Federalregister121013 - Volker Rule

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Voker Rule

Text of Federalregister121013 - Volker Rule

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    6351-01-P

    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 75

    RIN 3038AD05

    PROHIBITIONS AND RESTRICTIONS ON PROPRIETARY TRADING AND

    CERTAIN INTERESTS IN, AND RELATIONSHIPS WITH, HEDGE FUNDS

    AND PRIVATE EQUITY FUNDS

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rule.

    Summary: The Commodity Futures Trading Commision (CFTC or Commission) is

    adopting a final rule to implement Section 619 of the Dodd-Frank Wall Street Reform

    and Consumer Protection Act (the Dodd-Frank Act), which contains certain

    prohibitions and restrictions on the ability of a banking entity and nonbank financial

    company supervised by the Board of Governors of the Federal Reserve System (the

    Board) to engage in proprietary trading and have certain interests in, or relationships

    with, a hedge fund or private equity fund. Section 619 also requires the Board, the

    Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency,

    and the Securities and Exchange Commission to also issue regulations implementing

    section 619 and directs the CFTC and those four agencies to consult and coordinate with

    each other, as appropriate, in developing and issuing the implementing rules, for the

    purposes of assuring, to the extent possible, that such rules are comparable and provide

    for consistent application and implementation. To that end, although the Commission is

    adopting a final rule that is not a joint rule with the other agencies, the CFTC and the

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    other agencies have worked closely together to develop the same rule text and

    supplementary information, except for information specific to the CFTC or the other

    agencies, as applicable. In particular, the CFTCs final rule is numbered as part 75 of the

    Commissions regulations, the rule text refers to the Commission instead of the

    [Agency] and section 75.1 addresses authority, purpose, scope, and relationship to

    other authorities with respect to the Commission. Furthermore, it is noted that the

    supplementary information generally refers to the Agencies collectively when referring

    to deliberations and considerations in developing the final rule by the CFTC together

    with the other four agencies and references to the final rule should be deemed to refer

    to the final rule of the Commission as herein adopted.

    Effective Date: The final rule is effective April 1, 2014.

    For Further Information Contact: Erik Remmler, Deputy Director, Division of Swap

    Dealer and Intermediary Oversight (DSIO), (202) 4187630, eremmler@cftc.gov; Paul

    Schlichting, Assistant General Counsel, Office of the General Counsel (OGC), (202)

    418-5884, pschlichting@cftc.gov; Mark Fajfar, Assistant General Counsel, OGC, (202)

    418-6636, mfajfar@cftc.gov; Michael Barrett, Attorney-Advisor, DSIO, (202) 418-5598,

    mbarrett@cftc.gov; Stephen Kane, Research Economist, Office of the Chief Economist

    (OCE), (202) 418-5911, skane@cftc.gov; or Stephanie Lau, Research Economist,

    OCE, (202) 418-5218, slau@cftc.gov; Commodity Futures Trading Commission, Three

    Lafayette Centre, 1155 21st Street N.W., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Background II. Notice of Proposed Rulemaking: Summary of General Comments

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    III. Scope

    IV. CFTC-specific comments V. Overview of Final Rule

    A. General Approach and Summary of Final Rule

    B. Proprietary Trading Restrictions C. Restrictions on Covered Fund Activities and Investments D. Metrics Reporting Requirement E. Compliance Program Requirement

    VI. Final Rule A. Subpart B Proprietary Trading Restrictions

    1. Section 75.3: Prohibition on Proprietary Trading and Related Definitions a. Definition of Trading Account b. Rebuttable Presumption for the Short-Term Trading Account

    c. Definition of Financial Instrument d. Proprietary Trading Exclusions

    1. Repurchase and reverse repurchase arrangements and securities lending 2. Liquidity management activities

    3. Transactions of derivatives clearing organizations and clearing agencies 4. Excluded clearing-related activities of clearinghouse members 5. Satisfying an existing delivery obligation

    6. Satisfying an obligation in connection with a judicial, administrative, self-regulatory organization, or arbitration proceeding

    7. Acting solely as agent, broker, or custodian 8. Purchases or sales through a deferred compensation or similar plan 9. Collecting a debt previously contracted

    10. Other requested exclusions

    2. Section 75.4(a): Underwriting Exemption a. Introduction b. Overview

    1. Proposed underwriting exemption 2. Comments on proposed underwriting exemption

    3. Final underwriting exemption c. Detailed Explanation of the Underwriting Exemption

    1. Acting as an underwriter for a distribution of securities a. Proposed requirements that the purchase or sale be effected solely in connection with a distribution of securities for which the banking entity acts

    as an underwriter and that the covered financial position be a security i. Proposed definition of distribution ii. Proposed definition of underwriter iii. Proposed requirement that the covered financial position be a security

    b. Comments on the proposed requirements that the trade be effected solely in connection with a distribution for which the banking entity is acting

    as an underwriter and that the covered financial position be a security i. Definition of distribution ii. Definition of underwriter iii. Solely in connection with standard

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    c. Final requirement that the banking entity act as an underwriter for a

    distribution of securities and the trading desks underwriting position be related to such distribution

    i. Definition of underwriting position ii. Definition of trading desk iii. Definition of distribution iv. Definition of underwriter v. Activities conducted in connection with a distribution

    2. Near term customer demand requirement

    a. Proposed near term customer demand requirement b. Comments regarding the proposed near term customer demand requirement c. Final near term customer demand requirement

    3. Compliance program requirement a. Proposed compliance program requirement

    b. Comments on the proposed compliance program requirement c. Final compliance program requirement

    4. Compensation requirement a. Proposed compensation requirement b. Comments on the proposed compensation requirement

    c. Final compensation requirement 5. Registration requirement

    a. Proposed registration requirement b. Comments on proposed registration requirement c. Final registration requirement

    6. Source of revenue requirement

    a. Proposed source of revenue requirement b. Comments on the proposed source of revenue requirement c. Final rules approach to assessing source of revenue

    3. Section 75.4(b): Market-Making Exemption a. Introduction

    b. Overview 1. Proposed market-making exemption

    2. Comments on the proposed market-making exemption a. Comments on the overall scope of the proposed exemption b. Comments regarding the potential market impact of the proposed exemption

    3. Final market-making exemption

    c. Detailed Explanation of the Market-Making Exemption 1. Requirement to routinely stand ready to purchase and sell

    a. Proposed requirement to hold self out b. Comments on the proposed requirement to hold self out

    i. The proposed indicia ii. Treatment of block positioning activity iii. Treatment of anticipatory market making iv. High-frequency trading

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    c. Final requirement to routinely stand ready to purchase and sell

    i. Definition of trading desk ii. Definitions of financial exposure and market-maker inventory iii. Routinely standing ready to buy and sell

    2. Near term customer demand requirement a. Proposed near term customer demand requirement b. Comments regarding the proposed near term customer demand requirement

    i. The proposed guidance for determining compliance with the near term

    customer demand requirement ii. Potential inventory restrictions and differences across asset classes iii. Predicting near term customer demand iv. Potential definitions of client, customer, or counterparty v. Interdealer trading and trading for price discovery or to test market depth

    vi. Inventory management vii. Acting as an authorized participant or market maker in exchange-

    traded funds viii. Arbitrage or other activities that promote price transparency and liquidity

    ix. Primary dealer activities x. New or bespoke products or customized hedging contracts

    c. Final near term customer demand requirement i. Definition of client, customer, and counterparty ii. Impact of the liquidity, maturity, and depth of the market on the

    analysis

    iii. Demonstrable analysis of certain factors iv. Relationship to required limits

    3. Compliance program requirement

    a. Proposed compliance program requirement b. Comments on the proposed compliance program requirement

    c. Final compliance program requirement 4. Market making-related hedging

    a. Proposed treatment of market making-related hedging b. Comments on the proposed treatment of market making-related hedging c. Treatment of market making-related hedging in the final rule

    5. Compensation requirement

    a. Proposed compensation requirement b. Comments regarding the proposed compensation requirement

    c. Final compensation requirement 6. Registration requirement

    a. Proposed regist