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FDIC Open Meeting on Volcker

Federal Deposit Insurance Corporation

Open Meeting

Tuesday, August 20, 2019

Key Topics & Takeaways

  • Final Rule Approved: The FDIC approved a final rule amending the Volcker Rule in a 3-1 vote, with only Martin Gruenberg opposing. The final rule will be effective January 1, 2020 and have a compliance date of January 1, 2021.
  • Accounting Prong Removed: The final rule does not include the proposed accounting prong in its trading definition, and instead retains 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 with a presumption that instruments held for 60 days or longer are not captured by this prong.

FDIC Board

Memorandum and resolution re: Final Rule: Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds

FDIC staff provided an overview the final rule, which they said would provide banking entities with much-needed clarity regarding the application of the statutory prohibitions against proprietary trading. After issuing a notice of proposed rulemaking (NPR) in July 2018, the FDIC received seven public comments from industry groups and public organizations and 3,700 comments from individuals using form letters. Staff said the final rule made “modest modifications” to the 2018 NPR.

Three-Tiered Compliance Approach

Staff explained that the final rule implements a tiered compliance framework that ensures banking entities with “significant” consolidated trading assets and liabilities (over $20 billion) remain subject to the most stringent compliance program requirements, with two additional tiers for firms with “moderate” (between $1 billion and $20 billion) or “limited” (less than $1 billion) trading assets and liabilities. They said the final rule would provide a presumption of compliance to firms with limited trading assets and liabilities, requiring a simplified compliance programs for firms with moderate trading assets and liabilities, and requiring a six-pillar compliance program and metrics reporting for firms with significant trading assets and liabilities.

Calculation of Trading Assets and Liabilities

The final rule, staff advised, also makes several amendments to the methodology for calculating trading assets and liabilities, such as excluding securities that are issued or guaranteed by a government sponsored enterprise and calculating trading assets and liabilities for foreign banks entities based only on the combined US operations of such banks’ entities.

Proprietary Trading Restrictions

Staff continued that the final rule does not include the proposed accounting prong in its trading definition, and instead retains 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 with a presumption that instruments held for 60 days or longer are not captured by this prong. Staff explained that the new rebuttable presumption would shift the burden of the rebuttal process from the banking entity to the primary supervisor.

Proprietary Trading Definition Exclusions

According to staff, several new exclusions from the definition of proprietary trading were added to the final rule, staff said, including for error trades, certain customer-driven swaps, hedges of mortgage servicing rights, and purchases or sales of financial instruments that do not meet the definition of trading assets and liabilities under the applicable reporting form for a banking entity. The staff also noted that the final rule modifies the liquidity management exclusion to permit banking entities to use a broader range of financial instruments to manage liquidity.

Exemptions for Permitted Proprietary Trading

Staff said the final rule would include the NPR’s proposed changes to the exemptions for underwriting and market making-related activities, risk-mitigating hedging and trading by foreign banking entities outside the U.S. The final rule, they said, adopts a presumption of compliance with the reasonable expected short-term demand requirement for trading within certain internal limits, and a requirement that banks maintain and make available on request records of any breaches or increases.

Next Steps

Finally, staff stated that the agencies plan to issue a subsequent interagency NPR that would propose specific changes to the restrictions on the covered fund investments and activities and other issues related to the treatment of investment funds.

Jelena McWilliams, Chair, Federal Deposit Insurance Corporation (FDIC)

McWilliams noted that regulators responded to the financial crisis by imposing a number of new rules for the largest banks, and that these mandates have made the financial system safer and more resilient. She continued that as regulators have implemented reforms, they have learned that certain improvements can be made and they continue to “tweak” the rules as warranted.

McWilliams said the Volcker Rule has been one of the most challenging reforms to implement for regulators and industry, noting that its complexity has led to the publication of 21 sets of FAQs within three years of adoption. She stated that it is difficult to distinguish between what qualifies as proprietary trading and what does not and noted the substantial compliance exercises banks undertake to follow the 2013 rule. She spoke in support of the final rule being considered by the FDIC, which she said would seek to address these issues and provide more clarity and certainty while tailoring the rule to ensure that firms with significant levels of trading activity remain subject to the most stringent requirements.

“Additional fine-tuning” is necessary on the restrictions associated with covered funds, McWilliams continued, and she said the FDIC will address this in future rulemaking.

Martin Gruenberg, Director, FDIC

Gruenberg expressed serious concerns about the final rule being considered, stating that it would severely narrow the scope of financial instruments subject to the Volcker Rule and would allow systemically important bank holding companies to engage in speculative proprietary trading with FDIC-insured deposits. He was also critical of amendments to the definition of trading account and of the exclusion of fair value financial instruments that he said are used for proprietary trading. He said he would vote against the final rule

Joseph Otting, Comptroller of the Currency

Otting noted that earlier in the morning he had signed a final rule from the Office of the Comptroller of the Currency (OCC), and stated that he was pleased to approve changes that would simplify the rule in a “common sense” way that preserves the safety and soundness of the banking system and eliminates unintended consequences of the prior rule.

Kathleen Laura Kraninger, Director, Consumer Financial Protection Bureau (CFPB)

Kraninger echoed the comments of Otting and McWilliams and signaled her support for the new rule.

Final Vote

The FDIC Board approved the final rule in a 3-1 vote, with only Gruenberg opposing. The final rule will be effective January 1, 2020 and have a compliance date of January 1, 2021.

For more information on this meeting, please click here.