United States: Federal Reserve Finds First Bank In Violation Of The Volcker Rule

On April 20, 2017, the Board of Governors of the Federal Reserve System (the "Federal Reserve") issued a Consent Order to Deutsche Bank AG after finding deficiencies in the bank's Volcker Rule compliance program, imposing a civil money penalty of $19.71 million. This is the first time that the Federal Reserve has found a violation of the Volcker Rule, which requires banking entities with total assets greater than $10 billion to establish compliance programs reasonably designed to ensure and monitor compliance with Volcker Rule requirements.

While proprietary trading activities are prohibited under the Volcker Rule, there are two main exemptions that allow depository banks and their affiliates to trade or underwrite financial instruments without being in violation: (i) the underwriting exemption and (ii) the market-making exemption. In order for a bank that is subject to the Volcker Rule to avail itself of these exemptions, its trading desks must make sure that their trading activities are designed not to exceed the reasonably expected near-term demands ("RENTD") of clients, customers and counterparties. The Federal Reserve found Deutsche Bank AG to be in violation of the Volcker Rule pertaining to its RENTD methodologies under the market-making exemption.

Under the market-making exemption, RENTD is considered when setting risk and position limits for (i) market-making inventory, (ii) products used to manage risk in connection with market-making activity, (iii) risk factors relating to overall exposure of the trade desk's portfolio, and (iv) inventory holding periods. RENTD methodologies are used to create these limits and provide evidence that a trading desk's positions are correlated to customer activity and are estimates of future customer demand.

Market-making RENTD has been a challenge for banks to capture since the data that is necessary to make these estimates had never been collected by most banks before the Volcker Rule, and the data itself is complex and can span multiple trading systems depending on the size of the bank. For example, the market-making exemption applies to trades with "customers" only. Therefore, trading desks must bifurcate trades that will use the market-making exemption into customer and noncustomer trades for historical data purposes. Additionally, the market-making RENTD estimation is done on a trade-by-trade basis, making compliance even more complex.

In issuing its Consent Order, the Federal Reserve determined that Deutsche Bank AG failed to establish a compliance program reasonably designed to ensure and monitor compliance with Volcker Rule requirements, finding the following:

  1. Significant gaps existed across key aspects of the bank's Volcker Rule compliance program, including within policies and procedures, the management framework, and internal controls, causing deficiencies in the bank's independent testing efforts.
  2. Significant weaknesses existed in the bank's demonstrable analyses showing that its proprietary trading is not to exceed the reasonably expected near-term demands of its clients, customers and counterparties, which is required for permitted market-making activities. Additionally, the bank did not subject trading desks to this methodology and thus did not allow for sufficient review and challenge by internal control groups.
  3. The bank's metrics reporting and monitoring process suffered from weaknesses that, together with the absence of sufficient internal controls, limited the bank's ability to adequately monitor trading activity to detect impermissible proprietary trades.

The Consent Order requires an increase in senior management oversight and enhanced internal controls and the Volcker Rule compliance program. With regard to these two main areas of focus, the bank will need to submit a written plan that is acceptable to the Federal Reserve within sixty (60) days of the Consent Order. At a minimum, the plan must include the following:

Senior Management Oversight

  1. Actions that senior management will take to maintain effective oversight of actions taken by the bank to correct deficiencies.
  2. Clearly defined roles, responsibilities and accountability regarding compliance for the bank's management, compliance personnel and internal audit staff.
  3. Measures to ensure that management decisions related to key processes and controls are made in a timely manner.
  4. Measures to ensure adequate resourcing, implementation and maintenance of the bank's independent risk management control functions.
  5. Measures to ensure the implementation, maintenance and effective operation of Volcker Rule governance forums and identification and resolution of issues (along with proper documentation).
  6. Measures to ensure that Volcker Rule compliance issues are appropriately escalated to senior management.

Internal Controls and Volcker Rule Compliance

  1. Measures to implement complete, accurate and internally consistent policies and procedures governing the bank's compliance with the Volcker Rule, including desk-level policies and procedures that clearly define desk trading activities, financial instruments, and applicable exceptions or exclusions to the proprietary trading restrictions.
  2. Internal controls necessary to ensure adequate review and challenge of the bank's compliance with the Volcker Rule, including enhanced policies, controls and documentation.
  3. Enhanced internal controls to ensure proper monitoring and surveillance of trading activity to identify trades that potentially violate the Volcker Rule.
  4. Improved independent testing guidelines.
  5. Measures to improve metrics reporting and monitoring functions to enable more granular analyses and more timely identification and resolution of issues.

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.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (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 www.mondaq.com

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 Mondaq.com’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.

Disclaimer

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.

Registration

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 unsubscribe@mondaq.com 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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Security

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 webmaster@mondaq.com.

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 EditorialAdvisor@mondaq.com.

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 enquiries@mondaq.com.

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