1. Volcker Rule: The Final Rule
Henry M. Fields
Oliver I. Ireland
Kenneth E. Kohler
Daniel A. Nathan
Gary M Rosenblum gary.rosenblum
@bankofamerica.com
February 2014

2. Volcker Rule
The Volcker Rule is the popular name for Section 619 of the Dodd-Frank Act, enacted in July 2010
Codified as Section 13 of the Bank Holding Company Act
The statute prohibits (with exceptions) banking entities from:
Engaging in proprietary trading; and
Sponsoring, or acquiring or retaining an interest in, private equity and hedge funds

3. Volcker Rule The statute is broad
Congress left regulators to construe it, without much specific direction
October 2011: Proposed Rules
Proposed rules drew significant comments, including from international banking community
December 10, 2013: Final Rule (71 pages) approved by the five relevant U.S. regulatory agencies
Effective April 1, 2014
900 page preamble

4. Conformance Period
The Volcker Rule took effect by statute on July 21, 2012
Provides for a two-year conformance period, ending July 21, 2014
Conformance period recently extended by one year by Federal Reserve to July 21, 2015
Each banking entity is expected to make good faith efforts to conform by end of conformance period
Develop plan for disposition or restructuring of existing prohibited investments
New capital commitments likely prohibited
Honoring capital calls under existing commitments
Holding on to CDOs and CLOs awaiting guidance
Banking entities expected to terminate/divest stand-alone proprietary trading operations promptly

5. Conformance Period Two one-year extensions possible, upon application
Further extension of up to five years available, upon application, for continued investment/activity with respect to an “illiquid fund”
To qualify for “illiquid fund” extension, must demonstrate that retention of interest necessary to fulfill a contractual commitment in effect on May 1, 2010
Condition not met if a “regulatory-out” allows sale or redemption of interest
Banking entity required to make reasonable best efforts to get consent for sale or redemption, and to have that consent denied
No expansion of impermissible activities or investments during the conformance period with expectation of extensions

6. What the Volcker Rule Covers
Banking entities include
US banks and thrifts
Bank and thrift holding companies
Foreign banking organizations (FBOs) that operate a branch/agency or commercial lending company in the US
Affiliates of these entities (US and foreign)
Banking entities do not include
A covered fund (unless it is a banking entity included in one of the first three categories above)
A portfolio company held by a financial holding company under the merchant banking or insurance company authority or held by a SBIC (unless it is a banking entity included in one of the first three categories above)
Non-banking entities, such as broker-dealers not affiliated with banks, are not subject to the rule

7. Proprietary Trading

8. Proprietary Trading
The general rule is that a banking entity may not engage in proprietary trading – “engaging as principal for” its own “trading account” in a “purchase or sale of one or more financial instruments,” including derivatives
Definition of “trading account” incorporates concept of “short-term” resales, price movements or arbitrage profits
Definition of “financial instrument” includes most derivatives
There is a rebuttable presumption that if a banking entity holds in its trading account a financial instrument for less than 60 days, the purchase or sale of such instrument is for the banking entity’s trading account
Trading as agent on behalf of a customer is not prohibited

9. Financial instrument A financial instrument includes:
A security (including an option on a security);
A derivative (including an option on a derivative);
A contract of sale of a commodity future (or an option on same)
Certain instruments are not financial instruments:
Loans
A commodity that is not an “excluded commodity,” a derivative, or a commodity future
Foreign exchange or currency

10. Trading account An account that satisfies any one of three criteria:
Purpose test: trading for short-term resale (presumed if held for fewer than 60 days) or for benefitting from short-term price movements, short-term arbitrage profits, etc.
Market Risk Capital Rule test: if a US bank or thrift or US bank or thrift holding company is subject to the US banking agencies’ market risk capital rules, a trading account includes an account used to trade in financial instruments that are both market risk capital rule covered positions and trading positions
Status test: if the banking entity is a securities dealer, swap dealer or securities-based swap dealer, all trades that would require them to be licensed as such are deemed to be in a trading account

11. Proprietary Trading Exclusions
Repos or reverse repos
Trades arising under certain securities lending or borrowing arrangements
Trades for liquidity management pursuant to a plan
Trades by a derivatives clearing organization* and clearing agency** in connection with their clearing and settlement activities
Trades in connection with “excluded clearing activities”
Trades to satisfy an existing delivery obligation
Trades to satisfy a judicial, administrative, arbitration or similar proceeding
Trades where the banking entity is acting solely as agent, broker or custodian
Trades through a deferred compensation or pension plan
Trades made in the ordinary course of collecting a debt previously contracted (DPC exclusion)
*Registered under § 5b of the Commodity Exchange Act, or exempt from registration pursuant to CFTC regulations, or a foreign derivatives organization permitted to clear for a foreign board of trade registered pursuant to CFTC regulations
**Securities Exchange Act of 1934, § 3(a)(23).

12. Permitted Proprietary Trading
The following trading activity as principal is permitted:
Trading in US government/agency securities
Trading in US municipal securities
But trading in derivatives in these two categories of securities does not come within this exemption
For such derivatives consider market making or risk-mitigating hedging exemptions discussed below
Trading by a banking entity that is a regulated insurance company (foreign or domestic)

13. Permitted Proprietary Trading (cont’d)
The prohibition on proprietary trading does not apply to trading as principal on behalf of a customer in a fiduciary capacity or as a riskless principal
A banking entity may conduct a transaction for the account of, or on behalf of a customer, but the banking entity cannot have or retain beneficial ownership of the financial instruments
A banking entity also can conduct riskless principal activities so long as these are “customer-driven” and may not “expose the banking entity to gains (or losses) on the value of the traded instruments as principal”
Possible, as we discuss later, that more business will be structured as “agency” or “riskless principal” business

14. Permitted Proprietary Trading (cont’d)
Also permitted are
Certain risk-mitigating hedging activities
Certain market-making activities
Certain underwriting activities
Overall conditions to these permitted activities
The banking entity must maintain an internal compliance program
The compensation arrangements of personnel involved in these activities must not be designed to reward proprietary trading
The banking entity must be appropriately registered or licensed, or not subject to registration or licensing, to engage in market making or underwriting
This is highly complex area
See our Client Alert:

15. Permitted Hedging Activities
Permitted risk-mitigating hedging activities must be specifically focused on mitigating identified risks
A banking entity may not hedge with respect to “generalized risks that a trading desk or combination of desks, or the banking entity as a whole, believe exists, based on non-position-specific modelling or other considerations”
However, a banking entity may engage in hedging activities that are
“In connection with and related to individual or aggregated positions, contracts or other holdings” and
“Designed to reduce the specific risks to the banking entity” that are “related to such positions, contracts or other holdings”

16. Permitted Hedging Activities (cont’d)
Additional requirements for risk-mitigating hedging activities:
Activity must not give rise, at the inception of the hedge, to any significant new or additional risk that is not itself hedged contemporaneously
Continuing review, monitoring and management that requires ongoing recalibration of the hedging activity
Compensation arrangements of persons performing risk-mitigating hedging activities are designed not to reward or incentivize prohibited proprietary trading
Additional documentation requirements apply with respect to risk-mitigating hedging activities established by a trading desk other than the desk responsible for the underlying positions, or to hedge aggregated positions across trading desks

17. Permitted Hedging Activities (cont’d)
Additional requirements for risk-mitigating hedging activities:
An internal compliance program containing written policies and procedures regarding 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
Position and aging limits
Analysis designed to ensure that the positions, techniques and strategies that may be used for hedging may be reasonably be expected to demonstrably reduce or otherwise significantly mitigate the specific, identifiable risks being hedged
The extent of the required internal compliance program will depend upon the size and activities of the relevant banking entity, but for entities engaging in proprietary trading with consolidated assets of $10 billion or more, it will be quite substantial (discussed below)
Rule is quite prescriptive with respect to reporting and recordkeeping requirements, as set out in Appendices A and B

18. Permitted Market-Making Activities
Requirements for permitted market-making activities:
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
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

19. Permitted Market-Making Activities (cont’d)
“Routinely standing ready” to make a market may differ depending on market conditions and on the type of financial instrument
“Routinely standing ready” means more frequently than occasionally
“Trading by appointment” may meet the requirement
Block positioning activity also would meet the requirement
For “illiquid derivatives or structured instruments” a trading desk would “need to be able to demonstrate a pattern of taking actions in respond to demand from multiple customers with respect to both long and short risk exposures”

20. Permitted Market-Making Activities (cont’d)
Gauging “near-term” customer demand also may be challenging for certain products
Requires assessing historical demand, market conditions, and other factors
Preamble contemplates anticipatory trading in connection with creating and distributing structured products

21. Permitted Market-Making Activities(cont’d)
Additional Requirements for permitted market-making activities:
Internal compliance program that states
The instruments in which each trading desk will make a market
Actions the trading desk will take to demonstrably reduce or otherwise significantly mitigate promptly the risks of its financial exposure
Hedging market making exposures must comply with the market making exception, not the risk-mitigating hedging exception
Limits for each trading desk, based on the nature and amount of the trading desk’s market making-related activities
Internal controls and ongoing monitoring and analysis of each trading desk’s compliance with its limits
Authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk’s limit(s)
The compensation arrangements of persons performing the market-making activities are designed not to reward or incentivize prohibited proprietary trading.

22. Permitted Underwriting Activities
Permitted only if the trading desk’s underwriting position is related to a “distribution” of securities for which the bank is an underwriter
33 Act registered, or otherwise characterized as different from ordinary trading by virtue of selling efforts
This differs from the definition of a “distribution” used for Regulation M purposes
A Rule 144A offering, a 4(a)(2) offering, bought deal, etc. all may be considered “distributions”
The underwriting position must be designed not to exceed the reasonably expected near term demands of clients
Reasonable efforts must be made to sell or otherwise reduce the underwriting position within a reasonable period, taking into account the liquidity, maturity, and depth of the market for the relevant security

23. Permitted Underwriting Activities (cont’d)
Underwriter: defined broadly to include selling group members and other distribution participants
Preamble identifies distribution participants that would be included
Preamble also identifies activities that may be conducted by an underwriter—such as stabilization activities, syndicate shorting, helping an issuer mitigate its risk arising from the issuance of securities in the distribution, etc.
However, certain activities, examples of which are provided in the preamble, would not be considered to have been undertaken in connection with underwriting

24. Permitted Underwriting Activities (cont’d)
Amount and type of securities in the underwriting position cannot exceed the reasonably expected near term demands of clients, customers, counterparties, etc.
The underwriter must rely on historic experience
Can retain an unsold allotment that it was unable to sell, but…
The trading desk must use reasonable efforts to reduce the position within a reasonable time
The underwriter cannot hold the unsold allotment indefinitely
The underwriter cannot routinely retain unsold allotments

25. Effect on Rule 144A transactions
Purchase by FBO or its affiliate of securities for resale in a Rule 144A transaction are prohibited as proprietary trading unless (i) within the SOTUS exemption or (ii) the exemption for permissible underwriting activities (discussed above)
The SOTUS exemption will not be available if resale as principal is directly to US QIBs (because SOTUS exemption requires trade with an unaffiliated intermediary for prompt clearance and settlement through a clearing agency or organization acting as a central counterparty)
Participation in a global (non-US) tranche should satisfy SOTUS exemption as long as the FBO/affiliate does not participate in the US tranche
For US tranche, consider restructuring transaction as private placement to QIBs by issuer, with FBO/affiliate acting as agent

26. Effect on Rule 144A transactions (cont’d)
Underwriting exemption may be available for Rule 144A transactions, but only if the trading desk underwriting position is related to a “distribution” of securities for which the bank is an underwriter
Distribution: registered under the Securities Act of 1933, or otherwise characterized as different from ordinary trading by virtue of selling efforts
Amount and type of securities in the underwriting position cannot exceed the reasonably expected near term demands of clients, customers, counterparties, etc.
The trading desk must use reasonable efforts to reduce the position within a reasonable time
To rely on the underwriting exemption, banking entity is required to have a compliance program and must comply with other requirements, including compensation that does not incentivize proprietary trading
May constitute underwriting in the US under Regulation K
See our Client Alert:

27. Permitted Trading for FBOs
The rule establishes an exemption for proprietary trading by a foreign banking organization (“FBO”) to the extent that the trading is conducted solely outside the United States (SOTUS exemption)

28. Permitted trading for FBOs (cont’d)
Conditions:
May not be a US banking entity or controlled by a US banking entity
If an FBO, must be a qualified foreign banking organization (“QFBO”)
If not an FBO, must be organized outside the US and have a majority of its business outside the US
The FBO or its affiliate (including relevant personnel who arrange, negotiate or execute the trades, but not those who settle or clear) must be located outside the US and organized under foreign law
Trading decisions must be made outside the US
Trades (and related hedging) must be booked and accounted for outside the US by a non-US entity
No financing of trade by a US branch/agency or US affiliate of the FBO

29. Permitted trading for FBOs (cont’d)
Trades may not be with or through a US entity except:
Trades with the foreign operations of US entity as long as no personnel of that entity who are involved in arranging, negotiating or executing the trade are in the US
Trades with an unaffiliated intermediary acting as principal (if the trade is promptly cleared and settled through a clearing agency or organization acting as a central counterparty)
Trades with an unaffiliated intermediary acting as agent if conducted anonymously on an exchange and promptly cleared and settled through a clearing agency or organization acting as a central counterparty

30. Foreign Government Obligations
Trading by a foreign subsidiary of a US banking entity that is a foreign bank or regulated securities dealer in the debt of the foreign government in the country in which the foreign subsidiary is organized
A foreign banking entity or affiliate (including a US affiliate) may trade in obligations issued or guaranteed by a foreign sovereign (or any agency or political subdivision) or a multinational central bank of which the foreign sovereign is a part if:
The banking entity is not controlled by a top-tier US banking entity and is not a US bank or thrift
The obligations are issued or guaranteed by the foreign banking entity’s home country sovereign (or agency or political subdivision) or a multinational central bank of which such foreign sovereign is a part
Trading in obligations of multilateral development banks not within these exemptions
NB: An FBO can trade any foreign debt if it complies with the SOTUS exemption.

31. Deal flow under Rule 15a-6
Under SEC Rule 15a-6, foreign broker-dealers and foreign banks acting as principal or agent can solicit securities transactions with US institutional investors if the transactions are effected through a US registered broker-dealer, often a US affiliate. However, such trades as principal by an FBO and/or its foreign affiliates through its US registered broker-dealer affiliate would constitute proprietary trading
Trades by an FBO or its offshore affiliates as agent for its customers are not considered proprietary trading and thus can continue to be effected through a US registered broker-dealer affiliate

32. Prudential Backstops
Proprietary trading activities are not permissible if:
The trading involves or results in a material conflict of interest between the banking entity and its clients, customers or counterparties unless (i) the banking entity makes clear and timely disclosure of the conflict or (ii) uses information barriers, such physical separation of personnel or functions, that address the conflict;
The trading would result in a material exposure by the banking entity to a high-risk asset or a high-risk trading strategy; or
The trading poses a safety and soundness threat to the institution or a threat to US financial stability

33. TRADING DESK – Building Blocks for Metrics, Compliance Programs
Super Banks (over 50 BB in trading assets)
Metrics recordkeeping starts June 30, 2014
Metrics/Compliance Programs are built off of “Trading Desks”
Identifying Trading Desks
Take inventory of activities to determine if in scope/out of scope
Complex exercise
Multiple divisions (retail banking; corporate banking; sales and trading; private wealth management; trust/fiduciary; corporate/treasury)
Multiple jurisdictions
Multiple booking entities
Multiple asset classes
Numerous technology platforms

34. TRADING DESK – Building Blocks for Metrics, Compliance Programs
Determining what activity or activities comprise a single/discrete Trading Account. Considerations include:
PnL attribution historically
Reporting Lines
Licensing/Registration
Asset Classes
Consistency internally and awareness of peer approach

35. TRADING DESK – Building Blocks For Metrics, Compliance Programs (cont’d)
Classification of Trading Accounts
Market Making
Primary
Hedging
Underwriting
Risk Mitigating Hedging (multi-desk)
Different metric/compliance requirements dependent on which category
MM Primary & Underwriting require customer metrics
Risk Mitigating Hedging has enhanced risk metrics
What is a customer:
Other Super Banks – (i.e., CIO/Treasury; Asset Manager)
Affiliates – more significant question

36. TRADING DESK – Building Blocks For Metrics, Compliance Programs (cont’d)
Current State
Number of Trading Desks - most Super Banks are far along in the process of determining the number of Trading Desks
Testing – most Super Banks will begin sample testing in March

37. Covered Funds

38. Covered Funds Prohibition
A banking entity, as principal, may not directly or indirectly acquire or retain an ownership interest in, or sponsor, a covered fund
The prohibition on acquiring/retaining an ownership interest does not apply if:
The banking entity acts solely as agent, broker or custodian for the account of or on behalf of a customer and does not have its own ownership interest
The banking entity’s ownership interest is held/controlled by it as trustee in connection with a deferred compensation or similar plan;
The ownership interest is acquired and held in the ordinary course of collecting a debt; or
The banking entity holds the interest as trustee or in a similar capacity solely for a customer that is not itself a covered fund

39. Sponsorship
A banking entity may not sponsor a covered fund, subject to certain exceptions
Sponsorship means
To serve as a general partner, managing member, trustee or commodity pool operator (CPO) of a covered fund
To select or control selection of a majority of directors, trustees or management of a covered fund
To share with the covered fund the same name or a variation of the name

40. Ownership Interests
A banking entity may not acquire/retain an ownership interest in a covered fund, subject to certain exceptions
Ownership interest means any equity, partnership or “other similar interest”
“Other similar interest” is broadly defined to include
Right to participate in the selection/removal of general partner, or managing member, director, investment manager or adviser (but not including typical creditor’s rights in the event of a default or acceleration)
Right to receive a share of income, gains or profits or, after other interests redeemed or paid, the underlying assets (e.g., the “residual” in a securitization)
Right to receives income on a pass-through basis, or rate of return determined by reference to the performance of the underlying asset
Any synthetic right to receive, or be allocated, any of the foregoing
Does not include “restricted profit interest” (carried interest)
Ownership interest may include an interest in a covered fund not considered an ownership or equity interest in other contexts
Effect on securitizations discussed later

41. What is a Covered Fund?
Statute prohibits investment in/sponsorship of private equity and hedge funds (not defined)
Under the Final Rule, a covered fund includes an issuer that would be an “investment company” under the Investment Company Act of 1940 (1940 Act) but for Sections 3(c)(1) or 3(c)(7)
Section 3(c)(1) exempts from the definition of “investment company” funds whose securities are sold privately to less than 100 purchasers
Section 3(c)(7) exempts from the definition of “investment company” funds whose securities are sold privately only to “qualified purchasers”
These two exemptions are the principal ones relied upon by private equity and hedge funds, but many other investment companies rely on these exemptions
Concept imported from Title IV of the Dodd Frank Act, requiring registration of investments advisers to private funds

42. Certain commodity pools are covered funds
A commodity pool is a covered pool when the CPO has claimed an exemption under Rule 4.7 under the Commodity Exchange Act (CEA)
The CPO is registered in connection with the operation of a pool that limits investors to qualified eligible persons (QEPs)
“Exempt” commodity pools are covered funds because they have characteristics similar to those of hedge funds or private equity funds
They are restricted to investors that meet heightened qualification standards

43. Foreign Covered Funds
Certain foreign funds are covered funds. To be discussed later in connection with Volcker Rule’s treatment of foreign funds

44. What is Not a Covered Fund?
Companies that do not meet the general definition of an “investment company”
For example, a fund may not be an investment company if it is not engaged or proposes to engage in the business of investing in securities that have a value exceeding 40% of the value of the company’s total assets (excluding cash and government securities)
Funds that rely on an exception other than those found in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act
These could include funds invested primarily, for example, in real estate instead of securities.
See our Volcker Rule “User’s Guide”:

45. Other Exclusions
The following entities are also excluded from the definition of “covered funds”:
Wholly owned subsidiaries/joint ventures/acquisition vehicles
Registered investment companies (including seeding vehicles) and business development companies
Loan securitization issuers (discussed below)
Foreign public funds (discussed below)
Foreign pension or retirement funds
Insurance company separate accounts
Bank-owned life insurance company separate accounts
SBICs and certain permissible public welfare and similar funds
Entities used by the FDIC to dispose of assets as receiver/conservator
Others that the federal agencies choose to exclude

46. What May or May Not Be a Covered Fund
The federal agencies declined to exclude certain entities from the definition of covered fund despite requests to do so
In some cases, these are likely covered funds and in others not
These entities include
Financial market utilities
Collateral cash pools
Pass-through real estate investment trusts (REITs )
Municipal securities tender option bond transactions
Venture capital funds
Credit funds
Employee securities companies

47. Permitted Activities and Investments
Customer funds
A banking entity may acquire ownership interests in, and/or sponsor, a covered fund as a means of offering investment opportunities to its existing or future customers
This customer fund activity must be in connection with the banking entity’s trust, fiduciary or investment management services for customers pursuant to a written plan
Detailed conditions apply
Among other things, the banking entity
Cannot guarantee performance of customer funds
Cannot share the same name as a customer fund
Must make clear and conspicuous specified disclosures in writing to prospective investors

48. Permitted Activities and Investments
Asset-backed securities
A banking entity may acquire ownership interests in an issuing entity of asset-backed securities* that is a covered fund, but only in connection with the banking entity’s organization and offering of the covered fund’s ownership interests, subject, generally, to the same conditions that apply to customer funds
This exemption does not permit a banking entity to invest, as a passive investor, in ownership interests in securitization vehicles that are covered funds
Underwriting and market-making activities
A banking entity may acquire an ownership interest in a covered fund in connection with the banking entity’s underwriting or market making of the covered fund’s ownership interests, as long as those activities conform to the Volcker Rule’s requirements for permissible underwriting and market making-related activities
*See Securities and Exchange Act of 1934, §3(a)(79)

49. Investment Limitations
Per-fund limits
A banking entity’s and its affiliates’ investment in covered funds, as a general rule, cannot exceed 3% of the value of, or the number of ownership interests in, the covered fund
During a seeding period of up to one year, the investment may exceed the 3% limit while unaffiliated investors are actively solicited
Special rules apply for calculating the per-fund investment limits for ownership interests held in
Asset-backed securities issuers in connection with a banking entity’s organization and offering of that entity’s ownership interests and
Covered funds whose ownership interests are underwritten by a banking entity or in which a banking entity makes a market

50. Investment Limitations
Aggregate investment limits
The aggregate value of all ownership interests in such permitted covered fund investments cannot exceed 3% of the banking entity’s Tier 1 capital
Capital deduction
A US banking entity (but not an FBO) is required to deduct from Tier 1 capital its investment in such funds
The Volcker Rule treatment does not correspond to Basel III risk weights and deductions for fund investments
The Agencies intend to review the interaction between the Volcker Rule and Basel III and propose steps to reconcile them

51. “Super 23A” and 23B Restrictions
No banking entity that (i) advises or sponsors a covered fund, (ii) organizes and offers a customer fund or an issuer of ABS, or (iii) holds an ownership interest in an ABS issuer, and no affiliate of any of these, may enter into any of the following transactions with the fund*
A loan or extension of credit to the fund (including repos)
The purchase of securities issued by the fund (except for permitted ownership interests)
The purchase of assets from the fund
The issuance of guarantees, acceptances or letters of credit on behalf of the fund
Securities borrowing or lending or derivative transactions that result in the banking entity having a credit exposure to the fund
*Section 23A also prohibits the acceptance of securities issued by an affiliate as collateral for a loan, but as such a transaction would not be with the covered fund, it is not subject to Super 23A

52. “Super 23A” and 23B Restrictions
These restrictions are called “Super 23A” because, unlike Section 23A itself, which allows affiliated transactions within limits, these prohibitions are absolute
However, the following transactions are permitted
Acquisitions of ownership interests in a covered fund to the extent permitted elsewhere in the Final Rule
Subject to certain conditions, prime brokerage transactions (transactions that would be subject to Super 23A but are provided in connection with custody, clearance and settlement, securities borrowing and lending, trade execution, etc.) with a covered fund in which a covered fund that is managed, sponsored or advised by the banking entity or its affiliates has taken an ownership interest (a “second-tier fund”)
The “market terms” requirement of Section 23B of the Federal Reserve Act also applies, as if the banking entity were a bank and the fund it sponsors or advises, its affiliate

53. Other Permitted Fund Activities/Investments
Risk-mitigating hedging activities
Sponsorship of, and investment in, covered funds engaged in permitted risk-mitigating hedging activities, subject to extensive conditions, including a specific internal compliance program
Insurance companies
Investment and sponsorship by regulated foreign and domestic insurance companies of any covered funds, if conducted in compliance with applicable insurance investment laws

54. Prudential Backstops
No permitted fund investments and activities are permissible if
The investment/activity involves or results in a material conflict of interest between the banking entity and its clients, customers or counterparties, unless
The banking entity makes clear and timely disclosure of the conflict, or
The banking entity uses information barriers, such as physical separation of personnel or functions, that address the conflict
The investment/activity results in a material exposure by the banking entity to a high-risk asset or a high-risk trading strategy
The investment/activity poses a safety and soundness threat to the institution or a threat to US financial stability

55. Foreign Funds
Volcker Rule accords special treatment to foreign funds

56. Foreign Covered Funds Certain foreign funds are covered funds
For a banking entity that is, or is controlled by, a US banking entity (which would include a US branch/agency of a foreign bank), a covered fund includes a foreign fund with the following characteristics
The fund is organized outside the US;
The fund’s interests are offered and sold only to non-US persons; and
The fund is sponsored by the US banking entity (or an affiliate)
Such a covered foreign fund would not include a foreign fund that, if organized or offered in the US, would not rely on Section 3(c)(1) or 3(c)(7) for an exemption from the definition of an “investment company”

57. Foreign Fund Exclusion
The Proposed Rule included as a covered fund any fund organized/offered solely outside the US to non-US persons that would have been a covered fund if organized/offered in the US—a “foreign equivalent fund”
The narrowed definition in the Final Rule of a foreign covered fund implies that a foreign equivalent fund is not a covered fund for purposes of sponsorship/ investment by a foreign banking entity (not controlled by a US banking entity)
Same fund could be a covered foreign fund for a US banking entity but not for a foreign banking entity
Investment in or sponsorship of a foreign equivalent fund by a foreign banking entity not controlled by a US banking entity should not be subject to requirements applicable to covered funds (e.g., prudential backstops, compliance program)
Certain US connections with sponsorship or investment activity may make the exclusion unavailable
If foreign fund not a covered fund, could be a “banking entity” if controlled by an FBO

58. Foreign Fund Exemption
The Volcker Rule contains a specific exemption for a foreign fund. The exemption corresponds to the SOTUS exemption for proprietary trading. To qualify for the foreign fund exemption, the investor/sponsor
may not be a US banking entity or controlled by a US banking entity
if an FBO, must be a qualifying foreign banking organization (“QFBO”)
if not an FBO, must be organized outside the US and have a majority of its business outside the US
must make investment/sponsorship decisions outside the US through an entity located and organized outside the US—i.e., decision-making personnel must be outside the US
back office and administrative functions can be in the US
investment advice can be given from the US
US-based entity can offer and sell the fund interests—but only to non-US persons

59. Foreign Fund Exemption (cont’d)
Additional conditions for foreign fund exemption
Fund interests may be offered and sold only in an offering that does not target US Persons (basically, compliant with SEC Regulation S, with appropriate disclosures)
Secondary trades
Multi-tier funds
Parallel funds
Fund investment/sponsorship (including any related hedging) cannot be booked or accounted for in a US entity (including in any US branch/agency)
No financing of any fund investment/sponsorship may be provided by a US affiliate (including any US branch/agency)
Conditions applicable to covered funds apply (e.g., prudential backstops and compliance program)
See

60. Investments by Foreign Funds
No restrictions under Volcker Rule on a foreign excluded fund or foreign exempt fund investing in US portfolio companies or US securities
An foreign banking entity would need to determine whether the investment in the foreign fund was otherwise permissible under the Bank Holding Company Act

61. Foreign Public Funds A foreign public fund is not a covered fund if
The fund is organized outside the US
The fund is authorized to offer and sell its interests to retail investors in the fund’s home jurisdiction (no investor suitability qualification)
The fund sells its interests through one or more public offerings predominantly outside the US (85% or more to non-US Persons)
If a US banking entity sponsors the fund, the interests must be sold predominantly to persons other than the sponsoring banking entity, its affiliates and their employees and directors
Foreign funds that do not meet the specific conditions of this exclusion may not be covered funds for other reasons
They may qualify for the foreign fund exclusion (discussed above) or they may not rely on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act
Foreign public funds may also qualify for the foreign fund exemption

62. Securitizations

63. Securitization Overview
Banking entities involved as investors in, sponsors of, or transaction parties (e.g., credit or liquidity providers) with, securitization issuers are subject to severe restrictions or divestiture if the securitization issuer is a covered fund
Congress stated in the Dodd-Frank Act its intention that the Volcker Rule not limit or restrict the ability of banking entities to sell or securitize loans
In the Final Rule, the Agencies generally followed Congressional intent by making clear that most securitizations of traditional loan products (e.g., mortgage loans, auto loans, student loans and credit card receivables) are not covered funds

64. Securitization Overview (cont’d)
However, the Final Rule creates the possibility that certain securitization vehicles whose assets include securities or derivatives (as opposed to loans) may be covered funds
Banking entities should first closely examine the securitizations with which they are involved to determine if they are covered funds
If a banking entity has an investment in, sponsors, or engages in certain transactions with a securitization vehicle that is a covered fund, it should closely examine such relationships to determine if they are permissible or require divestiture or restructuring

65. Securitization Overview (cont'd)
The basic definition of “covered fund” is a three-pronged test previously described.
For most securitization issuers, the relevant test will be that set forth in the first prong of the definition – whether the issuer would be an investment company under the 1940 Act but for the exemptions set forth in Section 3(c)(1) or 3(c)(7) of the 1940 Act.
Many securitizations rely on other exemptions from the 1940 Act and are therefore not covered funds.
A banking entity involved with a securitization should be able to determine the applicable 1940 Act exemption by reviewing the offering documents.
If beneficial ownership of securities is limited to 100 or fewer persons, the deal probably relies on Section 3(c)(1)
If investors are required to be “qualified purchasers” for purposes of the 1940 Act, the deal probably relies on Section 3(c)(7)

66. Securitization Overview (cont'd)
Note that the D-F Act expanded the definition of commodity interest to include swaps
Any securitization holding swaps will be a commodity pool and needs to determine if it is required to register with the CFTC
A number of no-action letters are available for securitizations; note particularly CFTC Letters and 12-45
As noted previously, certain commodity pools will be covered funds for purposes of the Volcker Rule
Thus in addition to Sections 3(c)(1) and 3(c)(7) of the 1940 Act, certain securitization holding swaps may also bring the issuer within the ownership limitations of the Volcker Rule

67. Securitization Overview (cont'd)
The Agencies have stated that a deal that relied on Section 3(c)(1) or 3(c)(7) may still not be a covered fund if another 1940 Act exemption is also available
If a securitization issuer relied on 3(c)(1) or 3(c)(7), is another 1940 Act exemption available?
Section 3(c)(5)(C) – for certain mortgage-backed securities
Rule 3a-7 – for many traditional securitizations
Section 3(c)(5)(A) – for certain securitizations of consumer receivables
Section 3(c)(5)(B) – for certain securitizations of trade receivables
Rule 3a-5 – for finance subsidiaries whose securities are guaranteed by parent

68. Exclusions from Covered Fund Definition – General
If the issuer relied on Section 3(c)(1) or 3(c)(7) of the 1940 Act and another 1940 Act exemption is not available, it may still avail itself of one or more of the 14 enumerated exclusions from the definition of covered fund
Of the 14 exclusions, four are most likely to be applicable to a securitization issuer:
Loan securitization exclusion
Qualifying asset-backed commercial paper (ABCP) conduit exclusion
Qualifying covered bond exclusion
Wholly-owned subsidiary exclusion

69. Loan Securitization Exclusion
This exclusion applies to an issuer of ABS if its underlying assets are comprised solely of:
loans (defined as any loan, lease, extension of credit, or secured or unsecured receivable that is not a security or derivative)
rights or other assets designed to assure the servicing or timely distribution of proceeds to security holders or related or incidental to purchasing or otherwise acquiring, and holding loans, subject to certain limitations
certain interest rate or foreign exchange derivatives that (i) directly relate to the loans in the issuing entity, the related ABS or certain related contractual rights or assets and (ii) reduce the interest rate and/or foreign exchange risks related to such loans, the related ABS or permitted contractual rights or assets

70. Loan Securitization Exclusion (cont’d)
certain special units of beneficial interest (“SUBIs”) and collateral certificates (which are issued by certain intermediate special purpose vehicles that themselves satisfy the requirements of the loan securitization exclusion); and
certain securities constituting cash equivalents and securities received in lieu of debts previously contracted with respect to the loans underlying the ABS
In addition, in order to qualify for the loan securitization exclusion, the issuer may not hold (i) a security, including an ABS, or an interest in an equity or debt security other than as permitted above; (ii) a derivative, other than as permitted above; or (iii) a commodity forward contract
The Agencies stated in the preamble that the determination whether a loan or other financial asset is a “security” is made by reference to the federal securities laws

71. Qualifying ABCP Conduit Exclusion
This exclusion applies to an issuer of asset-backed commercial paper (ABCP) if the underlying assets are comprised solely of:
loans or other assets that would be permissible under the loan securitization exclusion described above, and
ABS that are supported solely by assets permissible under the loan securitization exclusion and are acquired by the ABCP conduit as part of the initial issuance of the securities
In addition, to qualify for the qualifying ABCP conduit exclusion, a “regulated liquidity provider” (as defined in the Final Rule) must provide a legally binding commitment to provide full and unconditional liquidity coverage with respect to all the outstanding ABCP issued in the event that funds are required to redeem the maturing ABCP

72. Qualifying Covered Bond Exclusion
This exclusion applies to an entity that owns or holds a dynamic or fixed pool of assets that covers the payment obligations of covered bonds if such assets or holdings meet the requirements of the loan securitization exclusion
In addition, the covered bonds must be debt obligations that are issued either directly
by a foreign banking organization (“FBO”) (in which case, the payment obligations of the covered bonds must be fully and unconditionally guaranteed by the entity that owns the permitted cover pool), or
by the entity that owns the permitted cover pool (in which case, the payment obligations of the covered bonds must be fully and unconditionally guaranteed by an FBO and the issuer of the covered bonds must be a wholly owned subsidiary that satisfies the requirements of the wholly owned subsidiary exclusion (described below) of the FBO

73. Wholly Owned Subsidiary Exclusion
This exclusion applies to an entity if all of its outstanding ownership interests are owned directly or indirectly by a banking entity or an affiliate thereof, except that:
up to five percent of the entity’s ownership interests may be owned by directors, employees, and certain former directors and employees of the banking entity or its affiliates; and
within the five percent ownership interest, up to 0.5 percent of the entity’s outstanding ownership interests may be held by a third party if the ownership interest is held by the third party for the purpose of establishing corporate separateness or addressing bankruptcy or insolvency
This exclusion was added to the Final Rule to clarify that wholly owned “depositors” and other intermediate transferors of assets in a securitization are not considered covered funds. This exclusion is also likely to be very helpful for banking entities that establish or rely on special purpose funding programs that utilize trust or other tax pass-through vehicles

74. Covered Fund Problem Areas
Most covered fund problems arise for Section 3(c)(1) or Section 3(c)(7) funds whose assets include securities or derivatives:
CDOs backed by securities or derivatives (including CDOs backed by trust- preferred securities (“TruPS”))
CLOs that hold debt securities
Certain CMOs backed by mortgage securities
Re-securitizations
Bond Repackagings
Synthetic ABS
Synthetic structured products
Auction rate preferred securities
Funding vehicles
Domestic covered bonds

75. Covered Fund Restrictions
If a securitization issuer is determined to be a covered fund, banking entities are prohibited from:
acquiring “ownership interests” in the securitization issuer,
sponsoring the securitization issuer, and
making loans to, or entering into certain other types of transactions with a securitization issuer for which the banking entity acts as sponsor, investment manager, investment adviser or commodity trading advisor
The prohibitions described in the third bullet point above are defined in the Final Rule by reference to the restrictions of Section 23A of the Federal Reserve Act, and are commonly referred to by commenters as the “Super 23A” provisions. These restrictions, among other things, severely limit the ability of banking entities to provide credit and liquidity support to covered fund securitizations to which they are related as investors, sponsors or advisors
Additionally, permitted transactions between the banking entity and the securitization issuer must be on market terms

76. Covered Fund Restrictions (cont’d)
The Final Rule also includes a limited exemption from ownership and sponsorship restrictions to the extent banking entities retain ownership interests in sponsored securitizations not otherwise excluded from the covered fund definition in order to comply with risk retention requirements
This exemption, however, does not exempt banking entities from Super 23A restrictions. Additionally, the exemption does not apply if banking entities retain ownership interests in excess of the required retention under risk retention rules, defeating its utility in situations in which rating agencies or prospective investors require a retention in excess of the regulatory risk retention requirement
The Final Rule does not itself “grandfather,” or exempt, structures and investments put in place before the effective date of the Final Rule or before the enactment of the Dodd-Frank Act. Accordingly, banking entities will need to closely examine their existing securitization investments and relationships, and prospective transactions, for compliance with the Volcker Rule

77. Definition of “Ownership Interest”
As previously discussed, an ownership interest includes any equity or partnership interest in a covered fund or any other interest in or security issued by a covered fund that exhibits any of certain characteristics on a current, future or contingent basis, including:
has the right to participate in the selection or removal of a general partner, managing member, member of the board of directors, investment manager, investment adviser or commodity trading advisor (not including rights of a creditor to exercise remedies in the event of a default);
has the right under the terms of the interest to receive a share of the income, gains or profits of the covered fund (regardless of whether the right is pro rata with other owners);
has the right to receive the underlying assets of the covered fund, after all other interests have been redeemed and/or paid in full (the “residual” in securitizations);
has the right to receive all or a portion of excess spread;

78. Definition of “Ownership Interest” (cont’d)
provides that the amounts payable by the covered fund with respect to the interest could, under the terms of the interest, 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;
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 (excluding interests that are entitled to received dividend amounts calculated at a fixed or floating rate); and
any synthetic right to have, receive or be allocated any of the rights described above (which would not allow banking entities to obtain derivative exposure to these characteristics)
Of particular importance to banking entities engaged in investment banking activities, notwithstanding the general prohibition of a banking entity acquiring an “ownership interest” in a covered fund, a banking entity may acquire such an ownership interest in connection with certain permitted underwriting and market making-related activities

79. Definition of “Ownership Interest” (cont’d)
It is also important to note that the definition of ownership interest in the Final Rule may include interests in a covered fund that might not usually be considered an ownership interest or an equity interest
Of particular concern is the first of the indicia of an ownership interest list above – that the interest has the right to participate in the selection or removal of a general partner, managing member, director, investment manager, investment adviser or commodity trading advisor
Many CLOs and CDOs provide rights to a “controlling class” of senior debt security holders to participate in the designation of investment managers or investment advisers, creating the potential that the holders of even the most senior, highly rated debt securities may be considered to hold “ownership interests”
It is hoped that further regulatory guidance will clarify whether senior debt interests in such structures are susceptible to classification as “ownership interests”

80. Definition of “Sponsor”
The Final Rule defines “sponsor” to mean any entity that:
serves as general partner, managing member, or trustee of a covered fund, or that serves as a commodity pool operator of a covered fund,
selects or controls (or has employees, officers, or directors, or agents who constitute) a majority of the directors, trustees, or management of a covered fund, or
shares with a covered fund, for corporate, marketing, promotional, or other purposes, the same name or a variation of the same name
A key question for trustees of ABS issuing trusts (which are typically appointed by the party usually regarded as the sponsor of the securitization) is whether such trustees may themselves be considered “sponsors” of the securitization
The Agencies stated in the Preamble that the term “sponsor” includes a trustee that has the right to exercise any investment discretion with respect to the securitization
The Agencies also indicated that for ABS issuers, this would generally not include a trustee that executes decision making, including investment of funds prior to the occurrence of an event of default, solely in accordance with the provisions of a written contract or at the written direction of an unaffiliated party

81. Interim Final Rule re TruPS CDOs
The Final Rule caused considerable industry outcry over the definition of “ownership interest” as applied to CDOs and CLOs—particularly from community banks that hold CDOs backed by trust preferred securities (“TruPS”)
On January 14, 2014 the Agencies issued an interim final rule providing grandfathering for certain existing TruPS CDOs
The interim final rule allows the retention of an interest in or sponsorship of covered funds by banking entities if, among other things, the following conditions are met:
The TruPS CDO was established, and the interest was issued, before May 19, 2010;
The banking entity reasonably believes that the offering proceeds received by the TruPS CDO were invested primarily in qualifying TruPS collateral; and
The banking entity’s interest in the TruPS CDO was acquired on or before December 10, 2013, the date the Agencies issued the Final Rule implementing the Volcker Rule

82. Interagency Working Group
February 5, 2014 – Federal Reserve governor Daniel Tarullo testifies in Congress that CLO issues “at the top of the list” to be addressed by interagency Volcker Rule working group
February 11, 2014 – Federal Reserve Chair Janet Yellen confirms in Congressional testimony that regulators are reviewing CLO issues
Neither regulator would commit to timing, but Yellen said decisions could come “reasonably soon”
Unclear what form relief, if any, would take
Grandfather legacy CLOs
Relax “ownership interest” definition
Relax “covered fund” definition

83. Compliance Programs

84. Compliance Programs Important focus of the Rule
All except the “less active” banking entities must implement six-point compliance program:
Written policies and procedures reasonably designed to document, describe, monitor and limit proprietary trading activities, and activities and investments with respect to covered fund activities, to ensure compliance with the Rule
A system of internal controls reasonably designed to monitor compliance with the Volcker Rule, and to prevent the occurrence of activities or investments that are prohibited by the Rule
A management framework that delineates responsibility and accountability for compliance with the Volcker Rule and includes management review of trading limits, strategies, etc.
Independent testing and audit of the effectiveness of the compliance program;
Training for trading personnel and managers, as well as other “appropriate” personnel, to appropriately implement and enforce the compliance program; and
Records sufficient to demonstrate compliance with the Volcker Rule

85. Compliance Programs (cont’d)
“Less active” banking entities
Those with no covered activities have no obligation to establish a compliance program until they begin to engage in those activities;
banking entities with “modest activities,” (those with total assets of $10 billion or less) need only refer to the requirements of the Volcker Rule in its compliance policies and procedures and make “adjustments as appropriate given the activities, size, scope and complexity of the [banking entity]”

86. Enhanced Compliance Programs
Enhanced Minimum Standards for Compliance Programs
Provided in Appendix B
Required of banking entities that:
Engage in permitted proprietary trading and are required to comply with the reporting requirements under Appendix A (that is, have a certain minimum level of trading assets and liabilities, as discussed below);
As of the previous calendar year-end, had total consolidated assets of $50 billion or more or, in the case of an FBO, had total U.S. assets of $50 billion or more; or
Are notified by the relevant Agency that it must satisfy the standards of Appendix B

87. Enhanced Compliance Programs (cont’d)
For the largest firms, the Compliance Programs must:
Be reasonably designed to identify, document, monitor and report 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
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 the Volcker Rule
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
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
Facilitate supervision and examination by the Agencies

88. Enhanced Compliance Programs (cont’d)
Enhanced Minimum Standards for Compliance Programs impose additional requirements for proprietary trading that address:
Trading desks
Descriptions of risks and risk management processes
Authorized risks, instruments and products
Hedging policies and procedures
Analysis and quantitative measurements
Remediation

89. Enhanced Compliance Programs – Trading Desks
Written policies and procedures for each desk should describe:
Process for identifying, authorizing and documenting what each desk may purchase or sell
Mapping each desk to the division responsible for supervision
Mission and strategy
Authorized activities, including products, and hedging strategies
Types and amounts risks allocated to each desk, and how risks will be measured
Limits on holding period of financial instruments
Process for setting new or revised limits, and escalation procedures for exceptions
Process for identifying, documenting and approving new products and strategies
Type of clients, customers and counterparties
Compensation arrangements – which may not be designed to reward or incentivize prohibited proprietary trading

90. Enhanced Compliance Programs – Risks
Compliance program must describe risk management program for the trading activity
Trading activity in similar financial instruments should be subject to similar governance, limits, testing, controls, and review
Must describe:
Supervisory and risk management structure governing all trading activity
Process for developing, documenting, testing, approving and reviewing;
Risk models, and
Limits for each desk
Process by which a security may be purchased or sold pursuant to liquidity management plan
Management review process for approving temporary or permanent changes to limits
Role of audit, compliance and risk management in conducting independent testing of trading and hedging

91. Enhanced Compliance Programs – Authorized risks, instruments and products
Banking entity must implement and enforce limits and internal controls appropriate to each trading desk, based on:
Measures of potential loss
Measured under normal and stress conditions
Internal controls must monitor, establish and enforce limits on:
Type and exposure of financial instruments each trading desk may trade
Types and levels of risk that each trading desk may take
Types of hedging instruments used, hedging strategies employed, and amount of risk hedged.

92. Enhanced Compliance Programs – Hedging Policies and Procedures
Policies regarding use of risk-mitigating hedging instruments must describe:
Positions, techniques and strategies that each desk may use
How the banking entity will identify risks related to positions that are to be hedged and how it will determine that risks have been properly hedged
Level of organization at which hedging activity and management will occur
How the hedging strategies will be monitored, and by whom
The risk management processes used to control unhedged or residual risks
Process for developing, documenting, testing, approving and reviewing all hedging positions, techniques and strategies for each desk and the banking entity

93. Enhanced Compliance Programs – Analysis and Quantitative Measurements
Banking entity must perform robust measurement to:
Ensure trading activity is consistent with compliance program
Monitor and identity potential and actual prohibited prop trading and
Prevent prohibited trading activity.
Must test and review analysis and models, including periodic and independent back-testing and revision of activities, limits, strategies and hedging
Must develop quantitative measures in addition to those reported pursuant to Appendix A

94. Enhanced Compliance Programs – Analysis and Quantitative Measurements(cont'd)
The analysis and quantitative measurements must include:
Internal controls and policies and procedures to ensure accuracy of measurements
Ongoing monitoring and review of measurements
Numerical thresholds and measures for each trading desk and heightened review of trading not consistent with those measures
When measurements or other information suggest that the trading desk has violated the Volcker Rule, immediate review and investigation of the desk’s activities, escalation, notification to the regulator, remedial action, and documentation of the findings and remedial action

95. Enhanced Compliance Programs – Other Compliance Matters
Compliance Program also must:
Identify activities that will be conducted in reliance on market making, underwriting and other exemptions
Explain process for documenting, approving and reviewing actions taken pursuant to liquidity management plan
Describe how banking entity monitors for and prohibits potential or actual material exposure to high-risk assets or high-risk trading strategies presented by trading desks that rely on the exemptions
Establish responsibility for compliance with reporting and recordkeeping requirements
Establish policies for monitoring and prohibiting conflicts of interest

96. Enhanced Compliance Programs – Remediation of Violations
Compliance Program must be designed to monitor and identify any trading that may indicate violations of the Rule, and prevent violations
Must include a requirement to promptly document, address and remedy any violation, and document all remediation efforts
Must include policies and procedures designed to assess extent to which modification to compliance program is warranted
Must provide for prompt notification of material weaknesses or deficiencies in compliance program to appropriate management and the board of directors

97. Enhanced Compliance Programs (cont’d)
Enhanced Minimum Standards for Compliance Programs impose additional requirements for covered funds activities or investments that address:
Identification of covered funds
Identification of covered fund activities and investments
Explanation of compliance
Description and documentation of covered fund activities and investments
Internal controls
Remediation of violations

98. Enhanced Compliance Programs – Responsibility and Accountability for the Compliance Program
Banking entity must:
Maintain and enforce a governance and management framework with a view to preventing violations of the Volcker Rule
Ensure that appropriate personnel are responsible and accountable for the compliance program
That there is a clear reporting line with a chain of responsibility
That senior management reviews the program periodically
Ensure that management and the board have appropriate resources to conduct their oversight activities effectively

99. Enhanced Compliance Programs – Responsibility and Accountability for the Compliance Program (cont'd)
Corporate Governance -- written compliance program must be approved by the board of directors and senior management
Management Procedures – must provide for designation of appropriate senior management with authority
Business line managers for trading desks are accountable for implementation of compliance program
Board and senior management must establish an appropriate culture of compliance with the Rule
CEO of a banking entity that is subject to the enhanced minimum standards for a compliance program must, annually, attest that the banking entity’s processes are adequate to achieve compliance with the Rule

100. Enhanced Compliance Programs – Responsibility and Accountability for the Compliance Program (cont'd)
Independent Testing – occur with appropriate frequency, conducted by qualified independent party, such as internal audit
Adequate Training – must be provided to personnel and managers involved in relevant activity
Recordkeeping – sufficient to demonstrate compliance. Must be retained for at least 5 years

101. Reporting and Recordkeeping Requirements
Provided in Appendix A
Required of banking entities:
Engaged in permitted proprietary trading activity
Which, together with affiliates and subsidiaries, has trading assets and liabilities, the average gross sum of which over the previous four quarters is greater than or equal to:
$50 billion between June 30, 2014 and April 29, 2016;
$25 billion between April 30, 3016 and December 30, 2016; and
$10 billion beginning on December 31, 2016
Purpose of the reporting and recordkeeping requirements is to assist banking entities and the Agencies in determining whether the banking entities are complying with the Rule

102. Reporting and Recordkeeping Requirements (cont’d)
Requires banking entities to:
Measure seven metrics daily
Report metrics for each calendar month within 30 days of the end of the month
For banking entities with $50 billion or more in trading assets and liabilities, beginning with information for the month of January 2015, report the information within 10 days of the end of the month
Create and maintain records documenting the preparation and content of these reports for five years from the end of the calendar year for which the measurement was taken

103. Reporting and Recordkeeping Requirements (cont’d)
The seven metrics, falling into three categories
Risk management
Risk and Position Limits and Usage
Risk Factor Sensitivities
Value-at-Risk and Stress Value-at-Risk  Source-of-Revenue Measurements
Comprehensive Profit and Loss Attribution
Customer-Facing Activity Measurements
Inventory Turnover
Inventory Aging
Customer-Facing Trade Ratio

104. About Morrison & Foerster
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