On June 10, 2014, the U.S. federal banking agencies,1 the U.S. Securities and Exchange Commission, and the U.S. Commodity Futures Trading Commission (collectively, the “Agencies”), published answers to six frequently asked questions (“FAQs”) regarding the Volcker Rule.2 The FAQs provide some clarity on certain aspects of the final Volcker Rule regulations published in December 2013 (the “Final Regulations”), but leave a large number of questions unanswered. In this Alert, we summarize the key points addressed in the FAQs.
- Metrics Reporting Due Dates. A banking entity with $50 billion or greater in trading assets and liabilities must measure and report quantitative measurements as required by Section .__20(d) and Appendix A of the Final Regulations. The Agencies explained that such banking entities must begin to measure and record the required metrics on a daily basis starting July 1, 2014. The banking entity must report its daily metrics recorded during July 2014 by September 2, 2014. For those required metrics that have a calculation period of 30 days, 60 days or 90 days, the initial report due September 2, 2014, may provide data for only a 30-day calculation period (and the second report due by September 30, 2014, may provide data for only a 30-day and 60-day calculation period). Beginning with the report due October 30, 2014, reports must include data for all required calculation periods.
- Trading Desks and Metrics Reporting. A trading desk may span more than one legal entity, and trades managed by the desk may be booked in different affiliated entities. The Agencies stated that, in such circumstances, the trading desk must maintain records identifying all positions included in the desk’s financial exposure and the legal entities where such positions are held. If the banking entity is subject to the quantitative metrics reporting requirements of Appendix A of the Final Regulations, the metrics should be reported to each of the Agencies with Volcker Rule jurisdiction over a banking entity in which the trading desk is located. The metrics should be calculated at the level of the entire trading desk and do not need to be performed separately for each subset of positions booked at the various legal entities that compose the trading desk. The same set of desk-wide measurements should be reported to each Agency to which the metrics are reported.
- Conformance Period and Capital Deductions. The Agencies restated guidance from the FRB’s order extending the Volcker Rule conformance period until July 21, 2015,3 including the expectation that a banking entity is expected to engage in good-faith efforts that will result in conformance of all of its activities and investments to the requirements of the Volcker Rule by the end of the conformance period. As an example of how the conformance period works in practice, the Agencies explained that a banking entity will not be required to make the capital deductions required for investments held under the Final Regulations’ seeding and de minimis investment exemption until the end of the conformance period, but should engage in good faith efforts in the meantime to ensure that it can make the required capital deductions when the conformance period ends.
- Loan Securitization Servicing Assets. The Agencies clarified that, for purposes of the loan securitization exclusion from the definition of covered fund, servicing assets (i.e., assets designed to assure the servicing or timely distribution of proceeds to holders of the asset-backed securities) may be any type of asset. However, any servicing asset that is a security must be a permitted security under Section .__10(c)(8)(iii) of the Final Regulations, which includes cash equivalents and securities received in lieu of debts previously contracted.
- Seeding Vehicles for Foreign Public Funds. The Agencies explained that an issuer that will become a foreign public fund (as defined in Section .__10(c)(1) of the Final Regulations) will not be treated as a covered fund during its seeding period. The Agencies provided this clarification to provide foreign public fund seeding vehicles with parallel treatment to seeding vehicles for registered investment companies, which are excluded from the definition of covered fund under Section .__10(c)(12) of the Final Regulations. The Agencies will not treat as a covered fund an issuer that is formed and operated pursuant to a written plan to become a qualifying foreign public fund. Any written plan would be expected to document the banking entity’s determination that the seeding vehicle will become a foreign public fund, the period of time during which the vehicle will operate as a seeding vehicle, the banking entity’s plan to market the vehicle to third-party investors and convert it into a foreign public fund within one year (or up to two additional years with approval from the FRB), and the banking entity’s plan to operate the seeding vehicle in a manner consistent with the investment strategy, including leverage, of the issuer upon becoming a foreign public fund.
- Covered Fund Name. For a banking entity to sponsor or invest in a covered fund in reliance on the Final Regulations’ exemption for organizing and offering a covered fund, the covered fund, for corporate, marketing, promotion or other purposes, cannot share the same name or a variation of the same name with the banking entity or any of its affiliates. The Agencies stated that a covered fund shares the same name or a variation of the same name with a banking entity if the name of the fund features the same root word, initials or a logo, trademark, or other corporate symbol that is also used by, or that clearly references a connection with, the banking entity, including any affiliate of the banking entity. Materials used to market, promote, or offer the fund may not contain any statements that would mislead an investor into thinking that the banking entity or any of its affiliates, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the covered fund or any covered fund in which such covered fund invests.4
Bingham’s Volcker Rule Team
Assistance also provided by:
Michael James Ableson
Princess E. Kludjeson
Elizabeth A. Marino
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The U.S. federal banking agencies are the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System (the “FRB”), and the Federal Deposit Insurance Corporation.
Each of the Agencies has published substantively identical versions of the FAQs, though technically each Agency’s version only applies to those banking entities subject to its jurisdiction for purposes of the Volcker Rule. The FRB’s version of the FAQs can be found on its website at http://www.federalreserve.gov/bankinforeg/volcker-rule/faq.htm.
FRB, Order Approving Extension of Conformance Period, available at http://www.federalreserve.gov/newsevents/press
This FAQ specifically addressed the covered fund’s name in the context of the exemption for organizing and offering a covered fund. A banking entity that shares the same name or a variation of the same name of a covered fund would also be the sponsor of the covered fund under the Final Regulations’ definition of sponsor. We assume that the Agencies would apply a similar standard in determining whether a banking entity is the sponsor of a covered fund on this basis.