United States: Regulators Approve Final Volcker Rule

Last Updated: December 13 2013
Article by Steve Ganis, Abby Matousek and Jason M. Rosenstock

After several years and 18,000 comments, yesterday regulators braved a "snow covered" Washington and voted to approve a final rule to prohibit banks from engaging in proprietary trading, known as the Volcker rule. As industry had feared, the Volcker rule will likely increase compliance burdens and complexity and, as a practical matter, narrow the scope of trading revenue generating activities for covered institutions. Given the phased implementation schedule for the new requirements, the impacts will not be fully felt until 2017.

Changes from the Proposed Rule

As with the proposed rule, the final Volcker rule generally prohibits banking entities from engaging in short-term proprietary trading of securities and derivatives (including swaps, commodity futures, and options) for their own account and bars them from having certain relationships with hedge funds or private equity funds. However, there are numerous exemptions to this standard, including for market making, underwriting, hedging, trading in government obligations, and organizing and offering a hedge or private equity fund.

In response to numerous comments and industry pressure, the final rule grants broader exemptions for banks' market-making activities. While the proposed rule outlined seven standards that banks must satisfy to meet the definition, the final rule provides that banks' trading desks need to be "routinely" ready to both "purchase and sell one or more types of financial instruments" in order to qualify as "market making." Furthermore, the rule states that trades qualifying for the market-making exemption, like those qualifying for the underwriting exemption, will not be allowed to surpass the "reasonably expected near-term demands of clients" which would be assessed through historical demand and consideration of market factors. The new rule mandates certain risk management activities and procedures for permissible hedging activities of market-making desks.

The final rule delineates the scope of certain foreign funds and commodity pools covered by the fund investment and sponsorship restrictions in a more limited manner than under the proposed rule. The final rule does not restrict investments in or sponsorship of certain entities like wholly-owned subsidiaries, joint ventures, and acquisition vehicles. The final rule excludes mutual funds and other registered investment companies, business development companies, certain publicly offered foreign pooled investment vehicles, loan securitizations, insurance company separate accounts, small business investment companies, and public welfare investments.

While the market-making exemption and private fund activity restrictions may have been softened, much of the final rule builds on the proposed, imposing new and stronger requirements on banks.

Among the strengthened provisions are risk-mitigating hedging provisions that require banks to analyze, test, and demonstrate to regulators that a hedge "demonstrably reduces or otherwise significantly mitigates one or more specific, identifiable risks of individual or aggregated positions of the banking entity." Banking entities will be required to support claims of exempt hedging with analysis, including detailed correlation analysis, to monitor and recalibrate as necessary hedging strategies on an ongoing basis and to document, contemporaneously with the transaction, the hedging rationale for certain transactions that present heightened risks. Based on public comments from regulators, it appears the hedging language was tightened partly in response to a $6.2 billion JPMorgan trading loss by the rogue trader known as the "London Whale."

Among the most vocal in their concerns with the proposed rule was the small and community banking industry, which feared that the compliance requirements associated with the rule would push them out of the market in favor of the large banks and financial institutions with greater capacity to handle the increased compliance costs associated with conforming to the Volcker rule's standards. The response to these concerns was to allow smaller institutions additional time to comply with select requirements. Regulators created a phased compliance schedule in the final rule. The originally proposed effective date of April 1, 2014 was extended until July 21, 2015. The rule also requires a number of quantitative measurements, knows as "value-at-risk" calculations. The final rule offers a phased approach for reporting estimates of risk, position limits, profits, losses, and estimates of capacity for loss per day. Beginning June 20, 2014, entities with over $50 billion in consolidated trading assets and liabilities will be required to report quantitative measurements. Those entities with less than $50 billion, but at least $25 billion in assets would be required to begin this reporting on April 30, 2016. Finally, banking entities with at least $10 billion, but less than $25 billion, will not have to begin this reporting until December 31, 2016.

Not only must larger institutions worry about a shorter compliance period, but their CEOs must annually attest in writing to compliance. These obligations, while less onerous than rumored, still apply to institutions with more than $50 billion in assets.

Regulators also made changes to allow foreign trading of sovereign debt under more circumstances than previously proposed. Earlier drafts of the Volcker rule had drawn criticism from international regulators for its potential to reach overseas banks' activities and the sovereign debt market. To resolve these concerns, the final Volcker rule adopts a territorial approach, exempting trades outside the U.S., assuming "the trading decisions and principal risks of the foreign banking entity occur and are held outside of the United States."

The Regulators Voted

While the day began with news that weather complications had forced the CFTC to change its public meeting to a private vote, snow did not stop regulators from voting to finalize the long-delayed Volcker rule.

The Fed was the first regulator to formally announce it had approved the rule in a unanimous vote to apply its provisions to the large bank and financial holding companies under its jurisdiction. The FDIC also approved the rule in a unanimous 5–0 vote. While Vice Chairman of the FDIC Thomas Hoenig expressed reservations about the complexity of the rule, he agreed with the remainder of the Board that the rule is a "necessary step in ensuring that the current financial industry structure is less vulnerable."

Although the Fed and FDIC votes were uncontentious, much of the debate over the final rule in weeks leading up to the vote appears to have been amongst CFTC and SEC commissioners. In the end, the SEC voted 3–2 to approve the final rule, with the Commission's two Republicans, Michael Piwowar and Daniel Gallagher, opposing.

The CFTC followed the SEC, approving the rule in a 3–1 vote. While the vote was private, CFTC Commissioner Scott O'Malia, who opposed the rule in its proposed form, also voted down the final rule. In his dissenting statement, O'Malia cited concerns that the rule does not adequately address the CFTC's jurisdiction and enforcement powers, adding that he cannot support a proposal that had not been meaningfully vetted by the full Commission.

Comptroller of the Currency Thomas Curry's approval made the OCC the fifth and last agency to approve. Notably, the OCC has also released a budgetary impact statement under the Unfunded Mandates Reform Act of 1995. The release states that the OCC has "determined that the final rule qualifies as a significant regulatory action under the UMRA because its Federal mandates may result in expenditures by the private sector in excess of $100 million or more."

Stakeholders Respond

At the release of the final rule, Senators Jeff Merkley (D-OR) and Carl Levin (D-MI), the sponsors of the Volcker rule amendment to the Dodd-Frank Act, released a statement reiterating the need for "a firewall between traditional banking and hedge fund style gambling." Though the lawmakers said they were still reviewing the specifics of the rule, finalizing the proprietary trading ban was a "big step" forward and that "hedging looks tougher, market-making looks simpler, trader compensation remains appropriately structured, and CEOs are required to set the tone at the top."

Chairman of the Senate Banking Committee Tim Johnson (D-SD) also praised the final rule, saying it is a "milestone" in the progress toward full implementation of the Dodd-Frank Act and that it will "help improve the integrity of our banking system."

After reports late last week that the final Volcker rule would be a stronger version of the proposed, industry groups expressed disappointment that regulators did not re-propose the Volcker rule before finalization. The head of the Chamber of Commerce's Center for Capital Markets Competitiveness, David Hirshmann, warned that the rule is the most complex of the "convoluted Dodd-Frank law" and that it has the potential to shut out small business, raise the cost of capital, and place the U.S. at a competitive disadvantage to the global economy. While not as pessimistic as the Chamber, other industry groups, such as the Financial Services Roundtable and Financial Services Forum have warned against the broad economic implications of the rule. Rob Nichols, head of the Financial Services Forum, expressed hope that regulators "implement it in a way that recognizes the economic importance of hedging and market-making."

Industry backlash may be tempered by looser than expected market-making requirements and the narrowing of the fund activities restrictions; however, it is still conceivable that a legal challenge to the Volcker rule could be brought, just as legal challenges to other Dodd-Frank related rulemaking efforts (e.g., the Fed's Durbin Amendment rules, the CFTC's initial position limit rules, and the CFTC's mutual fund regulations) have proceeded with varying degrees of success. In the interim, banks must now begin to plan their compliance programs for this much anticipated legacy of Dodd-Frank.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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

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

Steve Ganis
Abby Matousek
Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions