Australia: Exchange - International: In focus - the final Volcker rule

Financial Services Regulation Newsletter - Issue 21
Last Updated: 5 February 2014
Article by Mathias Hanten MBL, Michael McKee and Jeffrey L. Hare


On 10 December 2013, US federal financial regulatory agencies released final rules (the "Final Rule" or the "Volcker Rule") implementing Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). Section 619 created Section 13 in the Bank Holding Company Act to generally prohibit any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund ("covered fund").

On November 7, 2011, the Board of Governors of the Federal Reserve (the "Board"), the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Securities and Exchange Commission published proposed rules implementing the Volcker Rule (the "Proposed Rule"). The Proposed Rule prompted thousands of comment letters and required lengthy analysis and discussion by the agencies, ultimately resulting in the release of the Final Rule on December 10, 2013. The Final Rule will be effective on 21 July 2015, with the exception of certain reporting requirements discussed below, which have an earlier effective date.

The Volcker Rule applies to any banking entity, defined in both the Proposed Rule and Final Rule as (1) a bank; (2) any company that controls a bank; (3) any company treated as a bank holding company under section 8 of the International Banking Act; or (4) any affiliate or subsidiary of any such entity.

Proprietary Trading Prohibitions. Consistent with the Dodd-Frank Act, the Final Rule prohibits a banking entity from engaging in proprietary trading, defined as engaging as principal for the trading account of the banking entity in any purchase or sale of one or more financial instruments.

Among other exemptions to the general prohibition on propriety trading, the Final Rule makes important revisions to the treatment of trading activities by foreign banking entities. During the comment process, numerous commenters expressed concern that the foreign trading exemption contained in the Proposed Rule was too narrow and would unnecessarily prohibit foreign trading activities. Critics of the Proposed Rule expressed specific concern that the Proposed Rule's requirements would cause foreign banking entities to avoid transactions with overseas subsidiaries and branches of US banking entities and would harm the competitiveness of US trading platforms. In response, the Final Rule's requirements are designed to ensure that where foreign banking entities engage in proprietary trading, they do so in a manner that places the risk, financing, and execution, outside the US. Therefore, the Final Rule provides for a foreign trading exemption if:

  • the banking entity engaging as principal, making the trading decision, and providing the financing is not located in the US or organized under the laws of the US or any state;
  • the purchase or sale is not accounted for as principal by any branch or affiliate located in the US or organized under the laws of the US or any state; and
  • the purchase or sale is not conducted with or through any US entity, other than:
    • the foreign operations of US entities;
    • in cleared transactions with an unaffiliated market intermediary acting as principal; or
    • in cleared transactions through an unaffiliated market intermediary acting as agent, conducted anonymously on an exchange or similar trading facility.

Covered Fund Activities Prohibitions. A banking entity may not, as principal, directly or indirectly acquire or retain any ownership interest in or sponsor a covered fund. An ownership interest is any equity, partnership, or other similar interest. To sponsor a covered fund means:

  • to serve as a general partner, managing member, trustee, or commodity pool operator of a covered fund;
  • to select or control a majority of the directors, trustees, or management of a covered fund; or
  • to share the same name or a variation of the same name with a covered fund.

The Proposed Rule defined a covered fund to include:

  • an issuer that would be an investment company under the Investment Company Act but for exceptions under Sections 3(c)(1) or 3(c)(7) thereof;
  • any commodity pool under Section 1a(10) of the Commodity Exchange Act; and
  • any issuer organised or offered outside the US that would be a covered fund, were it organized or offered under the laws, or offered to one or more residents, of the US or one of its states.

In response to critical public comments which asserted that part (3) of the Proposed Rule's definition of covered fund was overly broad, exceeded statutory authority, and potentially violated international treaties, the Final Rule makes meaningful changes to the definition. Under the Final Rule, a foreign fund is an entity that:

  • is organised or established outside the US and the ownership interests are offered and sold solely outside the US; and
  • 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.

In focusing on the risks to US banking entities that the Volcker Rule was meant to address, the Final Rule provides that a foreign fund is only a covered fund where it is sponsored by, or has issued an ownership interest to, a banking entity that is, or is controlled by a banking entity that is, located in or organised under the laws of the US or any state. Therefore, a foreign fund may be a covered fund with respect to a US banking entity that sponsors it, but not a covered fund with respect to a foreign bank that invests in the fund solely outside the US.

In addition, the Final Rule retains exemptions provided in the Proposed Rule, including an exemption for certain permitted activities and investments outside of the US. The Final Rule revises the requirements in the same way as the foreign trading exemption under the proprietary trading rules. Among other conditions, the Proposed Rule would only have permitted the activities if:

  • the banking entity conducting the activity was not organised under the laws of the US or of one or more states;
  • no subsidiary, affiliate, or employee of the banking entity was incorporated or physically located in the US; and
  • no ownership interest in the covered fund was offered for sale or sold to a resident of the US.

By contrast, the Final Rule narrows these restrictions to require that:

  • the banking entity engaging as principal in, making the decision to, and providing the financing for, the investment in, or the sponsorship of, the covered fund not be located in or organized under the laws of the US or any state; and
  • the investment or sponsorship is not accounted for as principal by any branch or affiliate located in the US or organized under the laws of the US or any state.

The Final Rule retains the requirement that no ownership interest be offered for sale to a resident of the US, but potentially softens that requirement by clarifying that it is satisfied where an offering does not "target residents" of the US.

Compliance Requirements. The Final Rule makes the following changes to compliance program and reporting requirements:

  • Compliance Program: Banking entities are expected to establish a compliance program as soon as practicable, but in no event later than the effective date, which has been extended to July 21, 2015. The Final Rule requires a banking entity to comply with enhanced compliance program requirements where:
    • the banking entity is required to report on its proprietary trading activities (see below);
    • the banking entity has consolidated assets of $50 billion or more; or
    • the applicable federal regulator notifies the banking entity that it must comply with the enhanced requirements.
  • Reporting Requirements: The Final Rule reduces the number of banking entities subject to reporting requirements by raising the trading activity threshold from $1 billion under the Proposed Rule, to:
    • $50 billion beginning on June 30, 2014;
    • $25 billion beginning on April 30, 2016; and
    • $10 billion beginning on December 31, 2016.

    Banking entities with trading activity of $50 billion or more are required to report on a monthly basis, while all other banking entities that are or will be subject to the reporting requirement will only need to report on a quarterly basis. In addition, the Final Rule reduces the number of trading measurements banking entities must report from seventeen in the Proposed Rule to seven. Banking entities should note that the Board's decision to extend the effective date for Volcker Rule compliance to July 21, 2015 does not apply to reporting requirements, which become effective as early as June 30, 2014 for some banking entities.

  • Covered Fund Documentation: Banking entities with more than $10 billion in total consolidated assets must maintain records on fund-related activities and investments, particularly on the exclusion or exemption relied upon in determining that a fund is not a covered fund for purposes of the Volcker Rule.
  • Simplified Programs for Less Active Banking Entities: Banking entities that do not engage in activities covered by the Volcker Rule are no longer required to develop policies and procedures designed to ensure they do not engage in prohibited activities. Under the Final Rule, these banking entities need only develop a compliance program before engaging in any such activities. Banking entities with total consolidated assets of $10 billion or less that engage in activities covered by the Volcker Rule may satisfy the compliance program requirements by making appropriate references to the Volcker Rule in their existing policies and procedures, but are not required to develop separate compliance programs specific to the Volcker Rule.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.

DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.