Under the spotlight
The final Volcker Rule
What does it mean?
The final(1) Volcker Rule was approved and released by the US regulators on December 10, 2013. The scope of the market making exemption is broader than in the notice of proposed rulemaking (2) (NPR) , the minimum threshold for metrics reporting has increased, the number of required metrics is reduced, and the regulators have provided an extension of the conformance period by one year to July 21, 2015.
Some requirements have become more stringent, the compliance bar overall has been set up high, and there is much work to do. Ten key operational considerations for banking organizations' compliance with the rule requirements are discussed in this paper.
1 “Agencies Issue Final Rules Implementing the Volcker Rule,” Federal Reserve news release, Dec. 10, 2013.
2 “Federal Reserve seeks comment on proposal to implement ‘Volcker Rule’ requirements of the Dodd-Frank Act,” Federal Reserve news release, October 11, 2011.
Five key operational considerations
Listed below are five key operational considerations that banking entities should consider for compliance with the rule requirements.
- Broader interpretation and judgment. The final rule allows for--and requires--greater judgment in an institution's interpretation of what is permissible vs. impermissible in certain areas.
- Risk-mitigating hedging. The good news is that the risk-mitigating hedging exemption permits the hedging of not only individual but also aggregate risk. The bad news is complying with this exemption will be complex.
- Reporting metrics. The number of metrics required to be reported have in fact been reduced from 17 in the NPR to seven.
- Book structure and control processes. An appropriately designed book structure and robust related book control process will be critical to efficient and effective compliance especially at larger banking organizations.
- Compliance requirements. Generally, banking entities exceeding $10 billion in consolidated assets will be required to implement a program of compliance.
Additional operational considerations
Listed below are five additional key operational considerations that banking entities should consider for compliance with the rule requirements.
- Responsibility and accountability. Responsibility and accountability under the rule are significant.
- Functional responsibilities and interaction model. All organizational units will be involved in compliance.
- Covered funds. All banking organization are subject to the final rule's covered-fund provisions regardless of the size of their fund's activity.
- Other than temporary impairments (OTTI). The issuance of the final rule potentially triggers the recognition of OTTI, if there are instances in which underwater investments would now need to be disposed.
- Interactions with other regulations. There are interactions between the Volcker Rule and other regulations.
Financial institution personnel should understand the Volcker Rule requirements broadly in order to evaluate the distance between where they are now and where they will need to be. Download the report to gain more insights into other key considerations for the Volcker Rule.