Fed Proposes Overhaul of Volcker Rule to Tailor Compliance Burdens

The Federal Reserve Board today unanimously voted to propose a long-awaited set of changes to the Volcker Rule that is expected to simplify the rule’s compliance burdens and better target the rule’s effects toward intended activities. Other agencies are expected to issue the proposal in the coming days. The proposal would tailor the rule by focusing its restrictions on proprietary trading and investments in covered funds on banks with “significant” and “moderate” trading activities; banks with limited trading assets and liabilities of less than $1 billion would have a rebuttable presumption of compliance with the Volcker Rule.

By tailoring the rule to trading activity levels, the rule would focus supervisory efforts on the 40 firms with significant or moderate activities, which the Fed said accounts for 98 percent of U.S. trading activities by banks. This proposal would combine with a provision in the recently enacted S. 2155 that generally exempts banks with less than $10 billion in assets from Volcker Rule requirements to significantly reduce the rule’s burden on community banks.

Banks with the most significant trading activities — defined as trading assets and liabilities of more than $10 billion — would face the strictest compliance regime, including the six-pillar compliance program specified in the 2013 final rule. Meanwhile, banks with moderate trading activities would be allowed to establish a simplified compliance program that includes CEO attestation. “This proposal represents our best first effort at simplifying and tailoring the Volcker rule,” said Fed Vice Chairman for Supervision Randal Quarles. “I view this proposal as an important milestone in comprehensive Volcker rule reform, but not the completion of our work.”

“With the passage of legislation last week and today’s proposed rulemaking, policymakers are now taking sensible steps to better tailor regulations consistent with risk,” added American Bankers Association President and CEO Rob Nichols. “We are encouraged that today’s proposed rulemaking begins to address some of the complexity and uncertainty that has created needless compliance burdens and will allow banks to better serve their customers.”

The proposal would also address several compliance issues that have arisen since the Volcker Rule was finalized in 2013, including: revising the definition of “trading account” under the proprietary trading restrictions; clarifying the exemptions for permitted underwriting and market-making activities; removing or reducing certain hedging requirements; modifying foreign banks’ permitted trading activities; and clarifying activities connected to organizing or offering a covered fund. ABA staff will review the proposal in depth over the days to come. Comments are due 60 days after it is published in the Federal Register. For more information, contact ABA’s Tim Keehan.