market segments, the maturity profile of the 
positions, and risk factors with respect to interest rates of all 
relevant maturities;
     Credit-related derivative positions: Risk factor 
sensitivities, for example credit spreads, shifts (parallel and non-
parallel) in credit spreads--volatility, and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and the maturity profile of the 
positions;
     Equity derivative positions: Risk factor sensitivities 
such as equity positions, volatility, and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and the maturity profile of the 
positions;
     Equity positions: Risk factors for equity prices and 
risk factors that differentiate between important equity market 
sectors and segments, such as a small capitalization equities and 
international equities;
     Foreign exchange derivative positions: Risk factors 
with respect to major currency pairs and maturities, exposure to 
interest rates at relevant maturities, volatility, and/or 
correlation sensitivities (expressed in a manner that demonstrates 
any significant non-linearities), as well as the maturity profile of 
the positions; and
     Interest rate positions, including interest rate 
derivative positions: Risk factors with respect to major interest 
rate categories and maturities and volatility and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and shifts (parallel and non-parallel) 
in the interest rate curve, as well as the maturity profile of the 
positions.
    B. The methods used by a banking entity to calculate 
sensitivities to a common factor shared by multiple trading desks, 
such as an equity price factor, must be applied consistently across 
its trading desks so that the sensitivities can be compared from one 
trading desk to another.
    iii. Calculation Period: One trading day.

[[Page 62197]]

    iv. Measurement Frequency: Daily.

3. Value-at-Risk and Stress Value-at-Risk

    i. Description: For purposes of this appendix, Value-at-Risk 
(``VaR'') is the commonly used percentile measurement of the risk of 
future financial loss in the value of a given set of aggregated 
positions over a specified period of time, based on current market 
conditions. For purposes of this appendix, Stress Value-at-Risk 
(``Stress VaR'') is the percentile measurement of the risk of future 
financial loss in the value of a given set of aggregated positions 
over a specified period of time, based on market conditions during a 
period of significant financial stress.
    ii. General Calculation Guidance: Banking entities must compute 
and report VaR and Stress VaR by employing generally accepted 
standards and methods of calculation. VaR should reflect a loss in a 
trading desk that is expected to be exceeded less than one percent 
of the time over a one-day period. For those banking entities that 
are subject to regulatory capital requirements imposed by a Federal 
banking agency, VaR and Stress VaR must be computed and reported in 
a manner that is consistent with such regulatory capital 
requirements. In cases where a trading desk does not have a 
standalone VaR or Stress VaR calculation but is part of a larger 
aggregation of positions for which a VaR or Stress VaR calculation 
is performed, a VaR or Stress VaR calculation that includes only the 
trading desk's holdings must be performed consistent with the VaR or 
Stress VaR model and methodology used for the larger aggregation of 
positions.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

b. Source-of-Revenue Measurements

1. Comprehensive Profit and Loss Attribution

    i. Description: For purposes of this appendix, Comprehensive 
Profit and Loss Attribution is an analysis that attributes the daily 
fluctuation in the value of a trading desk's positions to various 
sources. First, the daily profit and loss of the aggregated 
positions is divided into three categories: (i) Profit and loss 
attributable to a trading desk's existing positions that were also 
positions held by the trading desk as of the end of the prior day 
(``existing positions''); (ii) profit and loss attributable to new 
positions resulting from the current day's trading activity (``new 
positions''); and (iii) residual profit and loss that cannot be 
specifically attributed to existing positions or new positions. The 
sum of (i), (ii), and (iii) must equal the trading desk's 
comprehensive profit and loss at each point in time. In addition, 
profit and loss measurements must calculate volatility of 
comprehensive profit and loss (i.e., the standard deviation of the 
trading desk's one-day profit and loss, in dollar terms) for the 
reporting period for at least a 30-, 60- and 90-day lag period, from 
the end of the reporting period, and any other period that the 
banking entity deems necessary to meet the requirements of the rule.
    A. The comprehensive profit and loss associated with existing 
positions must reflect changes in the value of these positions on 
the applicable day. The comprehensive profit and loss from existing 
positions must be further attributed, as applicable, to changes in 
(i) the specific Risk Factors and other factors that are monitored 
and managed as part of the trading desk's overall risk management 
policies and procedures; and (ii) any other applicable elements, 
such as cash flows, carry, changes in reserves, and the correction, 
cancellation, or exercise of a trade.
    B. 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.
    C. The portion of comprehensive profit and loss that cannot be 
specifically attributed to known sources must be allocated to a 
residual category identified as an unexplained portion of the 
comprehensive profit and loss. Significant unexplained profit and 
loss must be escalated for further investigation and analysis.
    ii. General Calculation Guidance: The specific categories used 
by a trading desk in the attribution analysis and amount of detail 
for the analysis should be tailored to the type and amount of 
trading activities undertaken by the trading desk. The new position 
attribution must be computed by calculating the difference between 
the prices at which instruments were bought and/or sold and the 
prices at which those instruments are marked to market at the close 
of business on that day multiplied by the notional or principal 
amount of each purchase or sale. Any fees, commissions, or other 
payments received (paid) that are associated with transactions 
executed on that day must be added (subtracted) from such 
difference. These factors must be measured consistently over time to 
facilitate historical comparisons.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

c. Customer-Facing Activity Measurements

1. Inventory Turnover

    i. Description: For purposes of this appendix, Inventory 
Turnover is a ratio that measures the turnover of a trading desk's 
inventory. The numerator of the ratio is the absolute value of all 
transactions over the reporting period. The denominator of the ratio 
is the value of the trading desk's inventory at the beginning of the 
reporting period.
    ii. General Calculation Guidance: For purposes of this appendix, 
for derivatives, other than options and interest rate derivatives, 
value means gross notional value, for options, value means delta 
adjusted notional value, and for interest rate derivatives, value 
means 10-year bond equivalent value.
    iii. Calculation Period: 30 days, 60 days, and 90 days.
    iv. Measurement Frequency: Daily.

2. Inventory Aging

    i. Description: For purposes of this appendix, Inventory Aging 
generally describes a schedule of the trading desk's aggregate 
assets and liabilities and the amount of time that those assets and 
liabilities have been held. Inventory Aging should measure the age 
profile of the trading desk's assets and liabilities.
    ii. General Calculation Guidance: In general, Inventory Aging 
must be computed using a trading desk's trading activity data and 
must identify the value of a trading desk's aggregate assets and 
liabilities. Inventory Aging must include two schedules, an asset-
aging schedule and a liability-aging schedule. Each schedule must 
record the value of assets or liabilities held over all holding 
periods. For derivatives, other than options, and interest rate 
derivatives, value means gross notional value, for options, value 
means delta adjusted notional value and, for interest rate 
derivatives, value means 10-year bond equivalent value.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

3. Customer-Facing Trade Ratio--Trade Count Based and Value Based

    i. Description: For purposes of this appendix, the Customer-
Facing Trade Ratio is a ratio comparing (i) the transactions 
involving a counterparty that is a customer of the trading desk to 
(ii) the transactions involving a counterparty that is not a 
customer of the trading desk. A trade count based ratio must be 
computed that records the number of transactions involving a 
counterparty that is a customer of the trading desk and the number 
of transactions involving a counterparty that is not a customer of 
the trading desk. A value based ratio must be computed that records 
the value of transactions involving a counterparty that is a 
customer of the trading desk and the value of transactions involving 
a counterparty that is not a customer of the trading desk.
    ii. General Calculation Guidance: For purposes of calculating 
the Customer-Facing Trade Ratio, a counterparty is considered to be 
a customer of the trading desk if the counterparty is a market 
participant that makes 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. However, a trading desk or other organizational 
unit of another banking entity would not be a client, customer, or 
counterparty of the trading desk if the other entity has trading 
assets and liabilities of $50 billion or more as measured in 
accordance with Sec.  351.20(d)(1) unless 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. Transactions conducted anonymously 
on an exchange or similar trading facility that permits trading on 
behalf of a broad range of market participants would be considered 
transactions with customers of the trading desk. For derivatives, 
other than options, and interest rate derivatives, value means gross 
notional value, for options, value means delta adjusted notional 
value, and for interest rate derivatives, value means 10-year bond 
equivalent value.

[[Page 62198]]

    iii. Calculation Period: 30 days, 60 days, and 90 days.
    iv. Measurement Frequency: Daily.

Appendix B to Part 351--Enhanced Minimum Standards for Compliance 
Programs

I. Overview

    Section 351.20(c) requires certain banking entities to 
establish, maintain, and enforce an enhanced compliance program that 
includes the requirements and standards in this Appendix as well as 
the minimum written policies and procedures, internal controls, 
management framework, independent testing, training, and 
recordkeeping provisions outlined in Sec.  351.20. This Appendix 
sets forth additional minimum standards with respect to the 
establishment, oversight, maintenance, and enforcement by these 
banking entities of an enhanced internal compliance program for 
ensuring and monitoring 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.
    a. This compliance program must:
    1. Be reasonably designed to identify, document, monitor, and 
report the permitted trading and covered fund activities and 
investments of the banking entity; identify, monitor and promptly 
address the risks of these covered activities and investments and 
potential areas of noncompliance; and prevent activities or 
investments prohibited by, or that do not comply with, section 13 of 
the BHC Act and this part;
    2. Establish and enforce appropriate limits on the covered 
activities and investments of the banking entity, including limits 
on the size, scope, complexity, and risks of the individual 
activities or investments consistent with the requirements of 
section 13 of the BHC Act and this part;
    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 chief executive 
officer (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 permitted trading and covered fund activities and 
investments.

II. Enhanced Compliance Program

    a. Proprietary Trading Activities. A banking entity must 
establish, maintain and enforce a compliance program that includes 
written policies and procedures that are appropriate for the types, 
size, and complexity of, and risks associated with, its permitted 
trading activities. The compliance program may be tailored to the 
types of trading activities conducted by the banking entity, and 
must include a detailed description of controls established by the 
banking entity to reasonably ensure that its trading activities are 
conducted in accordance with the requirements and limitations 
applicable to those trading activities under section 13 of the BHC 
Act and this part, and provide for appropriate revision of the 
compliance program before expansion of the trading activities of the 
banking entity. A banking entity must devote adequate resources and 
use knowledgeable personnel in conducting, supervising and managing 
its trading activities, and promote consistency, independence and 
rigor in implementing its risk controls and compliance efforts. The 
compliance program must be updated with a frequency sufficient to 
account for changes in the activities of the banking entity, results 
of independent testing of the program, identification of weaknesses 
in the program, and changes in legal, regulatory or other 
requirements.
    1. Trading Desks: The banking entity must have written policies 
and procedures governing each trading desk that include a 
description of:
    i. The process for identifying, authorizing and documenting 
financial instruments each trading desk may purchase or sell, with 
separate documentation for market making-related activities 
conducted in reliance on Sec.  351.4(b) and for hedging activity 
conducted in reliance on Sec.  351.5;
    ii. A mapping for each trading desk to the division, business 
line, or other organizational structure that is responsible for 
managing and overseeing the trading desk's activities;
    iii. The mission (i.e., the type of trading activity, such as 
market-making, trading in sovereign debt, etc.) and strategy (i.e., 
methods for conducting authorized trading activities) of each 
trading desk;
    iv. The activities that the trading desk is authorized to 
conduct, including (i) authorized instruments and products, and (ii) 
authorized hedging strategies, techniques and instruments;
    v. The types and amount of risks allocated by the banking entity 
to each trading desk to implement the mission and strategy of the 
trading desk, including an enumeration of material risks resulting 
from the activities in which the trading desk is authorized to 
engage (including but not limited to price risks, such as basis, 
volatility and correlation risks, as well as counterparty credit 
risk). Risk assessments must take into account both the risks 
inherent in the trading activity and the strength and effectiveness 
of controls designed to mitigate those risks;
    vi. How the risks allocated to each trading desk will be 
measured;
    vii. Why the allocated risks levels are appropriate to the 
activities authorized for the trading desk;
    viii. The limits on the holding period of, and the risk 
associated with, financial instruments under the responsibility of 
the trading desk;
    ix. The process for setting new or revised limits, as well as 
escalation procedures for granting exceptions to any limits or to 
any policies or procedures governing the desk, the analysis that 
will be required to support revising limits or granting exceptions, 
and the process for independently reviewing and documenting those 
exceptions and the underlying analysis;
    x. The process for identifying, documenting and approving new 
products, trading strategies, and hedging strategies;
    xi. The types of clients, customers, and counterparties with 
whom the trading desk may trade; and
    xii. The compensation arrangements, including incentive 
arrangements, for employees associated with the trading desk, which 
may not be designed to reward or incentivize prohibited proprietary 
trading or excessive or imprudent risk-taking.
    2. Description of risks and risk management processes: The 
compliance program for the banking entity must include a 
comprehensive description of the risk management program for the 
trading activity of the banking entity. The compliance program must 
also include a description of the governance, approval, reporting, 
escalation, review and other processes the banking entity will use 
to reasonably ensure that trading activity is conducted in 
compliance with section 13 of the BHC Act and this part. Trading 
activity in similar financial instruments should be subject to 
similar governance, limits, testing, controls, and review, unless 
the banking entity specifically determines to establish different 
limits or processes and documents those differences. Descriptions 
must include, at a minimum, the following elements:
    i. A description of the supervisory and risk management 
structure governing all trading activity, including a description of 
processes for initial and senior-level review of new products and 
new strategies;
    ii. A description of the process for developing, documenting, 
testing, approving and reviewing all models used for valuing, 
identifying and monitoring the risks of trading activity and related 
positions, including the process for periodic independent testing of 
the reliability and accuracy of those models;
    iii. A description of the process for developing, documenting, 
testing, approving and reviewing the limits established for each 
trading desk;
    iv. A description of the process by which a security may be 
purchased or sold pursuant to the liquidity management plan, 
including the process for authorizing and monitoring such activity 
to ensure compliance with the banking entity's liquidity management 
plan and the restrictions on liquidity management activities in this 
part;
    v. A description of the management review process, including 
escalation procedures, for approving any temporary exceptions or 
permanent adjustments to limits on the activities, positions, 
strategies, or risks associated with each trading desk; and
    vi. The role of the audit, compliance, risk management and other 
relevant units for conducting independent testing of trading and 
hedging activities, techniques and strategies.
    3. Authorized risks, instruments, and products. The banking 
entity must implement and enforce limits and internal controls for 
each trading desk that are reasonably designed to ensure that 
trading activity is conducted in conformance with

[[Page 62199]]

section 13 of the BHC Act and this part and with the banking 
entity's written policies and procedures. The banking entity must 
establish and enforce risk limits appropriate for the activity of 
each trading desk. These limits should be based on probabilistic and 
non-probabilistic measures of potential loss (e.g., Value-at-Risk 
and notional exposure, respectively), and measured under normal and 
stress market conditions. At a minimum, these internal controls must 
monitor, establish and enforce limits on:
    i. The financial instruments (including, at a minimum, by type 
and exposure) that the trading desk may trade;
    ii. The types and levels of risks that may be taken by each 
trading desk; and
    iii. The types of hedging instruments used, hedging strategies 
employed, and the amount of risk effectively hedged.
    4. Hedging policies and procedures. The banking entity must 
establish, maintain, and enforce written policies and procedures 
regarding the use of risk-mitigating hedging instruments and 
strategies that, at a minimum, describe:
    i. The positions, techniques and strategies that each trading 
desk may use to hedge the risk of its positions;
    ii. The manner in which the banking entity will identify the 
risks arising in connection with and related to the individual or 
aggregated positions, contracts or other holdings of the banking 
entity that are to be hedged and determine that those risks have 
been properly and effectively hedged;
    iii. The level of the organization at which hedging activity and 
management will occur;
    iv. The manner in which hedging strategies will be monitored and 
the personnel responsible for such monitoring;
    v. The risk management processes used to control unhedged or 
residual risks; and
    vi. The process for developing, documenting, testing, approving 
and reviewing all hedging positions, techniques and strategies 
permitted for each trading desk and for the banking entity in 
reliance on Sec.  351.5.
    5. Analysis and quantitative measurements. The banking entity 
must perform robust analysis and quantitative measurement of its 
trading activities that is reasonably designed to ensure that the 
trading activity of each trading desk is consistent with the banking 
entity's compliance program; monitor and assist in the 
identification of potential and actual prohibited proprietary 
trading activity; and prevent the occurrence of prohibited 
proprietary trading. Analysis and models used to determine, measure 
and limit risk must be rigorously tested and be reviewed by 
management responsible for trading activity to ensure that trading 
activities, limits, strategies, and hedging activities do not 
understate the risk and exposure to the banking entity or allow 
prohibited proprietary trading. This review should include periodic 
and independent back-testing and revision of activities, limits, 
strategies and hedging as appropriate to contain risk and ensure 
compliance. In addition to the quantitative measurements reported by 
any banking entity subject to Appendix A to this part, each banking 
entity must develop and implement, to the extent appropriate to 
facilitate compliance with this part, additional quantitative 
measurements specifically tailored to the particular risks, 
practices, and strategies of its trading desks. The banking entity's 
analysis and quantitative measurements must incorporate the 
quantitative measurements reported by the banking entity pursuant to 
Appendix A (if applicable) and include, at a minimum, the following:
    i. Internal controls and written policies and procedures 
reasonably designed to ensure the accuracy and integrity of 
quantitative measurements;
    ii. Ongoing, timely monitoring and review of calculated 
quantitative measurements;
    iii. The establishment of numerical thresholds and appropriate 
trading measures for each trading desk and heightened review of 
trading activity not consistent with those thresholds to ensure 
compliance with section 13 of the BHC Act and this part, including 
analysis of the measurement results or other information, 
appropriate escalation procedures, and documentation related to the 
review; and
    iv. Immediate review and compliance investigation of the trading 
desk's activities, escalation to senior management with oversight 
responsibilities for the applicable trading desk, timely 
notification to the FDIC, appropriate remedial action (e.g., 
divesting of impermissible positions, cessation of impermissible 
activity, disciplinary actions), and documentation of the 
investigation findings and remedial action taken when quantitative 
measurements or other information, considered together with the 
facts and circumstances, or findings of internal audit, independent 
testing or other review suggest a reasonable likelihood that the 
trading desk has violated any part of section 13 of the BHC Act or 
this part.
    6. Other Compliance Matters. In addition to the requirements 
specified above, the banking entity's compliance program must:
    i. Identify activities of each trading desk that will be 
conducted in reliance on exemptions contained in Sec. Sec.  351.4 
through 351.6, including an explanation of:
    A. How and where in the organization the activity occurs; and
    B. Which exemption is being relied on and how the activity meets 
the specific requirements for reliance on the applicable exemption;
    ii. Include an explanation of the process for documenting, 
approving and reviewing actions taken pursuant to the liquidity 
management plan, where in the organization this activity occurs, the 
securities permissible for liquidity management, the process for 
ensuring that liquidity management activities are not conducted for 
the purpose of prohibited proprietary trading, and the process for 
ensuring that securities purchased as part of the liquidity 
management plan are highly liquid and conform to the requirements of 
this part;
    iii. Describe how the banking entity monitors for and prohibits 
potential or actual material exposure to high-risk assets or high-
risk trading strategies presented by each trading desk that relies 
on the exemptions contained in Sec. Sec.  351.3(d)(3), and 351.4 
through 351.6, which must take into account potential or actual 
exposure to:
    A. Assets whose values cannot be externally priced or, where 
valuation is reliant on pricing models, whose model inputs cannot be 
externally validated;
    B. Assets whose changes in value cannot be adequately mitigated 
by effective hedging;
    C. New products with rapid growth, including those that do not 
have a market history;
    D. Assets or strategies that include significant embedded 
leverage;
    E. Assets or strategies that have demonstrated significant 
historical volatility;
    F. Assets or strategies for which the application of capital and 
liquidity standards would not adequately account for the risk; and
    G. Assets or strategies that result in large and significant 
concentrations to sectors, risk factors, or counterparties;
    iv. Establish responsibility for compliance with the reporting 
and recordkeeping requirements of subpart B and Sec.  351.20; and
    v. Establish policies for monitoring and prohibiting potential 
or actual material conflicts of interest between the banking entity 
and its clients, customers, or counterparties.
    7. Remediation of violations. The banking entity's compliance 
program must be reasonably designed and established to effectively 
monitor and identify for further analysis any trading activity that 
may indicate potential violations of section 13 of the BHC Act and 
this part and to prevent actual violations of section 13 of the BHC 
Act and this part. The compliance program must describe procedures 
for identifying and remedying violations of section 13 of the BHC 
Act and this part, and must include, at a minimum, a requirement to 
promptly document, address and remedy any violation of section 13 of 
the BHC Act or this part, and document all proposed and actual 
remediation efforts. The compliance program must include specific 
written policies and procedures that are reasonably designed to 
assess the extent to which any activity indicates that modification 
to the banking entity's compliance program is warranted and to 
ensure that appropriate modifications are implemented. The written 
policies and procedures must provide for prompt notification to 
appropriate management, including senior management and the board of 
directors, of any material weakness or significant deficiencies in 
the design or implementation of the compliance program of the 
banking entity.
    b. Covered Fund Activities or Investments. A banking entity must 
establish, maintain and enforce a compliance program that includes 
written policies and procedures that are appropriate for the types, 
size, complexity and risks of the covered fund and related 
activities conducted and investments made, by the banking entity.
    1. Identification of covered funds. The banking entity's 
compliance program must provide a process, which must include 
appropriate management review and independent testing, for 
identifying and documenting covered funds that each unit within the 
banking entity's organization

[[Page 62200]]

sponsors or organizes and offers, and covered funds in which each 
such unit invests. In addition to the documentation requirements for 
covered funds, as specified under Sec.  351.20(e), the documentation 
must include information that identifies all pools that the banking 
entity sponsors or has an interest in and the type of exemption from 
the Commodity Exchange Act (whether or not the pool relies on 
section 4.7 of the regulations under the Commodity Exchange Act), 
and the amount of ownership interest the banking entity has in those 
pools.
    2. Identification of covered fund activities and investments. 
The banking entity's compliance program must identify, document and 
map each unit within the organization that is permitted to acquire 
or hold an interest in any covered fund or sponsor any covered fund 
and map each unit to the division, business line, or other 
organizational structure that will be responsible for managing and 
overseeing that unit's activities and investments.
    3. Explanation of compliance. The banking entity's compliance 
program must explain how:
    i. The banking entity monitors for and prohibits potential or 
actual material conflicts of interest between the banking entity and 
its clients, customers, or counterparties related to its covered 
fund activities and investments;
    ii. The banking entity monitors for and prohibits potential or 
actual transactions or activities that may threaten the safety and 
soundness of the banking entity related to its covered fund 
activities and investments; and
    iii. The banking entity monitors for and prohibits potential or 
actual material exposure to high-risk assets or high-risk trading 
strategies presented by its covered fund activities and investments, 
taking into account potential or actual exposure to:
    A. Assets whose values cannot be externally priced or, where 
valuation is reliant on pricing models, whose model inputs cannot be 
externally validated;
    B. Assets whose changes in values cannot be adequately mitigated 
by effective hedging;
    C. New products with rapid growth, including those that do not 
have a market history;
    D. Assets or strategies that include significant embedded 
leverage;
    E. Assets or strategies that have demonstrated significant 
historical volatility;
    F. Assets or strategies for which the application of capital and 
liquidity standards would not adequately account for the risk; and
    G. Assets or strategies that expose the banking entity to large 
and significant concentrations with respect to sectors, risk 
factors, or counterparties;
    4. Description and documentation of covered fund activities and 
investments. For each organizational unit engaged in covered fund 
activities and investments, the banking entity's compliance program 
must document:
    i. The covered fund activities and investments that the unit is 
authorized to conduct;
    ii. The banking entity's plan for actively seeking unaffiliated 
investors to ensure that any investment by the banking entity 
conforms to the limits contained in Sec.  351.12 or registered in 
compliance with the securities laws and thereby exempt from those 
limits within the time periods allotted in Sec.  351.12; and
    iii. How it complies with the requirements of subpart C.
    5. Internal Controls. A banking entity must establish, maintain, 
and enforce internal controls that are reasonably designed to ensure 
that its covered fund activities or investments comply with the 
requirements of section 13 of the BHC Act and this part and are 
appropriate given the limits on risk established by the banking 
entity. These written internal controls must be reasonably designed 
and established to effectively monitor and identify for further 
analysis any covered fund activity or investment that may indicate 
potential violations of section 13 of the BHC Act or this part. The 
internal controls must, at a minimum require:
    i. Monitoring and limiting the banking entity's individual and 
aggregate investments in covered funds;
    ii. Monitoring the amount and timing of seed capital investments 
for compliance with the limitations under subpart C (including but 
not limited to the redemption, sale or disposition requirements) of 
Sec.  351.12, and the effectiveness of efforts to seek unaffiliated 
investors to ensure compliance with those limits;
    iii. Calculating the individual and aggregate levels of 
ownership interests in one or more covered fund required by Sec.  
351.12;
    iv. Attributing the appropriate instruments to the individual 
and aggregate ownership interest calculations above;
    v. Making disclosures to prospective and actual investors in any 
covered fund organized and offered or sponsored by the banking 
entity, as provided under Sec.  351.11(a)(8);
    vi. Monitoring for and preventing any relationship or 
transaction between the banking entity and a covered fund that is 
prohibited under Sec.  351.14, including where the banking entity 
has been designated as the sponsor, investment manager, investment 
adviser, or commodity trading advisor to a covered fund by another 
banking entity; and
    vii. Appropriate management review and supervision across legal 
entities of the banking entity to ensure that services and products 
provided by all affiliated entities comply with the limitation on 
services and products contained in Sec.  351.14.
    6. Remediation of violations. The banking entity's compliance 
program must be reasonably designed and established to effectively 
monitor and identify for further analysis any covered fund activity 
or investment that may indicate potential violations of section 13 
of the BHC Act or this part and to prevent actual violations of 
section 13 of the BHC Act and this part. The banking entity's 
compliance program must describe procedures for identifying and 
remedying violations of section 13 of the BHC Act and this part, and 
must include, at a minimum, a requirement to promptly document, 
address and remedy any violation of section 13 of the BHC Act or 
this part, including Sec.  351.21, and document all proposed and 
actual remediation efforts. The compliance program must include 
specific written policies and procedures that are reasonably 
designed to assess the extent to which any activity or investment 
indicates that modification to the banking entity's compliance 
program is warranted and to ensure that appropriate modifications 
are implemented. The written policies and procedures must provide 
for prompt notification to appropriate management, including senior 
management and the board of directors, of any material weakness or 
significant deficiencies in the design or implementation of the 
compliance program of the banking entity.

III. Responsibility and Accountability for the Compliance Program

    a. A banking entity must establish, maintain, and enforce a 
governance and management framework to manage its business and 
employees with a view to preventing violations of section 13 of the 
BHC Act and this part. A banking entity must have an appropriate 
management framework reasonably designed to ensure that: Appropriate 
personnel are responsible and accountable for the effective 
implementation and enforcement of the compliance program; a clear 
reporting line with a chain of responsibility is delineated; and the 
compliance program is reviewed periodically by senior management. 
The board of directors (or equivalent governance body) and senior 
management should have the appropriate authority and access to 
personnel and information within the organizations as well as 
appropriate resources to conduct their oversight activities 
effectively.
    1. Corporate governance. The banking entity must adopt a written 
compliance program approved by the board of directors, an 
appropriate committee of the board, or equivalent governance body, 
and senior management.
    2. Management procedures. The banking entity must establish, 
maintain, and enforce a governance framework that is reasonably 
designed to achieve compliance with section 13 of the BHC Act and 
this part, which, at a minimum, provides for:
    i. The designation of appropriate senior management or committee 
of senior management with authority to carry out the management 
responsibilities of the banking entity for each trading desk and for 
each organizational unit engaged in covered fund activities;
    ii. Written procedures addressing the management of the 
activities of the banking entity that are reasonably designed to 
achieve compliance with section 13 of the BHC Act and this part, 
including:
    A. A description of the management system, including the titles, 
qualifications, and locations of managers and the specific 
responsibilities of each person with respect to the banking entity's 
activities governed by section 13 of the BHC Act and this part; and
    B. Procedures for determining compensation arrangements for 
traders engaged in underwriting or market making-related activities 
under Sec.  351.4 or risk-mitigating hedging activities under Sec.  
351.5 so that such compensation arrangements are designed not to 
reward or incentivize

[[Page 62201]]

prohibited proprietary trading and appropriately balance risk and 
financial results in a manner that does not encourage employees to 
expose the banking entity to excessive or imprudent risk.
    3. Business line managers. Managers with responsibility for one 
or more trading desks of the banking entity are accountable for the 
effective implementation and enforcement of the compliance program 
with respect to the applicable trading desk(s).
    4. Board of directors, or similar corporate body, and senior 
management. The board of directors, or similar corporate body, and 
senior management are responsible for setting and communicating an 
appropriate culture of compliance with section 13 of the BHC Act and 
this part and ensuring that appropriate policies regarding the 
management of trading activities and covered fund activities or 
investments are adopted to comply with section 13 of the BHC Act and 
this part. The board of directors or similar corporate body (such as 
a designated committee of the board or an equivalent governance 
body) must ensure that senior management is fully capable, 
qualified, and properly motivated to manage compliance with this 
part in light of the organization's business activities and the 
expectations of the board of directors. The board of directors or 
similar corporate body must also ensure that senior management has 
established appropriate incentives and adequate resources to support 
compliance with this part, including the implementation of a 
compliance program meeting the requirements of this appendix into 
management goals and compensation structures across the banking 
entity.
    5. Senior management. Senior management is responsible for 
implementing and enforcing the approved compliance program. Senior 
management must also ensure that effective corrective action is 
taken when failures in compliance with section 13 of the BHC Act and 
this part are identified. Senior management and control personnel 
charged with overseeing compliance with section 13 of the BHC Act 
and this part should review the compliance program for the banking 
entity periodically and report to the board, or an appropriate 
committee thereof, on the effectiveness of the compliance program 
and compliance matters with a frequency appropriate to the size, 
scope, and risk profile of the banking entity's trading activities 
and covered fund activities or investments, which shall be at least 
annually.
    6. CEO attestation. Based on a review by the CEO of the banking 
entity, the CEO of the banking entity must, annually, attest in 
writing to the FDIC that the banking entity has in place processes 
to establish, maintain, enforce, review, test and modify the 
compliance program established under this Appendix and Sec.  351.20 
of this part 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 United States 
operations of the foreign banking entity who is located in the 
United States.

IV. Independent Testing

    a. Independent testing must occur with a frequency appropriate 
to the size, scope, and risk profile of the banking entity's trading 
and covered fund activities or investments, which shall be at least 
annually. This independent testing must include an evaluation of:
    1. The overall adequacy and effectiveness of the banking 
entity's compliance program, including an analysis of the extent to 
which the program contains all the required elements of this 
appendix;
    2. The effectiveness of the banking entity's internal controls, 
including an analysis and documentation of instances in which such 
internal controls have been breached, and how such breaches were 
addressed and resolved; and
    3. The effectiveness of the banking entity's management 
procedures.
    b. A banking entity must ensure that independent testing 
regarding the effectiveness of the banking entity's compliance 
program is conducted by a qualified independent party, such as the 
banking entity's internal audit department, compliance personnel or 
risk managers independent of the organizational unit being tested, 
outside auditors, consultants, or other qualified independent 
parties. A banking entity must promptly take appropriate action to 
remedy any significant deficiencies or material weaknesses in its 
compliance program and to terminate any violations of section 13 of 
the BHC Act or this part.

V. Training

    Banking entities must provide adequate training to personnel and 
managers of the banking entity engaged in activities or investments 
governed by section 13 of the BHC Act or this part, as well as other 
appropriate supervisory, risk, independent testing, and audit 
personnel, in order to effectively implement and enforce the 
compliance program. This training should occur with a frequency 
appropriate to the size and the risk profile of the banking entity's 
trading activities and covered fund activities or investments.

VI. Recordkeeping

    Banking entities must create and retain records sufficient to 
demonstrate compliance and support the operations and effectiveness 
of the compliance program. A banking entity must retain these 
records for a period that is no less than 5 years or such longer 
period as required by the FDIC in a form that allows it to promptly 
produce such records to the FDIC on request.

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

0
46. The authority citation for part 75 continues to read as follows:

    Authority:  12 U.S.C. 1851.

Subpart A--Authority and Definitions

0
47. Section 75.2 is revised to read as follows:


Sec.  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;
    (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 
paragraph (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 
paragraph (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 paragraph (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

[[Page 62202]]

Deposit Insurance Act (12 U.S.C. 1813(c)).
    (h) Derivative. (1) Except as provided in paragraph (h)(2) of this 
section, derivative means:
    (i) Any swap, as that term is defined in section 1a(47) of the 
Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as 
that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 
78c(a)(68));
    (ii) Any purchase or sale of a commodity, that is not an excluded 
commodity, for deferred shipment or delivery that is intended to be 
physically settled;
    (iii) Any foreign exchange forward (as that term is defined in 
section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)) or 
foreign exchange swap (as that term is defined in section 1a(25) of the 
Commodity Exchange Act (7 U.S.C. 1a(25));
    (iv) Any agreement, contract, or transaction in foreign currency 
described in section 2(c)(2)(C)(i) of the Commodity Exchange Act (7 
U.S.C. 2(c)(2)(C)(i));
    (v) Any agreement, contract, or transaction in a commodity other 
than foreign currency described in section 2(c)(2)(D)(i) of the 
Commodity Exchange Act (7 U.S.C. 2(c)(2)(D)(i)); and
    (vi) Any transaction authorized under section 19 of the Commodity 
Exchange Act (7 U.S.C. 23(a) or (b));
    (2) A derivative does not include:
    (i) Any consumer, commercial, or other agreement, contract, or 
transaction that the CFTC and SEC have further defined by joint 
regulation, interpretation, 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.
    (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 Sec.  
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: (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 means with respect to a 
banking entity that:
    (1)(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 Sec.  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 Sec.  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 (s)(3) of this section, 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 Sec.  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 this paragraph (s) means the 
trading assets and liabilities (excluding trading assets and 
liabilities attributable to trading activities permitted pursuant to 
Sec.  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 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),

[[Page 62203]]

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 Sec.  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.
    (ee) Significant trading assets and liabilities means with respect 
to a banking entity that:
    (1)(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 Sec.  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 (ee)(3) of this section, trading assets and 
liabilities for purposes of this paragraph (ee) means trading assets 
and liabilities (excluding trading assets and liabilities attributable 
to trading activities permitted pursuant to Sec.  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 this paragraph (ee) means the 
trading assets and liabilities (excluding trading assets and 
liabilities attributable to trading activities permitted pursuant to 
Sec.  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.
    (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

0
48. Section 75.3 is amended by:
0
a. Revising paragraphs (b), and (d)(3), (8), and (9);
0
b. Adding paragraphs (d)(10) through (13);
0
c. Redesignating paragraphs (e)(5) through (13) as paragraphs (e)(6) 
through (14);
0
d. Adding new paragraph (e)(5); and
0
e. Revising paragraph (e)(11), (12), and (14).
    The revisions and additions read as follows:


Sec.  75.3   Prohibition on proprietary trading.

* * * * *
    (b) Definition of trading account. (1) Trading account. 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
    (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) Trading account application for certain banking entities. (i) A 
banking entity that is subject to paragraph (b)(1)(ii) of this section 
in determining the scope of its trading account is not subject to 
paragraph (b)(1)(i) of this section.
    (ii) A banking entity that does not calculate risk-based capital 
ratios under

[[Page 62204]]

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 of this part.
    (ii) 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 
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 Sec.  75.6(a) or 
(b) of this subpart are for the purpose of liquidity management and in 
accordance with the liquidity management plan described in this 
paragraph (d)(3); 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;
    (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:
    (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

[[Page 62205]]

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 12 CFR part 3, subpart F, 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
    (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.

0
49. Section 75.4 is revised to read as follows:


Sec.  75.4   Permitted underwriting and market making-related 
activities.

    (a) Underwriting activities--(1) Permitted underwriting activities. 
The prohibition contained in Sec.  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 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.
    (iv) A banking entity with significant trading assets and 
liabilities may satisfy the requirements in paragraphs (a)(2))iii)(B) 
and (C) of this section by complying with the requirements set forth 
below in paragraph (c) of this section;
    (v) The compensation arrangements of persons performing the 
activities described in this paragraph (a) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (vi) 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 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 Sec.  75.3(a) does not 
apply to a banking entity's market making-related activities

[[Page 62206]]

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:
    (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.
    (iv) A banking entity with significant trading assets and 
liabilities may satisfy the requirements in paragraphs (b)(2)(iii)(C) 
and (D) of this section by complying with the requirements set forth 
below in paragraph (c) of this section;
    (v) The compensation arrangements of persons performing the 
activities described in this paragraph (b) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (vi) The banking entity is licensed or registered to engage in 
activity described in this paragraph (b) in accordance with applicable 
law.
    (3) 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 
Sec.  75.2(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.
    (ii) [Reserved]
    (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.
    (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 should take into account the liquidity, maturity, and depth 
of the market for the relevant types of securities and 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.
    (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 should take into account the liquidity, maturity, and depth 
of the market for the relevant types of financial instruments and 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;

[[Page 62207]]

    (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.
    (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 paragraph (c)(1)(ii)(A) or (B) of this section, a banking 
entity shall maintain and make available to the CFTC upon request 
records regarding:
    (A) Any limit that is exceeded; and
    (B) Any temporary or permanent increase to any limit(s), in each 
case in the form and manner as directed by the CFTC.
    (ii) In the event of a breach or increase of any limit set pursuant 
to paragraph (c)(1)(ii)(A) or (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:
    (A) Takes action as promptly as possible after a breach to bring 
the trading desk into compliance; and
    (B) 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 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) of this section must be made 
in accordance with the notice and response procedures in subpart D of 
this part.

0
50. Section 75.5 is amended by revising paragraphs (b) and (c)(1) 
introductory text and adding paragraph (c)(4) to read as follows:


Sec.  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:
    (A) Is conducted in accordance with the written policies, 
procedures, and internal controls required under this section;
    (B) At the inception of the hedging activity, including, without 
limitation, any adjustments to the hedging activity, is designed to 
reduce or otherwise significantly mitigate one or more specific, 
identifiable risks, including market risk, counterparty or other credit 
risk, currency or foreign exchange risk, interest rate risk, commodity 
price risk, basis risk, or similar risks, arising in connection with 
and related to identified positions, contracts, or other holdings of 
the banking entity, based upon the facts and circumstances of the 
identified underlying and hedging positions, contracts or other 
holdings and the risks and liquidity thereof;
    (C) Does not give rise, at the inception of the hedge, to any 
significant new or additional risk that is not itself hedged 
contemporaneously in accordance with this section;
    (D) Is subject to continuing review, monitoring and management by 
the banking entity that:
    (1) Is consistent with the written hedging policies and procedures 
required under paragraph (b)(1)(i) of this section;
    (2) Is designed to reduce or otherwise significantly mitigate the 
specific, identifiable risks that develop over time from the risk-
mitigating hedging activities undertaken under this section and the 
underlying positions, contracts, and other holdings of the banking 
entity, based upon the facts and circumstances of the underlying and 
hedging positions, contracts and other holdings of the banking entity 
and the risks and liquidity thereof; and
    (3) Requires ongoing recalibration of the hedging activity by the 
banking entity to ensure that the hedging activity satisfies the 
requirements set out in paragraph (b)(1)(ii) of this section and is not 
prohibited proprietary trading; and
    (iii) The compensation arrangements of persons performing risk-
mitigating hedging activities are designed not to reward or incentivize 
prohibited proprietary trading.
    (2) The risk-mitigating hedging activities of a banking entity that 
does not have significant trading assets and liabilities are permitted 
under paragraph (a) of this section only if the 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 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

[[Page 62208]]

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.

0
51. Section 75.6 is amended by revising paragraph (e)(3); removing 
paragraphs (e)(4) and (6); and redesignating paragraph (e)(5) as 
paragraph (e)(4).
    The revision reads as follows:


Sec.  75.6   Other permitted proprietary trading activities.

* * * * *
    (e) * * *
    (3) A purchase or sale by a banking entity is permitted for 
purposes of this paragraph (e) if:
    (i) The banking entity engaging as principal in the purchase or 
sale (including relevant personnel) is not located in the United States 
or organized under the laws of the United States or of any State;
    (ii) The banking entity (including relevant personnel) that makes 
the decision to purchase or sell as principal is not located in the 
United States or organized under the laws of the United States or of 
any State; and
    (iii) The purchase or sale, including any transaction arising from 
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

0
52. Section 75.10 is amended by revising paragraphs (c)(7)(ii) and 
(c)(8)(i)(A) to read as follows:


Sec.  75.10   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 Sec.  75.2(t) of subpart A;
* * * * *

0
53. Section 75.11 is amended by revising paragraph (c) to read as 
follows:


Sec.  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 Sec.  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 Sec.  75.4(a) or (b) of subpart B, respectively; and
    (2) With respect to any banking entity (or any affiliate thereof) 
that: Acts as a sponsor, investment adviser or commodity trading 
advisor to a particular covered fund or otherwise acquires and retains 
an ownership interest in such covered fund in reliance on paragraph (a) 
of this section; or acquires and retains an ownership interest in such 
covered fund and is either a securitizer, as that term is used in 
section 15G(a)(3) of the Exchange Act (15 U.S.C. 78o-11(a)(3)), or is 
acquiring and retaining an ownership interest in such covered fund in 
compliance with section 15G of that Act (15 U.S.C. 78o-11) and the 
implementing regulations issued thereunder each as permitted by 
paragraph (b) of this section, then in each such case any ownership 
interests acquired or retained by the banking entity and its affiliates 
in connection with underwriting and market making related activities 
for that particular covered fund are included in the calculation of 
ownership interests permitted to be held by the banking entity and its 
affiliates under the limitations of Sec.  75.12(a)(2)(ii); Sec.  
75.12(a)(2)(iii), and Sec.  75.12(d) of this subpart.

0
54. Section 75.13 is amended by revising paragraphs (a), (b)(3) and 
(4), and (c) to read as follows:


Sec.  75.13   Other permitted covered fund activities and investments.

    (a) Permitted risk-mitigating hedging activities. (1) The 
prohibition contained in Sec.  75.10(a) of this subpart does not apply 
with respect to an ownership interest in a covered fund acquired or 
retained by a banking entity that is designed to reduce or otherwise 
significantly mitigate the specific, identifiable risks to the banking 
entity in connection with:
    (i) A compensation arrangement with an employee of the banking 
entity or an affiliate thereof that directly provides investment 
advisory, commodity trading advisory or other services to the covered 
fund; or
    (ii) A position taken by the banking entity when acting as 
intermediary on behalf of a customer that is not itself a banking 
entity to facilitate the exposure by the customer to the profits and 
losses of the covered fund.
    (2) 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

[[Page 62209]]

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) of this section, 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 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 Sec.  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 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.

0
55. Section 75.14 is amended by revising paragraph (a)(2)(ii)(B) to 
read as follows:


Sec.  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

0
56. Section 75.20 is amended by revising paragraphs (a), (b) 
introductory text, (c), (d), (e) introductory text, and (f)(2) and 
adding paragraphs (g), (h), and (i) to read as follows:


Sec.  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.
    (d) Reporting requirements under appendix A to this part. (1) A 
banking entity engaged in proprietary trading activity permitted under 
subpart B of this part shall comply with the reporting requirements 
described in appendix A to this part, 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 appendix A to this 
part.
    (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 appendix A to this part shall report the information 
required by appendix A for

[[Page 62210]]

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 of this part 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 of this part, 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 section.
    (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, of this part 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 
section.
    (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 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) Waiver. 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) Decision. The CFTC will notify the banking entity of the 
decision in writing. The notice will include an explanation of the 
decision.

0
57. Revise appendix A to part 75 to read as follows:

Appendix A 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 Sec.  
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 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 Sec.  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 Sec.  
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 
Sec.  75.4, 75.5, or 75.6(a) and (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.
    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 Sec.  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 Sec. Sec.  75.4 through 75.6(a) and (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

[[Page 62211]]

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 Sec. Sec.  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 Sec.  75.4, Sec.  75.5, Sec.  75.6(a), or Sec.  75.6(b). 
A banking entity may include in its covered trading activity trading 
conducted under Sec.  75.3(d), Sec.  75.6(c), Sec.  75.6(d) or Sec.  
75.6(e).
    Measurement frequency means the frequency with which a 
particular quantitative metric must be calculated and recorded.
    Trading day means a calendar day on which a trading desk is open 
for trading.

III. Reporting and Recordkeeping

a. Scope of Required Reporting

    1. Quantitative measurements. Each banking entity made subject 
to this appendix by Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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.

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
    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 Sec.  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 
Sec.  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

    A banking entity must, for any quantitative measurement 
furnished to the CFTC pursuant to this appendix and Sec.  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 Sec. Sec.  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 Sec.  75.4(b) and hedging activity under Sec.  75.5. 
Accordingly, the limits required under Sec. Sec.  75.4(b)(2)(iii)(C) 
and 75.5(b)(1)(i)(A) must meet the applicable requirements under 
Sec. Sec.  75.4(b)(2)(iii)(C) and 75.5(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.

[[Page 62212]]

    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 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.
    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.'' \1227\ A banking entity must 
separately report the trading desk's market value of long securities 
positions, short securities positions, derivatives receivables, and 
derivatives payables.
---------------------------------------------------------------------------

    \1227\ See Sec.  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.
---------------------------------------------------------------------------

    ii. Calculation Period: One trading day.
    iii. Measurement Frequency: Daily.
    iv. Applicability: All trading desks that rely on Sec.  75.4(a) 
or (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.'' \1228\ Further, for purposes of the Transaction 
Volumes quantitative measurement, a customer of a trading desk that 
relies on Sec.  75.4(a) to conduct underwriting activity is a market 
participant identified in Sec.  75.4(a)(7), and a customer of a 
trading desk that relies on Sec.  75.4(b) to conduct market making-
related activity is a market participant identified in Sec.  
75.4(b)(3).
---------------------------------------------------------------------------

    \1228\ See Sec.  75.2(h), (aa).
---------------------------------------------------------------------------

    ii. Calculation Period: One trading day.
    iii. Measurement Frequency: Daily.
    iv. Applicability: All trading desks that rely on Sec.  75.4(a) 
or (b) to conduct underwriting activity or market-making-related 
activity, respectively.

Appendix B to Part 75 [Removed]

0
58. Appendix B to part 75 is removed.

0
59. Effective January 1, 2020, until December 31, 2020, appendix Z to 
part 75 is added to read as follows:

Appendix Z to Part 75--Proprietary Trading and Certain Interests in and 
Relationships with Covered Funds (Alternative Compliance)

    Note: The content of this appendix reproduces the regulation 
implementing Section 13 of the Bank Holding Company Act as of 
November 13, 2019.

Subpart A--Authority and Definitions


Sec.  75.1   Authority, purpose, scope, and relationship to other 
authorities.

    (a) Authority. This part is issued by the Commission under section 
13 of the Bank Holding Company Act of 1956, as amended (12 U.S.C. 
1851).
    (b) Purpose. Section 13 of the Bank Holding Company Act establishes 
prohibitions and restrictions on proprietary trading by, and 
investments in or relationships with covered funds by, certain banking 
entities. This part implements section 13 of the Bank Holding Company 
Act by defining terms used in the statute and related terms, 
establishing prohibitions and restrictions on proprietary trading and 
investments in or relationships with covered funds, and further 
explaining the statute's requirements.
    (c) Scope. This part implements section 13 of the Bank Holding 
Company Act with respect to banking entities for which the CFTC is the 
primary financial regulatory agency, as defined in section 2(12) of the 
Dodd-Frank Act, but does not include such entities to the extent they 
are not within the definition of banking entity in Sec.  75.2(c).
    (d) Relationship to other authorities. Except as otherwise provided 
under section 13 of the BHC Act, and notwithstanding any other 
provision of law, the prohibitions and restrictions under section 13 of 
the BHC Act shall apply to the activities of an applicable banking 
entity, even if such activities are authorized for the applicable 
banking entity under other applicable provisions of law.


Sec.  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

[[Page 62213]]

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
    (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 or Commission 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:
    (i) Any swap, as that term is defined in section 1a(47) of the 
Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as 
that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 
78c(a)(68));
    (ii) Any purchase or sale of a commodity, that is not an excluded 
commodity, for deferred shipment or delivery that is intended to be 
physically settled;
    (iii) Any foreign exchange forward (as that term is defined in 
section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)) or 
foreign exchange swap (as that term is defined in section 1a(25) of the 
Commodity Exchange Act (7 U.S.C. 1a(25));
    (iv) Any agreement, contract, or transaction in foreign currency 
described in section 2(c)(2)(C)(i) of the Commodity Exchange Act (7 
U.S.C. 2(c)(2)(C)(i));
    (v) Any agreement, contract, or transaction in a commodity other 
than foreign currency described in section 2(c)(2)(D)(i) of the 
Commodity Exchange Act (7 U.S.C. 2(c)(2)(D)(i)); and
    (vi) Any transaction authorized under section 19 of the Commodity 
Exchange Act (7 U.S.C. 23(a) or (b));
    (2) A derivative does not include:
    (i) Any consumer, commercial, or other agreement, contract, or 
transaction that the CFTC and SEC have further defined by joint 
regulation, interpretation, guidance, or other action as not within the 
definition of swap, as that term is defined in section 1a(47) of the 
Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as 
that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 
78c(a)(68)); or
    (ii) Any identified banking product, as defined in section 402(b) 
of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)), 
that is subject to section 403(a) of that Act (7 U.S.C. 27a(a)).
    (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, unless otherwise indicated, 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 Bank Holding Company Act of 1956 (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) Loan means any loan, lease, extension of credit, or secured or 
unsecured receivable that is not a security or derivative.
    (t) Primary financial regulatory agency has the same meaning as in 
section 2(12) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (12 U.S.C. 5301(12)).
    (u) 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.
    (v) Qualifying foreign banking organization means a foreign banking 
organization that qualifies as such under Sec.  211.23(a), (c) or (e) 
of the Board's Regulation K (12 CFR 211.23(a), (c), or (e)).
    (w) SEC means the Securities and Exchange Commission.
    (x) 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

[[Page 62214]]

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.
    (y) Security has the meaning specified in section 3(a)(10) of the 
Exchange Act (15 U.S.C. 78c(a)(10)).
    (z) 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)).
    (aa) Security future has the meaning specified in section 3(a)(55) 
of the Exchange Act (15 U.S.C. 78c(a)(55)).
    (bb) 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.
    (cc) 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.
    (dd) Subsidiary has the same meaning as in section 2(d) of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841(d)).
    (ee) 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.
    (ff) 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


Sec.  75.3   Prohibition on proprietary trading.

    (a) Prohibition. Except as otherwise provided in this subpart, a 
banking entity may not engage in proprietary trading. Proprietary 
trading means engaging as principal for the trading account of the 
banking entity in any purchase or sale of one or more financial 
instruments.
    (b) Definition of trading account. (1) Trading account means any 
account that is used by a banking entity to:
    (i) Purchase or sell one or more financial instruments principally 
for the purpose of:
    (A) Short-term 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 described in paragraphs (b)(1)(i)(A), 
(B), or (C) of this section;
    (ii) Purchase or sell one or more financial instruments that are 
both market risk capital rule covered positions and trading positions 
(or hedges of other market risk capital rule covered positions), if the 
banking entity, or any affiliate of the banking entity, is an insured 
depository institution, bank holding company, or savings and loan 
holding company, and calculates risk-based capital ratios under the 
market risk capital rule; or
    (iii) 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.
    (2) Rebuttable presumption for certain purchases and sales. The 
purchase (or sale) of a financial instrument by a banking entity shall 
be presumed 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 fewer than sixty days or substantially 
transfers the risk of the financial instrument within sixty days of the 
purchase (or sale), unless the banking entity can demonstrate, 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 paragraph (b)(1)(i) of this section.
    (c) Financial instrument--(1) Financial instrument means:
    (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.
    (2) A financial instrument does not include:
    (i) A loan;
    (ii) A commodity that is not:
    (A) An excluded commodity (other than foreign exchange or 
currency);
    (B) A derivative;
    (C) A contract of sale of a commodity for future delivery; or
    (D) An option on a contract of sale of a commodity for future 
delivery; or
    (iii) Foreign exchange or currency.
    (d) Proprietary trading does not include:--(1) Any purchase or sale 
of one or more financial instruments by a banking entity that arises 
under a repurchase or reverse repurchase agreement pursuant to which 
the banking entity has simultaneously agreed, in writing, to both 
purchase and sell a stated asset, at stated prices, and on stated dates 
or on demand with the same counterparty;
    (2) Any purchase or sale of one or more financial instruments by a 
banking entity that arises under a transaction in which the banking 
entity lends or borrows a security temporarily to or from another party 
pursuant to a written securities lending agreement under which the 
lender retains the economic interests of an owner of such security, and 
has the right to terminate the transaction and to recall the loaned 
security on terms agreed by the parties;
    (3) Any purchase or sale of a security by a banking entity for the 
purpose of liquidity management in accordance with a documented 
liquidity management plan of the banking entity that:
    (i) Specifically contemplates and authorizes the particular 
securities to be used for liquidity management purposes, the amount, 
types, and risks of these securities that are consistent with liquidity 
management, and the liquidity circumstances in which the particular 
securities may or must be used;
    (ii) Requires that any purchase or sale of securities 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 securities purchased or sold for liquidity 
management purposes be highly liquid and limited to securities 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 securities purchased or sold for liquidity 
management purposes, together with any other instruments

[[Page 62215]]

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 securities that are not permitted under Sec.  75.6(a) or (b) 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 Commission's supervisory requirements, 
guidance, and expectations regarding liquidity management;
    (4) Any purchase or sale of one or more financial instruments by a 
banking entity that is a derivatives clearing organization or a 
clearing agency in connection with clearing financial instruments;
    (5) Any excluded clearing activities by a banking entity that is a 
member of a clearing agency, a member of a derivatives clearing 
organization, or a member of a designated financial market utility;
    (6) Any purchase or sale of one or more financial instruments by a 
banking entity, so long as:
    (i) The purchase (or sale) satisfies an existing delivery 
obligation of the banking entity or its customers, including to prevent 
or close out a failure to deliver, in connection with delivery, 
clearing, or settlement activity; or
    (ii) The purchase (or sale) satisfies an obligation of the banking 
entity in connection with a judicial, administrative, self-regulatory 
organization, or arbitration proceeding;
    (7) Any purchase or sale of one or more financial instruments by a 
banking entity that is acting solely as agent, broker, or custodian;
    (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; or
    (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 Commission.
    (e) Definition of other terms related to proprietary trading. For 
purposes of this subpart:
    (1) Anonymous means that each party to a purchase or sale is 
unaware of the identity of the other party(ies) to the purchase or 
sale.
    (2) Clearing agency has the same meaning as in section 3(a)(23) of 
the Exchange Act (15 U.S.C. 78c(a)(23)).
    (3) Commodity has the same meaning as in section 1a(9) of the 
Commodity Exchange Act (7 U.S.C. 1a(9)), except that a commodity does 
not include any security;
    (4) Contract of sale of a commodity for future delivery means a 
contract of sale (as that term is defined in section 1a(13) of the 
Commodity Exchange Act (7 U.S.C. 1a(13)) for future delivery (as that 
term is defined in section 1a(27) of the Commodity Exchange Act (7 
U.S.C. 1a(27))).
    (5) Derivatives clearing organization means:
    (i) A derivatives clearing organization registered under section 5b 
of the Commodity Exchange Act (7 U.S.C. 7a-1);
    (ii) A derivatives clearing organization that, pursuant to CFTC 
regulation, is exempt from the registration requirements under section 
5b of the Commodity Exchange Act (7 U.S.C. 7a-1); or
    (iii) A foreign derivatives clearing organization that, pursuant to 
CFTC regulation, is permitted to clear for a foreign board of trade 
that is registered with the CFTC.
    (6) Exchange, unless the context otherwise requires, means any 
designated contract market, swap execution facility, or foreign board 
of trade registered with the CFTC, or, for purposes of securities or 
security-based swaps, an exchange, as defined under section 3(a)(1) of 
the Exchange Act (15 U.S.C. 78c(a)(1)), or security-based swap 
execution facility, as defined under section 3(a)(77) of the Exchange 
Act (15 U.S.C. 78c(a)(77)).
    (7) Excluded clearing activities means:
    (i) With respect to customer transactions cleared on a derivatives 
clearing organization, a clearing agency, or a designated financial 
market utility, any purchase or sale necessary to correct trading 
errors made by or on behalf of a customer provided that such purchase 
or sale is conducted in accordance with, for transactions cleared on a 
derivatives clearing organization, the Commodity Exchange Act, CFTC 
regulations, and the rules or procedures of the derivatives clearing 
organization, or, for transactions cleared on a clearing agency, the 
rules or procedures of the clearing agency, or, for transactions 
cleared on a designated financial market utility that is neither a 
derivatives clearing organization nor a clearing agency, the rules or 
procedures of the designated financial market utility;
    (ii) Any purchase or sale in connection with and related to the 
management of a default or threatened imminent default of a customer 
provided that such purchase or sale is conducted in accordance with, 
for transactions cleared on a derivatives clearing organization, the 
Commodity Exchange Act, CFTC regulations, and the rules or procedures 
of the derivatives clearing organization, or, for transactions cleared 
on a clearing agency, the rules or procedures of the clearing agency, 
or, for transactions cleared on a designated financial market utility 
that is neither a derivatives clearing organization nor a clearing 
agency, the rules or procedures of the designated financial market 
utility;
    (iii) Any purchase or sale in connection with and related to the 
management of a default or threatened imminent default of a member of a 
clearing agency, a member of a derivatives clearing organization, or a 
member of a designated financial market utility;
    (iv) Any purchase or sale in connection with and related to the 
management of the default or threatened default of a clearing agency, a 
derivatives clearing organization, or a designated financial market 
utility; and
    (v) Any purchase or sale that is required by the rules or 
procedures of a clearing agency, a derivatives clearing organization, 
or a designated financial market utility to mitigate the risk to the 
clearing agency, derivatives clearing organization, or designated 
financial market utility that would result from the clearing by a 
member of security-based swaps that reference the member or an 
affiliate of the member.
    (8) Designated financial market utility has the same meaning as in 
section 803(4) of the Dodd-Frank Act (12 U.S.C. 5462(4)).
    (9) Issuer has the same meaning as in section 2(a)(4) of the 
Securities Act of 1933 (15 U.S.C. 77b(a)(4)).
    (10) Market risk capital rule covered position and trading position 
means a financial instrument that is both a covered position and a 
trading position, as those terms are respectively defined:

[[Page 62216]]

    (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.
    (11) Market risk capital rule means the market risk capital rule 
that is contained in subpart F of 12 CFR part 3, 12 CFR parts 208 and 
225, or 12 CFR part 324, as applicable.
    (12) Municipal security means a security that is a direct 
obligation of or issued by, or an obligation guaranteed as to principal 
or interest by, a State or any political subdivision thereof, or any 
agency or instrumentality of a State or any political subdivision 
thereof, or any municipal corporate instrumentality of one or more 
States or political subdivisions thereof.
    (13) Trading desk means 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.


Sec.  75.4   Permitted underwriting and market making-related 
activities.

    (a) Underwriting activities--(1) Permitted underwriting activities. 
The prohibition contained in Sec.  75.3(a) does not apply to a banking 
entity's underwriting activities conducted in accordance with paragraph 
(a) of this section.
    (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) 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, 
and reasonable efforts are made to sell or otherwise reduce the 
underwriting position within a reasonable period, taking into account 
the liquidity, maturity, and depth of the market for the relevant type 
of security;
    (iii) 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, based on the nature and amount of 
the trading desk's underwriting activities, including the reasonably 
expected near term demands of clients, customers, or counterparties, on 
the:
    (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;
    (C) Internal controls and ongoing monitoring and analysis of each 
trading desk's compliance with its limits; and
    (D) Authorization procedures, including escalation procedures that 
require review and approval of any trade that would exceed a trading 
desk's limit(s), demonstrable analysis of the basis for any temporary 
or permanent increase to a trading desk's limit(s), and independent 
review of such demonstrable analysis and approval;
    (iv) The compensation arrangements of persons performing the 
activities described in paragraph (a) of this section 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 paragraph (a) of this section in accordance with 
applicable law.
    (3) Definition of distribution. For purposes of paragraph (a) of 
this section, 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 paragraph (a) of 
this section, 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 
paragraph (a) of this section, 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 paragraph 
(a) 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 paragraph (a) of this section, 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 Sec.  75.3(a) does not 
apply to a banking entity's market making-related activities conducted 
in accordance with paragraph (b) of this section.
    (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 amount, types, and risks of the financial instruments in 
the trading desk's market-maker inventory are designed not to exceed, 
on an ongoing

[[Page 62217]]

basis, the reasonably expected near term demands of clients, customers, 
or counterparties, based on:
    (A) The liquidity, maturity, and depth of the market for the 
relevant types of financial instrument(s); and
    (B) 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 financial 
instruments in which the trading desk makes a market, including through 
block trades;
    (iii) 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 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;
    (C) Limits for each trading desk, based on the nature and amount of 
the trading desk's market making-related activities, that address the 
factors prescribed by paragraph (b)(2)(ii) of this section, on:
    (1) The amount, types, and risks of its market-maker inventory;
    (2) The 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) The period of time a financial instrument may be held;
    (D) Internal controls and ongoing monitoring and analysis of each 
trading desk's compliance with its limits; and
    (E) Authorization procedures, including escalation procedures that 
require review and approval of any trade that would exceed a trading 
desk's limit(s), demonstrable analysis that the basis for any temporary 
or permanent increase to a trading desk's limit(s) is consistent with 
the requirements of paragraph (b) of this section, and independent 
review of such demonstrable analysis and approval;
    (iv) To the extent that any limit identified pursuant to paragraph 
(b)(2)(iii)(C) of this section is exceeded, the trading desk takes 
action to bring the trading desk into compliance with the limits as 
promptly as possible after the limit is exceeded;
    (v) The compensation arrangements of persons performing the 
activities described in paragraph (b) of this section are designed not 
to reward or incentivize prohibited proprietary trading; and
    (vi) The banking entity is licensed or registered to engage in 
activity described in paragraph (b) of this section in accordance with 
applicable law.
    (3) 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 Sec.  75.20(d)(1), 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.
    (ii) [Reserved]
    (4) Definition of financial exposure. For purposes of paragraph (b) 
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 inventory. For the purposes of 
paragraph (b) of this section, market-maker inventory 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.


Sec.  75.5   Permitted risk-mitigating hedging activities.

    (a) Permitted risk-mitigating hedging activities. The prohibition 
contained in Sec.  75.3(a) does not apply to the risk-mitigating 
hedging activities of a banking entity in connection with and related 
to individual or aggregated positions, contracts, or other holdings of 
the banking entity and designed to reduce the specific risks to the 
banking entity in connection with and related to such positions, 
contracts, or other holdings.
    (b) Requirements. The risk-mitigating hedging activities of a 
banking entity are permitted under paragraph (a) of this section only 
if:
    (1) 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:
    (i) 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;
    (ii) Internal controls and ongoing monitoring, management, and 
authorization procedures, including relevant escalation procedures; and
    (iii) The conduct of analysis, including correlation analysis, and 
independent testing designed to ensure 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, and such correlation 
analysis demonstrates that the hedging activity demonstrably reduces or 
otherwise significantly mitigates the specific, identifiable risk(s) 
being hedged;
    (2) The risk-mitigating hedging activity:

[[Page 62218]]

    (i) Is conducted in accordance with the written policies, 
procedures, and internal controls required under this section;
    (ii) At the inception of the hedging activity, including, without 
limitation, any adjustments to the hedging activity, is designed to 
reduce or otherwise significantly mitigate and demonstrably reduces or 
otherwise significantly mitigates 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;
    (iii) 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;
    (iv) Is subject to continuing review, monitoring and management by 
the banking entity that:
    (A) Is consistent with the written hedging policies and procedures 
required under paragraph (b)(1) of this section;
    (B) Is designed to reduce or otherwise significantly mitigate and 
demonstrably reduces or otherwise significantly mitigates 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
    (C) 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)(2) of this section and is not 
prohibited proprietary trading; and
    (3) The compensation arrangements of persons performing risk-
mitigating hedging activities are designed not to reward or incentivize 
prohibited proprietary trading.
    (c) Documentation requirement. (1) A banking entity must comply 
with the requirements of paragraphs (c)(2) and (c)(3) of this section 
with respect to any purchase or sale of financial instruments made in 
reliance on this section for risk-mitigating hedging purposes that is:
    (i) Not established by the specific trading desk establishing or 
responsible for the underlying positions, contracts, or other holdings 
the risks of which the hedging activity is designed to reduce;
    (ii) Established by the specific trading desk establishing or 
responsible for the underlying positions, contracts, or other holdings 
the risks of which the purchases or sales are designed to reduce, but 
that is effected through a financial instrument, exposure, technique, 
or strategy that is not specifically identified in the trading desk's 
written policies and procedures established under paragraph (b)(1) of 
this section or under Sec.  75.4(b)(2)(iii)(B) as a product, 
instrument, exposure, technique, or strategy such trading desk may use 
for hedging; or
    (iii) Established to hedge aggregated positions across two or more 
trading desks.
    (2) In connection with any purchase or sale identified in paragraph 
(c)(1) of this section, a banking entity must, at a minimum, and 
contemporaneously with the purchase or sale, document:
    (i) The specific, identifiable risk(s) of the identified positions, 
contracts, or other holdings of the banking entity that the purchase or 
sale is designed to reduce;
    (ii) The specific risk-mitigating strategy that the purchase or 
sale is designed to fulfill; and
    (iii) The trading desk or other business unit that is establishing 
and responsible for the hedge.
    (3) A banking entity must create and retain records sufficient to 
demonstrate compliance with the requirements of paragraph (c) of this 
section for a period that is no less than five years in a form that 
allows the banking entity to promptly produce such records to the 
Commission on request, or such longer period as required under other 
law or this part.


Sec.  75.6   Other permitted proprietary trading activities.

    (a) Permitted trading in domestic government obligations. The 
prohibition contained in Sec.  75.3(a) does not apply to the purchase 
or sale by a banking entity of a financial instrument that is:
    (1) An obligation of, or issued or guaranteed by, the United 
States;
    (2) An obligation, participation, or other instrument of, or issued 
or guaranteed by, an agency of the United States, the Government 
National Mortgage Association, the Federal National Mortgage 
Association, the Federal Home Loan Mortgage Corporation, a Federal Home 
Loan Bank, the Federal Agricultural Mortgage Corporation or a Farm 
Credit System institution chartered under and subject to the provisions 
of the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.);
    (3) An obligation of any State or any political subdivision 
thereof, including any municipal security; or
    (4) An obligation of the FDIC, or any entity formed by or on behalf 
of the FDIC for purpose of facilitating the disposal of assets acquired 
or held by the FDIC 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.
    (b) Permitted trading in foreign government obligations--(1) 
Affiliates of foreign banking entities in the United States. The 
prohibition contained in Sec.  75.3(a) does not apply to the purchase 
or sale of a financial instrument that is an obligation of, or issued 
or guaranteed by, a foreign sovereign (including any multinational 
central bank of which the foreign sovereign is a member), or any agency 
or political subdivision of such foreign sovereign, by a banking 
entity, so long as:
    (i) The banking entity is organized under or is directly or 
indirectly controlled by a banking entity that is organized under the 
laws of a foreign sovereign and is not directly or indirectly 
controlled by a top-tier banking entity that is organized under the 
laws of the United States;
    (ii) The financial instrument is an obligation of, or issued or 
guaranteed by, the foreign sovereign under the laws of which the 
foreign banking entity referred to in paragraph (b)(1)(i) of this 
section is organized (including any multinational central bank of which 
the foreign sovereign is a member), or any agency or political 
subdivision of that foreign sovereign; and
    (iii) The purchase or sale as principal is not made by an insured 
depository institution.
    (2) Foreign affiliates of a U.S. banking entity. The prohibition 
contained in Sec.  75.3(a) does not apply to the purchase or sale of a 
financial instrument that is an obligation of, or issued or guaranteed 
by, a foreign sovereign (including any multinational central bank of 
which the foreign sovereign is a member), or any agency or political 
subdivision of that foreign sovereign, by a foreign entity that is 
owned or controlled by a banking entity organized or established under 
the laws of the United States or any State, so long as:
    (i) The foreign entity is a foreign bank, as defined in Sec.  
211.2(j) of the Board's Regulation K (12 CFR 211.2(j)), or is regulated 
by the foreign sovereign as a securities dealer;

[[Page 62219]]

    (ii) The financial instrument is an obligation of, or issued or 
guaranteed by, the foreign sovereign under the laws of which the 
foreign entity is organized (including any multinational central bank 
of which the foreign sovereign is a member), or any agency or political 
subdivision of that foreign sovereign; and
    (iii) The financial instrument is owned by the foreign entity and 
is not financed by an affiliate that is located in the United States or 
organized under the laws of the United States or of any State.
    (c) Permitted trading on behalf of customers--(1) Fiduciary 
transactions. The prohibition contained in Sec.  75.3(a) does not apply 
to the purchase or sale of financial instruments by a banking entity 
acting as trustee or in a similar fiduciary capacity, so long as:
    (i) The transaction is conducted for the account of, or on behalf 
of, a customer; and
    (ii) The banking entity does not have or retain beneficial 
ownership of the financial instruments.
    (2) Riskless principal transactions. The prohibition contained in 
Sec.  75.3(a) does not apply to the purchase or sale of financial 
instruments by a banking entity acting as riskless principal in a 
transaction in which the banking entity, after receiving an order to 
purchase (or sell) a financial instrument from a customer, purchases 
(or sells) the financial instrument for its own account to offset a 
contemporaneous sale to (or purchase from) the customer.
    (d) Permitted trading by a regulated insurance company. The 
prohibition contained in Sec.  75.3(a) does not apply to the purchase 
or sale of financial instruments by a banking entity that is an 
insurance company or an affiliate of an insurance company if:
    (1) The insurance company or its affiliate purchases or sells the 
financial instruments solely for:
    (i) The general account of the insurance company; or
    (ii) A separate account established by the insurance company;
    (2) The purchase or sale is conducted in compliance with, and 
subject to, the insurance company investment laws, regulations, and 
written guidance 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, regulation, or written guidance described in 
paragraph (d)(2) of this section is insufficient to protect the safety 
and soundness of the covered banking entity, or the financial stability 
of the United States.
    (e) Permitted trading activities of foreign banking entities. (1) 
The prohibition contained in Sec.  75.3(a) does not apply to the 
purchase or sale of financial instruments by a banking entity if:
    (i) The banking entity is not organized or directly or indirectly 
controlled by a banking entity that is organized under the laws of the 
United States or of any State;
    (ii) The purchase or sale by the banking entity is made pursuant to 
paragraph (9) or (13) of section 4(c) of the BHC Act; and
    (iii) The purchase or sale meets the requirements of paragraph 
(e)(3) of this section.
    (2) A purchase or sale of financial instruments by a banking entity 
is made pursuant to paragraph (9) or (13) of section 4(c) of the BHC 
Act for purposes of paragraph (e)(1)(ii) of this section only if:
    (i) The purchase or sale is conducted in accordance with the 
requirements of paragraph (e) of this section; and
    (ii)(A) With respect to a banking entity that is a foreign banking 
organization, the banking entity meets the qualifying foreign banking 
organization requirements of Sec.  211.23(a), (c) or (e) of the Board's 
Regulation K (12 CFR 211.23(a), (c) or (e)), as applicable; or
    (B) With respect to a banking entity that is not a foreign banking 
organization, the banking entity is not organized under the laws of the 
United States or of any State and the banking entity, on a fully-
consolidated basis, meets at least two of the following requirements:
    (1) Total assets of the banking entity held outside of the United 
States exceed total assets of the banking entity held in the United 
States;
    (2) Total revenues derived from the business of the banking entity 
outside of the United States exceed total revenues derived from the 
business of the banking entity in the United States; or
    (3) Total net income derived from the business of the banking 
entity outside of the United States exceeds total net income derived 
from the business of the banking entity in the United States.
    (3) A purchase or sale by a banking entity is permitted for 
purposes of paragraph (e) of this section only if:
    (i) The banking entity engaging as principal in the purchase or 
sale (including any personnel of the banking entity or its affiliate 
that arrange, negotiate or execute such purchase or sale) is not 
located in the United States or organized under the laws of the United 
States or of any State;
    (ii) The banking entity (including relevant personnel) that makes 
the decision to purchase or sell as principal 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 purchases or sales 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; and
    (v) The purchase or sale is not conducted with or through any U.S. 
entity, other than:
    (A) A purchase or sale with the foreign operations of a U.S. entity 
if no personnel of such U.S. entity that are located in the United 
States are involved in the arrangement, negotiation, or execution of 
such purchase or sale;
    (B) A purchase or sale with an unaffiliated market intermediary 
acting as principal, provided the purchase or sale is promptly cleared 
and settled through a clearing agency or derivatives clearing 
organization acting as a central counterparty; or
    (C) A purchase or sale through an unaffiliated market intermediary 
acting as agent, provided the purchase or sale is conducted anonymously 
on an exchange or similar trading facility and is promptly cleared and 
settled through a clearing agency or derivatives clearing organization 
acting as a central counterparty,
    (4) For purposes of paragraph (e) of this section, a U.S. entity is 
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.
    (5) For purposes of paragraph (e) of this section, a U.S. branch, 
agency, or subsidiary of a foreign banking entity is considered to be 
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.
    (6) For purposes of paragraph (e) of this section, unaffiliated 
market

[[Page 62220]]

intermediary means an unaffiliated entity, acting as an intermediary, 
that is:
    (i) A broker or dealer registered with the SEC under section 15 of 
the Exchange Act or exempt from registration or excluded from 
regulation as such;
    (ii) A swap dealer registered with the CFTC under section 4s of the 
Commodity Exchange Act or exempt from registration or excluded from 
regulation as such;
    (iii) A security-based swap dealer registered with the SEC under 
section 15F of the Exchange Act or exempt from registration or excluded 
from regulation as such; or
    (iv) A futures commission merchant registered with the CFTC under 
section 4f of the Commodity Exchange Act or exempt from registration or 
excluded from regulation as such.


Sec.  75.7   Limitations on permitted proprietary trading activities.

    (a) No transaction, class of transactions, or activity may be 
deemed permissible under Sec. Sec.  75.4 through 75.6 if the 
transaction, class of transactions, or activity would:
    (1) Involve or result in a material conflict of interest between 
the banking entity and its clients, customers, or counterparties;
    (2) Result, directly or indirectly, in a material exposure by the 
banking entity to a high-risk asset or a high-risk trading strategy; or
    (3) Pose a threat to the safety and soundness of the banking entity 
or to the financial stability of the United States.
    (b) Definition of material conflict of interest. (1) For purposes 
of this section, a material conflict of interest between a banking 
entity and its clients, customers, or counterparties exists if the 
banking entity engages in any transaction, class of transactions, or 
activity that would involve or result in the banking entity's interests 
being materially adverse to the interests of its client, customer, or 
counterparty with respect to such transaction, class of transactions, 
or activity, and the banking entity has not taken at least one of the 
actions in paragraph (b)(2) of this section.
    (2) Prior to effecting the specific transaction or class or type of 
transactions, or engaging in the specific activity, the banking entity:
    (i) Timely and effective disclosure. (A) Has made clear, timely, 
and effective disclosure of the conflict of interest, together with 
other necessary information, in reasonable detail and in a manner 
sufficient to permit a reasonable client, customer, or counterparty to 
meaningfully understand the conflict of interest; and
    (B) Such disclosure is made in a manner that provides the client, 
customer, or counterparty the opportunity to negate, or substantially 
mitigate, any materially adverse effect on the client, customer, or 
counterparty created by the conflict of interest; or
    (ii) Information barriers. Has established, maintained, and 
enforced information barriers that are memorialized in written policies 
and procedures, such as physical separation of personnel, or functions, 
or limitations on types of activity, that are reasonably designed, 
taking into consideration the nature of the banking entity's business, 
to prevent the conflict of interest from involving or resulting in a 
materially adverse effect on a client, customer, or counterparty. A 
banking entity may not rely on such information barriers if, in the 
case of any specific transaction, class or type of transactions or 
activity, the banking entity knows or should reasonably know that, 
notwithstanding the banking entity's establishment of information 
barriers, the conflict of interest may involve or result in a 
materially adverse effect on a client, customer, or counterparty.
    (c) Definition of high-risk asset and high-risk trading strategy. 
For purposes of this section:
    (1) High-risk asset means an asset or group of related assets that 
would, if held by a banking entity, 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.
    (2) High-risk trading strategy means a trading strategy that would, 
if engaged in by a banking entity, 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.


Sec. Sec.  75.8-75.9   [Reserved]

Subpart C--Covered Fund Activities and Investments


Sec.  75.10   Prohibition on acquiring or retaining an ownership 
interest in and having certain relationships with a covered fund.

    (a) Prohibition. (1) Except as otherwise provided in this subpart, 
a banking entity may not, as principal, directly or indirectly, acquire 
or retain any ownership interest in or sponsor a covered fund.
    (2) Paragraph (a)(1) of this section does not include acquiring or 
retaining an ownership interest in a covered fund by a banking entity:
    (i) Acting solely as agent, broker, or custodian, so long as;
    (A) The activity is conducted for the account of, or on behalf of, 
a customer; and
    (B) The banking entity and its affiliates do not have or retain 
beneficial ownership of such ownership interest;
    (ii) Through a deferred compensation, stock-bonus, profit-sharing, 
or pension plan of the banking entity (or an affiliate thereof) that is 
established and administered in accordance with the law of the United 
States or a foreign sovereign, if the ownership interest is held or 
controlled directly or indirectly by the banking entity as trustee for 
the benefit of persons who are or were employees of the banking entity 
(or an affiliate thereof);
    (iii) In the ordinary course of collecting a debt previously 
contracted in good faith, provided that the banking entity divests the 
ownership interest as soon as practicable, and in no event may the 
banking entity retain such ownership interest for longer than such 
period permitted by the Commission; or
    (iv) On behalf of customers as trustee or in a similar fiduciary 
capacity for a customer that is not a covered fund, so long as:
    (A) The activity is conducted for the account of, or on behalf of, 
the customer; and
    (B) The banking entity and its affiliates do not have or retain 
beneficial ownership of such ownership interest.
    (b) Definition of covered fund. (1) Except as provided in paragraph 
(c) of this section, covered fund means:
    (i) An issuer that would be an investment company, as defined in 
the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), but for 
section 3(c)(1) or 3(c)(7) of that Act (15 U.S.C. 80a-3(c)(1) or (7));
    (ii) Any commodity pool under section 1a(10) of the Commodity 
Exchange Act (7 U.S.C. 1a(10)) for which:
    (A) The commodity pool operator has claimed an exemption under 
Sec.  4.7 of this chapter; or
    (B)(1) A commodity pool operator is registered with the CFTC as a 
commodity pool operator in connection with the operation of the 
commodity pool;
    (2) Substantially all participation units of the commodity pool are 
owned by qualified eligible persons under Sec.  4.7(a)(2) and (3) of 
this chapter; and
    (3) Participation units of the commodity pool have not been 
publicly offered to persons who are not qualified

[[Page 62221]]

eligible persons under Sec.  4.7(a)(2) and (3) of this chapter; or
    (iii) For any banking entity that is, or is controlled directly or 
indirectly by a banking entity that is, located in or organized under 
the laws of the United States or of any State, an entity that:
    (A) Is organized or established outside the United States and the 
ownership interests of which are offered and sold solely outside the 
United States;
    (B) Is, or holds itself out as being, an entity or arrangement that 
raises money from investors primarily for the purpose of investing in 
securities for resale or other disposition or otherwise trading in 
securities; and
    (C)(1) Has as its sponsor that banking entity (or an affiliate 
thereof); or
    (2) Has issued an ownership interest that is owned directly or 
indirectly by that banking entity (or an affiliate thereof).
    (2) An issuer shall not be deemed to be a covered fund under 
paragraph (b)(1)(iii) of this section if, were the issuer subject to 
U.S. securities laws, the issuer could rely on an exclusion or 
exemption from the definition of ``investment company'' under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) other than the 
exclusions contained in section 3(c)(1) and 3(c)(7) of that Act.
    (3) For purposes of paragraph (b)(1)(iii) of this section, a U.S. 
branch, agency, or subsidiary of a foreign 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.
    (c) Notwithstanding paragraph (b) of this section, unless the 
appropriate Federal banking agencies, the SEC, and the CFTC jointly 
determine otherwise, a covered fund does not include:
    (1) Foreign public funds. (i) Subject to paragraphs (c)(1)(ii) and 
(iii) of this section, an issuer that:
    (A) Is organized or established outside of the United States;
    (B) Is authorized to offer and sell ownership interests to retail 
investors in the issuer's home jurisdiction; and
    (C) Sells ownership interests predominantly through one or more 
public offerings outside of the United States.
    (ii) With respect to a banking entity that is, or is controlled 
directly or indirectly by a banking entity that is, located in or 
organized under the laws of the United States or of any State and any 
issuer for which such banking entity acts as sponsor, the sponsoring 
banking entity may not rely on the exemption in paragraph (c)(1)(i) of 
this section for such issuer unless ownership interests in the issuer 
are sold predominantly to persons other than:
    (A) Such sponsoring banking entity;
    (B) Such issuer;
    (C) Affiliates of such sponsoring banking entity or such issuer; 
and
    (D) Directors and employees of such entities.
    (iii) For purposes of paragraph (c)(1)(i)(C) of this section, the 
term public offering means a distribution (as defined in Sec.  
75.4(a)(3)) of securities in any jurisdiction outside the United States 
to investors, including retail investors, provided that:
    (A) The distribution complies with all applicable requirements in 
the jurisdiction in which such distribution is being made;
    (B) The distribution does not restrict availability to investors 
having a minimum level of net worth or net investment assets; and
    (C) The issuer has filed or submitted, with the appropriate 
regulatory authority in such jurisdiction, offering disclosure 
documents that are publicly available.
    (2) Wholly-owned subsidiaries. An entity, all of the outstanding 
ownership interests of which are owned directly or indirectly by the 
banking entity (or an affiliate thereof), except that:
    (i) Up to five percent of the entity's outstanding ownership 
interests, less any amounts outstanding under paragraph (c)(2)(ii) of 
this section, may be held by employees or directors of the banking 
entity or such affiliate (including former employees or directors if 
their ownership interest was acquired while employed by or in the 
service of the banking entity); and
    (ii) Up to 0.5 percent of the entity's outstanding ownership 
interests may be held by a third party if the ownership interest is 
acquired or retained by the third party for the purpose of establishing 
corporate separateness or addressing bankruptcy, insolvency, or similar 
concerns.
    (3) Joint ventures. A joint venture between a banking entity or any 
of its affiliates and one or more unaffiliated persons, provided that 
the joint venture:
    (i) Is comprised of no more than 10 unaffiliated co-venturers;
    (ii) Is in the business of engaging in activities that are 
permissible for the banking entity or affiliate, other than investing 
in securities for resale or other disposition; and
    (iii) Is not, and does not hold itself out as being, an entity or 
arrangement that raises money from investors primarily for the purpose 
of investing in securities for resale or other disposition or otherwise 
trading in securities.
    (4) Acquisition vehicles. An issuer:
    (i) Formed solely for the purpose of engaging in a bona fide merger 
or acquisition transaction; and
    (ii) That exists only for such period as necessary to effectuate 
the transaction.
    (5) Foreign pension or retirement funds. A plan, fund, or program 
providing pension, retirement, or similar benefits that is:
    (i) Organized and administered outside the United States;
    (ii) A broad-based plan for employees or citizens that is subject 
to regulation as a pension, retirement, or similar plan under the laws 
of the jurisdiction in which the plan, fund, or program is organized 
and administered; and
    (iii) Established for the benefit of citizens or residents of one 
or more foreign sovereigns or any political subdivision thereof.
    (6) Insurance company separate accounts. A separate account, 
provided that no banking entity other than the insurance company 
participates in the account's profits and losses.
    (7) Bank owned life insurance. A separate account that is used 
solely for the purpose of allowing one or more banking entities to 
purchase a life insurance policy for which the banking entity or 
entities is beneficiary, provided that no banking entity that purchases 
the policy:
    (i) Controls the investment decisions regarding the underlying 
assets or holdings of the separate account; or
    (ii) Participates in the profits and losses of the separate account 
other than in compliance with applicable supervisory guidance regarding 
bank owned life insurance.
    (8) Loan securitizations--(i) Scope. An issuing entity for asset-
backed securities that satisfies all the conditions of paragraph (c)(8) 
of this section and the assets or holdings of which are comprised 
solely of:
    (A) Loans as defined in Sec.  75.2(s);
    (B) Rights or other assets designed to assure the servicing or 
timely distribution of proceeds to holders of such securities and 
rights or other assets that are related or incidental to purchasing or 
otherwise acquiring and holding the loans, provided that each asset 
meets the requirements of paragraph (c)(8)(iii) of this section;
    (C) Interest rate or foreign exchange derivatives that meet the 
requirements of paragraph (c)(8)(iv) of this section; and
    (D) Special units of beneficial interest and collateral 
certificates that meet the requirements of paragraph (c)(8)(v) of this 
section.

[[Page 62222]]

    (ii) Impermissible assets. For purposes of paragraph (c)(8) of this 
section, the assets or holdings of the issuing entity shall not include 
any of the following:
    (A) A security, including an asset-backed security, or an interest 
in an equity or debt security other than as permitted in paragraph 
(c)(8)(iii) of this section;
    (B) A derivative, other than a derivative that meets the 
requirements of paragraph (c)(8)(iv) of this section; or
    (C) A commodity forward contract.
    (iii) Permitted securities. Notwithstanding paragraph (c)(8)(ii)(A) 
of this section, the issuing entity may hold securities if those 
securities are:
    (A) Cash equivalents for purposes of the rights and assets in 
paragraph (c)(8)(i)(B) of this section; or
    (B) Securities received in lieu of debts previously contracted with 
respect to the loans supporting the asset-backed securities.
    (iv) Derivatives. The holdings of derivatives by the issuing entity 
shall be limited to interest rate or foreign exchange derivatives that 
satisfy all of the following conditions:
    (A) The written terms of the derivative directly relate to the 
loans, the asset-backed securities, or the contractual rights of other 
assets described in paragraph (c)(8)(i)(B) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign 
exchange risks related to the loans, the asset-backed securities, or 
the contractual rights or other assets described in paragraph 
(c)(8)(i)(B) of this section.
    (v) Special units of beneficial interest and collateral 
certificates. The assets or holdings of the issuing entity may include 
collateral certificates and special units of beneficial interest issued 
by a special purpose vehicle, provided that:
    (A) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate meets the requirements in 
paragraph (c)(8) of this section;
    (B) The special unit of beneficial interest or collateral 
certificate is used for the sole purpose of transferring to the issuing 
entity for the loan securitization the economic risks and benefits of 
the assets that are permissible for loan securitizations under 
paragraph (c)(8) of this section and does not directly or indirectly 
transfer any interest in any other economic or financial exposure;
    (C) The special unit of beneficial interest or collateral 
certificate is created solely to satisfy legal requirements or 
otherwise facilitate the structuring of the loan securitization; and
    (D) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate and the issuing entity 
are established under the direction of the same entity that initiated 
the loan securitization.
    (9) Qualifying asset-backed commercial paper conduits. (i) An 
issuing entity for asset-backed commercial paper that satisfies all of 
the following requirements:
    (A) The asset-backed commercial paper conduit holds only:
    (1) Loans and other assets permissible for a loan securitization 
under paragraph (c)(8)(i) of this section; and
    (2) Asset-backed securities supported solely by assets that are 
permissible for loan securitizations under paragraph (c)(8)(i) of this 
section and acquired by the asset-backed commercial paper conduit as 
part of an initial issuance either directly from the issuing entity of 
the asset-backed securities or directly from an underwriter in the 
distribution of the asset-backed securities;
    (B) The asset-backed commercial paper conduit issues only asset-
backed securities, comprised of a residual interest and securities with 
a legal maturity of 397 days or less; and
    (C) A regulated liquidity provider has entered into a legally 
binding commitment to provide full and unconditional liquidity coverage 
with respect to all of the outstanding asset-backed securities issued 
by the asset-backed commercial paper conduit (other than any residual 
interest) in the event that funds are required to redeem maturing 
asset-backed securities.
    (ii) For purposes of this paragraph (c)(9) of this section, a 
regulated liquidity provider means:
    (A) A depository institution, as defined in section 3(c) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(c));
    (B) A bank holding company, as defined in section 2(a) of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841(a)), or a subsidiary 
thereof;
    (C) A savings and loan holding company, as defined in section 10a 
of the Home Owners' Loan Act (12 U.S.C. 1467a), provided all or 
substantially all of the holding company's activities are permissible 
for a financial holding company under section 4(k) of the Bank Holding 
Company Act of 1956 (12 U.S.C. 1843(k)), or a subsidiary thereof;
    (D) A foreign bank whose home country supervisor, as defined in 
Sec.  211.21(q) of the Board's Regulation K (12 CFR 211.21(q)), has 
adopted capital standards consistent with the Capital Accord for the 
Basel Committee on Banking Supervision, as amended, and that is subject 
to such standards, or a subsidiary thereof; or
    (E) The United States or a foreign sovereign.
    (10) Qualifying covered bonds--(i) Scope. An entity owning or 
holding a dynamic or fixed pool of loans or other assets as provided in 
paragraph (c)(8) of this section for the benefit of the holders of 
covered bonds, provided that the assets in the pool are comprised 
solely of assets that meet the conditions in paragraph (c)(8)(i) of 
this section.
    (ii) Covered bond. For purposes of paragraph (c)(10) of this 
section, a covered bond means:
    (A) A debt obligation issued by an entity that meets the definition 
of foreign banking organization, the payment obligations of which are 
fully and unconditionally guaranteed by an entity that meets the 
conditions set forth in paragraph (c)(10)(i) of this section; or
    (B) A debt obligation of an entity that meets the conditions set 
forth in paragraph (c)(10)(i) of this section, provided that the 
payment obligations are fully and unconditionally guaranteed by an 
entity that meets the definition of foreign banking organization and 
the entity is a wholly-owned subsidiary, as defined in paragraph (c)(2) 
of this section, of such foreign banking organization.
    (11) SBICs and public welfare investment funds. An issuer:
    (i) That is a small business investment company, as defined in 
section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 
662), or that has received from the Small Business Administration 
notice to proceed to qualify for a license as a small business 
investment company, which notice or license has not been revoked; or
    (ii) The business of which is to make investments that are:
    (A) Designed primarily to promote the public welfare, of the type 
permitted under paragraph (11) of section 5136 of the Revised Statutes 
of the United States (12 U.S.C. 24), including the welfare of low- and 
moderate-income communities or families (such as providing housing, 
services, or jobs); or
    (B) Qualified rehabilitation expenditures with respect to a 
qualified rehabilitated building or certified historic structure, as 
such terms are defined in section 47 of the Internal Revenue Code of 
1986 or a similar State historic tax credit program.
    (12) Registered investment companies and excluded entities. An 
issuer:
    (i) That is registered as an investment company under section 8 of 
the Investment Company Act of 1940 (15 U.S.C. 80a-8), or that is formed 
and

[[Page 62223]]

operated pursuant to a written plan to become a registered investment 
company as described in Sec.  75.20(e)(3) and that complies with the 
requirements of section 18 of the Investment Company Act of 1940 (15 
U.S.C. 80a-18);
    (ii) That may rely on an exclusion or exemption from the definition 
of ``investment company'' under the Investment Company Act of 1940 (15 
U.S.C. 80a-1 et seq.) other than the exclusions contained in section 
3(c)(1) and 3(c)(7) of that Act; or
    (iii) That has elected to be regulated as a business development 
company pursuant to section 54(a) of that Act (15 U.S.C. 80a-53) and 
has not withdrawn its election, or that is formed and operated pursuant 
to a written plan to become a business development company as described 
in Sec.  75.20(e)(3) and that complies with the requirements of section 
61 of the Investment Company Act of 1940 (15 U.S.C. 80a-60).
    (13) Issuers in conjunction with the FDIC's receivership or 
conservatorship operations. An issuer that is an entity formed by or on 
behalf of the FDIC for the purpose of facilitating the disposal of 
assets acquired in the FDIC's capacity as conservator or receiver under 
the Federal Deposit Insurance Act or Title II of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act.
    (14) Other excluded issuers. (i) Any issuer that the appropriate 
Federal banking agencies, the SEC, and the CFTC jointly determine the 
exclusion of which is consistent with the purposes of section 13 of the 
BHC Act.
    (ii) A determination made under paragraph (c)(14)(i) of this 
section will be promptly made public.
    (d) Definition of other terms related to covered funds. For 
purposes of this subpart:
    (1) Applicable accounting standards means U.S. generally accepted 
accounting principles, or such other accounting standards applicable to 
a banking entity that the Commission determines are appropriate and 
that the banking entity uses in the ordinary course of its business in 
preparing its consolidated financial statements.
    (2) Asset-backed security has the meaning specified in section 
3(a)(79) of the Exchange Act (15 U.S.C. 78c(a)(79)).
    (3) Director has the same meaning as provided in Sec.  215.2(d)(1) 
of the Board's Regulation O (12 CFR 215.2(d)(1)).
    (4) Issuer has the same meaning as in section 2(a)(22) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(22)).
    (5) Issuing entity means with respect to asset-backed securities 
the special purpose vehicle that owns or holds the pool assets 
underlying asset-backed securities and in whose name the asset-backed 
securities supported or serviced by the pool assets are issued.
    (6) Ownership interest--(i) Ownership interest means any equity, 
partnership, or other similar interest. An ``other similar interest'' 
means an interest that:
    (A) Has the right to participate in the selection or removal of a 
general partner, managing member, member of the board of directors or 
trustees, investment manager, investment adviser, or commodity trading 
advisor of the covered fund (excluding the rights of a creditor to 
exercise remedies upon the occurrence of an event of default or an 
acceleration event);
    (B) Has the right under the terms of the interest to receive a 
share of the income, gains or profits of the covered fund;
    (C) Has the right to receive the underlying assets of the covered 
fund after all other interests have been redeemed and/or paid in full 
(excluding the rights of a creditor to exercise remedies upon the 
occurrence of an event of default or an acceleration event);
    (D) Has the right to receive all or a portion of excess spread (the 
positive difference, if any, between the aggregate interest payments 
received from the underlying assets of the covered fund and the 
aggregate interest paid to the holders of other outstanding interests);
    (E) Provides under the terms of the interest that the amounts 
payable by the covered fund with respect to the interest could be 
reduced based on losses arising from the underlying assets of the 
covered fund, such as allocation of losses, write-downs or charge-offs 
of the outstanding principal balance, or reductions in the amount of 
interest due and payable on the interest;
    (F) Receives income on a pass-through basis from the covered fund, 
or has a rate of return that is determined by reference to the 
performance of the underlying assets of the covered fund; or
    (G) Any synthetic right to have, receive, or be allocated any of 
the rights in paragraphs (d)(6)(i)(A) through (d)(6)(i)(F) of this 
section.
    (ii) Ownership interest does not include restricted profit 
interest, which is an interest held by an entity (or an employee or 
former employee thereof) in a covered fund for which the entity (or 
employee thereof) serves as investment manager, investment adviser, 
commodity trading advisor, or other service provider so long as:
    (A) The sole purpose and effect of the interest is to allow the 
entity (or employee or former employee thereof) to share in the profits 
of the covered fund as performance compensation for the investment 
management, investment advisory, commodity trading advisory, or other 
services provided to the covered fund by the entity (or employee or 
former employee thereof), provided that the entity (or employee or 
former employee thereof) may be obligated under the terms of such 
interest to return profits previously received;
    (B) All such profit, once allocated, is distributed to the entity 
(or employee or former employee thereof) promptly after being earned 
or, if not so distributed, is retained by the covered fund for the sole 
purpose of establishing a reserve amount to satisfy contractual 
obligations with respect to subsequent losses of the covered fund and 
such undistributed profit of the entity (or employee or former employee 
thereof) does not share in the subsequent investment gains of the 
covered fund;
    (C) Any amounts invested in the covered fund, including any amounts 
paid by the entity (or employee or former employee thereof) in 
connection with obtaining the restricted profit interest, are within 
the limits of Sec.  75.12; and
    (D) The interest is not transferable by the entity (or employee or 
former employee thereof) except to an affiliate thereof (or an employee 
of the banking entity or affiliate), to immediate family members, or 
through the intestacy, of the employee or former employee, or in 
connection with a sale of the business that gave rise to the restricted 
profit interest by the entity (or employee or former employee thereof) 
to an unaffiliated party that provides investment management, 
investment advisory, commodity trading advisory, or other services to 
the fund.
    (7) Prime brokerage transaction means any transaction that would be 
a covered transaction, as defined in section 23A(b)(7) of the Federal 
Reserve Act (12 U.S.C. 371c(b)(7)), that is provided in connection with 
custody, clearance and settlement, securities borrowing or lending 
services, trade execution, financing, or data, operational, and 
administrative support.
    (8) Resident of the United States means a person that is a ``U.S. 
person'' as defined in rule 902(k) of the SEC's Regulation S (17 CFR 
230.902(k)).
    (9) Sponsor means, with respect to a covered fund:
    (i) To serve as a general partner, managing member, or trustee of a 
covered fund, or to serve as a commodity pool operator with respect to 
a covered fund as defined in (b)(1)(ii) of this section;

[[Page 62224]]

    (ii) In any manner to select or to control (or to have employees, 
officers, or directors, or agents who constitute) a majority of the 
directors, trustees, or management of a covered fund; or
    (iii) To share with a covered fund, for corporate, marketing, 
promotional, or other purposes, the same name or a variation of the 
same name, except as permitted under Sec.  75.11(a)(6).
    (10) Trustee. (i) For purposes of paragraph (d)(9) of this section 
and Sec.  75.11, a trustee does not include:
    (A) A trustee that does not exercise investment discretion with 
respect to a covered fund, including a trustee that is subject to the 
direction of an unaffiliated named fiduciary who is not a trustee 
pursuant to section 403(a)(1) of the Employee's Retirement Income 
Security Act (29 U.S.C. 1103(a)(1)); or
    (B) A trustee that is subject to fiduciary standards imposed under 
foreign law that are substantially equivalent to those described in 
paragraph (d)(10)(i)(A) of this section;
    (ii) Any entity that directs a person described in paragraph 
(d)(10)(i) of this section, or that possesses authority and discretion 
to manage and control the investment decisions of a covered fund for 
which such person serves as trustee, shall be considered to be a 
trustee of such covered fund.


Sec.  75.11   Permitted organizing and offering, underwriting, and 
market making with respect to a covered fund.

    (a) Organizing and offering a covered fund in general. 
Notwithstanding Sec.  75.10(a), a banking entity is not prohibited from 
acquiring or retaining an ownership interest in, or acting as sponsor 
to, a covered fund in connection with, directly or indirectly, 
organizing and offering a covered fund, including serving as a general 
partner, managing member, trustee, or commodity pool operator of the 
covered fund and in any manner selecting or controlling (or having 
employees, officers, directors, or agents who constitute) a majority of 
the directors, trustees, or management of the covered fund, including 
any necessary expenses for the foregoing, only if:
    (1) The banking entity (or an affiliate thereof) provides bona fide 
trust, fiduciary, investment advisory, or commodity trading advisory 
services;
    (2) The covered fund is organized and offered only in connection 
with the provision of bona fide trust, fiduciary, investment advisory, 
or commodity trading advisory services and only to persons that are 
customers of such services of the banking entity (or an affiliate 
thereof), pursuant to a written plan or similar documentation outlining 
how the banking entity or such affiliate intends to provide advisory or 
similar services to its customers through organizing and offering such 
fund;
    (3) The banking entity and its affiliates do not acquire or retain 
an ownership interest in the covered fund except as permitted under 
Sec.  75.12;
    (4) The banking entity and its affiliates comply with the 
requirements of Sec.  75.14;
    (5) The banking entity and its affiliates do 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;
    (6) The covered fund, for corporate, marketing, promotional, or 
other purposes:
    (i) Does not share the same name or a variation of the same name 
with the banking entity (or an affiliate thereof), except that a 
covered fund may share the same name or a variation of the same name 
with a banking entity that is an investment adviser to the covered fund 
if:
    (A) The investment adviser is not an insured depository 
institution, a company that controls an insured depository institution, 
or a company that is treated as a bank holding company for purposes of 
section 8 of the International Banking Act of 1978 (12 U.S.C. 3106); 
and
    (B) The investment adviser does not share the same name or a 
variation of the same name as an insured depository institution, a 
company that controls an insured depository institution, or a company 
that is treated as a bank holding company for purposes of section 8 of 
the International Banking Act of 1978 (12 U.S.C. 3106); and
    (ii) Does not use the word ``bank'' in its name;
    (7) No director or employee of the banking entity (or an affiliate 
thereof) takes or retains an ownership interest in the covered fund, 
except for any director or employee of the banking entity or such 
affiliate who is directly engaged in providing investment advisory, 
commodity trading advisory, or other services to the covered fund at 
the time the director or employee takes the ownership interest; and
    (8) The banking entity:
    (i) Clearly and conspicuously discloses, in writing, to any 
prospective and actual investor in the covered fund (such as through 
disclosure in the covered fund's offering documents):
    (A) That ``any losses in [such covered fund] will be borne solely 
by investors in [the covered fund] and not by [the banking entity] or 
its affiliates; therefore, [the banking entity's] losses in [such 
covered fund] will be limited to losses attributable to the ownership 
interests in the covered fund held by [the banking entity] and any 
affiliate in its capacity as investor in the [covered fund] or as 
beneficiary of a restricted profit interest held by [the banking 
entity] or any affiliate'';
    (B) That such investor should read the fund offering documents 
before investing in the covered fund;
    (C) That the ``ownership interests in the covered fund are not 
insured by the FDIC, and are not deposits, obligations of, or endorsed 
or guaranteed in any way, by any banking entity'' (unless that happens 
to be the case); and
    (D) The role of the banking entity and its affiliates and employees 
in sponsoring or providing any services to the covered fund; and
    (ii) Complies with any additional rules of the appropriate Federal 
banking agencies, the SEC, or the CFTC, as provided in section 13(b)(2) 
of the BHC Act, designed to ensure that losses in such covered fund are 
borne solely by investors in the covered fund and not by the covered 
banking entity and its affiliates.
    (b) Organizing and offering an issuing entity of asset-backed 
securities. (1) Notwithstanding Sec.  75.10(a), a banking entity is not 
prohibited from acquiring or retaining an ownership interest in, or 
acting as sponsor to, a covered fund that is an issuing entity of 
asset-backed securities in connection with, directly or indirectly, 
organizing and offering that issuing entity, so long as the banking 
entity and its affiliates comply with all of the requirements of 
paragraphs (a)(3) through (a)(8) of this section.
    (2) For purposes of paragraph (b) of this section, organizing and 
offering a covered fund that is an issuing entity of asset-backed 
securities means acting as the securitizer, as that term is used in 
section 15G(a)(3) of the Exchange Act (15 U.S.C. 78o-11(a)(3)) of the 
issuing entity, or acquiring or retaining an ownership interest in the 
issuing entity as required by section 15G of that Act (15 U.S.C. 78o-
11) and the implementing regulations issued thereunder.
    (c) Underwriting and market making in ownership interests of a 
covered fund. The prohibition contained in Sec.  75.10(a) 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 Sec.  75.4(a) or (b), respectively;
    (2) With respect to any banking entity (or any affiliate thereof) 
that acts as a

[[Page 62225]]

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; acquires and retains an ownership interest in such covered 
fund and is either a securitizer, as that term is used in section 
15G(a)(3) of the Exchange Act (15 U.S.C. 78o-11(a)(3)), or is acquiring 
and retaining an ownership interest in such covered fund in compliance 
with section 15G of that Act (15 U.S.C. 78o-11) and the implementing 
regulations issued thereunder each as permitted by paragraph (b) of 
this section; or, 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, 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 Sec.  
75.12(a)(2)(ii) and (d); and
    (3) With respect to any banking entity, the aggregate value of all 
ownership interests of the banking entity and its affiliates in all 
covered funds acquired and retained under Sec.  75.11, including all 
covered funds in which the banking entity holds an ownership interest 
in connection with underwriting and market making related activities 
permitted under paragraph (c) of this section, are included in the 
calculation of all ownership interests under Sec.  75.12(a)(2)(iii) and 
(d).


Sec.  75.12   Permitted investment in a covered fund.

    (a) Authority and limitations on permitted investments in covered 
funds. (1) Notwithstanding the prohibition contained in Sec.  75.10(a), 
a banking entity may acquire and retain an ownership interest in a 
covered fund that the banking entity or an affiliate thereof organizes 
and offers pursuant to Sec.  75.11, for the purposes of:
    (i) Establishment. Establishing the fund and providing the fund 
with sufficient initial equity for investment to permit the fund to 
attract unaffiliated investors, subject to the limits contained in 
paragraphs (a)(2)(i) and (a)(2)(iii) of this section; or
    (ii) De minimis investment. Making and retaining an investment in 
the covered fund subject to the limits contained in paragraphs 
(a)(2)(ii) and (a)(2)(iii) of this section.
    (2) Investment limits--(i) Seeding period. With respect to an 
investment in any covered fund made or held pursuant to paragraph 
(a)(1)(i) of this section, the banking entity and its affiliates:
    (A) Must actively seek unaffiliated investors to reduce, through 
redemption, sale, dilution, or other methods, the aggregate amount of 
all ownership interests of the banking entity in the covered fund to 
the amount permitted in paragraph (a)(2)(i)(B) of this section; and
    (B) Must, no later than 1 year after the date of establishment of 
the fund (or such longer period as may be provided by the Board 
pursuant to paragraph (e) of this section), conform its ownership 
interest in the covered fund to the limits in paragraph (a)(2)(ii) of 
this section;
    (ii) Per-fund limits. (A) Except as provided in paragraph 
(a)(2)(ii)(B) of this section, an investment by a banking entity and 
its affiliates in any covered fund made or held pursuant to paragraph 
(a)(1)(ii) of this section may not exceed 3 percent of the total number 
or value of the outstanding ownership interests of the fund.
    (B) An investment by a banking entity and its affiliates in a 
covered fund that is an issuing entity of asset-backed securities may 
not exceed 3 percent of the total fair market value of the ownership 
interests of the fund measured in accordance with paragraph (b)(3) of 
this section, unless a greater percentage is retained by the banking 
entity and its affiliates in compliance with the requirements of 
section 15G of the Exchange Act (15 U.S.C. 78o-11) and the implementing 
regulations issued thereunder, in which case the investment by the 
banking entity and its affiliates in the covered fund may not exceed 
the amount, number, or value of ownership interests of the fund 
required under section 15G of the Exchange Act and the implementing 
regulations issued thereunder.
    (iii) Aggregate limit. The aggregate value of all ownership 
interests of the banking entity and its affiliates in all covered funds 
acquired or retained under this section may not exceed 3 percent of the 
tier 1 capital of the banking entity, as provided under paragraph (c) 
of this section, and shall be calculated as of the last day of each 
calendar quarter.
    (iv) Date of establishment. For purposes of this section, the date 
of establishment of a covered fund shall be:
    (A) In general. The date on which the investment adviser or similar 
entity to the covered fund begins making investments pursuant to the 
written investment strategy for the fund;
    (B) Issuing entities of asset-backed securities. In the case of an 
issuing entity of asset-backed securities, the date on which the assets 
are initially transferred into the issuing entity of asset-backed 
securities.
    (b) Rules of construction--(1) Attribution of ownership interests 
to a covered banking entity. (i) For purposes of paragraph (a)(2) of 
this section, the amount and value of a banking entity's permitted 
investment in any single covered fund shall include any ownership 
interest held under Sec.  75.12 directly by the banking entity, 
including any affiliate of the banking entity.
    (ii) Treatment of registered investment companies, SEC-regulated 
business development companies and foreign public funds. For purposes 
of paragraph (b)(1)(i) of this section, a registered investment 
company, SEC-regulated business development companies or foreign public 
fund as described in Sec.  75.10(c)(1) will not be considered to be an 
affiliate of the banking entity so long as the banking entity:
    (A) Does not own, control, or hold with the power to vote 25 
percent or more of the voting shares of the company or fund; and
    (B) Provides investment advisory, commodity trading advisory, 
administrative, and other services to the company or fund in compliance 
with the limitations under applicable regulation, order, or other 
authority.
    (iii) Covered funds. For purposes of paragraph (b)(1)(i) of this 
section, a covered fund will not be considered to be an affiliate of a 
banking entity so long as the covered fund is held in compliance with 
the requirements of this subpart.
    (iv) Treatment of employee and director investments financed by the 
banking entity. For purposes of paragraph (b)(1)(i) of this section, an 
investment by a director or employee of a banking entity who acquires 
an ownership interest in his or her personal capacity in a covered fund 
sponsored by the banking entity will be attributed to the banking 
entity if the banking entity, directly or indirectly, extends financing 
for the purpose of enabling the director or employee to acquire the 
ownership interest in the fund and the financing is used to acquire 
such ownership interest in the covered fund.
    (2) Calculation of permitted ownership interests in a single 
covered fund. Except as provided in paragraphs (b)(3) or (4) of this 
section, for purposes of determining whether an investment in a single 
covered fund complies with

[[Page 62226]]

the restrictions on ownership interests under paragraphs (a)(2)(i)(B) 
and (ii)(A) of this section:
    (i) The aggregate number of the outstanding ownership interests 
held by the banking entity shall be the total number of ownership 
interests held under this section by the banking entity in a covered 
fund divided by the total number of ownership interests held by all 
entities in that covered fund, as of the last day of each calendar 
quarter (both measured without regard to committed funds not yet called 
for investment);
    (ii) The aggregate value of the outstanding ownership interests 
held by the banking entity shall be the aggregate fair market value of 
all investments in and capital contributions made to the covered fund 
by the banking entity, divided by the value of all investments in and 
capital contributions made to that covered fund by all entities, as of 
the last day of each calendar quarter (all measured without regard to 
committed funds not yet called for investment). If fair market value 
cannot be determined, then the value shall be the historical cost basis 
of all investments in and contributions made by the banking entity to 
the covered fund;
    (iii) For purposes of the calculation under paragraph (b)(2)(ii) of 
this section, once a valuation methodology is chosen, the banking 
entity must calculate the value of its investment and the investments 
of all others in the covered fund in the same manner and according to 
the same standards.
    (3) Issuing entities of asset-backed securities. In the case of an 
ownership interest in an issuing entity of asset-backed securities, for 
purposes of determining whether an investment in a single covered fund 
complies with the restrictions on ownership interests under paragraphs 
(a)(2)(i)(B) and (a)(2)(ii)(B) of this section:
    (i) For securitizations subject to the requirements of section 15G 
of the Exchange Act (15 U.S.C. 78o-11), the calculations shall be made 
as of the date and according to the valuation methodology applicable 
pursuant to the requirements of section 15G of the Exchange Act (15 
U.S.C. 78o-11) and the implementing regulations issued thereunder; or
    (ii) For securitization transactions completed prior to the 
compliance date of such implementing regulations (or as to which such 
implementing regulations do not apply), the calculations shall be made 
as of the date of establishment as defined in paragraph (a)(2)(iv)(B) 
of this section or such earlier date on which the transferred assets 
have been valued for purposes of transfer to the covered fund, and 
thereafter only upon the date on which additional securities of the 
issuing entity of asset-backed securities are priced for purposes of 
the sales of ownership interests to unaffiliated investors.
    (iii) For securitization transactions completed prior to the 
compliance date of such implementing regulations (or as to which such 
implementing regulations do not apply), the aggregate value of the 
outstanding ownership interests in the covered fund shall be the fair 
market value of the assets transferred to the issuing entity of the 
securitization and any other assets otherwise held by the issuing 
entity at such time, determined in a manner that is consistent with its 
determination of the fair market value of those assets for financial 
statement purposes.
    (iv) For purposes of the calculation under paragraph (b)(3)(iii) of 
this section, the valuation methodology used to calculate the fair 
market value of the ownership interests must be the same for both the 
ownership interests held by a banking entity and the ownership 
interests held by all others in the covered fund in the same manner and 
according to the same standards.
    (4) Multi-tier fund investments--(i) Master-feeder fund 
investments. If the principal investment strategy of a covered fund 
(the ``feeder fund'') is to invest substantially all of its assets in 
another single covered fund (the ``master fund''), then for purposes of 
the investment limitations in paragraphs (a)(2)(i)(B) and (a)(2)(ii) of 
this section, the banking entity's permitted investment in such funds 
shall be measured only by reference to the value of the master fund. 
The banking entity's permitted investment in the master fund shall 
include any investment by the banking entity in the master fund, as 
well as the banking entity's pro-rata share of any ownership interest 
of the master fund that is held through the feeder fund; and
    (ii) Fund-of-funds investments. If a banking entity organizes and 
offers a covered fund pursuant to Sec.  75.11 for the purpose of 
investing in other covered funds (a ``fund of funds'') and that fund of 
funds itself invests in another covered fund that the banking entity is 
permitted to own, then the banking entity's permitted investment in 
that other fund shall include any investment by the banking entity in 
that other fund, as well as the banking entity's pro-rata share of any 
ownership interest of the fund that is held through the fund of funds. 
The investment of the banking entity may not represent more than 3 
percent of the amount or value of any single covered fund.
    (c) Aggregate permitted investments in all covered funds. (1) For 
purposes of paragraph (a)(2)(iii) of this section, the aggregate value 
of all ownership interests held by a banking entity shall be the sum of 
all amounts paid or contributed by the banking entity in connection 
with acquiring or retaining an ownership interest in covered funds 
(together with any amounts paid by the entity (or employee thereof) in 
connection with obtaining a restricted profit interest under Sec.  
75.10(d)(6)(ii)), on a historical cost basis.
    (2) Calculation of tier 1 capital. For purposes of paragraph 
(a)(2)(iii) of this section:
    (i) Entities that are required to hold and report tier 1 capital. 
If a banking entity is required to calculate and report tier 1 capital, 
the banking entity's tier 1 capital shall be equal to the amount of 
tier 1 capital of the banking entity as of the last day of the most 
recent calendar quarter, as reported to its primary financial 
regulatory agency; and
    (ii) If a banking entity is not required to calculate and report 
tier 1 capital, the banking entity's tier 1 capital shall be determined 
to be equal to:
    (A) In the case of a banking entity that is controlled, directly or 
indirectly, by a depository institution that calculates and reports 
tier 1 capital, be equal to the amount of tier 1 capital reported by 
such controlling depository institution in the manner described in 
paragraph (c)(2)(i) of this section;
    (B) In the case of a banking entity that is not controlled, 
directly or indirectly, by a depository institution that calculates and 
reports tier 1 capital:
    (1) Bank holding company subsidiaries. If the banking entity is a 
subsidiary of a bank holding company or company that is treated as a 
bank holding company, be equal to the amount of tier 1 capital reported 
by the top-tier affiliate of such covered banking entity that 
calculates and reports tier 1 capital in the manner described in 
paragraph (c)(2)(i) of this section; and
    (2) Other holding companies and any subsidiary or affiliate 
thereof. If the banking entity is not a subsidiary of a bank holding 
company or a company that is treated as a bank holding company, be 
equal to the total amount of shareholders' equity of the top-tier 
affiliate within such organization as of the last day of the most 
recent calendar quarter that has ended, as determined under applicable 
accounting standards.
    (iii) Treatment of foreign banking entities--(A) Foreign banking 
entities. Except as provided in paragraph (c)(2)(iii)(B) of this 
section, with respect to a banking entity that is not itself, and is 
not controlled directly or indirectly

[[Page 62227]]

by, a banking entity that is located or organized under the laws of the 
United States or of any State, the tier 1 capital of the banking entity 
shall be the consolidated tier 1 capital of the entity as calculated 
under applicable home country standards.
    (B) U.S. affiliates of foreign banking entities. With respect to a 
banking entity that is located or organized under the laws of the 
United States or of any State and is controlled by a foreign banking 
entity identified under paragraph (c)(2)(iii)(A) of this section, the 
banking entity's tier 1 capital shall be as calculated under paragraphs 
(c)(2)(i) or (ii) of this section.
    (d) Capital treatment for a permitted investment in a covered fund. 
For purposes of calculating compliance with the applicable regulatory 
capital requirements, a banking entity shall deduct from the banking 
entity's tier 1 capital (as determined under paragraph (c)(2) of this 
section) the greater of:
    (1) The sum of all amounts paid or contributed by the banking 
entity in connection with acquiring or retaining an ownership interest 
(together with any amounts paid by the entity (or employee thereof) in 
connection with obtaining a restricted profit interest under Sec.  
75.10(d)(6)(ii)), on a historical cost basis, plus any earnings 
received; and
    (2) The fair market value of the banking entity's ownership 
interests in the covered fund as determined under paragraph (b)(2)(ii) 
or (3) of this section (together with any amounts paid by the entity 
(or employee thereof) in connection with obtaining a restricted profit 
interest under Sec.  75.10(d)(6)(ii)), if the banking entity accounts 
for the profits (or losses) of the fund investment in its financial 
statements.
    (e) Extension of time to divest an ownership interest. (1) Upon 
application by a banking entity, the Board may extend the period under 
paragraph (a)(2)(i) of this section for up to 2 additional years if the 
Board finds that an extension would be consistent with safety and 
soundness and not detrimental to the public interest. An application 
for extension must:
    (i) Be submitted to the Board at least 90 days prior to the 
expiration of the applicable time period;
    (ii) Provide the reasons for application, including information 
that addresses the factors in paragraph (e)(2) of this section; and
    (iii) Explain the banking entity's plan for reducing the permitted 
investment in a covered fund through redemption, sale, dilution or 
other methods as required in paragraph (a)(2) of this section.
    (2) Factors governing Board determinations. In reviewing any 
application under paragraph (e)(1) of this section, the Board may 
consider all the facts and circumstances related to the permitted 
investment in a covered fund, including:
    (i) Whether the investment would result, directly or indirectly, in 
a material exposure by the banking entity to high-risk assets or high-
risk trading strategies;
    (ii) The contractual terms governing the banking entity's interest 
in the covered fund;
    (iii) The date on which the covered fund is expected to have 
attracted sufficient investments from investors unaffiliated with the 
banking entity to enable the banking entity to comply with the 
limitations in paragraph (a)(2)(i) of this section;
    (iv) The total exposure of the covered banking entity to the 
investment and the risks that disposing of, or maintaining, the 
investment in the covered fund may pose to the banking entity and the 
financial stability of the United States;
    (v) The cost to the banking entity of divesting or disposing of the 
investment within the applicable period;
    (vi) Whether the investment or the divestiture or conformance of 
the investment would involve or result in a material conflict of 
interest between the banking entity and unaffiliated parties, including 
clients, customers or counterparties to which it owes a duty;
    (vii) The banking entity's prior efforts to reduce through 
redemption, sale, dilution, or other methods its ownership interests in 
the covered fund, including activities related to the marketing of 
interests in such covered fund;
    (viii) Market conditions; and
    (ix) Any other factor that the Board believes appropriate.
    (3) Authority to impose restrictions on activities or investment 
during any extension period. The Board may impose such conditions on 
any extension approved under paragraph (e)(1) of this section as the 
Board determines are necessary or appropriate to protect the safety and 
soundness of the banking entity or the financial stability of the 
United States, address material conflicts of interest or other unsound 
banking practices, or otherwise further the purposes of section 13 of 
the BHC Act and this part.
    (4) Consultation. In the case of a banking entity that is primarily 
regulated by another Federal banking agency, the SEC, or the CFTC, the 
Board will consult with such agency prior to acting on an application 
by the banking entity for an extension under paragraph (e)(1) of this 
section.


Sec.  75.13   Other permitted covered fund activities and investments.

    (a) Permitted risk-mitigating hedging activities. (1) The 
prohibition contained in Sec.  75.10(a) does not apply with respect to 
an ownership interest in a covered fund acquired or retained by a 
banking entity that is designed to demonstrably reduce or otherwise 
significantly mitigate the specific, identifiable risks to the banking 
entity in connection with a compensation arrangement with an employee 
of the banking entity or an affiliate thereof that directly provides 
investment advisory, commodity trading advisory or other services to 
the covered fund.
    (2) Requirements. The risk-mitigating hedging activities of a 
banking entity 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; 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 and demonstrably reduces or otherwise 
significantly mitigates one or more specific, identifiable risks 
arising 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) The compensation arrangement relates solely to the covered 
fund in which the banking entity or any affiliate has acquired an 
ownership interest pursuant to this paragraph and such compensation 
arrangement provides that any losses incurred by the banking entity on 
such ownership interest will be offset by corresponding decreases in

[[Page 62228]]

amounts payable under such compensation arrangement.
    (b) Certain permitted covered fund activities and investments 
outside of the United States. (1) The prohibition contained in Sec.  
75.10(a) does not apply to the acquisition or retention of any 
ownership interest in, or the sponsorship of, a covered fund by a 
banking entity only if:
    (i) The banking entity is not organized or directly or indirectly 
controlled by a banking entity that is organized under the laws of the 
United States or of one or more States;
    (ii) The activity or investment by the banking entity is pursuant 
to paragraph (9) or (13) of section 4(c) of the BHC Act;
    (iii) No ownership interest in the covered fund is offered for sale 
or sold to a resident of the United States; and
    (iv) The activity or investment occurs solely outside of the United 
States.
    (2) An activity or investment by the banking entity is pursuant to 
paragraph (9) or (13) of section 4(c) of the BHC Act for purposes of 
paragraph (b)(1)(ii) of this section only if:
    (i) The activity or investment is conducted in accordance with the 
requirements of this section; and
    (ii)(A) With respect to a banking entity that is a foreign banking 
organization, the banking entity meets the qualifying foreign banking 
organization requirements of Sec.  211.23(a), (c) or (e) of the Board's 
Regulation K (12 CFR 211.23(a), (c) or (e)), as applicable; or
    (B) With respect to a banking entity that is not a foreign banking 
organization, the banking entity is not organized under the laws of the 
United States or of one or more States and the banking entity, on a 
fully-consolidated basis, meets at least two of the following 
requirements:
    (1) Total assets of the banking entity held outside of the United 
States exceed total assets of the banking entity held in the United 
States;
    (2) Total revenues derived from the business of the banking entity 
outside of the United States exceed total revenues derived from the 
business of the banking entity in the United States; or
    (3) Total net income derived from the business of the banking 
entity outside of the United States exceeds total net income derived 
from the business of the banking entity in the United States.
    (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 sold or has been sold 
pursuant to an offering that does not target residents of the United 
States.
    (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;
    (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; and
    (iv) 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.
    (5) For purposes of this section, a U.S. branch, agency, or 
subsidiary of a foreign bank, or any subsidiary thereof, is located in 
the United States; however, a foreign bank of which that branch, 
agency, or subsidiary is a part is not considered to be located in the 
United States solely by virtue of operation of the U.S. branch, agency, 
or subsidiary.
    (c) Permitted covered fund interests and activities by a regulated 
insurance company. The prohibition contained in Sec.  75.10(a) 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, regulations, and written guidance 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, regulation, or written guidance 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.


Sec.  75.14   Limitations on relationships with a covered fund.

    (a) Relationships with a covered fund. (1) Except as provided for 
in paragraph (a)(2) of this section, no banking entity that serves, 
directly or indirectly, as the investment manager, investment adviser, 
commodity trading advisor, or sponsor to a covered fund, that organizes 
and offers a covered fund pursuant to Sec.  75.11, or that continues to 
hold an ownership interest in accordance with Sec.  75.11(b), and no 
affiliate of such entity, may enter into a transaction with the covered 
fund, or with any other covered fund that is controlled by such covered 
fund, that would be a covered transaction as defined in section 23A of 
the Federal Reserve Act (12 U.S.C. 371c(b)(7)), as if such banking 
entity and the affiliate thereof were a member bank and the covered 
fund were an affiliate thereof.
    (2) Notwithstanding paragraph (a)(1) of this section, a banking 
entity may:
    (i) Acquire and retain any ownership interest in a covered fund in 
accordance with the requirements of Sec.  75.11, Sec.  75.12, or Sec.  
75.13; and
    (ii) Enter into any prime brokerage transaction with any covered 
fund in which a covered fund managed, sponsored, or advised by such 
banking entity (or an affiliate thereof) has taken an ownership 
interest, if:
    (A) The banking entity is in compliance with each of the 
limitations set forth in Sec.  75.11 with respect to a covered fund 
organized and offered by such banking entity (or an affiliate thereof);
    (B) The chief executive officer (or equivalent officer) of the 
banking entity certifies in writing annually to the Commission (with a 
duty to update the certification if the information in the 
certification materially changes) that the banking entity does not, 
directly or indirectly, guarantee, assume, or otherwise insure the 
obligations or performance of the covered fund or of any covered fund 
in which such covered fund invests; and
    (C) The Board has not determined that such transaction is 
inconsistent with the safe and sound operation and condition of the 
banking entity.

[[Page 62229]]

    (b) Restrictions on transactions with covered funds. A banking 
entity that serves, directly or indirectly, as the investment manager, 
investment adviser, commodity trading advisor, or sponsor to a covered 
fund, or that organizes and offers a covered fund pursuant to Sec.  
75.11, or that continues to hold an ownership interest in accordance 
with Sec.  75.11(b), shall be subject to section 23B of the Federal 
Reserve Act (12 U.S.C. 371c-1), as if such banking entity were a member 
bank and such covered fund were an affiliate thereof.
    (c) Restrictions on prime brokerage transactions. A prime brokerage 
transaction permitted under paragraph (a)(2)(ii) of this section shall 
be subject to section 23B of the Federal Reserve Act (12 U.S.C. 371c-1) 
as if the counterparty were an affiliate of the banking entity.


Sec.  75.15   Other limitations on permitted covered fund activities.

    (a) No transaction, class of transactions, or activity may be 
deemed permissible under Sec. Sec.  75.11 through 75.13 if the 
transaction, class of transactions, or activity would:
    (1) Involve or result in a material conflict of interest between 
the banking entity and its clients, customers, or counterparties;
    (2) Result, directly or indirectly, in a material exposure by the 
banking entity to a high-risk asset or a high-risk trading strategy; or
    (3) Pose a threat to the safety and soundness of the banking entity 
or to the financial stability of the United States.
    (b) Definition of material conflict of interest. (1) For purposes 
of this section, a material conflict of interest between a banking 
entity and its clients, customers, or counterparties exists if the 
banking entity engages in any transaction, class of transactions, or 
activity that would involve or result in the banking entity's interests 
being materially adverse to the interests of its client, customer, or 
counterparty with respect to such transaction, class of transactions, 
or activity, and the banking entity has not taken at least one of the 
actions in paragraph (b)(2) of this section.
    (2) Prior to effecting the specific transaction or class or type of 
transactions, or engaging in the specific activity, the banking entity:
    (i) Timely and effective disclosure. (A) Has made clear, timely, 
and effective disclosure of the conflict of interest, together with 
other necessary information, in reasonable detail and in a manner 
sufficient to permit a reasonable client, customer, or counterparty to 
meaningfully understand the conflict of interest; and
    (B) Such disclosure is made in a manner that provides the client, 
customer, or counterparty the opportunity to negate, or substantially 
mitigate, any materially adverse effect on the client, customer, or 
counterparty created by the conflict of interest; or
    (ii) Information barriers. Has established, maintained, and 
enforced information barriers that are memorialized in written policies 
and procedures, such as physical separation of personnel, or functions, 
or limitations on types of activity, that are reasonably designed, 
taking into consideration the nature of the banking entity's business, 
to prevent the conflict of interest from involving or resulting in a 
materially adverse effect on a client, customer, or counterparty. A 
banking entity may not rely on such information barriers if, in the 
case of any specific transaction, class or type of transactions or 
activity, the banking entity knows or should reasonably know that, 
notwithstanding the banking entity's establishment of information 
barriers, the conflict of interest may involve or result in a 
materially adverse effect on a client, customer, or counterparty.
    (c) Definition of high-risk asset and high-risk trading strategy. 
For purposes of this section:
    (1) High-risk asset means an asset or group of related assets that 
would, if held by a banking entity, 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.
    (2) High-risk trading strategy means a trading strategy that would, 
if engaged in by a banking entity, 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.


Sec.  75.16   Ownership of interests in and sponsorship of issuers of 
certain collateralized debt obligations backed by trust-preferred 
securities.

    (a) The prohibition contained in Sec.  75.10(a)(1) does not apply 
to the ownership by a banking entity of an interest in, or sponsorship 
of, any issuer if:
    (1) The issuer was established, and the interest was issued, before 
May 19, 2010;
    (2) The banking entity reasonably believes that the offering 
proceeds received by the issuer were invested primarily in Qualifying 
TruPS Collateral; and
    (3) The banking entity acquired such interest on or before December 
10, 2013 (or acquired such interest in connection with a merger with or 
acquisition of a banking entity that acquired the interest on or before 
December 10, 2013).
    (b) For purposes of this Sec.  75.16, Qualifying TruPS Collateral 
shall mean any trust preferred security or subordinated debt instrument 
issued prior to May 19, 2010 by a depository institution holding 
company that, as of the end of any reporting period within 12 months 
immediately preceding the issuance of such trust preferred security or 
subordinated debt instrument, had total consolidated assets of less 
than $15,000,000,000 or issued prior to May 19, 2010 by a mutual 
holding company.
    (c) Notwithstanding paragraph (a)(3) of this section, a banking 
entity may act as a market maker with respect to the interests of an 
issuer described in paragraph (a) of this section in accordance with 
the applicable provisions of Sec. Sec.  75.4 and 75.11.
    (d) Without limiting the applicability of paragraph (a) of this 
section, the Board, the FDIC and the OCC will make public a non-
exclusive list of issuers that meet the requirements of paragraph (a). 
A banking entity may rely on the list published by the Board, the FDIC 
and the OCC.


Sec. Sec.  75.17-75.19   [Reserved]

Subpart D--Compliance Program Requirement; Violations


Sec.  75.20   Program for compliance; reporting.

    (a) Program requirement. Each banking entity 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) Contents of compliance program. Except as provided in paragraph 
(f) of this section, the compliance program required by paragraph (a) 
of this section, at a minimum, shall include:
    (1) Written policies and procedures reasonably designed to 
document, describe, monitor and limit trading activities subject to 
subpart B of this part (including those permitted under Sec. Sec.  75.3 
to 75.6), including setting,

[[Page 62230]]

monitoring and managing required limits set out in Sec. Sec.  75.4 and 
75.5, and activities and investments with respect to a covered fund 
subject to subpart C of this part (including those permitted under 
Sec. Sec.  75.11 through 75.14) conducted by the banking entity to 
ensure that all activities and investments conducted by the banking 
entity that are subject to section 13 of the BHC Act and this part 
comply with section 13 of the BHC Act and this part;
    (2) A system of internal controls reasonably designed to monitor 
compliance with section 13 of the BHC Act and this part and to prevent 
the occurrence of activities or investments that are prohibited by 
section 13 of the BHC Act and this part;
    (3) A management framework that clearly delineates responsibility 
and accountability for compliance with section 13 of the BHC Act and 
this part and includes appropriate management review of trading limits, 
strategies, hedging activities, investments, incentive compensation and 
other matters identified in this part or by management as requiring 
attention;
    (4) 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;
    (5) Training for trading personnel and managers, as well as other 
appropriate personnel, to effectively implement and enforce the 
compliance program; and
    (6) Records sufficient to demonstrate compliance with section 13 of 
the BHC Act and this part, which a banking entity must promptly provide 
to the Commission upon request and retain for a period of no less than 
5 years or such longer period as required by the Commission.
    (c) Additional standards. In addition to the requirements in 
paragraph (b) of this section, the compliance program of a banking 
entity must satisfy the requirements and other standards contained in 
appendix B of this part, if:
    (1) The banking entity engages in proprietary trading permitted 
under subpart B of this part and is required to comply with the 
reporting requirements of paragraph (d) of this section;
    (2) The banking entity has reported total consolidated assets as of 
the previous calendar year end of $50 billion or more or, in the case 
of a foreign banking entity, has total U.S. assets as of the previous 
calendar year end of $50 billion or more (including all subsidiaries, 
affiliates, branches and agencies of the foreign banking entity 
operating, located or organized in the United States); or
    (3) The Commission notifies the banking entity in writing that it 
must satisfy the requirements and other standards contained in appendix 
B of this part.
    (d) Reporting requirements under appendix A of this part. (1) A 
banking entity engaged in proprietary trading activity permitted under 
subpart B of this part shall comply with the reporting requirements 
described in appendix A of this part, if:
    (i) The banking entity (other than a foreign banking entity as 
provided in paragraph (d)(1)(ii) of this section) has, together with 
its 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 or exceeds the 
threshold established in paragraph (d)(2) of this section;
    (ii) In the case of a foreign banking entity, the average gross sum 
of the trading assets and liabilities of the combined U.S. operations 
of the foreign banking entity (including all subsidiaries, affiliates, 
branches and agencies of the foreign banking entity operating, located 
or organized in the United States and excluding trading assets and 
liabilities involving obligations of or guaranteed by the United States 
or any agency of the United States) over the previous consecutive four 
quarters, as measured as of the last day of each of the four prior 
calendar quarters, equals or exceeds the threshold established in 
paragraph (d)(2) of this section; or
    (iii) The Commission notifies the banking entity in writing that it 
must satisfy the reporting requirements contained in appendix A of this 
part.
    (2) The threshold for reporting under paragraph (d)(1) of this 
section shall be $50 billion beginning on June 30, 2014; $25 billion 
beginning on April 30, 2016; and $10 billion beginning on December 31, 
2016.
    (3) Frequency of reporting. Unless the Commission notifies the 
banking entity in writing that it must report on a different basis, a 
banking entity with $50 billion or more in trading assets and 
liabilities (as calculated in accordance with paragraph (d)(1) of this 
section) shall report the information required by appendix A of this 
part for each calendar month within 30 days of the end of the relevant 
calendar month; beginning with information for the month of January 
2015, such information shall be reported within 10 days of the end of 
each calendar month. Any other banking entity subject to appendix A of 
this part shall report the information required by appendix A of this 
part for each calendar quarter within 30 days of the end of that 
calendar quarter unless the Commission notifies the banking entity in 
writing that it must report on a different basis.
    (e) Additional documentation for covered funds. Any banking entity 
that has more than $10 billion in total consolidated assets as reported 
on December 31 of the previous two calendar years shall maintain 
records that include:
    (1) Documentation of the exclusions or exemptions other than 
sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 
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;
    (2) For each fund sponsored by the banking entity (including all 
subsidiaries and affiliates) for which the banking entity relies on one 
or more of the exclusions from the definition of covered fund provided 
by Sec.  75.10(c)(1), (5), (8), (9), or (10), documentation supporting 
the banking entity's determination that the fund is not a covered fund 
pursuant to one or more of those exclusions;
    (3) For each seeding vehicle described in Sec.  75.10(c)(12)(i) or 
(iii) 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 SEC-regulated business development company within the time 
period specified in Sec.  75.12(a)(2)(i)(B);
    (4) For any banking entity that is, or is controlled directly or 
indirectly by a banking entity that is, located in or organized under 
the laws of the United States or of any State, if the aggregate amount 
of ownership interests in foreign public funds that are described in 
Sec.  75.10(c)(1) owned by such banking entity (including ownership 
interests owned by any affiliate that is controlled directly or 
indirectly by a banking entity that is located in or organized under 
the laws of the United States or of any State) exceeds $50 million at 
the end of two or more consecutive calendar quarters,

[[Page 62231]]

beginning with the next succeeding calendar quarter, documentation of 
the value of the ownership interests owned by the banking entity (and 
such affiliates) in each foreign public fund and each jurisdiction in 
which any such foreign public fund is organized, calculated as of the 
end of each calendar quarter, which documentation must continue until 
the banking entity's aggregate amount of ownership interests in foreign 
public funds is below $50 million for two consecutive calendar 
quarters; and
    (5) For purposes of paragraph (e)(4) of this section, a U.S. 
branch, agency, or subsidiary of a foreign 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.
    (f) Simplified programs for less active banking entities--(1) 
Banking entities with no covered activities. A banking entity that does 
not engage in activities or investments pursuant to subpart B or 
subpart C of this part (other than trading activities permitted 
pursuant to Sec.  75.6(a)) may satisfy the requirements of this section 
by establishing the required compliance program prior to becoming 
engaged in such activities or making such investments (other than 
trading activities permitted pursuant to Sec.  75.6(a)).
    (2) Banking entities with modest activities. A banking entity with 
total consolidated assets of $10 billion or less as reported on 
December 31 of the previous two calendar years that engages in 
activities or investments pursuant to subpart B or subpart C of this 
part (other than trading activities permitted under Sec.  75.6(a)) 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.


Sec.  75.21   Termination of activities or investments; penalties for 
violations.

    (a) Any banking entity that engages in an activity or makes an 
investment in violation of section 13 of the BHC Act or this part, or 
acts in a manner that functions as an evasion of the requirements of 
section 13 of the BHC Act or this part, including through an abuse of 
any activity or investment permitted under subparts B or C of this 
part, or otherwise violates the restrictions and requirements of 
section 13 of the BHC Act or this part, shall, upon discovery, promptly 
terminate the activity and, as relevant, dispose of the investment.
    (b) Whenever the Commission finds reasonable cause to believe any 
banking entity has engaged in an activity or made an investment in 
violation of section 13 of the BHC Act or this part, or engaged in any 
activity or made any investment that functions as an evasion of the 
requirements of section 13 of the BHC Act or this part, the Commission 
may take any action permitted by law to enforce compliance with section 
13 of the BHC Act and this part, including directing the banking entity 
to restrict, limit, or terminate any or all activities under this part 
and dispose of any investment.

Appendix A 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 of this part (``proprietary trading restrictions''). 
Pursuant to Sec.  75.20(d), this appendix generally 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 Commission regarding 
a variety of quantitative measurements of their covered trading 
activities, which vary depending on the scope and size of covered 
trading activities, and (ii) create and maintain records documenting 
the preparation and content of these reports. The requirements of 
this appendix must be incorporated into the banking entity's 
internal compliance program under Sec.  75.20 and Appendix B of this 
part.
    b. The purpose of this appendix is to assist banking entities 
and the Commission in:
    (i) Better understanding and evaluating the scope, type, and 
profile of the banking entity's covered trading activities;
    (ii) Monitoring the banking entity's covered trading activities;
    (iii) Identifying covered trading activities that warrant 
further review or examination by the banking entity to verify 
compliance with the proprietary trading restrictions;
    (iv) Evaluating whether the covered trading activities of 
trading desks engaged in market making-related activities subject to 
Sec.  75.4(b) are consistent with the requirements governing 
permitted market making-related activities;
    (v) Evaluating whether the covered trading activities of trading 
desks that are engaged in permitted trading activity subject to 
Sec.  75.4, 75.5, or 75.6(a) and (b) (i.e., underwriting and market 
making-related 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;
    (vi) Identifying the profile of particular covered trading 
activities of the banking entity, and the individual trading desks 
of the banking entity, to help establish the appropriate frequency 
and scope of examination by the Commission of such activities; and
    (vii) Assessing and addressing the risks associated with the 
banking entity's covered trading activities.
    c. The quantitative measurements that must be furnished pursuant 
to this appendix are not intended to serve as a dispositive tool for 
the identification of permissible or impermissible activities.
    d. In order to allow banking entities and the Agencies to 
evaluate the effectiveness of these metrics, banking entities must 
collect and report these metrics for all trading desks beginning on 
the dates established in Sec.  75.20. The Agencies will review the 
data collected and revise this collection requirement as appropriate 
based on a review of the data collected prior to September 30, 2015.
    e. 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 Sec.  75.20 and Appendix B of this part. 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.
    f. 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 Sec. Sec.  75.4 through 75.6(a) and (b), or that 
result in a material exposure to high-risk assets or high-risk 
trading strategies, must be escalated within the banking entity for 
review, further analysis, explanation to the Commission, and 
remediation, where appropriate. The quantitative measurements 
discussed in this appendix should be helpful to banking entities in 
identifying and managing the risks related to their covered trading 
activities.

II. Definitions

    The terms used in this appendix have the same meanings as set 
forth in Sec. Sec.  75.2 and 75.3. In addition, for purposes of this 
appendix, the following definitions apply:

[[Page 62232]]

    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 Sec.  75.4, 75.5, or 75.6(a) or (b). A banking entity may 
include trading under Sec.  75.3(d) or 75.6(c), (d) or (e).
    Measurement frequency means the frequency with which a 
particular quantitative metric must be calculated and recorded.
    Trading desk means 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.

III. Reporting and Recordkeeping of Quantitative Measurements

a. Scope of Required Reporting

    General scope. Each banking entity made subject to this part by 
Sec.  75.20 must furnish the following quantitative measurements for 
each trading desk of the banking entity, calculated in accordance 
with this appendix:
     Risk and Position Limits and Usage;
     Risk Factor Sensitivities;
     Value-at-Risk and Stress VaR;
     Comprehensive Profit and Loss Attribution;
     Inventory Turnover;
     Inventory Aging; and
     Customer Facing Trade Ratio

b. Frequency of Required Calculation and Reporting

    A banking entity must calculate any applicable quantitative 
measurement for each trading day. A banking entity must report each 
applicable quantitative measurement to the Commission on the 
reporting schedule established in Sec.  75.20 unless otherwise 
requested by the Commission. All quantitative measurements for any 
calendar month must be reported within the time period required by 
Sec.  75.20.

c. Recordkeeping

    A banking entity must, for any quantitative measurement 
furnished to the Commission pursuant to this appendix and Sec.  
75.20(d), create and maintain records documenting the preparation 
and content of these reports, as well as such information as is 
necessary to permit the Commission to verify the accuracy of such 
reports, for a period of 5 years from the end of the calendar year 
for which the measurement was taken.

IV. Quantitative Measurements

a. Risk-Management Measurements

1. Risk and Position Limits and Usage

    i. Description: For purposes of this appendix, Risk and Position 
Limits are the constraints that define the amount of risk that a 
trading desk is permitted to take at a point in time, as defined by 
the banking entity for a specific trading desk. Usage represents the 
portion of the trading desk's limits that are accounted for by the 
current activity of the desk. Risk and position limits and their 
usage are key risk management tools used to control and monitor risk 
taking and include, but are not limited, to the limits set out in 
Sec. Sec.  75.4 and 75.5. A number of the metrics that are described 
below, including ``Risk Factor Sensitivities'' and ``Value-at-Risk 
and Stress Value-at-Risk,'' relate to a trading desk's risk and 
position limits and are useful in evaluating and setting these 
limits in the broader context of the trading desk's overall 
activities, particularly for the market making activities under 
Sec.  75.4(b) and hedging activity under Sec.  75.5. Accordingly, 
the limits required under Sec. Sec.  75.4(b)(2)(iii) and 
75.5(b)(1)(i) must meet the applicable requirements under Sec. Sec.  
75.4(b)(2)(iii) and 75.5(b)(1)(i) and also must include appropriate 
metrics for the trading desk limits including, at a minimum, the 
``Risk Factor Sensitivities'' and ``Value-at-Risk and Stress Value-
at-Risk'' metrics except to the extent any of the ``Risk Factor 
Sensitivities'' or ``Value-at-Risk and Stress Value-at-Risk'' 
metrics are demonstrably ineffective for measuring and monitoring 
the risks of a trading desk based on the types of positions traded 
by, and risk exposures of, that desk.
    ii. General Calculation Guidance: Risk and Position Limits must 
be reported in the format used by the banking entity for the 
purposes of risk management of each trading desk. Risk and Position 
Limits are often expressed in terms of risk measures, such as VaR 
and Risk Factor Sensitivities, but may also be expressed in terms of 
other observable criteria, such as net open positions. When criteria 
other than VaR or Risk Factor Sensitivities are used to define the 
Risk and Position Limits, both the value of the Risk and Position 
Limits and the value of the variables used to assess whether these 
limits have been reached must be reported.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

2. Risk Factor Sensitivities

    i. Description: For purposes of this appendix, Risk Factor 
Sensitivities are changes in a trading desk's Comprehensive Profit 
and Loss that are expected to occur in the event of a change in one 
or more underlying variables that are significant sources of the 
trading desk's profitability and risk.
    ii. General Calculation Guidance: A banking entity must report 
the Risk Factor Sensitivities that are monitored and managed as part 
of the trading desk's overall risk management policy. The underlying 
data and methods used to compute a trading desk's Risk Factor 
Sensitivities will depend on the specific function of the trading 
desk and the internal risk management models employed. The number 
and type of Risk Factor Sensitivities that are monitored and managed 
by a trading desk, and furnished to the Commission, will depend on 
the explicit risks assumed by the trading desk. In general, however, 
reported Risk Factor Sensitivities must be sufficiently granular to 
account for a preponderance of the expected price variation in the 
trading desk's holdings.
    A. Trading desks must take into account any relevant factors in 
calculating Risk Factor Sensitivities, including, for example, the 
following with respect to particular asset classes:
     Commodity derivative positions: Risk factors with 
respect to the related commodities set out in Sec.  20.2 of this 
chapter, the maturity of the positions, volatility and/or 
correlation sensitivities (expressed in a manner that demonstrates 
any significant non-linearities), and the maturity profile of the 
positions;
     Credit positions: Risk factors with respect to credit 
spreads that are sufficiently granular to account for specific 
credit sectors and market segments, the maturity profile of the 
positions, and risk factors with respect to interest rates of all 
relevant maturities;
     Credit-related derivative positions: Risk factor 
sensitivities, for example credit spreads, shifts (parallel and non-
parallel) in credit spreads--volatility, and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and the maturity profile of the 
positions;
     Equity derivative positions: Risk factor sensitivities 
such as equity positions, volatility, and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and the maturity profile of the 
positions;
     Equity positions: Risk factors for equity prices and 
risk factors that differentiate between important equity market 
sectors and segments, such as a small capitalization equities and 
international equities;
     Foreign exchange derivative positions: Risk factors 
with respect to major currency pairs and maturities, exposure to 
interest rates at relevant maturities, volatility, and/or 
correlation sensitivities (expressed in a manner that demonstrates 
any significant non-linearities), as well as the maturity profile of 
the positions; and
     Interest rate positions, including interest rate 
derivative positions: Risk factors with respect to major interest 
rate categories and maturities and volatility and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and shifts (parallel and non-parallel) 
in the interest rate curve, as well as the maturity profile of the 
positions.
    B. The methods used by a banking entity to calculate 
sensitivities to a common factor shared by multiple trading desks, 
such as an equity price factor, must be applied consistently across 
its trading desks so that the sensitivities can be compared from one 
trading desk to another.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

3. Value-at-Risk and Stress Value-at-Risk

    i. Description: For purposes of this appendix, Value-at-Risk 
(``VaR'') is the commonly used percentile measurement of the risk of 
future financial loss in the value of a given set of aggregated 
positions over a specified period of time, based on current market 
conditions. For purposes of this appendix, Stress Value-at-Risk 
(``Stress VaR'') is the percentile measurement of the risk of future 
financial loss in the value of a given set of aggregated positions 
over a specified

[[Page 62233]]

period of time, based on market conditions during a period of 
significant financial stress.
    ii. General Calculation Guidance: Banking entities must compute 
and report VaR and Stress VaR by employing generally accepted 
standards and methods of calculation. VaR should reflect a loss in a 
trading desk that is expected to be exceeded less than one percent 
of the time over a one-day period. For those banking entities that 
are subject to regulatory capital requirements imposed by a Federal 
banking agency, VaR and Stress VaR must be computed and reported in 
a manner that is consistent with such regulatory capital 
requirements. In cases where a trading desk does not have a 
standalone VaR or Stress VaR calculation but is part of a larger 
aggregation of positions for which a VaR or Stress VaR calculation 
is performed, a VaR or Stress VaR calculation that includes only the 
trading desk's holdings must be performed consistent with the VaR or 
Stress VaR model and methodology used for the larger aggregation of 
positions.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

b. Source-of-Revenue Measurements

1. Comprehensive Profit and Loss Attribution

    i. Description: For purposes of this appendix, Comprehensive 
Profit and Loss Attribution is an analysis that attributes the daily 
fluctuation in the value of a trading desk's positions to various 
sources. First, the daily profit and loss of the aggregated 
positions is divided into three categories: (i) Profit and loss 
attributable to a trading desk's existing positions that were also 
positions held by the trading desk as of the end of the prior day 
(``existing positions''); (ii) profit and loss attributable to new 
positions resulting from the current day's trading activity (``new 
positions''); and (iii) residual profit and loss that cannot be 
specifically attributed to existing positions or new positions. The 
sum of (i), (ii), and (iii) must equal the trading desk's 
comprehensive profit and loss at each point in time. In addition, 
profit and loss measurements must calculate volatility of 
comprehensive profit and loss (i.e., the standard deviation of the 
trading desk's one-day profit and loss, in dollar terms) for the 
reporting period for at least a 30-, 60- and 90-day lag period, from 
the end of the reporting period, and any other period that the 
banking entity deems necessary to meet the requirements of the rule.
    A. The comprehensive profit and loss associated with existing 
positions must reflect changes in the value of these positions on 
the applicable day. The comprehensive profit and loss from existing 
positions must be further attributed, as applicable, to changes in 
(i) the specific Risk Factors and other factors that are monitored 
and managed as part of the trading desk's overall risk management 
policies and procedures; and (ii) any other applicable elements, 
such as cash flows, carry, changes in reserves, and the correction, 
cancellation, or exercise of a trade.
    B. 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.
    C. The portion of comprehensive profit and loss that cannot be 
specifically attributed to known sources must be allocated to a 
residual category identified as an unexplained portion of the 
comprehensive profit and loss. Significant unexplained profit and 
loss must be escalated for further investigation and analysis.
    ii. General Calculation Guidance: The specific categories used 
by a trading desk in the attribution analysis and amount of detail 
for the analysis should be tailored to the type and amount of 
trading activities undertaken by the trading desk. The new position 
attribution must be computed by calculating the difference between 
the prices at which instruments were bought and/or sold and the 
prices at which those instruments are marked to market at the close 
of business on that day multiplied by the notional or principal 
amount of each purchase or sale. Any fees, commissions, or other 
payments received (paid) that are associated with transactions 
executed on that day must be added (subtracted) from such 
difference. These factors must be measured consistently over time to 
facilitate historical comparisons.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

c. Customer-Facing Activity Measurements

1. Inventory Turnover

    i. Description: For purposes of this appendix, Inventory 
Turnover is a ratio that measures the turnover of a trading desk's 
inventory. The numerator of the ratio is the absolute value of all 
transactions over the reporting period. The denominator of the ratio 
is the value of the trading desk's inventory at the beginning of the 
reporting period.
    ii. General Calculation Guidance: For purposes of this appendix, 
for derivatives, other than options and interest rate derivatives, 
value means gross notional value, for options, value means delta 
adjusted notional value, and for interest rate derivatives, value 
means 10-year bond equivalent value.
    iii. Calculation Period: 30 days, 60 days, and 90 days.
    iv. Measurement Frequency: Daily.

2. Inventory Aging

    i. Description: For purposes of this appendix, Inventory Aging 
generally describes a schedule of the trading desk's aggregate 
assets and liabilities and the amount of time that those assets and 
liabilities have been held. Inventory Aging should measure the age 
profile of the trading desk's assets and liabilities.
    ii. General Calculation Guidance: In general, Inventory Aging 
must be computed using a trading desk's trading activity data and 
must identify the value of a trading desk's aggregate assets and 
liabilities. Inventory Aging must include two schedules, an asset-
aging schedule and a liability-aging schedule. Each schedule must 
record the value of assets or liabilities held over all holding 
periods. For derivatives, other than options, and interest rate 
derivatives, value means gross notional value, for options, value 
means delta adjusted notional value and, for interest rate 
derivatives, value means 10-year bond equivalent value.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

3. Customer-Facing Trade Ratio--Trade Count Based and Value Based

    i. Description: For purposes of this appendix, the Customer-
Facing Trade Ratio is a ratio comparing (i) the transactions 
involving a counterparty that is a customer of the trading desk to 
(ii) the transactions involving a counterparty that is not a 
customer of the trading desk. A trade count based ratio must be 
computed that records the number of transactions involving a 
counterparty that is a customer of the trading desk and the number 
of transactions involving a counterparty that is not a customer of 
the trading desk. A value based ratio must be computed that records 
the value of transactions involving a counterparty that is a 
customer of the trading desk and the value of transactions involving 
a counterparty that is not a customer of the trading desk.
    ii. General Calculation Guidance: For purposes of calculating 
the Customer-Facing Trade Ratio, a counterparty is considered to be 
a customer of the trading desk if the counterparty is a market 
participant that makes 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. However, a trading desk or other organizational 
unit of another banking entity would not be a client, customer, or 
counterparty of the trading desk if the other entity has trading 
assets and liabilities of $50 billion or more as measured in 
accordance with Sec.  75.20(d)(1) unless 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. Transactions conducted anonymously 
on an exchange or similar trading facility that permits trading on 
behalf of a broad range of market participants would be considered 
transactions with customers of the trading desk. For derivatives, 
other than options, and interest rate derivatives, value means gross 
notional value, for options, value means delta adjusted notional 
value, and for interest rate derivatives, value means 10-year bond 
equivalent value.
    iii. Calculation Period: 30 days, 60 days, and 90 days.
    iv. Measurement Frequency: Daily.

Appendix B to Part 75--Enhanced Minimum Standards for Compliance 
Programs

I. Overview

    Section 75.20(c) requires certain banking entities to establish, 
maintain, and enforce an enhanced compliance program that includes 
the requirements and standards in this Appendix as well as the 
minimum written

[[Page 62234]]

policies and procedures, internal controls, management framework, 
independent testing, training, and recordkeeping provisions outlined 
in Sec.  75.20. This Appendix sets forth additional minimum 
standards with respect to the establishment, oversight, maintenance, 
and enforcement by these banking entities of an enhanced internal 
compliance program for ensuring and monitoring 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.
    a. This compliance program must:
    1. Be reasonably designed to identify, document, monitor, and 
report the permitted trading and covered fund activities and 
investments of the banking entity; identify, monitor and promptly 
address the risks of these covered activities and investments and 
potential areas of noncompliance; and prevent activities or 
investments prohibited by, or that do not comply with, section 13 of 
the BHC Act and this part;
    2. Establish and enforce appropriate limits on the covered 
activities and investments of the banking entity, including limits 
on the size, scope, complexity, and risks of the individual 
activities or investments consistent with the requirements of 
section 13 of the BHC Act and this part;
    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 chief executive 
officer (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 permitted trading and covered fund activities and 
investments.

II. Enhanced Compliance Program

a. Proprietary Trading Activities

    A banking entity must establish, maintain and enforce a 
compliance program that includes written policies and procedures 
that are appropriate for the types, size, and complexity of, and 
risks associated with, its permitted trading activities. The 
compliance program may be tailored to the types of trading 
activities conducted by the banking entity, and must include a 
detailed description of controls established by the banking entity 
to reasonably ensure that its trading activities are conducted in 
accordance with the requirements and limitations applicable to those 
trading activities under section 13 of the BHC Act and this part, 
and provide for appropriate revision of the compliance program 
before expansion of the trading activities of the banking entity. A 
banking entity must devote adequate resources and use knowledgeable 
personnel in conducting, supervising and managing its trading 
activities, and promote consistency, independence and rigor in 
implementing its risk controls and compliance efforts. The 
compliance program must be updated with a frequency sufficient to 
account for changes in the activities of the banking entity, results 
of independent testing of the program, identification of weaknesses 
in the program, and changes in legal, regulatory or other 
requirements.
    1. Trading Desks: The banking entity must have written policies 
and procedures governing each trading desk that include a 
description of:
    i. The process for identifying, authorizing and documenting 
financial instruments each trading desk may purchase or sell, with 
separate documentation for market making-related activities 
conducted in reliance on Sec.  75.4(b) and for hedging activity 
conducted in reliance on Sec.  75.5;
    ii. A mapping for each trading desk to the division, business 
line, or other organizational structure that is responsible for 
managing and overseeing the trading desk's activities;
    iii. The mission (i.e., the type of trading activity, such as 
market-making, trading in sovereign debt, etc.) and strategy (i.e., 
methods for conducting authorized trading activities) of each 
trading desk;
    iv. The activities that the trading desk is authorized to 
conduct, including (i) authorized instruments and products, and (ii) 
authorized hedging strategies, techniques and instruments;
    v. The types and amount of risks allocated by the banking entity 
to each trading desk to implement the mission and strategy of the 
trading desk, including an enumeration of material risks resulting 
from the activities in which the trading desk is authorized to 
engage (including but not limited to price risks, such as basis, 
volatility and correlation risks, as well as counterparty credit 
risk). Risk assessments must take into account both the risks 
inherent in the trading activity and the strength and effectiveness 
of controls designed to mitigate those risks;
    vi. How the risks allocated to each trading desk will be 
measured;
    vii. Why the allocated risks levels are appropriate to the 
activities authorized for the trading desk;
    viii. The limits on the holding period of, and the risk 
associated with, financial instruments under the responsibility of 
the trading desk;
    ix. The process for setting new or revised limits, as well as 
escalation procedures for granting exceptions to any limits or to 
any policies or procedures governing the desk, the analysis that 
will be required to support revising limits or granting exceptions, 
and the process for independently reviewing and documenting those 
exceptions and the underlying analysis;
    x. The process for identifying, documenting and approving new 
products, trading strategies, and hedging strategies;
    xi. The types of clients, customers, and counterparties with 
whom the trading desk may trade; and
    xii. The compensation arrangements, including incentive 
arrangements, for employees associated with the trading desk, which 
may not be designed to reward or incentivize prohibited proprietary 
trading or excessive or imprudent risk-taking.
    2. Description of risks and risk management processes: The 
compliance program for the banking entity must include a 
comprehensive description of the risk management program for the 
trading activity of the banking entity. The compliance program must 
also include a description of the governance, approval, reporting, 
escalation, review and other processes the banking entity will use 
to reasonably ensure that trading activity is conducted in 
compliance with section 13 of the BHC Act and this part. Trading 
activity in similar financial instruments should be subject to 
similar governance, limits, testing, controls, and review, unless 
the banking entity specifically determines to establish different 
limits or processes and documents those differences. Descriptions 
must include, at a minimum, the following elements:
    i. A description of the supervisory and risk management 
structure governing all trading activity, including a description of 
processes for initial and senior-level review of new products and 
new strategies;
    ii. A description of the process for developing, documenting, 
testing, approving and reviewing all models used for valuing, 
identifying and monitoring the risks of trading activity and related 
positions, including the process for periodic independent testing of 
the reliability and accuracy of those models;
    iii. A description of the process for developing, documenting, 
testing, approving and reviewing the limits established for each 
trading desk;
    iv. A description of the process by which a security may be 
purchased or sold pursuant to the liquidity management plan, 
including the process for authorizing and monitoring such activity 
to ensure compliance with the banking entity's liquidity management 
plan and the restrictions on liquidity management activities in this 
part;
    v. A description of the management review process, including 
escalation procedures, for approving any temporary exceptions or 
permanent adjustments to limits on the activities, positions, 
strategies, or risks associated with each trading desk; and
    vi. The role of the audit, compliance, risk management and other 
relevant units for conducting independent testing of trading and 
hedging activities, techniques and strategies.
    3. Authorized risks, instruments, and products. The banking 
entity must implement and enforce limits and internal controls for 
each trading desk that are reasonably designed to ensure that 
trading activity is conducted in conformance with section 13 of the 
BHC Act and this part and with the banking entity's written policies 
and procedures. The banking entity must establish and enforce risk 
limits appropriate for the activity of each trading desk. These 
limits should be based on probabilistic and non-probabilistic 
measures of potential loss (e.g., Value-at-Risk and notional 
exposure, respectively), and measured under normal and stress market 
conditions. At a minimum, these internal controls must monitor, 
establish and enforce limits on:
    i. The financial instruments (including, at a minimum, by type 
and exposure) that the trading desk may trade;

[[Page 62235]]

    ii. The types and levels of risks that may be taken by each 
trading desk; and
    iii. The types of hedging instruments used, hedging strategies 
employed, and the amount of risk effectively hedged.
    4. Hedging policies and procedures. The banking entity must 
establish, maintain, and enforce written policies and procedures 
regarding the use of risk-mitigating hedging instruments and 
strategies that, at a minimum, describe:
    i. The positions, techniques and strategies that each trading 
desk may use to hedge the risk of its positions;
    ii. The manner in which the banking entity will identify the 
risks arising in connection with and related to the individual or 
aggregated positions, contracts or other holdings of the banking 
entity that are to be hedged and determine that those risks have 
been properly and effectively hedged;
    iii. The level of the organization at which hedging activity and 
management will occur;
    iv. The manner in which hedging strategies will be monitored and 
the personnel responsible for such monitoring;
    v. The risk management processes used to control unhedged or 
residual risks; and
    vi. The process for developing, documenting, testing, approving 
and reviewing all hedging positions, techniques and strategies 
permitted for each trading desk and for the banking entity in 
reliance on Sec.  75.5.
    5. Analysis and quantitative measurements. The banking entity 
must perform robust analysis and quantitative measurement of its 
trading activities that is reasonably designed to ensure that the 
trading activity of each trading desk is consistent with the banking 
entity's compliance program; monitor and assist in the 
identification of potential and actual prohibited proprietary 
trading activity; and prevent the occurrence of prohibited 
proprietary trading. Analysis and models used to determine, measure 
and limit risk must be rigorously tested and be reviewed by 
management responsible for trading activity to ensure that trading 
activities, limits, strategies, and hedging activities do not 
understate the risk and exposure to the banking entity or allow 
prohibited proprietary trading. This review should include periodic 
and independent back-testing and revision of activities, limits, 
strategies and hedging as appropriate to contain risk and ensure 
compliance. In addition to the quantitative measurements reported by 
any banking entity subject to Appendix A of this part, each banking 
entity must develop and implement, to the extent appropriate to 
facilitate compliance with this part, additional quantitative 
measurements specifically tailored to the particular risks, 
practices, and strategies of its trading desks. The banking entity's 
analysis and quantitative measurements must incorporate the 
quantitative measurements reported by the banking entity pursuant to 
Appendix A of this part (if applicable) and include, at a minimum, 
the following:
    i. Internal controls and written policies and procedures 
reasonably designed to ensure the accuracy and integrity of 
quantitative measurements;
    ii. Ongoing, timely monitoring and review of calculated 
quantitative measurements;
    iii. The establishment of numerical thresholds and appropriate 
trading measures for each trading desk and heightened review of 
trading activity not consistent with those thresholds to ensure 
compliance with section 13 of the BHC Act and this part, including 
analysis of the measurement results or other information, 
appropriate escalation procedures, and documentation related to the 
review; and
    iv. Immediate review and compliance investigation of the trading 
desk's activities, escalation to senior management with oversight 
responsibilities for the applicable trading desk, timely 
notification to the Commission, appropriate remedial action (e.g., 
divesting of impermissible positions, cessation of impermissible 
activity, disciplinary actions), and documentation of the 
investigation findings and remedial action taken when quantitative 
measurements or other information, considered together with the 
facts and circumstances, or findings of internal audit, independent 
testing or other review suggest a reasonable likelihood that the 
trading desk has violated any part of section 13 of the BHC Act or 
this part.
    6. Other Compliance Matters. In addition to the requirements 
specified above, the banking entity's compliance program must:
    i. Identify activities of each trading desk that will be 
conducted in reliance on exemptions contained in Sec. Sec.  75.4 
through 75.6, including an explanation of:
    A. How and where in the organization the activity occurs; and
    B. Which exemption is being relied on and how the activity meets 
the specific requirements for reliance on the applicable exemption;
    ii. Include an explanation of the process for documenting, 
approving and reviewing actions taken pursuant to the liquidity 
management plan, where in the organization this activity occurs, the 
securities permissible for liquidity management, the process for 
ensuring that liquidity management activities are not conducted for 
the purpose of prohibited proprietary trading, and the process for 
ensuring that securities purchased as part of the liquidity 
management plan are highly liquid and conform to the requirements of 
this part;
    iii. Describe how the banking entity monitors for and prohibits 
potential or actual material exposure to high-risk assets or high-
risk trading strategies presented by each trading desk that relies 
on the exemptions contained in Sec. Sec.  75.3(d)(3) and 75.4 
through 75.6, which must take into account potential or actual 
exposure to:
    A. Assets whose values cannot be externally priced or, where 
valuation is reliant on pricing models, whose model inputs cannot be 
externally validated;
    B. Assets whose changes in value cannot be adequately mitigated 
by effective hedging;
    C. New products with rapid growth, including those that do not 
have a market history;
    D. Assets or strategies that include significant embedded 
leverage;
    E. Assets or strategies that have demonstrated significant 
historical volatility;
    F. Assets or strategies for which the application of capital and 
liquidity standards would not adequately account for the risk; and
    G. Assets or strategies that result in large and significant 
concentrations to sectors, risk factors, or counterparties;
    iv. Establish responsibility for compliance with the reporting 
and recordkeeping requirements of subpart B of this part and Sec.  
75.20; and
    v. Establish policies for monitoring and prohibiting potential 
or actual material conflicts of interest between the banking entity 
and its clients, customers, or counterparties.
    7. Remediation of violations. The banking entity's compliance 
program must be reasonably designed and established to effectively 
monitor and identify for further analysis any trading activity that 
may indicate potential violations of section 13 of the BHC Act and 
this part and to prevent actual violations of section 13 of the BHC 
Act and this part. The compliance program must describe procedures 
for identifying and remedying violations of section 13 of the BHC 
Act and this part, and must include, at a minimum, a requirement to 
promptly document, address and remedy any violation of section 13 of 
the BHC Act or this part, and document all proposed and actual 
remediation efforts. The compliance program must include specific 
written policies and procedures that are reasonably designed to 
assess the extent to which any activity indicates that modification 
to the banking entity's compliance program is warranted and to 
ensure that appropriate modifications are implemented. The written 
policies and procedures must provide for prompt notification to 
appropriate management, including senior management and the board of 
directors, of any material weakness or significant deficiencies in 
the design or implementation of the compliance program of the 
banking entity.

b. Covered Fund Activities or Investments

    A banking entity must establish, maintain and enforce a 
compliance program that includes written policies and procedures 
that are appropriate for the types, size, complexity and risks of 
the covered fund and related activities conducted and investments 
made, by the banking entity.
    1. Identification of covered funds. The banking entity's 
compliance program must provide a process, which must include 
appropriate management review and independent testing, for 
identifying and documenting covered funds that each unit within the 
banking entity's organization sponsors or organizes and offers, and 
covered funds in which each such unit invests. In addition to the 
documentation requirements for covered funds, as specified under 
Sec.  75.20(e), the documentation must include information that 
identifies all pools that the banking entity sponsors or has an 
interest in and the type of exemption from the Commodity Exchange 
Act (whether or not the pool relies on Sec.  4.7 of the regulations 
under the Commodity Exchange Act (Sec.  4.7 of this chapter)), and 
the amount of ownership interest the banking entity has in those 
pools.

[[Page 62236]]

    2. Identification of covered fund activities and investments. 
The banking entity's compliance program must identify, document and 
map each unit within the organization that is permitted to acquire 
or hold an interest in any covered fund or sponsor any covered fund 
and map each unit to the division, business line, or other 
organizational structure that will be responsible for managing and 
overseeing that unit's activities and investments.
    3. Explanation of compliance. The banking entity's compliance 
program must explain how:
    i. The banking entity monitors for and prohibits potential or 
actual material conflicts of interest between the banking entity and 
its clients, customers, or counterparties related to its covered 
fund activities and investments;
    ii. The banking entity monitors for and prohibits potential or 
actual transactions or activities that may threaten the safety and 
soundness of the banking entity related to its covered fund 
activities and investments; and
    iii. The banking entity monitors for and prohibits potential or 
actual material exposure to high-risk assets or high-risk trading 
strategies presented by its covered fund activities and investments, 
taking into account potential or actual exposure to:
    A. Assets whose values cannot be externally priced or, where 
valuation is reliant on pricing models, whose model inputs cannot be 
externally validated;
    B. Assets whose changes in values cannot be adequately mitigated 
by effective hedging;
    C. New products with rapid growth, including those that do not 
have a market history;
    D. Assets or strategies that include significant embedded 
leverage;
    E. Assets or strategies that have demonstrated significant 
historical volatility;
    F. Assets or strategies for which the application of capital and 
liquidity standards would not adequately account for the risk; and
    G. Assets or strategies that expose the banking entity to large 
and significant concentrations with respect to sectors, risk 
factors, or counterparties;
    4. Description and documentation of covered fund activities and 
investments. For each organizational unit engaged in covered fund 
activities and investments, the banking entity's compliance program 
must document:
    i. The covered fund activities and investments that the unit is 
authorized to conduct;
    ii. The banking entity's plan for actively seeking unaffiliated 
investors to ensure that any investment by the banking entity 
conforms to the limits contained in Sec.  75.12 or registered in 
compliance with the securities laws and thereby exempt from those 
limits within the time periods allotted in Sec.  75.12; and
    iii. How it complies with the requirements of subpart C of this 
part.
    5. Internal Controls. A banking entity must establish, maintain, 
and enforce internal controls that are reasonably designed to ensure 
that its covered fund activities or investments comply with the 
requirements of section 13 of the BHC Act and this part and are 
appropriate given the limits on risk established by the banking 
entity. These written internal controls must be reasonably designed 
and established to effectively monitor and identify for further 
analysis any covered fund activity or investment that may indicate 
potential violations of section 13 of the BHC Act or this part. The 
internal controls must, at a minimum require:
    i. Monitoring and limiting the banking entity's individual and 
aggregate investments in covered funds;
    ii. Monitoring the amount and timing of seed capital investments 
for compliance with the limitations under subpart C of this part 
(including but not limited to the redemption, sale or disposition 
requirements of Sec.  75.12), and the effectiveness of efforts to 
seek unaffiliated investors to ensure compliance with those limits;
    iii. Calculating the individual and aggregate levels of 
ownership interests in one or more covered fund required by Sec.  
75.12;
    iv. Attributing the appropriate instruments to the individual 
and aggregate ownership interest calculations above;
    v. Making disclosures to prospective and actual investors in any 
covered fund organized and offered or sponsored by the banking 
entity, as provided under Sec.  75.11(a)(8);
    vi. Monitoring for and preventing any relationship or 
transaction between the banking entity and a covered fund that is 
prohibited under Sec.  75.14, including where the banking entity has 
been designated as the sponsor, investment manager, investment 
adviser, or commodity trading advisor to a covered fund by another 
banking entity; and
    vii. Appropriate management review and supervision across legal 
entities of the banking entity to ensure that services and products 
provided by all affiliated entities comply with the limitation on 
services and products contained in Sec.  75.14.
    6. Remediation of violations. The banking entity's compliance 
program must be reasonably designed and established to effectively 
monitor and identify for further analysis any covered fund activity 
or investment that may indicate potential violations of section 13 
of the BHC Act or this part and to prevent actual violations of 
section 13 of the BHC Act and this part. The banking entity's 
compliance program must describe procedures for identifying and 
remedying violations of section 13 of the BHC Act and this part, and 
must include, at a minimum, a requirement to promptly document, 
address and remedy any violation of section 13 of the BHC Act or 
this part, including Sec.  75.21, and document all proposed and 
actual remediation efforts. The compliance program must include 
specific written policies and procedures that are reasonably 
designed to assess the extent to which any activity or investment 
indicates that modification to the banking entity's compliance 
program is warranted and to ensure that appropriate modifications 
are implemented. The written policies and procedures must provide 
for prompt notification to appropriate management, including senior 
management and the board of directors, of any material weakness or 
significant deficiencies in the design or implementation of the 
compliance program of the banking entity.

III. Responsibility and Accountability for the Compliance Program

    a. A banking entity must establish, maintain, and enforce a 
governance and management framework to manage its business and 
employees with a view to preventing violations of section 13 of the 
BHC Act and this part. A banking entity must have an appropriate 
management framework reasonably designed to ensure that: Appropriate 
personnel are responsible and accountable for the effective 
implementation and enforcement of the compliance program; a clear 
reporting line with a chain of responsibility is delineated; and the 
compliance program is reviewed periodically by senior management. 
The board of directors (or equivalent governance body) and senior 
management should have the appropriate authority and access to 
personnel and information within the organizations as well as 
appropriate resources to conduct their oversight activities 
effectively.
    1. Corporate governance. The banking entity must adopt a written 
compliance program approved by the board of directors, an 
appropriate committee of the board, or equivalent governance body, 
and senior management.
    2. Management procedures. The banking entity must establish, 
maintain, and enforce a governance framework that is reasonably 
designed to achieve compliance with section 13 of the BHC Act and 
this part, which, at a minimum, provides for:
    i. The designation of appropriate senior management or committee 
of senior management with authority to carry out the management 
responsibilities of the banking entity for each trading desk and for 
each organizational unit engaged in covered fund activities;
    ii. Written procedures addressing the management of the 
activities of the banking entity that are reasonably designed to 
achieve compliance with section 13 of the BHC Act and this part, 
including:
    A. A description of the management system, including the titles, 
qualifications, and locations of managers and the specific 
responsibilities of each person with respect to the banking entity's 
activities governed by section 13 of the BHC Act and this part; and
    B. Procedures for determining compensation arrangements for 
traders engaged in underwriting or market making-related activities 
under Sec.  75.4 or risk-mitigating hedging activities under Sec.  
75.5 so that such compensation arrangements are designed not to 
reward or incentivize prohibited proprietary trading and 
appropriately balance risk and financial results in a manner that 
does not encourage employees to expose the banking entity to 
excessive or imprudent risk.
    3. Business line managers. Managers with responsibility for one 
or more trading desks of the banking entity are accountable for the 
effective implementation and enforcement of the compliance program 
with respect to the applicable trading desk(s).
    4. Board of directors, or similar corporate body, and senior 
management. The board of

[[Page 62237]]

directors, or similar corporate body, and senior management are 
responsible for setting and communicating an appropriate culture of 
compliance with section 13 of the BHC Act and this part and ensuring 
that appropriate policies regarding the management of trading 
activities and covered fund activities or investments are adopted to 
comply with section 13 of the BHC Act and this part. The board of 
directors or similar corporate body (such as a designated committee 
of the board or an equivalent governance body) must ensure that 
senior management is fully capable, qualified, and properly 
motivated to manage compliance with this part in light of the 
organization's business activities and the expectations of the board 
of directors. The board of directors or similar corporate body must 
also ensure that senior management has established appropriate 
incentives and adequate resources to support compliance with this 
part, including the implementation of a compliance program meeting 
the requirements of this appendix into management goals and 
compensation structures across the banking entity.
    5. Senior management. Senior management is responsible for 
implementing and enforcing the approved compliance program. Senior 
management must also ensure that effective corrective action is 
taken when failures in compliance with section 13 of the BHC Act and 
this part are identified. Senior management and control personnel 
charged with overseeing compliance with section 13 of the BHC Act 
and this part should review the compliance program for the banking 
entity periodically and report to the board, or an appropriate 
committee thereof, on the effectiveness of the compliance program 
and compliance matters with a frequency appropriate to the size, 
scope, and risk profile of the banking entity's trading activities 
and covered fund activities or investments, which shall be at least 
annually.
    6. CEO attestation. Based on a review by the CEO of the banking 
entity, the CEO of the banking entity must, annually, attest in 
writing to the Commission that the banking entity has in place 
processes to establish, maintain, enforce, review, test and modify 
the compliance program established under this appendix and Sec.  
75.20 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 United States 
operations of the foreign banking entity who is located in the 
United States.

IV. Independent Testing

    a. Independent testing must occur with a frequency appropriate 
to the size, scope, and risk profile of the banking entity's trading 
and covered fund activities or investments, which shall be at least 
annually. This independent testing must include an evaluation of:
    1. The overall adequacy and effectiveness of the banking 
entity's compliance program, including an analysis of the extent to 
which the program contains all the required elements of this 
appendix;
    2. The effectiveness of the banking entity's internal controls, 
including an analysis and documentation of instances in which such 
internal controls have been breached, and how such breaches were 
addressed and resolved; and
    3. The effectiveness of the banking entity's management 
procedures.
    b. A banking entity must ensure that independent testing 
regarding the effectiveness of the banking entity's compliance 
program is conducted by a qualified independent party, such as the 
banking entity's internal audit department, compliance personnel or 
risk managers independent of the organizational unit being tested, 
outside auditors, consultants, or other qualified independent 
parties. A banking entity must promptly take appropriate action to 
remedy any significant deficiencies or material weaknesses in its 
compliance program and to terminate any violations of section 13 of 
the BHC Act or this part.

V. Training

    Banking entities must provide adequate training to personnel and 
managers of the banking entity engaged in activities or investments 
governed by section 13 of the BHC Act or this part, as well as other 
appropriate supervisory, risk, independent testing, and audit 
personnel, in order to effectively implement and enforce the 
compliance program. This training should occur with a frequency 
appropriate to the size and the risk profile of the banking entity's 
trading activities and covered fund activities or investments.

VI. Recordkeeping

    Banking entities must create and retain records sufficient to 
demonstrate compliance and support the operations and effectiveness 
of the compliance program. A banking entity must retain these 
records for a period that is no less than 5 years or such longer 
period as required by the Commission in a form that allows it to 
promptly produce such records to the Commission on request.

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

0
60. The authority citation for part 255 continues to read as follows:

    Authority: 12 U.S.C. 1851.

Subpart A--Authority and Definitions

0
61. Section 255.2 is revised to read as follows:


Sec.  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 the International Banking Act of 1978 (12 
U.S.C. 3106); and
    (iv) Any affiliate or subsidiary of any entity described in 
paragraph (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 
paragraph (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 paragraph (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:
    (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

[[Page 62238]]

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.
    (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 Sec.  
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:
    (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 means with respect to a 
banking entity that:
    (1)(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 Sec.  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 Sec.  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 (s)(3) of this section, 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 Sec.  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 this paragraph (s) means the 
trading assets and liabilities (excluding trading assets and 
liabilities attributable to trading activities permitted pursuant to 
Sec.  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 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 Sec.  211.23(a), (c) or (e) 
of the Board's Regulation K (12 CFR 211.23(a), (c), or (e)).

[[Page 62239]]

    (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.
    (ee) Significant trading assets and liabilities means with respect 
to a banking entity that: (1)(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 Sec.  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 (ee)(3) of this section, trading assets and 
liabilities for purposes of this paragraph (ee) means trading assets 
and liabilities (excluding trading assets and liabilities attributable 
to trading activities permitted pursuant to Sec.  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 this paragraph (ee) means the 
trading assets and liabilities (excluding trading assets and 
liabilities attributable to trading activities permitted pursuant to 
Sec.  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.
    (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

0
62. Section 255.3 is amended by:
0
a. Revising paragraphs (b) and (d)(3), (8), and (9);
0
b. Adding paragraphs (d)(10) through (13);
0
c. Redesignating paragraphs (e)(5) through (13) as paragraphs (e)(6) 
through (14);
0
d. Adding new paragraph (e)(5); and
0
e. Revising paragraph (e)(11), (12), and (14).
    The revisions and additions read as follows:


Sec.  255.3  Prohibition on proprietary trading.

* * * * *
    (b) Definition of trading account. (1) Trading account. 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
    (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) Trading account application for certain banking entities. (i) A 
banking entity that is subject to paragraph (b)(1)(ii) of this section 
in determining the scope of its trading account is not subject to 
paragraph (b)(1)(i) of this section.
    (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

[[Page 62240]]

elects under this section 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) 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 
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 Sec.  255.6(a) or 
(b) of this subpart are for the purpose of liquidity management and in 
accordance with the liquidity management plan described in this 
paragraph (d)(3); 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;
    (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:
    (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

[[Page 62241]]

bank holding company or savings and loan holding company.
    (12) Market risk capital rule means the market risk capital rule 
that is contained in 12 CFR part 3, subpart F, 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
    (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.

0
63. Section 255.4 is revised to read as follows:


Sec.  255.4  Permitted underwriting and market making-related 
activities.

    (a) Underwriting activities--(1) Permitted underwriting activities. 
The prohibition contained in Sec.  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 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.
    (iv) A banking entity with significant trading assets and 
liabilities may satisfy the requirements in paragraphs (a)(2)(iii)(B) 
and (C) of this section by complying with the requirements set forth 
below in paragraph (c) of this section;
    (v) The compensation arrangements of persons performing the 
activities described in this paragraph (a) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (vi) 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 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 Sec.  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:

[[Page 62242]]

    (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:
    (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.
    (iv) A banking entity with significant trading assets and 
liabilities may satisfy the requirements in paragraphs (b)(2)(iii)(C) 
and (D) of this section by complying with the requirements set forth 
below in paragraph (c) of this section;
    (v) The compensation arrangements of persons performing the 
activities described in this paragraph (b) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (vi) The banking entity is licensed or registered to engage in 
activity described in this paragraph (b) in accordance with applicable 
law.
    (3) 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 
Sec.  255.2(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.
    (ii) [Reserved]
    (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.
    (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 should take into account the liquidity, maturity, and depth 
of the market for the relevant types of securities and 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.
    (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 should take into account the liquidity, maturity, and depth 
of the market for the relevant types of financial instruments and 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

[[Page 62243]]

    (4) Period of time a financial instrument may be held.
    (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 any limit that is exceeded and 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 paragraph (c)(1)(ii)(A) or (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:
    (A) Takes action as promptly as possible after a breach to bring 
the trading desk into compliance; and
    (B) 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 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 of this part.

0
64. Section 255.5 is amended by revising paragraphs (b) and (c)(1) 
introductory text and adding paragraph (c)(4) to read as follows:


Sec.  255.5  Permitted risk-mitigating hedging activities.

* * * * *
    (b) Requirements. (1) The risk-mitigating hedging activities of a 
banking entity that has significant trading assets and liabilities are 
permitted under paragraph (a) of this section only if:
    (i) The banking entity has established and implements, maintains 
and enforces an internal compliance program required by subpart D of 
this part that is reasonably designed to ensure the banking entity's 
compliance with the requirements of this section, including:
    (A) Reasonably designed written policies and procedures regarding 
the positions, techniques and strategies that may be used for hedging, 
including documentation indicating what positions, contracts or other 
holdings a particular trading desk may use in its risk-mitigating 
hedging activities, as well as position and aging limits with respect 
to such positions, contracts or other holdings;
    (B) Internal controls and ongoing monitoring, management, and 
authorization procedures, including relevant escalation procedures; and
    (C) The conduct of analysis and independent testing designed to 
ensure that the positions, techniques and strategies that may be used 
for hedging may reasonably be expected to reduce or otherwise 
significantly mitigate the specific, identifiable risk(s) being hedged;
    (ii) The risk-mitigating hedging activity:
    (A) Is conducted in accordance with the written policies, 
procedures, and internal controls required under this section;
    (B) At the inception of the hedging activity, including, without 
limitation, any adjustments to the hedging activity, is designed to 
reduce or otherwise significantly mitigate one or more specific, 
identifiable risks, including market risk, counterparty or other credit 
risk, currency or foreign exchange risk, interest rate risk, commodity 
price risk, basis risk, or similar risks, arising in connection with 
and related to identified positions, contracts, or other holdings of 
the banking entity, based upon the facts and circumstances of the 
identified underlying and hedging positions, contracts or other 
holdings and the risks and liquidity thereof;
    (C) Does not give rise, at the inception of the hedge, to any 
significant new or additional risk that is not itself hedged 
contemporaneously in accordance with this section;
    (D) Is subject to continuing review, monitoring and management by 
the banking entity that:
    (1) Is consistent with the written hedging policies and procedures 
required under paragraph (b)(1)(i) of this section;
    (2) Is designed to reduce or otherwise significantly mitigate the 
specific, identifiable risks that develop over time from the risk-
mitigating hedging activities undertaken under this section and the 
underlying positions, contracts, and other holdings of the banking 
entity, based upon the facts and circumstances of the underlying and 
hedging positions, contracts and other holdings of the banking entity 
and the risks and liquidity thereof; and
    (3) Requires ongoing recalibration of the hedging activity by the 
banking entity to ensure that the hedging activity satisfies the 
requirements set out in paragraph (b)(1)(ii) of this section and is not 
prohibited proprietary trading; and
    (iii) The compensation arrangements of persons performing risk-
mitigating hedging activities are designed not to reward or incentivize 
prohibited proprietary trading.
    (2) The risk-mitigating hedging activities of a banking entity that 
does not have significant trading assets and liabilities are permitted 
under paragraph (a) of this section only if the 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 sale of financial 
instruments made in reliance on this section for risk-mitigating 
hedging purposes that is:
* * * * *
    (4) The requirements of paragraphs (c)(2) and (3) of this section 
do not apply to the purchase or sale of a financial instrument 
described in paragraph (c)(1) of this section if:
    (i) The financial instrument purchased or sold is identified on a 
written list of pre-approved financial instruments that are commonly 
used by the trading desk for the specific type of

[[Page 62244]]

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.

0
65. Section 255.6 is amended by revising paragraph (e)(3); removing 
paragraphs (e)(4) and (6); and redesignating paragraph (e)(5) as 
paragraph (e)(4).
    The revision reads as follows:


Sec.  255.6   Other permitted proprietary trading activities.

* * * * *
    (e) * * *
    (3) A purchase or sale by a banking entity is permitted for 
purposes of this paragraph (e) if:
    (i) The banking entity engaging as principal in the purchase or 
sale (including relevant personnel) is not located in the United States 
or organized under the laws of the United States or of any State;
    (ii) The banking entity (including relevant personnel) that makes 
the decision to purchase or sell as principal is not located in the 
United States or organized under the laws of the United States or of 
any State; and
    (iii) The purchase or sale, including any transaction arising from 
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

0
66. Section 255.10 is amended by revising paragraphs (c)(7)(ii) and 
(c)(8)(i)(A) to read as follows:


Sec.  255.10   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 Sec.  255.2(t) of subpart A;
* * * * *

0
67. Section 255.11 is amended by revising paragraph (c) to read as 
follows:


Sec.  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 Sec.  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 Sec.  255.4(a) or Sec.  255.4(b) of subpart B, 
respectively; and
    (2) With respect to any banking entity (or any affiliate thereof) 
that: Acts as a sponsor, investment adviser or commodity trading 
advisor to a particular covered fund or otherwise acquires and retains 
an ownership interest in such covered fund in reliance on paragraph (a) 
of this section; or acquires and retains an ownership interest in such 
covered fund and is either a securitizer, as that term is used in 
section 15G(a)(3) of the Exchange Act (15 U.S.C. 78o-11(a)(3)), or is 
acquiring and retaining an ownership interest in such covered fund in 
compliance with section 15G of that Act (15 U.S.C.78o-11) and the 
implementing regulations issued thereunder each as permitted by 
paragraph (b) of this section, then in each such case any ownership 
interests acquired or retained by the banking entity and its affiliates 
in connection with underwriting and market making related activities 
for that particular covered fund are included in the calculation of 
ownership interests permitted to be held by the banking entity and its 
affiliates under the limitations of Sec.  255.12(a)(2)(ii); Sec.  
255.12(a)(2)(iii), and Sec.  255.12(d) of this subpart.


Sec.  255.12   [Amended]

0
68. Section 255.12 is amended by redesignating the second instance of 
paragraph (e)(2)(vi) as paragraph (e)(2)(vii).

0
69. Section 255.13 is amended by revising paragraphs (a), (b)(3) and 
(4), and (c) to read as follows:


Sec.  255.13   Other permitted covered fund activities and investments.

    (a) Permitted risk-mitigating hedging activities. (1) The 
prohibition contained in Sec.  255.10(a) of this subpart does not apply 
with respect to an ownership interest in a covered fund acquired or 
retained by a banking entity that is designed to reduce or otherwise 
significantly mitigate the specific, identifiable risks to the banking 
entity in connection with:
    (i) A compensation arrangement with an employee of the banking 
entity or an affiliate thereof that directly provides investment 
advisory, commodity trading advisory or other services to the covered 
fund; or
    (ii) A position taken by the banking entity when acting as 
intermediary on behalf of a customer that is not itself a banking 
entity to facilitate the exposure by the customer to the profits and 
losses of the covered fund.
    (2) The risk-mitigating hedging activities of a banking entity are 
permitted under this paragraph (a) only if:
    (i) The banking entity has established and implements, maintains 
and enforces an internal compliance program in accordance with subpart 
D of this part that is reasonably designed to ensure the banking 
entity's compliance with the requirements of this section, including:
    (A) Reasonably designed written policies and procedures; and
    (B) Internal controls and ongoing monitoring, management, and 
authorization procedures, including relevant escalation procedures; and
    (ii) The acquisition or retention of the ownership interest:
    (A) Is made in accordance with the written policies, procedures, 
and internal controls required under this section;
    (B) At the inception of the hedge, is designed to reduce or 
otherwise significantly mitigate one or more specific, identifiable 
risks arising:
    (1) Out of a transaction conducted solely to accommodate a specific 
customer request with respect to the covered fund; or
    (2) In connection with the compensation arrangement with the 
employee that directly provides investment advisory, commodity trading 
advisory, or other services to the covered fund;
    (C) Does not give rise, at the inception of the hedge, to any 
significant new or additional risk that is not itself hedged 
contemporaneously in accordance with this section; and

[[Page 62245]]

    (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) of this section, 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 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 Sec.  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 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.

0
70. Section 255.14 is amended by revising paragraph (a)(2)(ii)(B) to 
read as follows:


Sec.  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

0
71. Section 255.20 is amended by eevising paragraphs (a), (b) 
introductory text, (c), (d), (e) introductory text, and (f)(2) and 
adding paragraphs (g), (h) and (i) to read as follows:


Sec.  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.
    (d) Reporting requirements under appendix A to this part. (1) A 
banking entity engaged in proprietary trading activity permitted under 
subpart B of this part shall comply with the reporting requirements 
described in appendix A to this part, 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 appendix A to this 
part.
    (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 appendix A to this part shall report the information 
required by appendix A for each quarter within 30 days of the end of 
the quarter.
    (e) Additional documentation for covered funds. A banking entity 
with

[[Page 62246]]

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 of this part 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 of this part, 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 section.
    (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 of this part, 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 
section.
    (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 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) Waiver. 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) Decision. The SEC will notify the banking entity of the 
decision in writing. The notice will include an explanation of the 
decision.

0
72. Revise appendix A to part 255 to read as follows:

Appendix A 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 Sec.  
255.20(d), this appendix applies to a banking entity that, together 
with its affiliates and subsidiaries, has significant trading assets 
and liabilities. These entities are required to (i) furnish periodic 
reports to the SEC regarding a variety of quantitative measurements 
of their covered trading activities, which vary depending on the 
scope and size of covered trading activities, and (ii) create and 
maintain records documenting the preparation and content of these 
reports. The requirements of this appendix must be incorporated into 
the banking entity's internal compliance program under Sec.  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 Sec.  
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 
Sec.  255.4, Sec.  255.5, or Sec.  255.6(a) and (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.
    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 Sec.  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 Sec. Sec.  255.4 through 255.6(a) and (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 this 
appendix should be helpful to banking entities in identifying and 
managing the risks related to their covered trading activities.

[[Page 62247]]

II. Definitions

    The terms used in this appendix have the same meanings as set 
forth in Sec. Sec.  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 Sec.  255.4, Sec.  255.5, Sec.  255.6(a), or Sec.  
255.6(b). A banking entity may include in its covered trading 
activity trading conducted under Sec.  255.3(d), Sec.  255.6(c), 
Sec.  255.6(d), or Sec.  255.6(e).
    Measurement frequency means the frequency with which a 
particular quantitative metric must be calculated and recorded.
    Trading day means a calendar day on which a trading desk is open 
for trading.

III. Reporting and Recordkeeping

a. Scope of Required Reporting

    1. Quantitative measurements. Each banking entity made subject 
to this appendix by Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  255.20 must provide file 
identifying information in each submission to the SEC pursuant to 
this appendix, including the name of the banking entity, the RSSD ID 
assigned to the top-tier banking entity by the Board, and 
identification of the reporting period and creation date and time.

b. Trading Desk Information

    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
    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 Sec.  
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 
Sec.  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.

f. Recordkeeping

    A banking entity must, for any quantitative measurement 
furnished to the SEC pursuant to this appendix and Sec.  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 Sec. Sec.  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 Sec.  255.4(b) and hedging activity under Sec.  255.5. 
Accordingly, the limits required under Sec. Sec.  
255.4(b)(2)(iii)(C) and 255.5(b)(1)(i)(A) must meet the applicable 
requirements under Sec. Sec.  255.4(b)(2)(iii)(C) and 
255.5(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

[[Page 62248]]

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 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.
    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 Sec.  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.
---------------------------------------------------------------------------

    ii. Calculation Period: One trading day.
    iii. Measurement Frequency: Daily.
    iv. Applicability: All trading desks that rely on Sec.  255.4(a) 
or (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 Sec.  255.4(a) to conduct underwriting activity is a 
market participant identified in Sec.  255.4(a)(7), and a customer 
of a trading desk that relies on Sec.  255.4(b) to conduct market 
making-related activity is a market participant identified in Sec.  
255.4(b)(3).
---------------------------------------------------------------------------

    \2\ See Sec.  255.2(h), (aa).
---------------------------------------------------------------------------

    ii. Calculation Period: One trading day.
    iii. Measurement Frequency: Daily.
    iv. Applicability: All trading desks that rely on Sec.  255.4(a) 
or (b) to conduct underwriting activity or market-making-related 
activity, respectively.

Appendix B to Part 255 [Removed]

0
73. Appendix B to part 255 is removed.

0
74. Effective January 1, 2020, until December 31, 2020, appendix Z to 
part 255 is added to read as follows:

Appendix Z to Part 255--Proprietary Trading and Certain Interests in 
and Relationships With Covered Funds (Alternative Compliance)

    Note: The content of this appendix reproduces the regulation 
implementing Section 13 of the Bank Holding Company Act as of 
November 13, 2019.

Subpart A--Authority and Definitions


Sec.  255.1   Authority, purpose, scope, and relationship to other 
authorities.

    (a) Authority. This part is issued by the SEC under section 13 of 
the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1851).
    (b) Purpose. Section 13 of the Bank Holding Company Act establishes 
prohibitions and restrictions on proprietary trading and investments in 
or relationships with covered funds by certain banking entities, 
including registered broker-dealers, registered investment advisers, 
and registered security-based swap dealers, among others identified in 
section 2(12)(B) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (12 U.S.C. 5301(12)(B)). This part implements 
section 13 of the Bank Holding Company Act by defining terms used in 
the statute and related terms, establishing prohibitions and 
restrictions on proprietary trading and investments in or relationships 
with covered funds, and explaining the statute's requirements.
    (c) Scope. This part implements section 13 of the Bank Holding 
Company Act with respect to banking entities for which the SEC is the 
primary financial regulatory agency, as defined in this part, but does 
not include such entities to the extent they are not within the 
definition of banking entity in Sec.  255.2(c).
    (d) Relationship to other authorities. Except as otherwise provided 
under section 13 of the Bank Holding Company Act, and notwithstanding 
any other provision of law, the prohibitions and restrictions under 
section 13 of Bank Holding Company Act shall apply to the activities 
and investments of a banking entity identified in paragraph (c) of this 
section, even if such activities and investments are authorized for the 
banking entity under other applicable provisions of law.
    (e) Preservation of authority. Nothing in this part limits in any 
way the authority of the SEC to impose on a banking entity identified 
in paragraph (c) of this section additional

[[Page 62249]]

requirements or restrictions with respect to any activity, investment, 
or relationship covered under section 13 of the Bank Holding Company 
Act or this part, or additional penalties for violation of this part 
provided under any other applicable provision of law.


Sec.  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 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:
    (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 the SEC have further defined by joint 
regulation, interpretation, guidance, or other action as not within the 
definition of swap, as that term is defined in section 1a(47) of the 
Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as 
that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 
78c(a)(68)); or
    (ii) Any identified banking product, as defined in section 402(b) 
of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)), 
that is subject to section 403(a) of that Act (7 U.S.C. 27a(a)).
    (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, unless otherwise indicated, 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) Loan means any loan, lease, extension of credit, or secured or 
unsecured receivable that is not a security or derivative.
    (t) Primary financial regulatory agency has the same meaning as in 
section 2(12) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (12 U.S.C. 5301(12)).
    (u) 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.

[[Page 62250]]

    (v) 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)).
    (w) SEC means the Securities and Exchange Commission.
    (x) 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.
    (y) Security has the meaning specified in section 3(a)(10) of the 
Exchange Act (15 U.S.C. 78c(a)(10)).
    (z) 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)).
    (aa) Security future has the meaning specified in section 3(a)(55) 
of the Exchange Act (15 U.S.C. 78c(a)(55)).
    (bb) 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.
    (cc) 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.
    (dd) Subsidiary has the same meaning as in section 2(d) of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841(d)).
    (ee) 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.
    (ff) 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


Sec.  255.3   Prohibition on proprietary trading.

    (a) Prohibition. Except as otherwise provided in this subpart, a 
banking entity may not engage in proprietary trading. Proprietary 
trading means engaging as principal for the trading account of the 
banking entity in any purchase or sale of one or more financial 
instruments.
    (b) Definition of trading account. (1) Trading account means any 
account that is used by a banking entity to:
    (i) Purchase or sell one or more financial instruments principally 
for the purpose of:
    (A) Short-term 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 described in paragraphs (b)(1)(i)(A), 
(B), or (C) of this section;
    (ii) Purchase or sell one or more financial instruments that are 
both market risk capital rule covered positions and trading positions 
(or hedges of other market risk capital rule covered positions), if the 
banking entity, or any affiliate of the banking entity, is an insured 
depository institution, bank holding company, or savings and loan 
holding company, and calculates risk-based capital ratios under the 
market risk capital rule; or
    (iii) 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.
    (2) Rebuttable presumption for certain purchases and sales. The 
purchase (or sale) of a financial instrument by a banking entity shall 
be presumed 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 fewer than sixty days or substantially 
transfers the risk of the financial instrument within sixty days of the 
purchase (or sale), unless the banking entity can demonstrate, 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 paragraph (b)(1)(i) of this section.
    (c) Financial instrument. (1) Financial instrument means:
    (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.
    (2) A financial instrument does not include:
    (i) A loan;
    (ii) A commodity that is not:
    (A) An excluded commodity (other than foreign exchange or 
currency);
    (B) A derivative;
    (C) A contract of sale of a commodity for future delivery; or
    (D) An option on a contract of sale of a commodity for future 
delivery; or
    (iii) Foreign exchange or currency.
    (d) Proprietary trading. Proprietary trading does not include:
    (1) Any purchase or sale of one or more financial instruments by a 
banking entity that arises under a repurchase or reverse repurchase 
agreement pursuant to which the banking entity has simultaneously 
agreed, in writing, to both purchase and sell a stated asset, at stated 
prices, and on stated dates or on demand with the same counterparty;
    (2) Any purchase or sale of one or more financial instruments by a 
banking entity that arises under a transaction in which the banking 
entity lends or borrows a security temporarily to or from another party 
pursuant to a written securities lending agreement under which the 
lender retains the economic interests of an owner of such security, and 
has the right to terminate the transaction and to recall the loaned 
security on terms agreed by the parties;
    (3) Any purchase or sale of a security by a banking entity for the 
purpose of liquidity management in accordance with a documented 
liquidity management plan of the banking entity that:
    (i) Specifically contemplates and authorizes the particular 
securities to be used for liquidity management purposes, the amount, 
types, and risks of these securities that are consistent with liquidity 
management, and the liquidity circumstances in which the particular 
securities may or must be used;
    (ii) Requires that any purchase or sale of securities contemplated 
and authorized by the plan be principally for the purpose of managing 
the liquidity of

[[Page 62251]]

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 securities purchased or sold for liquidity 
management purposes be highly liquid and limited to securities 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 securities purchased or sold for liquidity 
management purposes, together with any other instruments purchased or 
sold for such purposes, to an amount that is consistent with the 
banking entity's near-term funding needs, including deviations from 
normal operations of the banking entity or any affiliate thereof, as 
estimated and documented pursuant to methods specified in the plan;
    (v) Includes written policies and procedures, internal controls, 
analysis, and independent testing to ensure that the purchase and sale 
of securities that are not permitted under Sec. Sec.  255.6(a) or (b) 
of this subpart are for the purpose of liquidity management and in 
accordance with the liquidity management plan described in paragraph 
(d)(3) of this section; and
    (vi) Is consistent with the SEC's supervisory requirements, 
guidance, and expectations regarding liquidity management;
    (4) Any purchase or sale of one or more financial instruments by a 
banking entity that is a derivatives clearing organization or a 
clearing agency in connection with clearing financial instruments;
    (5) Any excluded clearing activities by a banking entity that is a 
member of a clearing agency, a member of a derivatives clearing 
organization, or a member of a designated financial market utility;
    (6) Any purchase or sale of one or more financial instruments by a 
banking entity, so long as:
    (i) The purchase (or sale) satisfies an existing delivery 
obligation of the banking entity or its customers, including to prevent 
or close out a failure to deliver, in connection with delivery, 
clearing, or settlement activity; or
    (ii) The purchase (or sale) satisfies an obligation of the banking 
entity in connection with a judicial, administrative, self-regulatory 
organization, or arbitration proceeding;
    (7) Any purchase or sale of one or more financial instruments by a 
banking entity that is acting solely as agent, broker, or custodian;
    (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; or
    (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.
    (e) Definition of other terms related to proprietary trading. For 
purposes of this subpart:
    (1) Anonymous means that each party to a purchase or sale is 
unaware of the identity of the other party(ies) to the purchase or 
sale.
    (2) Clearing agency has the same meaning as in section 3(a)(23) of 
the Exchange Act (15 U.S.C. 78c(a)(23)).
    (3) Commodity has the same meaning as in section 1a(9) of the 
Commodity Exchange Act (7 U.S.C. 1a(9)), except that a commodity does 
not include any security;
    (4) Contract of sale of a commodity for future delivery means a 
contract of sale (as that term is defined in section 1a(13) of the 
Commodity Exchange Act (7 U.S.C. 1a(13)) for future delivery (as that 
term is defined in section 1a(27) of the Commodity Exchange Act (7 
U.S.C. 1a(27))).
    (5) Derivatives clearing organization means:
    (i) A derivatives clearing organization registered under section 5b 
of the Commodity Exchange Act (7 U.S.C. 7a-1);
    (ii) A derivatives clearing organization that, pursuant to CFTC 
regulation, is exempt from the registration requirements under section 
5b of the Commodity Exchange Act (7 U.S.C. 7a-1); or
    (iii) A foreign derivatives clearing organization that, pursuant to 
CFTC regulation, is permitted to clear for a foreign board of trade 
that is registered with the CFTC.
    (6) Exchange, unless the context otherwise requires, means any 
designated contract market, swap execution facility, or foreign board 
of trade registered with the CFTC, or, for purposes of securities or 
security-based swaps, an exchange, as defined under section 3(a)(1) of 
the Exchange Act (15 U.S.C. 78c(a)(1)), or security-based swap 
execution facility, as defined under section 3(a)(77) of the Exchange 
Act (15 U.S.C. 78c(a)(77)).
    (7) Excluded clearing activities means:
    (i) With respect to customer transactions cleared on a derivatives 
clearing organization, a clearing agency, or a designated financial 
market utility, any purchase or sale necessary to correct trading 
errors made by or on behalf of a customer provided that such purchase 
or sale is conducted in accordance with, for transactions cleared on a 
derivatives clearing organization, the Commodity Exchange Act, CFTC 
regulations, and the rules or procedures of the derivatives clearing 
organization, or, for transactions cleared on a clearing agency, the 
rules or procedures of the clearing agency, or, for transactions 
cleared on a designated financial market utility that is neither a 
derivatives clearing organization nor a clearing agency, the rules or 
procedures of the designated financial market utility;
    (ii) Any purchase or sale in connection with and related to the 
management of a default or threatened imminent default of a customer 
provided that such purchase or sale is conducted in accordance with, 
for transactions cleared on a derivatives clearing organization, the 
Commodity Exchange Act, CFTC regulations, and the rules or procedures 
of the derivatives clearing organization, or, for transactions cleared 
on a clearing agency, the rules or procedures of the clearing agency, 
or, for transactions cleared on a designated financial market utility 
that is neither a derivatives clearing organization nor a clearing 
agency, the rules or procedures of the designated financial market 
utility;
    (iii) Any purchase or sale in connection with and related to the 
management of a default or threatened imminent default of a member of a 
clearing agency, a member of a derivatives clearing organization, or a 
member of a designated financial market utility;
    (iv) Any purchase or sale in connection with and related to the 
management of the default or threatened default of a clearing agency, a 
derivatives clearing organization, or a designated financial market 
utility; and
    (v) Any purchase or sale that is required by the rules or 
procedures of a clearing agency, a derivatives clearing organization, 
or a designated financial market utility to mitigate the risk to the

[[Page 62252]]

clearing agency, derivatives clearing organization, or designated 
financial market utility that would result from the clearing by a 
member of security-based swaps that reference the member or an 
affiliate of the member.
    (8) Designated financial market utility has the same meaning as in 
section 803(4) of the Dodd-Frank Act (12 U.S.C. 5462(4)).
    (9) Issuer has the same meaning as in section 2(a)(4) of the 
Securities Act of 1933 (15 U.S.C. 77b(a)(4)).
    (10) Market risk capital rule covered position and trading position 
means a financial instrument that is both a covered position and a 
trading position, as those terms are respectively defined:
    (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.
    (11) Market risk capital rule means the market risk capital rule 
that is contained in subpart F of 12 CFR part 3, 12 CFR parts 208 and 
225, or 12 CFR part 324, as applicable.
    (12) Municipal security means a security that is a direct 
obligation of or issued by, or an obligation guaranteed as to principal 
or interest by, a State or any political subdivision thereof, or any 
agency or instrumentality of a State or any political subdivision 
thereof, or any municipal corporate instrumentality of one or more 
States or political subdivisions thereof.
    (13) Trading desk means 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.


Sec.  255.4  Permitted underwriting and market making-related 
activities.

    (a) Underwriting activities--(1) Permitted underwriting activities. 
The prohibition contained in Sec.  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) 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, 
and reasonable efforts are made to sell or otherwise reduce the 
underwriting position within a reasonable period, taking into account 
the liquidity, maturity, and depth of the market for the relevant type 
of security;
    (iii) 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, based on the nature and amount of 
the trading desk's underwriting activities, including the reasonably 
expected near term demands of clients, customers, or counterparties, on 
the:
    (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;
    (C) Internal controls and ongoing monitoring and analysis of each 
trading desk's compliance with its limits; and
    (D) Authorization procedures, including escalation procedures that 
require review and approval of any trade that would exceed a trading 
desk's limit(s), demonstrable analysis of the basis for any temporary 
or permanent increase to a trading desk's limit(s), and independent 
review of such demonstrable analysis and approval;
    (iv) The compensation arrangements of persons performing the 
activities described in this paragraph (a) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (v) The banking entity is licensed or registered to engage in the 
activity described in this paragraph (a) in accordance with applicable 
law.
    (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 
paragraph (a), 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 Sec.  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

[[Page 62253]]

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 amount, types, and risks of the financial instruments in 
the trading desk's market-maker inventory are designed not to exceed, 
on an ongoing basis, the reasonably expected near term demands of 
clients, customers, or counterparties, based on:
    (A) The liquidity, maturity, and depth of the market for the 
relevant types of financial instrument(s); and
    (B) 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 financial 
instruments in which the trading desk makes a market, including through 
block trades;
    (iii) 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 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;
    (C) Limits for each trading desk, based on the nature and amount of 
the trading desk's market making-related activities, that address the 
factors prescribed by paragraph (b)(2)(ii) of this section, on:
    (1) The amount, types, and risks of its market-maker inventory;
    (2) The 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) The period of time a financial instrument may be held;
    (D) Internal controls and ongoing monitoring and analysis of each 
trading desk's compliance with its limits; and
    (E) Authorization procedures, including escalation procedures that 
require review and approval of any trade that would exceed a trading 
desk's limit(s), demonstrable analysis that the basis for any temporary 
or permanent increase to a trading desk's limit(s) is consistent with 
the requirements of this paragraph (b), and independent review of such 
demonstrable analysis and approval;
    (iv) To the extent that any limit identified pursuant to paragraph 
(b)(2)(iii)(C) of this section is exceeded, the trading desk takes 
action to bring the trading desk into compliance with the limits as 
promptly as possible after the limit is exceeded;
    (v) The compensation arrangements of persons performing the 
activities described in this paragraph (b) are designed not to reward 
or incentivize prohibited proprietary trading; and
    (vi) The banking entity is licensed or registered to engage in 
activity described in this paragraph (b) in accordance with applicable 
law.
    (3) 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 Sec.  255.20(d)(1) of subpart D, 
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 
paragraph (b), 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 inventory. For the purposes of this 
paragraph (b), market-maker inventory 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.


Sec.  255.5  Permitted risk-mitigating hedging activities.

    (a) Permitted risk-mitigating hedging activities. The prohibition 
contained in Sec.  255.3(a) does not apply to the risk-mitigating 
hedging activities of a banking entity in connection with and related 
to individual or aggregated positions, contracts, or other holdings of 
the banking entity and designed to reduce the specific risks to the 
banking entity in connection with and related to such positions, 
contracts, or other holdings.
    (b) Requirements. The risk-mitigating hedging activities of a 
banking entity are permitted under paragraph (a) of this section only 
if:
    (1) 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:
    (i) 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;
    (ii) Internal controls and ongoing monitoring, management, and 
authorization procedures, including relevant escalation procedures; and
    (iii) The conduct of analysis, including correlation analysis, and 
independent testing designed to ensure that the positions, techniques 
and strategies that may be used for hedging may reasonably be expected 
to

[[Page 62254]]

demonstrably reduce or otherwise significantly mitigate the specific, 
identifiable risk(s) being hedged, and such correlation analysis 
demonstrates that the hedging activity demonstrably reduces or 
otherwise significantly mitigates the specific, identifiable risk(s) 
being hedged;
    (2) The risk-mitigating hedging activity:
    (i) Is conducted in accordance with the written policies, 
procedures, and internal controls required under this section;
    (ii) At the inception of the hedging activity, including, without 
limitation, any adjustments to the hedging activity, is designed to 
reduce or otherwise significantly mitigate and demonstrably reduces or 
otherwise significantly mitigates 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;
    (iii) 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;
    (iv) Is subject to continuing review, monitoring and management by 
the banking entity that:
    (A) Is consistent with the written hedging policies and procedures 
required under paragraph (b)(1) of this section;
    (B) Is designed to reduce or otherwise significantly mitigate and 
demonstrably reduces or otherwise significantly mitigates 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
    (C) 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)(2) of this section and is not 
prohibited proprietary trading; and
    (3) The compensation arrangements of persons performing risk-
mitigating hedging activities are designed not to reward or incentivize 
prohibited proprietary trading.
    (c) Documentation requirement--(1) A banking entity must comply 
with the requirements of paragraphs (c)(2) and (3) of this section with 
respect to any purchase or sale of financial instruments made in 
reliance on this section for risk-mitigating hedging purposes that is:
    (i) Not established by the specific trading desk establishing or 
responsible for the underlying positions, contracts, or other holdings 
the risks of which the hedging activity is designed to reduce;
    (ii) Established by the specific trading desk establishing or 
responsible for the underlying positions, contracts, or other holdings 
the risks of which the purchases or sales are designed to reduce, but 
that is effected through a financial instrument, exposure, technique, 
or strategy that is not specifically identified in the trading desk's 
written policies and procedures established under paragraph (b)(1) of 
this section or under Sec.  255.4(b)(2)(iii)(B) of this subpart as a 
product, instrument, exposure, technique, or strategy such trading desk 
may use for hedging; or
    (iii) Established to hedge aggregated positions across two or more 
trading desks.
    (2) In connection with any purchase or sale identified in paragraph 
(c)(1) of this section, a banking entity must, at a minimum, and 
contemporaneously with the purchase or sale, document:
    (i) The specific, identifiable risk(s) of the identified positions, 
contracts, or other holdings of the banking entity that the purchase or 
sale is designed to reduce;
    (ii) The specific risk-mitigating strategy that the purchase or 
sale is designed to fulfill; and
    (iii) The trading desk or other business unit that is establishing 
and responsible for the hedge.
    (3) A banking entity must create and retain records sufficient to 
demonstrate compliance with the requirements of this paragraph (c) for 
a period that is no less than five years in a form that allows the 
banking entity to promptly produce such records to the SEC on request, 
or such longer period as required under other law or this part.


Sec.  255.6  Other permitted proprietary trading activities.

    (a) Permitted trading in domestic government obligations. The 
prohibition contained in Sec.  255.3(a) does not apply to the purchase 
or sale by a banking entity of a financial instrument that is:
    (1) An obligation of, or issued or guaranteed by, the United 
States;
    (2) An obligation, participation, or other instrument of, or issued 
or guaranteed by, an agency of the United States, the Government 
National Mortgage Association, the Federal National Mortgage 
Association, the Federal Home Loan Mortgage Corporation, a Federal Home 
Loan Bank, the Federal Agricultural Mortgage Corporation or a Farm 
Credit System institution chartered under and subject to the provisions 
of the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.);
    (3) An obligation of any State or any political subdivision 
thereof, including any municipal security; or
    (4) An obligation of the FDIC, or any entity formed by or on behalf 
of the FDIC for purpose of facilitating the disposal of assets acquired 
or held by the FDIC 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.
    (b) Permitted trading in foreign government obligations--(1) 
Affiliates of foreign banking entities in the United States. The 
prohibition contained in Sec.  255.3(a) does not apply to the purchase 
or sale of a financial instrument that is an obligation of, or issued 
or guaranteed by, a foreign sovereign (including any multinational 
central bank of which the foreign sovereign is a member), or any agency 
or political subdivision of such foreign sovereign, by a banking 
entity, so long as:
    (i) The banking entity is organized under or is directly or 
indirectly controlled by a banking entity that is organized under the 
laws of a foreign sovereign and is not directly or indirectly 
controlled by a top-tier banking entity that is organized under the 
laws of the United States;
    (ii) The financial instrument is an obligation of, or issued or 
guaranteed by, the foreign sovereign under the laws of which the 
foreign banking entity referred to in paragraph (b)(1)(i) of this 
section is organized (including any multinational central bank of which 
the foreign sovereign is a member), or any agency or political 
subdivision of that foreign sovereign; and
    (iii) The purchase or sale as principal is not made by an insured 
depository institution.
    (2) Foreign affiliates of a U.S. banking entity. The prohibition 
contained in Sec.  255.3(a) does not apply to the purchase or sale of a 
financial instrument that is an obligation of, or issued or guaranteed 
by, a foreign sovereign (including any multinational central bank of 
which the foreign sovereign is a member), or any agency or political 
subdivision of that foreign sovereign, by a foreign entity that is

[[Page 62255]]

owned or controlled by a banking entity organized or established under 
the laws of the United States or any State, so long as:
    (i) The foreign entity is a foreign bank, as defined in section 
211.2(j) of the Board's Regulation K (12 CFR 211.2(j)), or is regulated 
by the foreign sovereign as a securities dealer;
    (ii) The financial instrument is an obligation of, or issued or 
guaranteed by, the foreign sovereign under the laws of which the 
foreign entity is organized (including any multinational central bank 
of which the foreign sovereign is a member), or any agency or political 
subdivision of that foreign sovereign; and
    (iii) The financial instrument is owned by the foreign entity and 
is not financed by an affiliate that is located in the United States or 
organized under the laws of the United States or of any State.
    (c) Permitted trading on behalf of customers--(1) Fiduciary 
transactions. The prohibition contained in Sec.  255.3(a) does not 
apply to the purchase or sale of financial instruments by a banking 
entity acting as trustee or in a similar fiduciary capacity, so long 
as:
    (i) The transaction is conducted for the account of, or on behalf 
of, a customer; and
    (ii) The banking entity does not have or retain beneficial 
ownership of the financial instruments.
    (2) Riskless principal transactions. The prohibition contained in 
Sec.  255.3(a) does not apply to the purchase or sale of financial 
instruments by a banking entity acting as riskless principal in a 
transaction in which the banking entity, after receiving an order to 
purchase (or sell) a financial instrument from a customer, purchases 
(or sells) the financial instrument for its own account to offset a 
contemporaneous sale to (or purchase from) the customer.
    (d) Permitted trading by a regulated insurance company. The 
prohibition contained in Sec.  255.3(a) does not apply to the purchase 
or sale of financial instruments by a banking entity that is an 
insurance company or an affiliate of an insurance company if:
    (1) The insurance company or its affiliate purchases or sells the 
financial instruments solely for:
    (i) The general account of the insurance company; or
    (ii) A separate account established by the insurance company;
    (2) The purchase or sale is conducted in compliance with, and 
subject to, the insurance company investment laws, regulations, and 
written guidance 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, regulation, or written guidance described in 
paragraph (d)(2) of this section is insufficient to protect the safety 
and soundness of the covered banking entity, or the financial stability 
of the United States.
    (e) Permitted trading activities of foreign banking entities. (1) 
The prohibition contained in Sec.  255.3(a) does not apply to the 
purchase or sale of financial instruments by a banking entity if:
    (i) The banking entity is not organized or directly or indirectly 
controlled by a banking entity that is organized under the laws of the 
United States or of any State;
    (ii) The purchase or sale by the banking entity is made pursuant to 
paragraph (9) or (13) of section 4(c) of the BHC Act; and
    (iii) The purchase or sale meets the requirements of paragraph 
(e)(3) of this section.
    (2) A purchase or sale of financial instruments by a banking entity 
is made pursuant to paragraph (9) or (13) of section 4(c) of the BHC 
Act for purposes of paragraph (e)(1)(ii) of this section only if:
    (i) The purchase or sale is conducted in accordance with the 
requirements of paragraph (e) of this section; and
    (ii)(A) With respect to a banking entity that is a foreign banking 
organization, the banking entity meets the qualifying foreign banking 
organization requirements of section 211.23(a), (c) or (e) of the 
Board's Regulation K (12 CFR 211.23(a), (c) or (e)), as applicable; or
    (B) With respect to a banking entity that is not a foreign banking 
organization, the banking entity is not organized under the laws of the 
United States or of any State and the banking entity, on a fully-
consolidated basis, meets at least two of the following requirements:
    (1) Total assets of the banking entity held outside of the United 
States exceed total assets of the banking entity held in the United 
States;
    (2) Total revenues derived from the business of the banking entity 
outside of the United States exceed total revenues derived from the 
business of the banking entity in the United States; or
    (3) Total net income derived from the business of the banking 
entity outside of the United States exceeds total net income derived 
from the business of the banking entity in the United States.
    (3) A purchase or sale by a banking entity is permitted for 
purposes of this paragraph (e) if:
    (i) The banking entity engaging as principal in the purchase or 
sale (including any personnel of the banking entity or its affiliate 
that arrange, negotiate or execute such purchase or sale) is not 
located in the United States or organized under the laws of the United 
States or of any State;
    (ii) The banking entity (including relevant personnel) that makes 
the decision to purchase or sell as principal 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 purchases or sales 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; and
    (v) The purchase or sale is not conducted with or through any U.S. 
entity, other than:
    (A) A purchase or sale with the foreign operations of a U.S. entity 
if no personnel of such U.S. entity that are located in the United 
States are involved in the arrangement, negotiation, or execution of 
such purchase or sale;
    (B) A purchase or sale with an unaffiliated market intermediary 
acting as principal, provided the purchase or sale is promptly cleared 
and settled through a clearing agency or derivatives clearing 
organization acting as a central counterparty; or
    (C) A purchase or sale through an unaffiliated market intermediary 
acting as agent, provided the purchase or sale is conducted anonymously 
on an exchange or similar trading facility and is promptly cleared and 
settled through a clearing agency or derivatives clearing organization 
acting as a central counterparty.
    (4) For purposes of this paragraph (e), a U.S. entity is 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.
    (5) For purposes of this paragraph (e), a U.S. branch, agency, or 
subsidiary of

[[Page 62256]]

a foreign banking entity is considered to be 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.
    (6) For purposes of this paragraph (e), unaffiliated market 
intermediary means an unaffiliated entity, acting as an intermediary, 
that is:
    (i) A broker or dealer registered with the SEC under section 15 of 
the Exchange Act or exempt from registration or excluded from 
regulation as such;
    (ii) A swap dealer registered with the CFTC under section 4s of the 
Commodity Exchange Act or exempt from registration or excluded from 
regulation as such;
    (iii) A security-based swap dealer registered with the SEC under 
section 15F of the Exchange Act or exempt from registration or excluded 
from regulation as such; or
    (iv) A futures commission merchant registered with the CFTC under 
section 4f of the Commodity Exchange Act or exempt from registration or 
excluded from regulation as such.


Sec.  255.7  Limitations on permitted proprietary trading activities.

    (a) No transaction, class of transactions, or activity may be 
deemed permissible under Sec. Sec.  255.4 through 255.6 if the 
transaction, class of transactions, or activity would:
    (1) Involve or result in a material conflict of interest between 
the banking entity and its clients, customers, or counterparties;
    (2) Result, directly or indirectly, in a material exposure by the 
banking entity to a high-risk asset or a high-risk trading strategy; or
    (3) Pose a threat to the safety and soundness of the banking entity 
or to the financial stability of the United States.
    (b) Definition of material conflict of interest. (1) For purposes 
of this section, a material conflict of interest between a banking 
entity and its clients, customers, or counterparties exists if the 
banking entity engages in any transaction, class of transactions, or 
activity that would involve or result in the banking entity's interests 
being materially adverse to the interests of its client, customer, or 
counterparty with respect to such transaction, class of transactions, 
or activity, and the banking entity has not taken at least one of the 
actions in paragraph (b)(2) of this section.
    (2) Prior to effecting the specific transaction or class or type of 
transactions, or engaging in the specific activity, the banking entity:
    (i) Timely and effective disclosure. (A) Has made clear, timely, 
and effective disclosure of the conflict of interest, together with 
other necessary information, in reasonable detail and in a manner 
sufficient to permit a reasonable client, customer, or counterparty to 
meaningfully understand the conflict of interest; and
    (B) Such disclosure is made in a manner that provides the client, 
customer, or counterparty the opportunity to negate, or substantially 
mitigate, any materially adverse effect on the client, customer, or 
counterparty created by the conflict of interest; or
    (ii) Information barriers. Has established, maintained, and 
enforced information barriers that are memorialized in written policies 
and procedures, such as physical separation of personnel, or functions, 
or limitations on types of activity, that are reasonably designed, 
taking into consideration the nature of the banking entity's business, 
to prevent the conflict of interest from involving or resulting in a 
materially adverse effect on a client, customer, or counterparty. A 
banking entity may not rely on such information barriers if, in the 
case of any specific transaction, class or type of transactions or 
activity, the banking entity knows or should reasonably know that, 
notwithstanding the banking entity's establishment of information 
barriers, the conflict of interest may involve or result in a 
materially adverse effect on a client, customer, or counterparty.
    (c) Definition of high-risk asset and high-risk trading strategy. 
For purposes of this section:
    (1) High-risk asset means an asset or group of related assets that 
would, if held by a banking entity, 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.
    (2) High-risk trading strategy means a trading strategy that would, 
if engaged in by a banking entity, 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.


Sec. Sec.  255.8-255.9  [Reserved]

Subpart C--Covered Funds Activities and Investments


Sec.  255.10  Prohibition on acquiring or retaining an ownership 
interest in and having certain relationships with a covered fund.

    (a) Prohibition. (1) Except as otherwise provided in this subpart, 
a banking entity may not, as principal, directly or indirectly, acquire 
or retain any ownership interest in or sponsor a covered fund.
    (2) Paragraph (a)(1) of this section does not include acquiring or 
retaining an ownership interest in a covered fund by a banking entity:
    (i) Acting solely as agent, broker, or custodian, so long as;
    (A) The activity is conducted for the account of, or on behalf of, 
a customer; and
    (B) The banking entity and its affiliates do not have or retain 
beneficial ownership of such ownership interest;
    (ii) Through a deferred compensation, stock-bonus, profit-sharing, 
or pension plan of the banking entity (or an affiliate thereof) that is 
established and administered in accordance with the law of the United 
States or a foreign sovereign, if the ownership interest is held or 
controlled directly or indirectly by the banking entity as trustee for 
the benefit of persons who are or were employees of the banking entity 
(or an affiliate thereof);
    (iii) In the ordinary course of collecting a debt previously 
contracted in good faith, provided that the banking entity divests the 
ownership interest as soon as practicable, and in no event may the 
banking entity retain such ownership interest for longer than such 
period permitted by the SEC; or
    (iv) On behalf of customers as trustee or in a similar fiduciary 
capacity for a customer that is not a covered fund, so long as:
    (A) The activity is conducted for the account of, or on behalf of, 
the customer; and
    (B) The banking entity and its affiliates do not have or retain 
beneficial ownership of such ownership interest.
    (b) Definition of covered fund. (1) Except as provided in paragraph 
(c) of this section, covered fund means:
    (i) An issuer that would be an investment company, as defined in 
the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), but for 
section 3(c)(1) or 3(c)(7) of that Act (15 U.S.C. 80a-3(c)(1) or (7));
    (ii) Any commodity pool under section 1a(10) of the Commodity 
Exchange Act (7 U.S.C. 1a(10)) for which:

[[Page 62257]]

    (A) The commodity pool operator has claimed an exemption under 17 
CFR 4.7; or
    (B)(1) A commodity pool operator is registered with the CFTC as a 
commodity pool operator in connection with the operation of the 
commodity pool;
    (2) Substantially all participation units of the commodity pool are 
owned by qualified eligible persons under 17 CFR 4.7(a)(2) and (3); and
    (3) Participation units of the commodity pool have not been 
publicly offered to persons who are not qualified eligible persons 
under 17 CFR 4.7(a)(2) and (3); or
    (iii) For any banking entity that is, or is controlled directly or 
indirectly by a banking entity that is, located in or organized under 
the laws of the United States or of any State, an entity that:
    (A) Is organized or established outside the United States and the 
ownership interests of which are offered and sold solely outside the 
United States;
    (B) Is, or holds itself out as being, an entity or arrangement that 
raises money from investors primarily for the purpose of investing in 
securities for resale or other disposition or otherwise trading in 
securities; and
    (C)(1) Has as its sponsor that banking entity (or an affiliate 
thereof); or
    (2) Has issued an ownership interest that is owned directly or 
indirectly by that banking entity (or an affiliate thereof).
    (2) An issuer shall not be deemed to be a covered fund under 
paragraph (b)(1)(iii) of this section if, were the issuer subject to 
U.S. securities laws, the issuer could rely on an exclusion or 
exemption from the definition of ``investment company'' under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) other than the 
exclusions contained in section 3(c)(1) and 3(c)(7) of that Act.
    (3) For purposes of paragraph (b)(1)(iii) of this section, a U.S. 
branch, agency, or subsidiary of a foreign 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.
    (c) Notwithstanding paragraph (b) of this section, unless the 
appropriate Federal banking agencies, the SEC, and the CFTC jointly 
determine otherwise, a covered fund does not include:
    (1) Foreign public funds. (i) Subject to paragraphs (ii) and (iii) 
below, an issuer that:
    (A) Is organized or established outside of the United States;
    (B) Is authorized to offer and sell ownership interests to retail 
investors in the issuer's home jurisdiction; and
    (C) Sells ownership interests predominantly through one or more 
public offerings outside of the United States.
    (ii) With respect to a banking entity that is, or is controlled 
directly or indirectly by a banking entity that is, located in or 
organized under the laws of the United States or of any State and any 
issuer for which such banking entity acts as sponsor, the sponsoring 
banking entity may not rely on the exemption in paragraph (c)(1)(i) of 
this section for such issuer unless ownership interests in the issuer 
are sold predominantly to persons other than:
    (A) Such sponsoring banking entity;
    (B) Such issuer;
    (C) Affiliates of such sponsoring banking entity or such issuer; 
and
    (D) Directors and employees of such entities.
    (iii) For purposes of paragraph (c)(1)(i)(C) of this section, the 
term ``public offering'' means a distribution (as defined in Sec.  
255.4(a)(3) of subpart B) of securities in any jurisdiction outside the 
United States to investors, including retail investors, provided that:
    (A) The distribution complies with all applicable requirements in 
the jurisdiction in which such distribution is being made;
    (B) The distribution does not restrict availability to investors 
having a minimum level of net worth or net investment assets; and
    (C) The issuer has filed or submitted, with the appropriate 
regulatory authority in such jurisdiction, offering disclosure 
documents that are publicly available.
    (2) Wholly-owned subsidiaries. An entity, all of the outstanding 
ownership interests of which are owned directly or indirectly by the 
banking entity (or an affiliate thereof), except that:
    (i) Up to five percent of the entity's outstanding ownership 
interests, less any amounts outstanding under paragraph (c)(2)(ii) of 
this section, may be held by employees or directors of the banking 
entity or such affiliate (including former employees or directors if 
their ownership interest was acquired while employed by or in the 
service of the banking entity); and
    (ii) Up to 0.5 percent of the entity's outstanding ownership 
interests may be held by a third party if the ownership interest is 
acquired or retained by the third party for the purpose of establishing 
corporate separateness or addressing bankruptcy, insolvency, or similar 
concerns.
    (3) Joint ventures. A joint venture between a banking entity or any 
of its affiliates and one or more unaffiliated persons, provided that 
the joint venture:
    (i) Is comprised of no more than 10 unaffiliated co-venturers;
    (ii) Is in the business of engaging in activities that are 
permissible for the banking entity or affiliate, other than investing 
in securities for resale or other disposition; and
    (iii) Is not, and does not hold itself out as being, an entity or 
arrangement that raises money from investors primarily for the purpose 
of investing in securities for resale or other disposition or otherwise 
trading in securities.
    (4) Acquisition vehicles. An issuer:
    (i) Formed solely for the purpose of engaging in a bona fide merger 
or acquisition transaction; and
    (ii) That exists only for such period as necessary to effectuate 
the transaction.
    (5) Foreign pension or retirement funds. A plan, fund, or program 
providing pension, retirement, or similar benefits that is:
    (i) Organized and administered outside the United States;
    (ii) A broad-based plan for employees or citizens that is subject 
to regulation as a pension, retirement, or similar plan under the laws 
of the jurisdiction in which the plan, fund, or program is organized 
and administered; and
    (iii) Established for the benefit of citizens or residents of one 
or more foreign sovereigns or any political subdivision thereof.
    (6) Insurance company separate accounts. A separate account, 
provided that no banking entity other than the insurance company 
participates in the account's profits and losses.
    (7) Bank owned life insurance. A separate account that is used 
solely for the purpose of allowing one or more banking entities to 
purchase a life insurance policy for which the banking entity or 
entities is beneficiary, provided that no banking entity that purchases 
the policy:
    (i) Controls the investment decisions regarding the underlying 
assets or holdings of the separate account; or
    (ii) Participates in the profits and losses of the separate account 
other than in compliance with applicable supervisory guidance regarding 
bank owned life insurance.
    (8) Loan securitizations. (i) Scope. An issuing entity for asset-
backed securities that satisfies all the conditions of this paragraph 
(c)(8) and the assets or holdings of which are comprised solely of:
    (A) Loans as defined in Sec.  255.2(s) of subpart A;
    (B) Rights or other assets designed to assure the servicing or 
timely

[[Page 62258]]

distribution of proceeds to holders of such securities and rights or 
other assets that are related or incidental to purchasing or otherwise 
acquiring and holding the loans, provided that each asset meets the 
requirements of paragraph (c)(8)(iii) of this section;
    (C) Interest rate or foreign exchange derivatives that meet the 
requirements of paragraph (c)(8)(iv) of this section; and
    (D) Special units of beneficial interest and collateral 
certificates that meet the requirements of paragraph (c)(8)(v) of this 
section.
    (ii) Impermissible assets. For purposes of this paragraph (c)(8), 
the assets or holdings of the issuing entity shall not include any of 
the following:
    (A) A security, including an asset-backed security, or an interest 
in an equity or debt security other than as permitted in paragraph 
(c)(8)(iii) of this section;
    (B) A derivative, other than a derivative that meets the 
requirements of paragraph (c)(8)(iv) of this section; or
    (C) A commodity forward contract.
    (iii) Permitted securities. Notwithstanding paragraph (c)(8)(ii)(A) 
of this section, the issuing entity may hold securities if those 
securities are:
    (A) Cash equivalents for purposes of the rights and assets in 
paragraph (c)(8)(i)(B) of this section; or
    (B) Securities received in lieu of debts previously contracted with 
respect to the loans supporting the asset-backed securities.
    (iv) Derivatives. The holdings of derivatives by the issuing entity 
shall be limited to interest rate or foreign exchange derivatives that 
satisfy all of the following conditions:
    (A) The written terms of the derivative directly relate to the 
loans, the asset-backed securities, or the contractual rights of other 
assets described in paragraph (c)(8)(i)(B) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign 
exchange risks related to the loans, the asset-backed securities, or 
the contractual rights or other assets described in paragraph 
(c)(8)(i)(B) of this section.
    (v) Special units of beneficial interest and collateral 
certificates. The assets or holdings of the issuing entity may include 
collateral certificates and special units of beneficial interest issued 
by a special purpose vehicle, provided that:
    (A) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate meets the requirements in 
this paragraph (c)(8);
    (B) The special unit of beneficial interest or collateral 
certificate is used for the sole purpose of transferring to the issuing 
entity for the loan securitization the economic risks and benefits of 
the assets that are permissible for loan securitizations under this 
paragraph (c)(8) and does not directly or indirectly transfer any 
interest in any other economic or financial exposure;
    (C) The special unit of beneficial interest or collateral 
certificate is created solely to satisfy legal requirements or 
otherwise facilitate the structuring of the loan securitization; and
    (D) The special purpose vehicle that issues the special unit of 
beneficial interest or collateral certificate and the issuing entity 
are established under the direction of the same entity that initiated 
the loan securitization.
    (9) Qualifying asset-backed commercial paper conduits. (i) An 
issuing entity for asset-backed commercial paper that satisfies all of 
the following requirements:
    (A) The asset-backed commercial paper conduit holds only:
    (1) Loans and other assets permissible for a loan securitization 
under paragraph (c)(8)(i) of this section; and
    (2) Asset-backed securities supported solely by assets that are 
permissible for loan securitizations under paragraph (c)(8)(i) of this 
section and acquired by the asset-backed commercial paper conduit as 
part of an initial issuance either directly from the issuing entity of 
the asset-backed securities or directly from an underwriter in the 
distribution of the asset-backed securities;
    (B) The asset-backed commercial paper conduit issues only asset-
backed securities, comprised of a residual interest and securities with 
a legal maturity of 397 days or less; and
    (C) A regulated liquidity provider has entered into a legally 
binding commitment to provide full and unconditional liquidity coverage 
with respect to all of the outstanding asset-backed securities issued 
by the asset-backed commercial paper conduit (other than any residual 
interest) in the event that funds are required to redeem maturing 
asset-backed securities.
    (ii) For purposes of this paragraph (c)(9), a regulated liquidity 
provider means:
    (A) A depository institution, as defined in section 3(c) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(c));
    (B) A bank holding company, as defined in section 2(a) of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841(a)), or a subsidiary 
thereof;
    (C) A savings and loan holding company, as defined in section 10a 
of the Home Owners' Loan Act (12 U.S.C. 1467a), provided all or 
substantially all of the holding company's activities are permissible 
for a financial holding company under section 4(k) of the Bank Holding 
Company Act of 1956 (12 U.S.C. 1843(k)), or a subsidiary thereof;
    (D) A foreign bank whose home country supervisor, as defined in 
Sec.  211.21(q) of the Board's Regulation K (12 CFR 211.21(q)), has 
adopted capital standards consistent with the Capital Accord for the 
Basel Committee on banking Supervision, as amended, and that is subject 
to such standards, or a subsidiary thereof; or
    (E) The United States or a foreign sovereign.
    (10) Qualifying covered bonds--(i) Scope. An entity owning or 
holding a dynamic or fixed pool of loans or other assets as provided in 
paragraph (c)(8) of this section for the benefit of the holders of 
covered bonds, provided that the assets in the pool are comprised 
solely of assets that meet the conditions in paragraph (c)(8)(i) of 
this section.
    (ii) Covered bond. For purposes of this paragraph (c)(10), a 
covered bond means:
    (A) A debt obligation issued by an entity that meets the definition 
of foreign banking organization, the payment obligations of which are 
fully and unconditionally guaranteed by an entity that meets the 
conditions set forth in paragraph (c)(10)(i) of this section; or
    (B) A debt obligation of an entity that meets the conditions set 
forth in paragraph (c)(10)(i) of this section, provided that the 
payment obligations are fully and unconditionally guaranteed by an 
entity that meets the definition of foreign banking organization and 
the entity is a wholly-owned subsidiary, as defined in paragraph (c)(2) 
of this section, of such foreign banking organization.
    (11) SBICs and public welfare investment funds. An issuer:
    (i) That is a small business investment company, as defined in 
section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 
662), or that has received from the Small Business Administration 
notice to proceed to qualify for a license as a small business 
investment company, which notice or license has not been revoked; or
    (ii) The business of which is to make investments that are:
    (A) Designed primarily to promote the public welfare, of the type 
permitted under paragraph (11) of section 5136 of the Revised Statutes 
of the United States (12 U.S.C. 24), including the welfare of low- and 
moderate-income communities

[[Page 62259]]

or families (such as providing housing, services, or jobs); or
    (B) Qualified rehabilitation expenditures with respect to a 
qualified rehabilitated building or certified historic structure, as 
such terms are defined in section 47 of the Internal Revenue Code of 
1986 or a similar State historic tax credit program.
    (12) Registered investment companies and excluded entities. An 
issuer:
    (i) That is registered as an investment company under section 8 of 
the Investment Company Act of 1940 (15 U.S.C. 80a-8), or that is formed 
and operated pursuant to a written plan to become a registered 
investment company as described in Sec.  255.20(e)(3) of subpart D and 
that complies with the requirements of section 18 of the Investment 
Company Act of 1940 (15 U.S.C. 80a-18);
    (ii) That may rely on an exclusion or exemption from the definition 
of ``investment company'' under the Investment Company Act of 1940 (15 
U.S.C. 80a-1 et seq.) other than the exclusions contained in section 
3(c)(1) and 3(c)(7) of that Act; or
    (iii) That has elected to be regulated as a business development 
company pursuant to section 54(a) of that Act (15 U.S.C. 80a-53) and 
has not withdrawn its election, or that is formed and operated pursuant 
to a written plan to become a business development company as described 
in Sec.  255.20(e)(3) of subpart D and that complies with the 
requirements of section 61 of the Investment Company Act of 1940 (15 
U.S.C. 80a-60).
    (13) Issuers in conjunction with the FDIC's receivership or 
conservatorship operations. An issuer that is an entity formed by or on 
behalf of the FDIC for the purpose of facilitating the disposal of 
assets acquired in the FDIC's capacity as conservator or receiver under 
the Federal Deposit Insurance Act or Title II of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act.
    (14) Other excluded issuers. (i) Any issuer that the appropriate 
Federal banking agencies, the SEC, and the CFTC jointly determine the 
exclusion of which is consistent with the purposes of section 13 of the 
BHC Act.
    (ii) A determination made under paragraph (c)(14)(i) of this 
section will be promptly made public.
    (d) Definition of other terms related to covered funds. For 
purposes of this subpart:
    (1) Applicable accounting standards means U.S. generally accepted 
accounting principles, or such other accounting standards applicable to 
a banking entity that the SEC determines are appropriate and that the 
banking entity uses in the ordinary course of its business in preparing 
its consolidated financial statements.
    (2) Asset-backed security has the meaning specified in Section 
3(a)(79) of the Exchange Act (15 U.S.C. 78c(a)(79)).
    (3) Director has the same meaning as provided in section 
215.2(d)(1) of the Board's Regulation O (12 CFR 215.2(d)(1)).
    (4) Issuer has the same meaning as in section 2(a)(22) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(22)).
    (5) Issuing entity means with respect to asset-backed securities 
the special purpose vehicle that owns or holds the pool assets 
underlying asset-backed securities and in whose name the asset-backed 
securities supported or serviced by the pool assets are issued.
    (6) Ownership interest--(i) Ownership interest means any equity, 
partnership, or other similar interest. An ``other similar interest'' 
means an interest that:
    (A) Has the right to participate in the selection or removal of a 
general partner, managing member, member of the board of directors or 
trustees, investment manager, investment adviser, or commodity trading 
advisor of the covered fund (excluding the rights of a creditor to 
exercise remedies upon the occurrence of an event of default or an 
acceleration event);
    (B) Has the right under the terms of the interest to receive a 
share of the income, gains or profits of the covered fund;
    (C) Has the right to receive the underlying assets of the covered 
fund after all other interests have been redeemed and/or paid in full 
(excluding the rights of a creditor to exercise remedies upon the 
occurrence of an event of default or an acceleration event);
    (D) Has the right to receive all or a portion of excess spread (the 
positive difference, if any, between the aggregate interest payments 
received from the underlying assets of the covered fund and the 
aggregate interest paid to the holders of other outstanding interests);
    (E) Provides under the terms of the interest that the amounts 
payable by the covered fund with respect to the interest could be 
reduced based on losses arising from the underlying assets of the 
covered fund, such as allocation of losses, write-downs or charge-offs 
of the outstanding principal balance, or reductions in the amount of 
interest due and payable on the interest;
    (F) Receives income on a pass-through basis from the covered fund, 
or has a rate of return that is determined by reference to the 
performance of the underlying assets of the covered fund; or
    (G) Any synthetic right to have, receive, or be allocated any of 
the rights in paragraphs (d)(6)(i)(A) through (F) of this section.
    (ii) Ownership interest does not include: Restricted profit 
interest. An interest held by an entity (or an employee or former 
employee thereof) in a covered fund for which the entity (or employee 
thereof) serves as investment manager, investment adviser, commodity 
trading advisor, or other service provider so long as:
    (A) The sole purpose and effect of the interest is to allow the 
entity (or employee or former employee thereof) to share in the profits 
of the covered fund as performance compensation for the investment 
management, investment advisory, commodity trading advisory, or other 
services provided to the covered fund by the entity (or employee or 
former employee thereof), provided that the entity (or employee or 
former employee thereof) may be obligated under the terms of such 
interest to return profits previously received;
    (B) All such profit, once allocated, is distributed to the entity 
(or employee or former employee thereof) promptly after being earned 
or, if not so distributed, is retained by the covered fund for the sole 
purpose of establishing a reserve amount to satisfy contractual 
obligations with respect to subsequent losses of the covered fund and 
such undistributed profit of the entity (or employee or former employee 
thereof) does not share in the subsequent investment gains of the 
covered fund;
    (C) Any amounts invested in the covered fund, including any amounts 
paid by the entity (or employee or former employee thereof) in 
connection with obtaining the restricted profit interest, are within 
the limits of Sec.  255.12 of this subpart; and
    (D) The interest is not transferable by the entity (or employee or 
former employee thereof) except to an affiliate thereof (or an employee 
of the banking entity or affiliate), to immediate family members, or 
through the intestacy, of the employee or former employee, or in 
connection with a sale of the business that gave rise to the restricted 
profit interest by the entity (or employee or former employee thereof) 
to an unaffiliated party that provides investment management, 
investment advisory, commodity trading advisory, or other services to 
the fund.
    (7) Prime brokerage transaction means any transaction that would be 
a covered transaction, as defined in section 23A(b)(7) of the Federal 
Reserve Act (12 U.S.C. 371c(b)(7)), that is provided in

[[Page 62260]]

connection with custody, clearance and settlement, securities borrowing 
or lending services, trade execution, financing, or data, operational, 
and administrative support.
    (8) Resident of the United States means a person that is a ``U.S. 
person'' as defined in rule 902(k) of the SEC's Regulation S (17 CFR 
230.902(k)).
    (9) Sponsor means, with respect to a covered fund:
    (i) To serve as a general partner, managing member, or trustee of a 
covered fund, or to serve as a commodity pool operator with respect to 
a covered fund as defined in (b)(1)(ii) of this section;
    (ii) In any manner to select or to control (or to have employees, 
officers, or directors, or agents who constitute) a majority of the 
directors, trustees, or management of a covered fund; or
    (iii) To share with a covered fund, for corporate, marketing, 
promotional, or other purposes, the same name or a variation of the 
same name, except as permitted under Sec.  255.11(a)(6).
    (10) Trustee. (i) For purposes of paragraph (d)(9) of this section 
and Sec.  255.11 of subpart C, a trustee does not include:
    (A) A trustee that does not exercise investment discretion with 
respect to a covered fund, including a trustee that is subject to the 
direction of an unaffiliated named fiduciary who is not a trustee 
pursuant to section 403(a)(1) of the Employee's Retirement Income 
Security Act (29 U.S.C. 1103(a)(1)); or
    (B) A trustee that is subject to fiduciary standards imposed under 
foreign law that are substantially equivalent to those described in 
paragraph (d)(10)(i)(A) of this section;
    (ii) Any entity that directs a person described in paragraph 
(d)(10)(i) of this section, or that possesses authority and discretion 
to manage and control the investment decisions of a covered fund for 
which such person serves as trustee, shall be considered to be a 
trustee of such covered fund.


Sec.  255.11   Permitted organizing and offering, underwriting, and 
market making with respect to a covered fund.

    (a) Organizing and offering a covered fund in general. 
Notwithstanding Sec.  255.10(a) of this subpart, a banking entity is 
not prohibited from acquiring or retaining an ownership interest in, or 
acting as sponsor to, a covered fund in connection with, directly or 
indirectly, organizing and offering a covered fund, including serving 
as a general partner, managing member, trustee, or commodity pool 
operator of the covered fund and in any manner selecting or controlling 
(or having employees, officers, directors, or agents who constitute) a 
majority of the directors, trustees, or management of the covered fund, 
including any necessary expenses for the foregoing, only if:
    (1) The banking entity (or an affiliate thereof) provides bona fide 
trust, fiduciary, investment advisory, or commodity trading advisory 
services;
    (2) The covered fund is organized and offered only in connection 
with the provision of bona fide trust, fiduciary, investment advisory, 
or commodity trading advisory services and only to persons that are 
customers of such services of the banking entity (or an affiliate 
thereof), pursuant to a written plan or similar documentation outlining 
how the banking entity or such affiliate intends to provide advisory or 
similar services to its customers through organizing and offering such 
fund;
    (3) The banking entity and its affiliates do not acquire or retain 
an ownership interest in the covered fund except as permitted under 
Sec.  255.12 of this subpart;
    (4) The banking entity and its affiliates comply with the 
requirements of Sec.  255.14 of this subpart;
    (5) The banking entity and its affiliates do 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;
    (6) The covered fund, for corporate, marketing, promotional, or 
other purposes:
    (i) Does not share the same name or a variation of the same name 
with the banking entity (or an affiliate thereof) except that a covered 
fund may share the same name or a variation of the same name with a 
banking entity that is an investment adviser to the covered fund if:
    (A) The investment adviser is not an insured depository 
institution, a company that controls an insured depository institution, 
or a company that is treated as a bank holding company for purposes of 
section 8 of the International Banking Act of 1978 (12 U.S.C. 3106); 
and
    (B) The investment adviser does not share the same name or a 
variation of the same name as an insured depository institution, a 
company that controls an insured depository institution, or a company 
that is treated as a bank holding company for purposes of section 8 of 
the International Banking Act of 1978 (12 U.S.C. 3106); and
    (ii) Does not use the word ``bank'' in its name;
    (7) No director or employee of the banking entity (or an affiliate 
thereof) takes or retains an ownership interest in the covered fund, 
except for any director or employee of the banking entity or such 
affiliate who is directly engaged in providing investment advisory, 
commodity trading advisory, or other services to the covered fund at 
the time the director or employee takes the ownership interest; and
    (8) The banking entity:
    (i) Clearly and conspicuously discloses, in writing, to any 
prospective and actual investor in the covered fund (such as through 
disclosure in the covered fund's offering documents):
    (A) That ``any losses in [such covered fund] will be borne solely 
by investors in [the covered fund] and not by [the banking entity] or 
its affiliates; therefore, [the banking entity's] losses in [such 
covered fund] will be limited to losses attributable to the ownership 
interests in the covered fund held by [the banking entity] and any 
affiliate in its capacity as investor in the [covered fund] or as 
beneficiary of a restricted profit interest held by [the banking 
entity] or any affiliate'';
    (B) That such investor should read the fund offering documents 
before investing in the covered fund;
    (C) That the ``ownership interests in the covered fund are not 
insured by the FDIC, and are not deposits, obligations of, or endorsed 
or guaranteed in any way, by any banking entity'' (unless that happens 
to be the case); and
    (D) The role of the banking entity and its affiliates and employees 
in sponsoring or providing any services to the covered fund; and
    (ii) Complies with any additional rules of the appropriate Federal 
banking agencies, the SEC, or the CFTC, as provided in section 13(b)(2) 
of the BHC Act, designed to ensure that losses in such covered fund are 
borne solely by investors in the covered fund and not by the covered 
banking entity and its affiliates.
    (b) Organizing and offering an issuing entity of asset-backed 
securities. (1) Notwithstanding Sec.  255.10(a) of this subpart, a 
banking entity is not prohibited from acquiring or retaining an 
ownership interest in, or acting as sponsor to, a covered fund that is 
an issuing entity of asset-backed securities in connection with, 
directly or indirectly, organizing and offering that issuing entity, so 
long as the banking entity and its affiliates comply with all of the 
requirements of paragraph (a)(3) through (8) of this section.
    (2) For purposes of this paragraph (b), organizing and offering a 
covered fund that is an issuing entity of asset-backed securities means 
acting as the securitizer, as that term is used in section 15G(a)(3) of 
the Exchange Act

[[Page 62261]]

(15 U.S.C. 78o-11(a)(3)) of the issuing entity, or acquiring or 
retaining an ownership interest in the issuing entity as required by 
section 15G of that Act (15 U.S.C.78o-11) and the implementing 
regulations issued thereunder.
    (c) Underwriting and market making in ownership interests of a 
covered fund. The prohibition contained in Sec.  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 Sec.  255.4(a) or Sec.  255.4(b) of subpart B, 
respectively;
    (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; acquires and retains an ownership interest in such 
covered fund and is either a securitizer, as that term is used in 
section 15G(a)(3) of the Exchange Act (15 U.S.C. 78o-11(a)(3)), or is 
acquiring and retaining an ownership interest in such covered fund in 
compliance with section 15G of that Act (15 U.S.C.78o-11) and the 
implementing regulations issued thereunder each as permitted by 
paragraph (b) of this section; or, 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, 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 Sec.  
255.12(a)(2)(ii) and Sec.  255.12(d) of this subpart; and
    (3) With respect to any banking entity, the aggregate value of all 
ownership interests of the banking entity and its affiliates in all 
covered funds acquired and retained under Sec.  255.11 of this subpart, 
including all covered funds in which the banking entity holds an 
ownership interest in connection with underwriting and market making 
related activities permitted under this paragraph (c), are included in 
the calculation of all ownership interests under Sec.  
255.12(a)(2)(iii) and Sec.  255.12(d) of this subpart.


Sec.  255.12   Permitted investment in a covered fund.

    (a) Authority and limitations on permitted investments in covered 
funds. (1) Notwithstanding the prohibition contained in Sec.  255.10(a) 
of this subpart, a banking entity may acquire and retain an ownership 
interest in a covered fund that the banking entity or an affiliate 
thereof organizes and offers pursuant to Sec.  255.11, for the purposes 
of:
    (i) Establishment. Establishing the fund and providing the fund 
with sufficient initial equity for investment to permit the fund to 
attract unaffiliated investors, subject to the limits contained in 
paragraphs (a)(2)(i) and (iii) of this section; or
    (ii) De minimis investment. Making and retaining an investment in 
the covered fund subject to the limits contained in paragraphs 
(a)(2)(ii) and (iii) of this section.
    (2) Investment limits--(i) Seeding period. With respect to an 
investment in any covered fund made or held pursuant to paragraph 
(a)(1)(i) of this section, the banking entity and its affiliates:
    (A) Must actively seek unaffiliated investors to reduce, through 
redemption, sale, dilution, or other methods, the aggregate amount of 
all ownership interests of the banking entity in the covered fund to 
the amount permitted in paragraph (a)(2)(i)(B) of this section; and
    (B) Must, no later than 1 year after the date of establishment of 
the fund (or such longer period as may be provided by the Board 
pursuant to paragraph (e) of this section), conform its ownership 
interest in the covered fund to the limits in paragraph (a)(2)(ii) of 
this section;
    (ii) Per-fund limits. (A) Except as provided in paragraph 
(a)(2)(ii)(B) of this section, an investment by a banking entity and 
its affiliates in any covered fund made or held pursuant to paragraph 
(a)(1)(ii) of this section may not exceed 3 percent of the total number 
or value of the outstanding ownership interests of the fund.
    (B) An investment by a banking entity and its affiliates in a 
covered fund that is an issuing entity of asset-backed securities may 
not exceed 3 percent of the total fair market value of the ownership 
interests of the fund measured in accordance with paragraph (b)(3) of 
this section, unless a greater percentage is retained by the banking 
entity and its affiliates in compliance with the requirements of 
section 15G of the Exchange Act (15 U.S.C. 78o-11) and the implementing 
regulations issued thereunder, in which case the investment by the 
banking entity and its affiliates in the covered fund may not exceed 
the amount, number, or value of ownership interests of the fund 
required under section 15G of the Exchange Act and the implementing 
regulations issued thereunder.
    (iii) Aggregate limit. The aggregate value of all ownership 
interests of the banking entity and its affiliates in all covered funds 
acquired or retained under this section may not exceed 3 percent of the 
tier 1 capital of the banking entity, as provided under paragraph (c) 
of this section, and shall be calculated as of the last day of each 
calendar quarter.
    (iv) Date of establishment. For purposes of this section, the date 
of establishment of a covered fund shall be:
    (A) In general. The date on which the investment adviser or similar 
entity to the covered fund begins making investments pursuant to the 
written investment strategy for the fund;
    (B) Issuing entities of asset-backed securities. In the case of an 
issuing entity of asset-backed securities, the date on which the assets 
are initially transferred into the issuing entity of asset-backed 
securities.
    (b) Rules of construction--(1) Attribution of ownership interests 
to a covered banking entity. (i) For purposes of paragraph (a)(2) of 
this section, the amount and value of a banking entity's permitted 
investment in any single covered fund shall include any ownership 
interest held under Sec.  255__.12 directly by the banking entity, 
including any affiliate of the banking entity.
    (ii) Treatment of registered investment companies, SEC-regulated 
business development companies and foreign public funds. For purposes 
of paragraph (b)(1)(i) of this section, a registered investment 
company, SEC-regulated business development companies or foreign public 
fund as described in Sec.  255__.10(c)(1) of this subpart will not be 
considered to be an affiliate of the banking entity so long as the 
banking entity:
    (A) Does not own, control, or hold with the power to vote 25 
percent or more of the voting shares of the company or fund; and
    (B) Provides investment advisory, commodity trading advisory, 
administrative, and other services to the company or fund in compliance 
with the limitations under applicable regulation, order, or other 
authority.
    (iii) Covered funds. For purposes of paragraph (b)(1)(i) of this 
section, a covered fund will not be considered to be an affiliate of a 
banking entity so long as the covered fund is held in

[[Page 62262]]

compliance with the requirements of this subpart.
    (iv) Treatment of employee and director investments financed by the 
banking entity. For purposes of paragraph (b)(1)(i) of this section, an 
investment by a director or employee of a banking entity who acquires 
an ownership interest in his or her personal capacity in a covered fund 
sponsored by the banking entity will be attributed to the banking 
entity if the banking entity, directly or indirectly, extends financing 
for the purpose of enabling the director or employee to acquire the 
ownership interest in the fund and the financing is used to acquire 
such ownership interest in the covered fund.
    (2) Calculation of permitted ownership interests in a single 
covered fund. Except as provided in paragraph (b)(3) or (4), for 
purposes of determining whether an investment in a single covered fund 
complies with the restrictions on ownership interests under paragraphs 
(a)(2)(i)(B) and (a)(2)(ii)(A) of this section:
    (i) The aggregate number of the outstanding ownership interests 
held by the banking entity shall be the total number of ownership 
interests held under this section by the banking entity in a covered 
fund divided by the total number of ownership interests held by all 
entities in that covered fund, as of the last day of each calendar 
quarter (both measured without regard to committed funds not yet called 
for investment);
    (ii) The aggregate value of the outstanding ownership interests 
held by the banking entity shall be the aggregate fair market value of 
all investments in and capital contributions made to the covered fund 
by the banking entity, divided by the value of all investments in and 
capital contributions made to that covered fund by all entities, as of 
the last day of each calendar quarter (all measured without regard to 
committed funds not yet called for investment). If fair market value 
cannot be determined, then the value shall be the historical cost basis 
of all investments in and contributions made by the banking entity to 
the covered fund;
    (iii) For purposes of the calculation under paragraph (b)(2)(ii) of 
this section, once a valuation methodology is chosen, the banking 
entity must calculate the value of its investment and the investments 
of all others in the covered fund in the same manner and according to 
the same standards.
    (3) Issuing entities of asset-backed securities. In the case of an 
ownership interest in an issuing entity of asset-backed securities, for 
purposes of determining whether an investment in a single covered fund 
complies with the restrictions on ownership interests under paragraphs 
(a)(2)(i)(B) and (a)(2)(ii)(B) of this section:
    (i) For securitizations subject to the requirements of section 15G 
of the Exchange Act (15 U.S.C. 78o-11), the calculations shall be made 
as of the date and according to the valuation methodology applicable 
pursuant to the requirements of section 15G of the Exchange Act (15 
U.S.C. 78o-11) and the implementing regulations issued thereunder; or
    (ii) For securitization transactions completed prior to the 
compliance date of such implementing regulations (or as to which such 
implementing regulations do not apply), the calculations shall be made 
as of the date of establishment as defined in paragraph (a)(2)(iv)(B) 
of this section or such earlier date on which the transferred assets 
have been valued for purposes of transfer to the covered fund, and 
thereafter only upon the date on which additional securities of the 
issuing entity of asset-backed securities are priced for purposes of 
the sales of ownership interests to unaffiliated investors.
    (iii) For securitization transactions completed prior to the 
compliance date of such implementing regulations (or as to which such 
implementing regulations do not apply), the aggregate value of the 
outstanding ownership interests in the covered fund shall be the fair 
market value of the assets transferred to the issuing entity of the 
securitization and any other assets otherwise held by the issuing 
entity at such time, determined in a manner that is consistent with its 
determination of the fair market value of those assets for financial 
statement purposes.
    (iv) For purposes of the calculation under paragraph (b)(3)(iii) of 
this section, the valuation methodology used to calculate the fair 
market value of the ownership interests must be the same for both the 
ownership interests held by a banking entity and the ownership 
interests held by all others in the covered fund in the same manner and 
according to the same standards.
    (4) Multi-tier fund investments--(i) Master-feeder fund 
investments. If the principal investment strategy of a covered fund 
(the ``feeder fund'') is to invest substantially all of its assets in 
another single covered fund (the ``master fund''), then for purposes of 
the investment limitations in paragraphs (a)(2)(i)(B) and (a)(2)(ii) of 
this section, the banking entity's permitted investment in such funds 
shall be measured only by reference to the value of the master fund. 
The banking entity's permitted investment in the master fund shall 
include any investment by the banking entity in the master fund, as 
well as the banking entity's pro-rata share of any ownership interest 
of the master fund that is held through the feeder fund; and
    (ii) Fund-of-funds investments. If a banking entity organizes and 
offers a covered fund pursuant to Sec.  255.11 of this subpart for the 
purpose of investing in other covered funds (a ``fund of funds'') and 
that fund of funds itself invests in another covered fund that the 
banking entity is permitted to own, then the banking entity's permitted 
investment in that other fund shall include any investment by the 
banking entity in that other fund, as well as the banking entity's pro-
rata share of any ownership interest of the fund that is held through 
the fund of funds. The investment of the banking entity may not 
represent more than 3 percent of the amount or value of any single 
covered fund.
    (c) Aggregate permitted investments in all covered funds. (1) For 
purposes of paragraph (a)(2)(iii) of this section, the aggregate value 
of all ownership interests held by a banking entity shall be the sum of 
all amounts paid or contributed by the banking entity in connection 
with acquiring or retaining an ownership interest in covered funds 
(together with any amounts paid by the entity (or employee thereof) in 
connection with obtaining a restricted profit interest under Sec.  
255__.10(d)(6)(ii) of this subpart), on a historical cost basis.
    (2) Calculation of tier 1 capital. For purposes of paragraph 
(a)(2)(iii) of this section:
    (i) Entities that are required to hold and report tier 1 capital. 
If a banking entity is required to calculate and report tier 1 capital, 
the banking entity's tier 1 capital shall be equal to the amount of 
tier 1 capital of the banking entity as of the last day of the most 
recent calendar quarter, as reported to its primary financial 
regulatory agency; and
    (ii) If a banking entity is not required to calculate and report 
tier 1 capital, the banking entity's tier 1 capital shall be determined 
to be equal to:
    (A) In the case of a banking entity that is controlled, directly or 
indirectly, by a depository institution that calculates and reports 
tier 1 capital, be equal to the amount of tier 1 capital reported by 
such controlling depository institution in the manner described in 
paragraph (c)(2)(i) of this section;
    (B) In the case of a banking entity that is not controlled, 
directly or indirectly, by a depository institution that calculates and 
reports tier 1 capital:

[[Page 62263]]

    (1) Bank holding company subsidiaries. If the banking entity is a 
subsidiary of a bank holding company or company that is treated as a 
bank holding company, be equal to the amount of tier 1 capital reported 
by the top-tier affiliate of such covered banking entity that 
calculates and reports tier 1 capital in the manner described in 
paragraph (c)(2)(i) of this section; and
    (2) Other holding companies and any subsidiary or affiliate 
thereof. If the banking entity is not a subsidiary of a bank holding 
company or a company that is treated as a bank holding company, be 
equal to the total amount of shareholders' equity of the top-tier 
affiliate within such organization as of the last day of the most 
recent calendar quarter that has ended, as determined under applicable 
accounting standards.
    (iii) Treatment of foreign banking entities--(A) Foreign banking 
entities. Except as provided in paragraph (c)(2)(iii)(B) of this 
section, with respect to a banking entity that is not itself, and is 
not controlled directly or indirectly by, a banking entity that is 
located or organized under the laws of the United States or of any 
State, the tier 1 capital of the banking entity shall be the 
consolidated tier 1 capital of the entity as calculated under 
applicable home country standards.
    (B) U.S. affiliates of foreign banking entities. With respect to a 
banking entity that is located or organized under the laws of the 
United States or of any State and is controlled by a foreign banking 
entity identified under paragraph (c)(2)(iii)(A) of this section, the 
banking entity's tier 1 capital shall be as calculated under paragraphs 
(c)(2)(i) or (ii) of this section.
    (d) Capital treatment for a permitted investment in a covered fund. 
For purposes of calculating compliance with the applicable regulatory 
capital requirements, a banking entity shall deduct from the banking 
entity's tier 1 capital (as determined under paragraph (c)(2) of this 
section) the greater of:
    (1) The sum of all amounts paid or contributed by the banking 
entity in connection with acquiring or retaining an ownership interest 
(together with any amounts paid by the entity (or employee thereof) in 
connection with obtaining a restricted profit interest under Sec.  
255__.10(d)(6)(ii) of subpart C), on a historical cost basis, plus any 
earnings received; and
    (2) The fair market value of the banking entity's ownership 
interests in the covered fund as determined under paragraph (b)(2)(ii) 
or (b)(3) of this section (together with any amounts paid by the entity 
(or employee thereof) in connection with obtaining a restricted profit 
interest under Sec.  255__.10(d)(6)(ii) of subpart C), if the banking 
entity accounts for the profits (or losses) of the fund investment in 
its financial statements.
    (e) Extension of time to divest an ownership interest. (1) Upon 
application by a banking entity, the Board may extend the period under 
paragraph (a)(2)(i) of this section for up to 2 additional years if the 
Board finds that an extension would be consistent with safety and 
soundness and not detrimental to the public interest. An application 
for extension must:
    (i) Be submitted to the Board at least 90 days prior to the 
expiration of the applicable time period;
    (ii) Provide the reasons for application, including information 
that addresses the factors in paragraph (e)(2) of this section; and
    (iii) Explain the banking entity's plan for reducing the permitted 
investment in a covered fund through redemption, sale, dilution or 
other methods as required in paragraph (a)(2) of this section.
    (2) Factors governing Board determinations. In reviewing any 
application under paragraph (e)(1) of this section, the Board may 
consider all the facts and circumstances related to the permitted 
investment in a covered fund, including:
    (i) Whether the investment would result, directly or indirectly, in 
a material exposure by the banking entity to high-risk assets or high-
risk trading strategies;
    (ii) The contractual terms governing the banking entity's interest 
in the covered fund;
    (iii) The date on which the covered fund is expected to have 
attracted sufficient investments from investors unaffiliated with the 
banking entity to enable the banking entity to comply with the 
limitations in paragraph (a)(2)(i) of this section;
    (iv) The total exposure of the covered banking entity to the 
investment and the risks that disposing of, or maintaining, the 
investment in the covered fund may pose to the banking entity and the 
financial stability of the United States;
    (v) The cost to the banking entity of divesting or disposing of the 
investment within the applicable period;
    (vi) Whether the investment or the divestiture or conformance of 
the investment would involve or result in a material conflict of 
interest between the banking entity and unaffiliated parties, including 
clients, customers or counterparties to which it owes a duty;
    (vi) The banking entity's prior efforts to reduce through 
redemption, sale, dilution, or other methods its ownership interests in 
the covered fund, including activities related to the marketing of 
interests in such covered fund;
    (viii) Market conditions; and
    (ix) Any other factor that the Board believes appropriate.
    (3) Authority to impose restrictions on activities or investment 
during any extension period. The Board may impose such conditions on 
any extension approved under paragraph (e)(1) of this section as the 
Board determines are necessary or appropriate to protect the safety and 
soundness of the banking entity or the financial stability of the 
United States, address material conflicts of interest or other unsound 
banking practices, or otherwise further the purposes of section 13 of 
the BHC Act and this part.
    (4) Consultation. In the case of a banking entity that is primarily 
regulated by another Federal banking agency, the SEC, or the CFTC, the 
Board will consult with such agency prior to acting on an application 
by the banking entity for an extension under paragraph (e)(1) of this 
section.


Sec.  255.13   Other permitted covered fund activities and investments.

    (a) Permitted risk-mitigating hedging activities. (1) The 
prohibition contained in Sec.  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 demonstrably reduce or 
otherwise significantly mitigate the specific, identifiable risks to 
the banking entity in connection with 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.
    (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 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; 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

[[Page 62264]]

internal controls required under this section;
    (B) At the inception of the hedge, is designed to reduce or 
otherwise significantly mitigate and demonstrably reduces or otherwise 
significantly mitigates one or more specific, identifiable risks 
arising 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) The compensation arrangement relates solely to the covered 
fund in which the banking entity or any affiliate has acquired an 
ownership interest pursuant to this paragraph 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) Certain permitted covered fund activities and investments 
outside of the United States. (1) The prohibition contained in Sec.  
255.10(a) of this subpart does not apply to the acquisition or 
retention of any ownership interest in, or the sponsorship of, a 
covered fund by a banking entity only if:
    (i) The banking entity is not organized or directly or indirectly 
controlled by a banking entity that is organized under the laws of the 
United States or of one or more States;
    (ii) The activity or investment by the banking entity is pursuant 
to paragraph (9) or (13) of section 4(c) of the BHC Act;
    (iii) No ownership interest in the covered fund is offered for sale 
or sold to a resident of the United States; and
    (iv) The activity or investment occurs solely outside of the United 
States.
    (2) An activity or investment by the banking entity is pursuant to 
paragraph (9) or (13) of section 4(c) of the BHC Act for purposes of 
paragraph (b)(1)(ii) of this section only if:
    (i) The activity or investment is conducted in accordance with the 
requirements of this section; and
    (ii)(A) With respect to a banking entity that is a foreign banking 
organization, the banking entity meets the qualifying foreign banking 
organization requirements of section 211.23(a), (c) or (e) of the 
Board's Regulation K (12 CFR 211.23(a), (c) or (e)), as applicable; or
    (B) With respect to a banking entity that is not a foreign banking 
organization, the banking entity is not organized under the laws of the 
United States or of one or more States and the banking entity, on a 
fully-consolidated basis, meets at least two of the following 
requirements:
    (1) Total assets of the banking entity held outside of the United 
States exceed total assets of the banking entity held in the United 
States;
    (2) Total revenues derived from the business of the banking entity 
outside of the United States exceed total revenues derived from the 
business of the banking entity in the United States; or
    (3) Total net income derived from the business of the banking 
entity outside of the United States exceeds total net income derived 
from the business of the banking entity in the United States.
    (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 sold or has been sold 
pursuant to an offering that does not target residents of the United 
States.
    (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;
    (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; and
    (iv) 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.
    (5) For purposes of this section, a U.S. branch, agency, or 
subsidiary of a foreign bank, or any subsidiary thereof, is located in 
the United States; however, a foreign bank of which that branch, 
agency, or subsidiary is a part is not considered to be located in the 
United States solely by virtue of operation of the U.S. branch, agency, 
or subsidiary.
    (c) Permitted covered fund interests and activities by a regulated 
insurance company. The prohibition contained in Sec.  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, regulations, and written guidance 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, regulation, or written guidance 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.


Sec.  255.14   Limitations on relationships with a covered fund.

    (a) Relationships with a covered fund. (1) Except as provided for 
in paragraph (a)(2) of this section, no banking entity that serves, 
directly or indirectly, as the investment manager, investment adviser, 
commodity trading advisor, or sponsor to a covered fund, that organizes 
and offers a covered fund pursuant to Sec.  255.11 of this subpart, or 
that continues to hold an ownership interest in accordance with Sec.  
255.11(b) of this subpart, and no affiliate of such entity, may enter 
into a transaction with the covered fund, or with any other covered 
fund that is controlled by such covered fund, that would be a covered 
transaction as defined in section 23A of the Federal Reserve Act (12 
U.S.C. 371c(b)(7)), as if such banking entity and the affiliate thereof 
were a member bank and the covered fund were an affiliate thereof.
    (2) Notwithstanding paragraph (a)(1) of this section, a banking 
entity may:
    (i) Acquire and retain any ownership interest in a covered fund in 
accordance

[[Page 62265]]

with the requirements of Sec.  255.11, Sec.  255.12, or Sec.  255.13 of 
this subpart; and
    (ii) Enter into any prime brokerage transaction with any covered 
fund in which a covered fund managed, sponsored, or advised by such 
banking entity (or an affiliate thereof) has taken an ownership 
interest, if:
    (A) The banking entity is in compliance with each of the 
limitations set forth in Sec.  255.11 of this subpart with respect to a 
covered fund organized and offered by such banking entity (or an 
affiliate thereof);
    (B) The chief executive officer (or equivalent officer) of the 
banking entity certifies in writing annually 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
    (C) The Board has not determined that such transaction is 
inconsistent with the safe and sound operation and condition of the 
banking entity.
    (b) Restrictions on transactions with covered funds. A banking 
entity that serves, directly or indirectly, as the investment manager, 
investment adviser, commodity trading advisor, or sponsor to a covered 
fund, or that organizes and offers a covered fund pursuant to Sec.  
255.11 of this subpart, or that continues to hold an ownership interest 
in accordance with Sec.  255.11(b) of this subpart, shall be subject to 
section 23B of the Federal Reserve Act (12 U.S.C. 371c-1), as if such 
banking entity were a member bank and such covered fund were an 
affiliate thereof.
    (c) Restrictions on prime brokerage transactions. A prime brokerage 
transaction permitted under paragraph (a)(2)(ii) of this section shall 
be subject to section 23B of the Federal Reserve Act (12 U.S.C. 371c-1) 
as if the counterparty were an affiliate of the banking entity.


Sec.  255.15   Other limitations on permitted covered fund activities.

    (a) No transaction, class of transactions, or activity may be 
deemed permissible under Sec. Sec.  255.11 through 255.13 of this 
subpart if the transaction, class of transactions, or activity would:
    (1) Involve or result in a material conflict of interest between 
the banking entity and its clients, customers, or counterparties;
    (2) Result, directly or indirectly, in a material exposure by the 
banking entity to a high-risk asset or a high-risk trading strategy; or
    (3) Pose a threat to the safety and soundness of the banking entity 
or to the financial stability of the United States.
    (b) Definition of material conflict of interest. (1) For purposes 
of this section, a material conflict of interest between a banking 
entity and its clients, customers, or counterparties exists if the 
banking entity engages in any transaction, class of transactions, or 
activity that would involve or result in the banking entity's interests 
being materially adverse to the interests of its client, customer, or 
counterparty with respect to such transaction, class of transactions, 
or activity, and the banking entity has not taken at least one of the 
actions in paragraph (b)(2) of this section.
    (2) Prior to effecting the specific transaction or class or type of 
transactions, or engaging in the specific activity, the banking entity:
    (i) Timely and effective disclosure. (A) Has made clear, timely, 
and effective disclosure of the conflict of interest, together with 
other necessary information, in reasonable detail and in a manner 
sufficient to permit a reasonable client, customer, or counterparty to 
meaningfully understand the conflict of interest; and
    (B) Such disclosure is made in a manner that provides the client, 
customer, or counterparty the opportunity to negate, or substantially 
mitigate, any materially adverse effect on the client, customer, or 
counterparty created by the conflict of interest; or
    (ii) Information barriers. Has established, maintained, and 
enforced information barriers that are memorialized in written policies 
and procedures, such as physical separation of personnel, or functions, 
or limitations on types of activity, that are reasonably designed, 
taking into consideration the nature of the banking entity's business, 
to prevent the conflict of interest from involving or resulting in a 
materially adverse effect on a client, customer, or counterparty. A 
banking entity may not rely on such information barriers if, in the 
case of any specific transaction, class or type of transactions or 
activity, the banking entity knows or should reasonably know that, 
notwithstanding the banking entity's establishment of information 
barriers, the conflict of interest may involve or result in a 
materially adverse effect on a client, customer, or counterparty.
    (c) Definition of high-risk asset and high-risk trading strategy. 
For purposes of this section:
    (1) High-risk asset means an asset or group of related assets that 
would, if held by a banking entity, 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.
    (2) High-risk trading strategy means a trading strategy that would, 
if engaged in by a banking entity, 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.


Sec.  255.16   Ownership of interests in and sponsorship of issuers of 
certain collateralized debt obligations backed by trust-preferred 
securities.

    (a) The prohibition contained in Sec.  255.10(a)(1) does not apply 
to the ownership by a banking entity of an interest in, or sponsorship 
of, any issuer if:
    (1) The issuer was established, and the interest was issued, before 
May 19, 2010;
    (2) The banking entity reasonably believes that the offering 
proceeds received by the issuer were invested primarily in Qualifying 
TruPS Collateral; and
    (3) The banking entity acquired such interest on or before December 
10, 2013 (or acquired such interest in connection with a merger with or 
acquisition of a banking entity that acquired the interest on or before 
December 10, 2013).
    (b) For purposes of this Sec.  255.16, Qualifying TruPS Collateral 
shall mean any trust preferred security or subordinated debt instrument 
issued prior to May 19, 2010 by a depository institution holding 
company that, as of the end of any reporting period within 12 months 
immediately preceding the issuance of such trust preferred security or 
subordinated debt instrument, had total consolidated assets of less 
than $15,000,000,000 or issued prior to May 19, 2010 by a mutual 
holding company.
    (c) Notwithstanding paragraph (a)(3) of this section, a banking 
entity may act as a market maker with respect to the interests of an 
issuer described in paragraph (a) of this section in accordance with 
the applicable provisions of Sec. Sec.  255.4 and 255.11.
    (d) Without limiting the applicability of paragraph (a) of this 
section, the Board, the FDIC and the OCC will make public a non-
exclusive list of issuers that meet the requirements of paragraph (a). 
A banking entity may rely on the list published by the Board, the FDIC 
and the OCC.

[[Page 62266]]

Sec. Sec.  255.17-255.19   [Reserved]

Subpart D--Compliance Program Requirement; Violations


Sec.  255.20   Program for compliance; reporting.

    (a) Program requirement. Each banking entity 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) Contents of compliance program. Except as provided in paragraph 
(f) of this section, the compliance program required by paragraph (a) 
of this section, at a minimum, shall include:
    (1) Written policies and procedures reasonably designed to 
document, describe, monitor and limit trading activities subject to 
subpart B (including those permitted under Sec. Sec.  255.3 to 255.6 of 
subpart B), including setting, monitoring and managing required limits 
set out in Sec.  2554 and Sec.  2555, and activities and investments 
with respect to a covered fund subject to subpart C (including those 
permitted under Sec. Sec.  255.11 through 255.14 of subpart C) 
conducted by the banking entity to ensure that all activities and 
investments conducted by the banking entity that are subject to section 
13 of the BHC Act and this part comply with section 13 of the BHC Act 
and this part;
    (2) A system of internal controls reasonably designed to monitor 
compliance with section 13 of the BHC Act and this part and to prevent 
the occurrence of activities or investments that are prohibited by 
section 13 of the BHC Act and this part;
    (3) A management framework that clearly delineates responsibility 
and accountability for compliance with section 13 of the BHC Act and 
this part and includes appropriate management review of trading limits, 
strategies, hedging activities, investments, incentive compensation and 
other matters identified in this part or by management as requiring 
attention;
    (4) 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;
    (5) Training for trading personnel and managers, as well as other 
appropriate personnel, to effectively implement and enforce the 
compliance program; and
    (6) Records sufficient to demonstrate compliance with section 13 of 
the BHC Act and this part, which a banking entity must promptly provide 
to the SEC upon request and retain for a period of no less than 5 years 
or such longer period as required by the SEC.
    (c) Additional standards. In addition to the requirements in 
paragraph (b) of this section, the compliance program of a banking 
entity must satisfy the requirements and other standards contained in 
Appendix B, if:
    (1) The banking entity engages in proprietary trading permitted 
under subpart B and is required to comply with the reporting 
requirements of paragraph (d) of this section;
    (2) The banking entity has reported total consolidated assets as of 
the previous calendar year end of $50 billion or more or, in the case 
of a foreign banking entity, has total U.S. assets as of the previous 
calendar year end of $50 billion or more (including all subsidiaries, 
affiliates, branches and agencies of the foreign banking entity 
operating, located or organized in the United States); or
    (3) The SEC notifies the banking entity in writing that it must 
satisfy the requirements and other standards contained in Appendix B to 
this part.
    (d) Reporting requirements under Appendix A to this part. (1) A 
banking entity engaged in proprietary trading activity permitted under 
subpart B shall comply with the reporting requirements described in 
Appendix A, if:
    (i) The banking entity (other than a foreign banking entity as 
provided in paragraph (d)(1)(ii) of this section) has, together with 
its 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 or exceeds the 
threshold established in paragraph (d)(2) of this section;
    (ii) In the case of a foreign banking entity, the average gross sum 
of the trading assets and liabilities of the combined U.S. operations 
of the foreign banking entity (including all subsidiaries, affiliates, 
branches and agencies of the foreign banking entity operating, located 
or organized in the United States and excluding trading assets and 
liabilities involving obligations of or guaranteed by the United States 
or any agency of the United States) over the previous consecutive four 
quarters, as measured as of the last day of each of the four prior 
calendar quarters, equals or exceeds the threshold established in 
paragraph (d)(2) of this section; or
    (iii) The SEC notifies the banking entity in writing that it must 
satisfy the reporting requirements contained in Appendix A.
    (2) The threshold for reporting under paragraph (d)(1) of this 
section shall be $50 billion beginning on June 30, 2014; $25 billion 
beginning on April 30, 2016; and $10 billion beginning on December 31, 
2016.
    (3) Frequency of reporting: Unless the SEC notifies the banking 
entity in writing that it must report on a different basis, a banking 
entity with $50 billion or more in trading assets and liabilities (as 
calculated in accordance with paragraph (d)(1) of this section) shall 
report the information required by Appendix A for each calendar month 
within 30 days of the end of the relevant calendar month; beginning 
with information for the month of January 2015, such information shall 
be reported within 10 days of the end of each calendar month. Any other 
banking entity subject to Appendix A shall report the information 
required by Appendix A for each calendar quarter within 30 days of the 
end of that calendar quarter unless the SEC notifies the banking entity 
in writing that it must report on a different basis.
    (e) Additional documentation for covered funds. Any banking entity 
that has more than $10 billion in total consolidated assets as reported 
on December 31 of the previous two calendar years shall maintain 
records that include:
    (1) Documentation of the exclusions or exemptions other than 
sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 
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;
    (2) For each fund sponsored by the banking entity (including all 
subsidiaries and affiliates) for which the banking entity relies on one 
or more of the exclusions from the definition of covered fund provided 
by Sec. Sec.  255.10(c)(1), 255.10(c)(5), 255.10(c)(8), 255.10(c)(9), 
or 255.10(c)(10) of subpart C, documentation supporting the banking 
entity's determination that the fund is not a covered fund pursuant to 
one or more of those exclusions;
    (3) For each seeding vehicle described in Sec.  255.10(c)(12)(i) or 
(iii) of subpart C that will become a registered investment

[[Page 62267]]

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 SEC-regulated business development company within 
the time period specified in Sec.  255.12(a)(2)(i)(B) of subpart C;
    (4) For any banking entity that is, or is controlled directly or 
indirectly by a banking entity that is, located in or organized under 
the laws of the United States or of any State, if the aggregate amount 
of ownership interests in foreign public funds that are described in 
Sec.  255.10(c)(1) of subpart C owned by such banking entity (including 
ownership interests owned by any affiliate that is controlled directly 
or indirectly by a banking entity that is located in or organized under 
the laws of the United States or of any State) exceeds $50 million at 
the end of two or more consecutive calendar quarters, beginning with 
the next succeeding calendar quarter, documentation of the value of the 
ownership interests owned by the banking entity (and such affiliates) 
in each foreign public fund and each jurisdiction in which any such 
foreign public fund is organized, calculated as of the end of each 
calendar quarter, which documentation must continue until the banking 
entity's aggregate amount of ownership interests in foreign public 
funds is below $50 million for two consecutive calendar quarters; and
    (5) For purposes of paragraph (e)(4) of this section, a U.S. 
branch, agency, or subsidiary of a foreign 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.
    (f) Simplified programs for less active banking entities--(1) 
Banking entities with no covered activities. A banking entity that does 
not engage in activities or investments pursuant to subpart B or 
subpart C (other than trading activities permitted pursuant to Sec.  
255.6(a) of subpart B) may satisfy the requirements of this section by 
establishing the required compliance program prior to becoming engaged 
in such activities or making such investments (other than trading 
activities permitted pursuant to Sec.  255.6(a) of subpart B).
    (2) Banking entities with modest activities. A banking entity with 
total consolidated assets of $10 billion or less as reported on 
December 31 of the previous two calendar years that engages in 
activities or investments pursuant to subpart B or subpart C (other 
than trading activities permitted under Sec.  255.6(a) of subpart B) 
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.


Sec.  255.21   Termination of activities or investments; penalties for 
violations.

    (a) Any banking entity that engages in an activity or makes an 
investment in violation of section 13 of the BHC Act or this part, or 
acts in a manner that functions as an evasion of the requirements of 
section 13 of the BHC Act or this part, including through an abuse of 
any activity or investment permitted under subparts B or C, or 
otherwise violates the restrictions and requirements of section 13 of 
the BHC Act or this part, shall, upon discovery, promptly terminate the 
activity and, as relevant, dispose of the investment.
    (b) Whenever the SEC finds reasonable cause to believe any banking 
entity has engaged in an activity or made an investment in violation of 
section 13 of the BHC Act or this part, or engaged in any activity or 
made any investment that functions as an evasion of the requirements of 
section 13 of the BHC Act or this part, the SEC may take any action 
permitted by law to enforce compliance with section 13 of the BHC Act 
and this part, including directing the banking entity to restrict, 
limit, or terminate any or all activities under this part and dispose 
of any investment.

Appendix A 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 Sec.  
255.20(d), this appendix generally applies to a banking entity that, 
together with its affiliates and subsidiaries, has significant 
trading assets and liabilities. These entities are required to (i) 
furnish periodic reports to the SEC regarding a variety of 
quantitative measurements of their covered trading activities, which 
vary depending on the scope and size of covered trading activities, 
and (ii) create and maintain records documenting the preparation and 
content of these reports. The requirements of this appendix must be 
incorporated into the banking entity's internal compliance program 
under Sec.  255.20 and Appendix B.
    b. The purpose of this appendix is to assist banking entities 
and the SEC in:
    (i) Better understanding and evaluating the scope, type, and 
profile of the banking entity's covered trading activities;
    (ii) Monitoring the banking entity's covered trading activities;
    (iii) Identifying covered trading activities that warrant 
further review or examination by the banking entity to verify 
compliance with the proprietary trading restrictions;
    (iv) Evaluating whether the covered trading activities of 
trading desks engaged in market making-related activities subject to 
Sec.  255.4(b) are consistent with the requirements governing 
permitted market making-related activities;
    (v) Evaluating whether the covered trading activities of trading 
desks that are engaged in permitted trading activity subject to 
Sec. Sec.  255.4, 255.5, or 255.6(a)-(b) (i.e., underwriting and 
market making-related 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;
    (vi) Identifying the profile of particular covered trading 
activities of the banking entity, and the individual trading desks 
of the banking entity, to help establish the appropriate frequency 
and scope of examination by the SEC of such activities; and
    (vii) Assessing and addressing the risks associated with the 
banking entity's covered trading activities.
    c. The quantitative measurements that must be furnished pursuant 
to this appendix are not intended to serve as a dispositive tool for 
the identification of permissible or impermissible activities.
    d. In order to allow banking entities and the Agencies to 
evaluate the effectiveness of these metrics, banking entities must 
collect and report these metrics for all trading desks beginning on 
the dates established in Sec.  255.20 of the final rule. The 
Agencies will review the data collected and revise this collection 
requirement as appropriate based on a review of the data collected 
prior to September 30, 2015.
    e. 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 Sec.  255.20 and Appendix B to this part. 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

[[Page 62268]]

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.
    f. 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 Sec. Sec.  255.4 through 255.6(a) and (b), or that 
result in a material exposure to high-risk assets or high-risk 
trading strategies, must be escalated within the banking entity for 
review, further analysis, explanation to the SEC, and remediation, 
where appropriate. The quantitative measurements discussed in this 
appendix should be helpful to banking entities in identifying and 
managing the risks related to their covered trading activities.

II. Definitions

    The terms used in this appendix have the same meanings as set 
forth in Sec. Sec.  255.2 and 255.3. In addition, for purposes of 
this appendix, the following definitions apply:
    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 Sec. Sec.  255.4, 255.5, 255.6(a), or 255.6(b). A banking 
entity may include trading under Sec. Sec.  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 desk means 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.

III. Reporting and Recordkeeping of Quantitative Measurements

a. Scope of Required Reporting

    General scope. Each banking entity made subject to this part by 
Sec.  255.20 must furnish the following quantitative measurements 
for each trading desk of the banking entity, calculated in 
accordance with this appendix:
     Risk and Position Limits and Usage;
     Risk Factor Sensitivities;
     Value-at-Risk and Stress VaR;
     Comprehensive Profit and Loss Attribution;
     Inventory Turnover;
     Inventory Aging; and
     Customer-Facing Trade Ratio

b. Frequency of Required Calculation and Reporting

    A banking entity must calculate any applicable quantitative 
measurement for each trading day. A banking entity must report each 
applicable quantitative measurement to the SEC on the reporting 
schedule established in Sec.  255.20 unless otherwise requested by 
the SEC. All quantitative measurements for any calendar month must 
be reported within the time period required by Sec.  255.20.

c. Recordkeeping

    A banking entity must, for any quantitative measurement 
furnished to the SEC pursuant to this appendix and Sec.  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 5 years from the end of the calendar year for which the 
measurement was taken.

IV. Quantitative Measurements

a. Risk-Management Measurements

1. Risk and Position Limits and Usage

    i. Description: For purposes of this appendix, Risk and Position 
Limits are the constraints that define the amount of risk that a 
trading desk is permitted to take at a point in time, as defined by 
the banking entity for a specific trading desk. Usage represents the 
portion of the trading desk's limits that are accounted for by the 
current activity of the desk. Risk and position limits and their 
usage are key risk management tools used to control and monitor risk 
taking and include, but are not limited, to the limits set out in 
Sec.  255.4 and Sec.  255.5. A number of the metrics that are 
described below, including ``Risk Factor Sensitivities'' and 
``Value-at-Risk and Stress Value-at-Risk,'' relate to a trading 
desk's risk and position limits and are useful in evaluating and 
setting these limits in the broader context of the trading desk's 
overall activities, particularly for the market making activities 
under Sec.  255.4(b) and hedging activity under Sec.  255.5. 
Accordingly, the limits required under Sec.  255.4(b)(2)(iii) and 
Sec.  255.5(b)(1)(i) must meet the applicable requirements under 
Sec.  255.4(b)(2)(iii) and Sec.  255.5(b)(1)(i) and also must 
include appropriate metrics for the trading desk limits including, 
at a minimum, the ``Risk Factor Sensitivities'' and ``Value-at-Risk 
and Stress Value-at-Risk'' metrics except to the extent any of the 
``Risk Factor Sensitivities'' or ``Value-at-Risk and Stress Value-
at-Risk'' metrics are demonstrably ineffective for measuring and 
monitoring the risks of a trading desk based on the types of 
positions traded by, and risk exposures of, that desk.
    ii. General Calculation Guidance: Risk and Position Limits must 
be reported in the format used by the banking entity for the 
purposes of risk management of each trading desk. Risk and Position 
Limits are often expressed in terms of risk measures, such as VaR 
and Risk Factor Sensitivities, but may also be expressed in terms of 
other observable criteria, such as net open positions. When criteria 
other than VaR or Risk Factor Sensitivities are used to define the 
Risk and Position Limits, both the value of the Risk and Position 
Limits and the value of the variables used to assess whether these 
limits have been reached must be reported.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

2. Risk Factor Sensitivities

    i. Description: For purposes of this appendix, Risk Factor 
Sensitivities are changes in a trading desk's Comprehensive Profit 
and Loss that are expected to occur in the event of a change in one 
or more underlying variables that are significant sources of the 
trading desk's profitability and risk.
    ii. General Calculation Guidance: A banking entity must report 
the Risk Factor Sensitivities that are monitored and managed as part 
of the trading desk's overall risk management policy. The underlying 
data and methods used to compute a trading desk's Risk Factor 
Sensitivities will depend on the specific function of the trading 
desk and the internal risk management models employed. The number 
and type of Risk Factor Sensitivities that are monitored and managed 
by a trading desk, and furnished to the SEC, will depend on the 
explicit risks assumed by the trading desk. In general, however, 
reported Risk Factor Sensitivities must be sufficiently granular to 
account for a preponderance of the expected price variation in the 
trading desk's holdings.
    A. Trading desks must take into account any relevant factors in 
calculating Risk Factor Sensitivities, including, for example, the 
following with respect to particular asset classes:
     Commodity derivative positions: Risk factors with 
respect to the related commodities set out in 17 CFR 20.2, the 
maturity of the positions, volatility and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and the maturity profile of the 
positions;
     Credit positions: Risk factors with respect to credit 
spreads that are sufficiently granular to account for specific 
credit sectors and market segments, the maturity profile of the 
positions, and risk factors with respect to interest rates of all 
relevant maturities;
     Credit-related derivative positions: Risk factor 
sensitivities, for example credit spreads, shifts (parallel and non-
parallel) in credit spreads--volatility, and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and the maturity profile of the 
positions;
     Equity derivative positions: Risk factor sensitivities 
such as equity positions, volatility, and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and the maturity profile of the 
positions;
     Equity positions: Risk factors for equity prices and 
risk factors that differentiate between important equity market 
sectors and segments, such as a small capitalization equities and 
international equities;
     Foreign exchange derivative positions: Risk factors 
with respect to major currency pairs and maturities, exposure to 
interest rates at relevant maturities, volatility, and/or

[[Page 62269]]

correlation sensitivities (expressed in a manner that demonstrates 
any significant non-linearities), as well as the maturity profile of 
the positions; and
     Interest rate positions, including interest rate 
derivative positions: Risk factors with respect to major interest 
rate categories and maturities and volatility and/or correlation 
sensitivities (expressed in a manner that demonstrates any 
significant non-linearities), and shifts (parallel and non-parallel) 
in the interest rate curve, as well as the maturity profile of the 
positions.
    B. The methods used by a banking entity to calculate 
sensitivities to a common factor shared by multiple trading desks, 
such as an equity price factor, must be applied consistently across 
its trading desks so that the sensitivities can be compared from one 
trading desk to another.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

3. Value-at-Risk and Stress Value-at-Risk

    i. Description: For purposes of this appendix, Value-at-Risk 
(``VaR'') is the commonly used percentile measurement of the risk of 
future financial loss in the value of a given set of aggregated 
positions over a specified period of time, based on current market 
conditions. For purposes of this appendix, Stress Value-at-Risk 
(``Stress VaR'') is the percentile measurement of the risk of future 
financial loss in the value of a given set of aggregated positions 
over a specified period of time, based on market conditions during a 
period of significant financial stress.
    ii. General Calculation Guidance: Banking entities must compute 
and report VaR and Stress VaR by employing generally accepted 
standards and methods of calculation. VaR should reflect a loss in a 
trading desk that is expected to be exceeded less than one percent 
of the time over a one-day period. For those banking entities that 
are subject to regulatory capital requirements imposed by a Federal 
banking agency, VaR and Stress VaR must be computed and reported in 
a manner that is consistent with such regulatory capital 
requirements. In cases where a trading desk does not have a 
standalone VaR or Stress VaR calculation but is part of a larger 
aggregation of positions for which a VaR or Stress VaR calculation 
is performed, a VaR or Stress VaR calculation that includes only the 
trading desk's holdings must be performed consistent with the VaR or 
Stress VaR model and methodology used for the larger aggregation of 
positions.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

b. Source-of-Revenue Measurements

1. Comprehensive Profit and Loss Attribution

    i. Description: For purposes of this appendix, Comprehensive 
Profit and Loss Attribution is an analysis that attributes the daily 
fluctuation in the value of a trading desk's positions to various 
sources. First, the daily profit and loss of the aggregated 
positions is divided into three categories: (i) Profit and loss 
attributable to a trading desk's existing positions that were also 
positions held by the trading desk as of the end of the prior day 
(``existing positions''); (ii) profit and loss attributable to new 
positions resulting from the current day's trading activity (``new 
positions''); and (iii) residual profit and loss that cannot be 
specifically attributed to existing positions or new positions. The 
sum of (i), (ii), and (iii) must equal the trading desk's 
comprehensive profit and loss at each point in time. In addition, 
profit and loss measurements must calculate volatility of 
comprehensive profit and loss (i.e., the standard deviation of the 
trading desk's one-day profit and loss, in dollar terms) for the 
reporting period for at least a 30-, 60- and 90-day lag period, from 
the end of the reporting period, and any other period that the 
banking entity deems necessary to meet the requirements of the rule.
    A. The comprehensive profit and loss associated with existing 
positions must reflect changes in the value of these positions on 
the applicable day. The comprehensive profit and loss from existing 
positions must be further attributed, as applicable, to changes in 
(i) the specific Risk Factors and other factors that are monitored 
and managed as part of the trading desk's overall risk management 
policies and procedures; and (ii) any other applicable elements, 
such as cash flows, carry, changes in reserves, and the correction, 
cancellation, or exercise of a trade.
    B. 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.
    C. The portion of comprehensive profit and loss that cannot be 
specifically attributed to known sources must be allocated to a 
residual category identified as an unexplained portion of the 
comprehensive profit and loss. Significant unexplained profit and 
loss must be escalated for further investigation and analysis.
    ii. General Calculation Guidance: The specific categories used 
by a trading desk in the attribution analysis and amount of detail 
for the analysis should be tailored to the type and amount of 
trading activities undertaken by the trading desk. The new position 
attribution must be computed by calculating the difference between 
the prices at which instruments were bought and/or sold and the 
prices at which those instruments are marked to market at the close 
of business on that day multiplied by the notional or principal 
amount of each purchase or sale. Any fees, commissions, or other 
payments received (paid) that are associated with transactions 
executed on that day must be added (subtracted) from such 
difference. These factors must be measured consistently over time to 
facilitate historical comparisons.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

c. Customer-Facing Activity Measurements

1. Inventory Turnover

    i. Description: For purposes of this appendix, Inventory 
Turnover is a ratio that measures the turnover of a trading desk's 
inventory. The numerator of the ratio is the absolute value of all 
transactions over the reporting period. The denominator of the ratio 
is the value of the trading desk's inventory at the beginning of the 
reporting period.
    ii. General Calculation Guidance: For purposes of this appendix, 
for derivatives, other than options and interest rate derivatives, 
value means gross notional value, for options, value means delta 
adjusted notional value, and for interest rate derivatives, value 
means 10-year bond equivalent value.
    iii. Calculation Period: 30 days, 60 days, and 90 days.
    iv. Measurement Frequency: Daily.

2. Inventory Aging

    i. Description: For purposes of this appendix, Inventory Aging 
generally describes a schedule of the trading desk's aggregate 
assets and liabilities and the amount of time that those assets and 
liabilities have been held. Inventory Aging should measure the age 
profile of the trading desk's assets and liabilities.
    ii. General Calculation Guidance: In general, Inventory Aging 
must be computed using a trading desk's trading activity data and 
must identify the value of a trading desk's aggregate assets and 
liabilities. Inventory Aging must include two schedules, an asset-
aging schedule and a liability-aging schedule. Each schedule must 
record the value of assets or liabilities held over all holding 
periods. For derivatives, other than options, and interest rate 
derivatives, value means gross notional value, for options, value 
means delta adjusted notional value and, for interest rate 
derivatives, value means 10-year bond equivalent value.
    iii. Calculation Period: One trading day.
    iv. Measurement Frequency: Daily.

3. Customer-Facing Trade Ratio--Trade Count Based and Value Based

    i. Description: For purposes of this appendix, the Customer-
Facing Trade Ratio is a ratio comparing (i) the transactions 
involving a counterparty that is a customer of the trading desk to 
(ii) the transactions involving a counterparty that is not a 
customer of the trading desk. A trade count based ratio must be 
computed that records the number of transactions involving a 
counterparty that is a customer of the trading desk and the number 
of transactions involving a counterparty that is not a customer of 
the trading desk. A value based ratio must be computed that records 
the value of transactions involving a counterparty that is a 
customer of the trading desk and the value of transactions involving 
a counterparty that is not a customer of the trading desk.
    ii. General Calculation Guidance: For purposes of calculating 
the Customer-Facing Trade Ratio, a counterparty is considered to be 
a customer of the trading desk if the counterparty is a market 
participant that makes 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. However, a trading

[[Page 62270]]

desk or other organizational unit of another banking entity would 
not be a client, customer, or counterparty of the trading desk if 
the other entity has trading assets and liabilities of $50 billion 
or more as measured in accordance with Sec.  255.20(d)(1) unless 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. Transactions 
conducted anonymously on an exchange or similar trading facility 
that permits trading on behalf of a broad range of market 
participants would be considered transactions with customers of the 
trading desk. For derivatives, other than options, and interest rate 
derivatives, value means gross notional value, for options, value 
means delta adjusted notional value, and for interest rate 
derivatives, value means 10-year bond equivalent value.
    iii. Calculation Period: 30 days, 60 days, and 90 days.
    iv. Measurement Frequency: Daily.

Appendix B to Part 255--Enhanced Minimum Standards for Compliance 
Programs

I. Overview

    Section 255.20(c) requires certain banking entities to 
establish, maintain, and enforce an enhanced compliance program that 
includes the requirements and standards in this Appendix as well as 
the minimum written policies and procedures, internal controls, 
management framework, independent testing, training, and 
recordkeeping provisions outlined in Sec.  255.20. This Appendix 
sets forth additional minimum standards with respect to the 
establishment, oversight, maintenance, and enforcement by these 
banking entities of an enhanced internal compliance program for 
ensuring and monitoring 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.
    a. This compliance program must:
    1. Be reasonably designed to identify, document, monitor, and 
report the permitted trading and covered fund activities and 
investments of the banking entity; identify, monitor and promptly 
address the risks of these covered activities and investments and 
potential areas of noncompliance; and prevent activities or 
investments prohibited by, or that do not comply with, section 13 of 
the BHC Act and this part;
    2. Establish and enforce appropriate limits on the covered 
activities and investments of the banking entity, including limits 
on the size, scope, complexity, and risks of the individual 
activities or investments consistent with the requirements of 
section 13 of the BHC Act and this part;
    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 chief executive 
officer (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 permitted trading and covered fund activities and 
investments.

II. Enhanced Compliance Program

    a. Proprietary Trading Activities. A banking entity must 
establish, maintain and enforce a compliance program that includes 
written policies and procedures that are appropriate for the types, 
size, and complexity of, and risks associated with, its permitted 
trading activities. The compliance program may be tailored to the 
types of trading activities conducted by the banking entity, and 
must include a detailed description of controls established by the 
banking entity to reasonably ensure that its trading activities are 
conducted in accordance with the requirements and limitations 
applicable to those trading activities under section 13 of the BHC 
Act and this part, and provide for appropriate revision of the 
compliance program before expansion of the trading activities of the 
banking entity. A banking entity must devote adequate resources and 
use knowledgeable personnel in conducting, supervising and managing 
its trading activities, and promote consistency, independence and 
rigor in implementing its risk controls and compliance efforts. The 
compliance program must be updated with a frequency sufficient to 
account for changes in the activities of the banking entity, results 
of independent testing of the program, identification of weaknesses 
in the program, and changes in legal, regulatory or other 
requirements.
    1. Trading Desks: The banking entity must have written policies 
and procedures governing each trading desk that include a 
description of:
    i. The process for identifying, authorizing and documenting 
financial instruments each trading desk may purchase or sell, with 
separate documentation for market making-related activities 
conducted in reliance on Sec.  255.4(b) and for hedging activity 
conducted in reliance on Sec.  255.5;
    ii. A mapping for each trading desk to the division, business 
line, or other organizational structure that is responsible for 
managing and overseeing the trading desk's activities;
    iii. The mission (i.e., the type of trading activity, such as 
market-making, trading in sovereign debt, etc.) and strategy (i.e., 
methods for conducting authorized trading activities) of each 
trading desk;
    iv. The activities that the trading desk is authorized to 
conduct, including (i) authorized instruments and products, and (ii) 
authorized hedging strategies, techniques and instruments;
    v. The types and amount of risks allocated by the banking entity 
to each trading desk to implement the mission and strategy of the 
trading desk, including an enumeration of material risks resulting 
from the activities in which the trading desk is authorized to 
engage (including but not limited to price risks, such as basis, 
volatility and correlation risks, as well as counterparty credit 
risk). Risk assessments must take into account both the risks 
inherent in the trading activity and the strength and effectiveness 
of controls designed to mitigate those risks;
    vi. How the risks allocated to each trading desk will be 
measured;
    vii. Why the allocated risks levels are appropriate to the 
activities authorized for the trading desk;
    viii. The limits on the holding period of, and the risk 
associated with, financial instruments under the responsibility of 
the trading desk;
    ix. The process for setting new or revised limits, as well as 
escalation procedures for granting exceptions to any limits or to 
any policies or procedures governing the desk, the analysis that 
will be required to support revising limits or granting exceptions, 
and the process for independently reviewing and documenting those 
exceptions and the underlying analysis;
    x. The process for identifying, documenting and approving new 
products, trading strategies, and hedging strategies;
    xi. The types of clients, customers, and counterparties with 
whom the trading desk may trade; and
    xii. The compensation arrangements, including incentive 
arrangements, for employees associated with the trading desk, which 
may not be designed to reward or incentivize prohibited proprietary 
trading or excessive or imprudent risk-taking.
    2. Description of risks and risk management processes: The 
compliance program for the banking entity must include a 
comprehensive description of the risk management program for the 
trading activity of the banking entity. The compliance program must 
also include a description of the governance, approval, reporting, 
escalation, review and other processes the banking entity will use 
to reasonably ensure that trading activity is conducted in 
compliance with section 13 of the BHC Act and this part. Trading 
activity in similar financial instruments should be subject to 
similar governance, limits, testing, controls, and review, unless 
the banking entity specifically determines to establish different 
limits or processes and documents those differences. Descriptions 
must include, at a minimum, the following elements:
    i. A description of the supervisory and risk management 
structure governing all trading activity, including a description of 
processes for initial and senior-level review of new products and 
new strategies;
    ii. A description of the process for developing, documenting, 
testing, approving and reviewing all models used for valuing, 
identifying and monitoring the risks of trading activity and related 
positions, including the process for periodic independent testing of 
the reliability and accuracy of those models;
    iii. A description of the process for developing, documenting, 
testing, approving and reviewing the limits established for each 
trading desk;
    iv. A description of the process by which a security may be 
purchased or sold pursuant to the liquidity management plan, 
including

[[Page 62271]]

the process for authorizing and monitoring such activity to ensure 
compliance with the banking entity's liquidity management plan and 
the restrictions on liquidity management activities in this part;
    v. A description of the management review process, including 
escalation procedures, for approving any temporary exceptions or 
permanent adjustments to limits on the activities, positions, 
strategies, or risks associated with each trading desk; and
    vi. The role of the audit, compliance, risk management and other 
relevant units for conducting independent testing of trading and 
hedging activities, techniques and strategies.
    3. Authorized risks, instruments, and products. The banking 
entity must implement and enforce limits and internal controls for 
each trading desk that are reasonably designed to ensure that 
trading activity is conducted in conformance with section 13 of the 
BHC Act and this part and with the banking entity's written policies 
and procedures. The banking entity must establish and enforce risk 
limits appropriate for the activity of each trading desk. These 
limits should be based on probabilistic and non-probabilistic 
measures of potential loss (e.g., Value-at-Risk and notional 
exposure, respectively), and measured under normal and stress market 
conditions. At a minimum, these internal controls must monitor, 
establish and enforce limits on:
    i. The financial instruments (including, at a minimum, by type 
and exposure) that the trading desk may trade;
    ii. The types and levels of risks that may be taken by each 
trading desk; and
    iii. The types of hedging instruments used, hedging strategies 
employed, and the amount of risk effectively hedged.
    4. Hedging policies and procedures. The banking entity must 
establish, maintain, and enforce written policies and procedures 
regarding the use of risk-mitigating hedging instruments and 
strategies that, at a minimum, describe:
    i. The positions, techniques and strategies that each trading 
desk may use to hedge the risk of its positions;
    ii. The manner in which the banking entity will identify the 
risks arising in connection with and related to the individual or 
aggregated positions, contracts or other holdings of the banking 
entity that are to be hedged and determine that those risks have 
been properly and effectively hedged;
    iii. The level of the organization at which hedging activity and 
management will occur;
    iv. The manner in which hedging strategies will be monitored and 
the personnel responsible for such monitoring;
    v. The risk management processes used to control unhedged or 
residual risks; and
    vi. The process for developing, documenting, testing, approving 
and reviewing all hedging positions, techniques and strategies 
permitted for each trading desk and for the banking entity in 
reliance on Sec.  255.5.
    5. Analysis and quantitative measurements. The banking entity 
must perform robust analysis and quantitative measurement of its 
trading activities that is reasonably designed to ensure that the 
trading activity of each trading desk is consistent with the banking 
entity's compliance program; monitor and assist in the 
identification of potential and actual prohibited proprietary 
trading activity; and prevent the occurrence of prohibited 
proprietary trading. Analysis and models used to determine, measure 
and limit risk must be rigorously tested and be reviewed by 
management responsible for trading activity to ensure that trading 
activities, limits, strategies, and hedging activities do not 
understate the risk and exposure to the banking entity or allow 
prohibited proprietary trading. This review should include periodic 
and independent back-testing and revision of activities, limits, 
strategies and hedging as appropriate to contain risk and ensure 
compliance. In addition to the quantitative measurements reported by 
any banking entity subject to Appendix A to this part, each banking 
entity must develop and implement, to the extent appropriate to 
facilitate compliance with this part, additional quantitative 
measurements specifically tailored to the particular risks, 
practices, and strategies of its trading desks. The banking entity's 
analysis and quantitative measurements must incorporate the 
quantitative measurements reported by the banking entity pursuant to 
Appendix A (if applicable) and include, at a minimum, the following:
    i. Internal controls and written policies and procedures 
reasonably designed to ensure the accuracy and integrity of 
quantitative measurements;
    ii. Ongoing, timely monitoring and review of calculated 
quantitative measurements;
    iii. The establishment of numerical thresholds and appropriate 
trading measures for each trading desk and heightened review of 
trading activity not consistent with those thresholds to ensure 
compliance with section 13 of the BHC Act and this part, including 
analysis of the measurement results or other information, 
appropriate escalation procedures, and documentation related to the 
review; and
    iv. Immediate review and compliance investigation of the trading 
desk's activities, escalation to senior management with oversight 
responsibilities for the applicable trading desk, timely 
notification to the SEC, appropriate remedial action (e.g., 
divesting of impermissible positions, cessation of impermissible 
activity, disciplinary actions), and documentation of the 
investigation findings and remedial action taken when quantitative 
measurements or other information, considered together with the 
facts and circumstances, or findings of internal audit, independent 
testing or other review suggest a reasonable likelihood that the 
trading desk has violated any part of section 13 of the BHC Act or 
this part.
    6. Other Compliance Matters. In addition to the requirements 
specified above, the banking entity's compliance program must:
    i. Identify activities of each trading desk that will be 
conducted in reliance on exemptions contained in Sec. Sec.  255.4 
through 255.6, including an explanation of:
    A. How and where in the organization the activity occurs; and
    B. Which exemption is being relied on and how the activity meets 
the specific requirements for reliance on the applicable exemption;
    ii. Include an explanation of the process for documenting, 
approving and reviewing actions taken pursuant to the liquidity 
management plan, where in the organization this activity occurs, the 
securities permissible for liquidity management, the process for 
ensuring that liquidity management activities are not conducted for 
the purpose of prohibited proprietary trading, and the process for 
ensuring that securities purchased as part of the liquidity 
management plan are highly liquid and conform to the requirements of 
this part;
    iii. Describe how the banking entity monitors for and prohibits 
potential or actual material exposure to high-risk assets or high-
risk trading strategies presented by each trading desk that relies 
on the exemptions contained in Sec. Sec.  255.3(d)(3), and 255.4 
through 255.6, which must take into account potential or actual 
exposure to:
    A. Assets whose values cannot be externally priced or, where 
valuation is reliant on pricing models, whose model inputs cannot be 
externally validated;
    B. Assets whose changes in value cannot be adequately mitigated 
by effective hedging;
    C. New products with rapid growth, including those that do not 
have a market history;
    D. Assets or strategies that include significant embedded 
leverage;
    E. Assets or strategies that have demonstrated significant 
historical volatility;
    F. Assets or strategies for which the application of capital and 
liquidity standards would not adequately account for the risk; and
    G. Assets or strategies that result in large and significant 
concentrations to sectors, risk factors, or counterparties;
    iv. Establish responsibility for compliance with the reporting 
and recordkeeping requirements of subpart B and Sec.  255.20; and
    v. Establish policies for monitoring and prohibiting potential 
or actual material conflicts of interest between the banking entity 
and its clients, customers, or counterparties.
    7. Remediation of violations. The banking entity's compliance 
program must be reasonably designed and established to effectively 
monitor and identify for further analysis any trading activity that 
may indicate potential violations of section 13 of the BHC Act and 
this part and to prevent actual violations of section 13 of the BHC 
Act and this part. The compliance program must describe procedures 
for identifying and remedying violations of section 13 of the BHC 
Act and this part, and must include, at a minimum, a requirement to 
promptly document, address and remedy any violation of section 13 of 
the BHC Act or this part, and document all proposed and actual 
remediation efforts. The compliance program must include specific 
written policies and procedures that are reasonably designed to 
assess the extent to which any activity indicates that modification 
to the banking entity's compliance program is warranted and to 
ensure that appropriate modifications are implemented. The written 
policies and procedures must provide for prompt

[[Page 62272]]

notification to appropriate management, including senior management 
and the board of directors, of any material weakness or significant 
deficiencies in the design or implementation of the compliance 
program of the banking entity.
    b. Covered Fund Activities or Investments. A banking entity must 
establish, maintain and enforce a compliance program that includes 
written policies and procedures that are appropriate for the types, 
size, complexity and risks of the covered fund and related 
activities conducted and investments made, by the banking entity.
    1. Identification of covered funds. The banking entity's 
compliance program must provide a process, which must include 
appropriate management review and independent testing, for 
identifying and documenting covered funds that each unit within the 
banking entity's organization sponsors or organizes and offers, and 
covered funds in which each such unit invests. In addition to the 
documentation requirements for covered funds, as specified under 
Sec.  255.20(e), the documentation must include information that 
identifies all pools that the banking entity sponsors or has an 
interest in and the type of exemption from the Commodity Exchange 
Act (whether or not the pool relies on section 4.7 of the 
regulations under the Commodity Exchange Act), and the amount of 
ownership interest the banking entity has in those pools.
    2. Identification of covered fund activities and investments. 
The banking entity's compliance program must identify, document and 
map each unit within the organization that is permitted to acquire 
or hold an interest in any covered fund or sponsor any covered fund 
and map each unit to the division, business line, or other 
organizational structure that will be responsible for managing and 
overseeing that unit's activities and investments.
    3. Explanation of compliance. The banking entity's compliance 
program must explain how:
    i. The banking entity monitors for and prohibits potential or 
actual material conflicts of interest between the banking entity and 
its clients, customers, or counterparties related to its covered 
fund activities and investments;
    ii. The banking entity monitors for and prohibits potential or 
actual transactions or activities that may threaten the safety and 
soundness of the banking entity related to its covered fund 
activities and investments; and
    iii. The banking entity monitors for and prohibits potential or 
actual material exposure to high-risk assets or high-risk trading 
strategies presented by its covered fund activities and investments, 
taking into account potential or actual exposure to:
    A. Assets whose values cannot be externally priced or, where 
valuation is reliant on pricing models, whose model inputs cannot be 
externally validated;
    B. Assets whose changes in values cannot be adequately mitigated 
by effective hedging;
    C. New products with rapid growth, including those that do not 
have a market history;
    D. Assets or strategies that include significant embedded 
leverage;
    E. Assets or strategies that have demonstrated significant 
historical volatility;
    F. Assets or strategies for which the application of capital and 
liquidity standards would not adequately account for the risk; and
    G. Assets or strategies that expose the banking entity to large 
and significant concentrations with respect to sectors, risk 
factors, or counterparties;
    4. Description and documentation of covered fund activities and 
investments. For each organizational unit engaged in covered fund 
activities and investments, the banking entity's compliance program 
must document:
    i. The covered fund activities and investments that the unit is 
authorized to conduct;
    ii. The banking entity's plan for actively seeking unaffiliated 
investors to ensure that any investment by the banking entity 
conforms to the limits contained in Sec.  255.12 or registered in 
compliance with the securities laws and thereby exempt from those 
limits within the time periods allotted inSec.  255.12; and
    iii. How it complies with the requirements of subpart C.
    5. Internal Controls. A banking entity must establish, maintain, 
and enforce internal controls that are reasonably designed to ensure 
that its covered fund activities or investments comply with the 
requirements of section 13 of the BHC Act and this part and are 
appropriate given the limits on risk established by the banking 
entity. These written internal controls must be reasonably designed 
and established to effectively monitor and identify for further 
analysis any covered fund activity or investment that may indicate 
potential violations of section 13 of the BHC Act or this part. The 
internal controls must, at a minimum require:
    i. Monitoring and limiting the banking entity's individual and 
aggregate investments in covered funds;
    ii. Monitoring the amount and timing of seed capital investments 
for compliance with the limitations under subpart C (including but 
not limited to the redemption, sale or disposition requirements) of 
Sec.  255.12, and the effectiveness of efforts to seek unaffiliated 
investors to ensure compliance with those limits;
    iii. Calculating the individual and aggregate levels of 
ownership interests in one or more covered fund required by Sec.  
255.12;
    iv. Attributing the appropriate instruments to the individual 
and aggregate ownership interest calculations above;
    v. Making disclosures to prospective and actual investors in any 
covered fund organized and offered or sponsored by the banking 
entity, as provided under Sec.  255.11(a)(8);
    vi. Monitoring for and preventing any relationship or 
transaction between the banking entity and a covered fund that is 
prohibited under Sec.  255.14, including where the banking entity 
has been designated as the sponsor, investment manager, investment 
adviser, or commodity trading advisor to a covered fund by another 
banking entity; and
    vii. Appropriate management review and supervision across legal 
entities of the banking entity to ensure that services and products 
provided by all affiliated entities comply with the limitation on 
services and products contained in Sec.  255.14.
    6. Remediation of violations. The banking entity's compliance 
program must be reasonably designed and established to effectively 
monitor and identify for further analysis any covered fund activity 
or investment that may indicate potential violations of section 13 
of the BHC Act or this part and to prevent actual violations of 
section 13 of the BHC Act and this part. The banking entity's 
compliance program must describe procedures for identifying and 
remedying violations of section 13 of the BHC Act and this part, and 
must include, at a minimum, a requirement to promptly document, 
address and remedy any violation of section 13 of the BHC Act or 
this part, including Sec.  255.21, and document all proposed and 
actual remediation efforts. The compliance program must include 
specific written policies and procedures that are reasonably 
designed to assess the extent to which any activity or investment 
indicates that modification to the banking entity's compliance 
program is warranted and to ensure that appropriate modifications 
are implemented. The written policies and procedures must provide 
for prompt notification to appropriate management, including senior 
management and the board of directors, of any material weakness or 
significant deficiencies in the design or implementation of the 
compliance program of the banking entity.

III. Responsibility and Accountability for the Compliance Program

    a. A banking entity must establish, maintain, and enforce a 
governance and management framework to manage its business and 
employees with a view to preventing violations of section 13 of the 
BHC Act and this part. A banking entity must have an appropriate 
management framework reasonably designed to ensure that: Appropriate 
personnel are responsible and accountable for the effective 
implementation and enforcement of the compliance program; a clear 
reporting line with a chain of responsibility is delineated; and the 
compliance program is reviewed periodically by senior management. 
The board of directors (or equivalent governance body) and senior 
management should have the appropriate authority and access to 
personnel and information within the organizations as well as 
appropriate resources to conduct their oversight activities 
effectively.
    1. Corporate governance. The banking entity must adopt a written 
compliance program approved by the board of directors, an 
appropriate committee of the board, or equivalent governance body, 
and senior management.
    2. Management procedures. The banking entity must establish, 
maintain, and enforce a governance framework that is reasonably 
designed to achieve compliance with section 13 of the BHC Act and 
this part, which, at a minimum, provides for:
    i. The designation of appropriate senior management or committee 
of senior management with authority to carry out the management 
responsibilities of the banking

[[Page 62273]]

entity for each trading desk and for each organizational unit 
engaged in covered fund activities;
    ii. Written procedures addressing the management of the 
activities of the banking entity that are reasonably designed to 
achieve compliance with section 13 of the BHC Act and this part, 
including:
    A. A description of the management system, including the titles, 
qualifications, and locations of managers and the specific 
responsibilities of each person with respect to the banking entity's 
activities governed by section 13 of the BHC Act and this part; and
    B. Procedures for determining compensation arrangements for 
traders engaged in underwriting or market making-related activities 
under Sec.  255.4 or risk-mitigating hedging activities under Sec.  
255.5 so that such compensation arrangements are designed not to 
reward or incentivize prohibited proprietary trading and 
appropriately balance risk and financial results in a manner that 
does not encourage employees to expose the banking entity to 
excessive or imprudent risk.
    3. Business line managers. Managers with responsibility for one 
or more trading desks of the banking entity are accountable for the 
effective implementation and enforcement of the compliance program 
with respect to the applicable trading desk(s).
    4. Board of directors, or similar corporate body, and senior 
management. The board of directors, or similar corporate body, and 
senior management are responsible for setting and communicating an 
appropriate culture of compliance with section 13 of the BHC Act and 
this part and ensuring that appropriate policies regarding the 
management of trading activities and covered fund activities or 
investments are adopted to comply with section 13 of the BHC Act and 
this part. The board of directors or similar corporate body (such as 
a designated committee of the board or an equivalent governance 
body) must ensure that senior management is fully capable, 
qualified, and properly motivated to manage compliance with this 
part in light of the organization's business activities and the 
expectations of the board of directors. The board of directors or 
similar corporate body must also ensure that senior management has 
established appropriate incentives and adequate resources to support 
compliance with this part, including the implementation of a 
compliance program meeting the requirements of this appendix into 
management goals and compensation structures across the banking 
entity.
    5. Senior management. Senior management is responsible for 
implementing and enforcing the approved compliance program. Senior 
management must also ensure that effective corrective action is 
taken when failures in compliance with section 13 of the BHC Act and 
this part are identified. Senior management and control personnel 
charged with overseeing compliance with section 13 of the BHC Act 
and this part should review the compliance program for the banking 
entity periodically and report to the board, or an appropriate 
committee thereof, on the effectiveness of the compliance program 
and compliance matters with a frequency appropriate to the size, 
scope, and risk profile of the banking entity's trading activities 
and covered fund activities or investments, which shall be at least 
annually.
    6. CEO attestation. Based on a review by the CEO of the banking 
entity, the CEO of the banking entity must, annually, attest in 
writing to the SEC that the banking entity has in place processes to 
establish, maintain, enforce, review, test and modify the compliance 
program established under this Appendix and Sec.  255.20 of this 
part 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 United States 
operations of the foreign banking entity who is located in the 
United States.

IV. Independent Testing

    a. Independent testing must occur with a frequency appropriate 
to the size, scope, and risk profile of the banking entity's trading 
and covered fund activities or investments, which shall be at least 
annually. This independent testing must include an evaluation of:
    1. The overall adequacy and effectiveness of the banking 
entity's compliance program, including an analysis of the extent to 
which the program contains all the required elements of this 
appendix;
    2. The effectiveness of the banking entity's internal controls, 
including an analysis and documentation of instances in which such 
internal controls have been breached, and how such breaches were 
addressed and resolved; and
    3. The effectiveness of the banking entity's management 
procedures.
    b. A banking entity must ensure that independent testing 
regarding the effectiveness of the banking entity's compliance 
program is conducted by a qualified independent party, such as the 
banking entity's internal audit department, compliance personnel or 
risk managers independent of the organizational unit being tested, 
outside auditors, consultants, or other qualified independent 
parties. A banking entity must promptly take appropriate action to 
remedy any significant deficiencies or material weaknesses in its 
compliance program and to terminate any violations of section 13 of 
the BHC Act or this part.

V. Training

    Banking entities must provide adequate training to personnel and 
managers of the banking entity engaged in activities or investments 
governed by section 13 of the BHC Act or this part, as well as other 
appropriate supervisory, risk, independent testing, and audit 
personnel, in order to effectively implement and enforce the 
compliance program. This training should occur with a frequency 
appropriate to the size and the risk profile of the banking entity's 
trading activities and covered fund activities or investments.

VI. Recordkeeping

    Banking entities must create and retain records sufficient to 
demonstrate compliance and support the operations and effectiveness 
of the compliance program. A banking entity must retain these 
records for a period that is no less than 5 years or such longer 
period as required by the SEC in a form that allows it to promptly 
produce such records to the SEC on request.

    Dated: August 19, 2019.
Joseph M. Otting,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, October 9, 2019.
Ann E. Misback,
Secretary of the Board.
    Dated at Washington, DC, on August 20, 2019.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Valerie Jean Best,
Assistant Executive Secretary.

    By the Securities and Exchange Commission.

    Dated: September 18, 2019.

    Vanessa A. Countryman.

    Issued in Washington, DC, on October 11, 2019, by the Commodity 
Futures Trading Commission.
Christopher Kirkpatrick,
Secretary of the Commodity Futures Trading Commission.

    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 well-intentioned 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

[[Page 62274]]

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.''
    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 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.
---------------------------------------------------------------------------

    \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-the-volcker-rule; ``Paul Volcker Says 
Volcker Rule Too Complicated,'' Reuters (Nov. 9, 2011), available at 
https://www.reuters.com/article/us-regulation-volcker/paul-volcker-says-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-volcker-the-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).
    \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).
---------------------------------------------------------------------------

    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-
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\
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    \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, Public Law 113-235, 128 Stat. 2130 at 
section 630 (2014).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
    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

[[Page 62275]]

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.

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 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 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\
---------------------------------------------------------------------------

    \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-volcker-the-rule-in-letter-to-fed-chair.
---------------------------------------------------------------------------

    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 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.

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

[[Page 62276]]

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 
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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).

---------------------------------------------------------------------------

[[Page 62277]]

Conclusion

    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.

[FR Doc. 2019-22695 Filed 11-13-19; 8:45 am]
BILLING CODE P


