Fed’s Quarles details possible Volcker Rule changes

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WASHINGTON — Federal Reserve Vice Chairman for Supervision Randal Quarles laid out fresh details on the scope and areas of change being considered for the proprietary trading ban known as the Volcker Rule.

Quarles said the five agencies tasked with implementing the ban, which was enacted in the Dodd-Frank Act and originally proposed by former Fed Chairman Paul Volcker, are at work on potential administrative changes. (The five agencies also include the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., Securities and Exchange Commission and the Commodity Futures Trading Commission.)

He said the definitions of “proprietary trading” and “covered fund” should be made more consistent and clearer in order to give regulated entities a better understanding of what to expect and how not to run afoul of the Volcker Rule.

“It should be clearer and more transparent what is subject to the Volcker rule’s implementing regulation and what is not,” Quarles said in a speech to the Institute of International Bankers. “The definition of key terms like 'proprietary trading' and 'covered fund' should be as simple and clear as possible. It should not be a guessing game or require hours of legal analysis of complex banking and securities regulations to determine if a particular entity is a covered fund.”

Quarles went on to say that he wanted Volcker compliance to be “similar to compliance in other areas of our supervisory regime,” and that another area where regulators are weighing revisions is the applicability of the Volcker Rule to transactions by covered firms that either partially or entirely reside outside of the U.S. Last summer, the SEC and CFTC issued a guidance calling on their supervisors not to enforce the Volcker Rule on such funds.

“In particular, there are certain foreign funds — funds that are organized outside the United States by foreign banks in foreign jurisdictions and offered solely to foreign investors — that are subject to the Volcker rule due to Bank Holding Company Act control principles,” Quarles said. “I expect we would continue this period of stay while we continue to consider these important issues.”

The Volcker Rule’s exemption for market-making — as well as the five agencies’ definitions meant to determine what qualifies for that exemption — is another area that regulators are looking to revise. Under criteria known as RENT’D, the rule requires banks to hold no more of a product than that which is required to meet the near-term demands of customers.

“We are considering different ways to use a clearer test for RENT’D,” Quarles said. “We want banks to be able to engage in market making and provide liquidity to financial markets with less fasting and prayer about their compliance with the Volcker rule.”

Quarles also said that one aspect of the Fed’s ongoing review of post-crisis regulations is the agency’s treatment of so-called foreign banking organizations, or FBOs. But he said that, from the Fed’s point of view, the rules have largely met their objectives of creating capital and liquidity, and have thus been effective.

“In implementing enhanced prudential standards for foreign banks with a large U.S. presence, we sought to ensure that firms hold sufficient local capital and liquidity — and have a risk management infrastructure — that is commensurate with the risks in their U.S. operations. And in general, that approach is meeting many of the broad goals the Federal Reserve set out to achieve.”

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