Federal Banking Regulators Sign Off on Volcker Rule 2.0

On October 8, 2019, five federal agencies jointly announced that they had finalized revisions designed to simplify compliance with the Volcker Rule regulations implementing Section 13 of the Bank Holding Company Act. The changes primarily relate to the rule’s proprietary trading and compliance program requirements. The final rule goes into effect on January 1, 2020, with a mandatory compliance date of January 1, 2021.

The Volcker Rule, a regulation named after former Federal Reserve Board Chairman Paul Volcker, generally bars banking entities from engaging in proprietary trading and from acquiring or retaining an ownership interest in hedge funds or private equity funds. The revisions continue to prohibit proprietary trading, while providing greater clarity and certainty for activities allowed under the law. Community banks generally are exempt from the Volcker Rule.

Key changes to the Volcker Rule include the following:

A Reversed Presumption: Under the Volcker Rule, banking entities generally may not engage as principal for the trading account of the banking entity in any purchase or sale of certain financial instruments. The rule’s definition of “trading account” includes any account used to buy or sell a financial instrument principally for the purpose of short-term resale, benefitting from actual or expected short-term price movements, realizing short-term arbitrage movements, or hedging a position resulting from any of the foregoing activities. A 2018 proposal by regulators would have replaced this portion of the definition, also known as the short-term intent prong, with a prong tied to the accounting treatment of a position. The proposed accounting prong received significant pushback from the banking industry, which argued that the inclusion of an accounting prong would expand the definition of “trading account” beyond the statutory focus on short-term activities to capture a wide range of longer-term transactions that were never intended to be prohibited by Section 13.

The revised rule remains focused on the idea of short-term intent by abandoning the proposed accounting prong. Instead, the rule reverses the rebuttable presumption that financial instruments held for less than 60 days are within the short-term intent prong of a trading account. The new rule now includes a rebuttable presumption that financial instruments held for 60 days or more are not within the short-term intent prong of a trading account.

Tiered Compliance Regime: The new rule revises the various levels of compliance program requirements by categorizing banking entities based only on their trading activity. The most stringent requirements—including a six-pillar compliance program, an annual CEO attestation, and metrics reporting—will now be placed on entities with $20 billion or more in consolidated trading assets and liabilities. The original rule had taken into account a banking entity’s total asset size rather than just its trading activity, and the 2018 proposal placed the most stringent requirements on entities starting at a much lower threshold of $10 billion or more in trading assets and liabilities.