A summary of the impact of Volcker 2.0

1. VOLCKER 2.0
PROPOSED CHANGES TO THE VOLCKER RULE
A SUMMARY OF THE PROPOSAL AS DOCUMENTED IN THE
PRE-FEDERAL REGISTER RELEASE1
On January 14, 2014, Congress approved the revised
final Volcker regulations that largely went into effect on
July 21, 2015. The Volcker Rule, as it is commonly
referred to, is Section 13 of the Bank Holding Company
Act (the “Act”). Section 13 of the Act requires that the
five prudential regulators collaborate on one common
set of requirements for the Volcker Rule. The five
prudential regulators are; the Federal Reserve (“Fed”), the OCC, the FDIC, the CFTC and the SEC (the “Agencies”).
The Volcker Rule restricts certain banking entities and nonbank financial companies from engaging in proprietary
trading and certain interests in, or relationships with, specific types of funds (i.e. hedge funds or private equity
funds). This month, led by the Fed, a proposed amendment to the Volcker Rule was agreed upon by the Agencies
and submitted currently for public comment. The final step will be to present a final version to Congress for
formal approval.
Overview of the Proposal
The Agencies acknowledge concerns that some parts of the 2013 final rule2
may be unclear and potentially
difficult to implement in practice. Based on experience since the adoption of the 2013 final rule, specifically the
collection of nearly four years of quantitative data as required under Appendix A of the 2013 final rule, the
Agencies have identified opportunities, consistent with the statute, for improving the rule. Most notably, further
tailoring the Volcker Rule’s application based on the activities and risks of banking entities globally.
The proposed amendment is intended to provide banking entities with clarity about what activities are prohibited
and to improve supervision and implementation of the Volcker Rule.
While the Volcker Rule addresses certain risks related to proprietary trading and covered fund activities of
banking entities, the Agencies note that the nature and business of banking entities involve other inherent risks,
such as credit risk and general market risk. To that end, the Agencies have various tools, such as the regulatory
capital rules of the Federal banking agencies and the comprehensive capital analysis and review framework of
the Fed, to require banking entities to manage the risks associated with their activities. The Agencies believe that
the proposed changes to the 2013 final rule are consistent with keeping the banking industry safe and sound
while providing banking entities the ability to implement the appropriate risk management policies in line with
the risks associated with the activities in which banking entities are permitted to engage under section 13.
1
https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180605.pdf
2 The final rule signed January 2014 is referred to as the “2013 final rule.”

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The Agencies also note that the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCP
Act”), which was enacted on May 24, 2018, amends section 13 of the BHC Act by narrowing the definition of
banking entity and revising the statutory provisions related to the naming of covered funds. The Agencies plan
to address these statutory amendments through a separate rulemaking process; no changes have been included
in the proposed amendment that would implement the amendments in the EGRRCP Act. The EGRRCP Act
amendments took effect upon enactment, however, and in the interim period since enactment and before
adoption, the Agencies will not enforce the 2013 final rule in a manner inconsistent with the amendments to
section 13 of the BHC Act with respect to institutions excluded by the statute and with respect to the naming
restrictions for covered funds.
Proposed Changes by Sub-Type:
Authority, Scope, Purpose & Relationship
CHANGE 1: CATEGORIES
The creation of categories to direct specific levels of compliance efforts based on the size of the
banking entity or nonbank financial institution global trading assets and liabilities3
;
SIGNIFICANT (≥$10B), MODERATE (<$10B & ≥$1B) & LIMITED (<$1B)
The proposed rule creates a Banking Entity Categorization that is meant to tailor the Volcker Rule’s compliance
program to the size of the trading operations and thereby the risks associated with their activities. The proposal
creates the following categories and defines each of the parameters:
SIGNIFICANT: This category is reserved for banking entities with combined global trading assets and
liabilities3
greater than or equal to ten billion US dollars.
MODERATE: This second category is reserved for banking entities with combined global trading assets
and liabilities3
greater than or equal to one billion but less than ten billion US dollars.
LIMITED: The last category is reserved for banking entities with combined global trading assets and
liabilities3
less than one billion US dollars. Further, for banking entities in this category, there is
presumption of compliance and there is no obligation to demonstrate compliance. However, discovery
of non-compliance would change the category to “MODERATE” and the regulatory agency may apply
the more stringent requirements upon the non-compliant banking entity.
Changes to the Prohibition of Proprietary Trading
In the 2013 final rule, the Agencies created three prongs to define a “trading account.” The three original prongs
where the Short-Term Intent prong – trading for the purpose of short-term holding periods, the Market Risk
Capital prong, and the Dealer prong – covering activities of a registered Dealer, Swap Dealer or Security-based
Swap Dealer. The proposed changes eliminate the Short-Term Intent prong and with it, the rebuttable
presumption.
The Short-term Intent prong is replaced with the Accounting prong and a presumption of compliance with the
prohibition on proprietary trading for desks not subject to the Market Risk Capital or Dealer prong.
CHANGE 2: P&L v. HOLDING PERIOD, ELIMINATION OF REBUTTABLE PRESUMPTION
Change to the metric used to flag trading as potentially proprietary trading activity from the
length of the holding period to the total profit & losses (“P&L”) made from trading activities.
This change removes the “rebuttable presumption” and replaces it with the presumption of
compliance provided the P&L doesn’t exceed $25MM over a rolling trailing 90 day period.
3
For the determination of the trading assets and liabilities, the calculation should be excluding obligations of or guarantees
by the US government and should include all global trading assets and liabilities.

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The Accounting prong and the presumption of compliance is based on the aggregate absolute value of the profits
& losses (“P&L”) not exceeding $25 million for all financial instruments recorded at Fair Market Value (“FMV”).
The financial instruments measured in the calculation are all buys and sells of assets and liabilities that are
recorded as “Trading” or “Available-for-Sale” securities as defined by and accounted for under US GAAP.
Specifically, compliance is presumed provided the sum of the absolute values of the daily P&Ls for the trailing 90
calendar days does not exceed $25 million. If that threshold is exceeded then the desk must demonstrate that
is not involved in proprietary trading.
CHANGE 3: FBOs RELIANCE ON LOCAL REQUIREMENTS/BCBS MINIMUM STANDARD
With respect to the Market Risk Capital prong of the prohibition of proprietary trading prong,
Foreign Banking Organizations will be permitted to use their local capital requirements provide
those requirements at least meet the standards set by the Basel committee.
The second prong, the Market Risk Capital prong, has a slight modification that allows Foreign Banking
Organizations to apply local regulatory requirements in place of the US requirements provided the local
requirements are at least consistent with the Basel Committee on Banking Supervision market capital framework.
The third prong, the Dealer prong, remains almost unchanged.
In addition to the changes to the prongs listed above, the proposed changes impact the original “exclusions” and
“exemptions” for underwriting and market making activities previously included in the 2013 final rule.
Exclusion Changes
(1) The expansion of the financial instruments included in the liquidity management exclusion to
include FX forwards, swaps, and physically-settled cross-currency swaps, and
(2) The addition of a new exclusion to account for “transactions” that are made to correct errors.
Transactions with the intent to reverse a trade or correct an error is permitted. For example if a
swap transaction was intended to be booked for 2 years but was rather booked for 2 ½ years, a
counter swap transactions would be allowed to be booked that effectively shortens the original
swap trade and the net of both transactions is the effective 2 year term.
Exemption Changes
(1) Establishment of the presumption that trading within internally set risk limits satisfies the
requirements provided the risk limits set are done so to comply with the reasonably expected near-
term demands of the market (aka RENTD),
(2) Changing the scope of the exemptions’ compliance program requirements to only be applicable to
banking entities categorized as SIGNIFICANT, exempting MODERATE and LIMITED banking entities,
(3) Modification of the exemption for permitted risk-mitigating hedging activities to reduce the
restrictions on eligible activities that qualify as permitted.
a. For MODERATE and LIMITED banking entities the requirements are removed except the
requirement that hedging activities must reduce or mitigate one or more identifiable risks.
b. For SIGNIFICANT banking entities the proposal maintains most of the original 2013 final
rule requirements however, it (1) softens the language to make the effects of the hedging
less stringent, (2) reduces required documentation for hedging across desks with pre-
approved instruments and pre-set limits.
(4) Modifies & removes certain trading outside the US (“TOTUS”) requirements:
a. the prohibition against the purchases or sales being conducted with or through a US entity,
b. the prohibition against provision of financing for the transaction by any US branch or
entity, and
c. the requirement that no US personnel be involved in arranging, negotiating or executing
the transaction.
Instead, the revised rule focuses on principal risk and actions remaining outside the United States.

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CHANGE 4: EXCLUSIONS
(1) Expansion of financial instruments (i.e. FX forwards, etc. per statutory definition list)
(2) Use of transactions to correct previously booked trades/transactions
CHANGE 5: EXEMPTIONS
(1) Elimination of RENTD metric. The ability to use internally set risk limits, provided they’re
established in accordance with the Volcker Rule, to presume that trading within those
limits signals compliance with the proprietary trading restrictions.
(2) Relaxing the compliance program requirements for MODERATE and LIMITED categories.
(3) Risk-mitigating hedging standards
MODERATE and LIMITED: eliminated except the effective requirements
SIGNIFICANT: no change except softening language and relaxing documentation reqs.
(4) Modifies and removes certain TOTUS requirements (significant change for FBOs)
Changes to the Prohibition of Covered Fund Activities and Investment
There are no proposed changes to the covered fund definition but the proposal asks for comments on several
topics such as whether to adopt a characteristics-based definition of covered funds and whether to revisit the
conditions of several exclusions from the covered fund definition. The requirement to count interests in third-
party covered funds acquired through market making and underwriting exemptions is proposed to be removed.
CHANGE 6: ALLOWING 3RD
PARTY COVERED FUNDS & USE OF COVERED FUNDS FOR HEDGING
The Agencies are seeking comments related to the prohibition of transactions involving covered
fund activities and investments. However they have proposed to allow covered transactions
involving 3rd
parties and allowing covered funds to be used for risk-mitigating hedging.
The proposal plans to restore the exemption from the 2011 proposed rule, allowing a banking entity to hold a
covered fund interest as a risk-mitigating hedge when acting on behalf of a customer to facilitate that customer’s
exposure to the fund. They are also seeking comments on the Super 23A prohibition, and asking whether the
exemptions of regular 23A should be incorporated.
Changes to the Compliance Program Requirements
The Agencies are looking to simplify compliance of the Volcker rule and allow for more efficient data collection
and compliance from its members. The proposal would streamline the metrics reporting and recordkeeping
requirements by tailoring the requirements based on a banking entity’s size and level of trading activity,
completely removing particular metrics based on experience working with the data, and adding a limited set of
new metrics. The proposal also would allow certain firms additional time to report metrics to the Agencies.
CHANGE 7: COMPLIANCE PROGRAMS
The proposed changes would allow SIGNIFICANT firms to integrate their Volcker compliance
programs (“6 Pillar program”) into their existing framework. MODERATE firms will implement
a simplified version and LIMITED firms will not be required to proactively demonstrate
compliance and will enjoy a presumption of compliance. But they are still required to maintain
a compliance program.
The proposal would require banking entities categorized as SIGNIFICANT to implement a six-pillar compliance
program. The proposed rule will eliminate Appendix B of the 2013 final rule and allow SIGNIFICANT firms to
incorporate their compliance programs into the existing framework, eliminating the requirement for separate
compliance programs. The six pillars of the compliance program are the following:
(1) Written policies and procedures,
(2) A system of internal controls,
(3) An appropriate management framework or governance program,

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(4) Independent testing,
(5) Specialized training, and
(6) Recordkeeping requirements.
Banking entities categorized as MODERATE will be required to implement a simplified compliance program by
incorporating the Volcker Rule compliance requirements into the firm’s existing policies and procedures. LIMITED
banking entities will benefit from the new presumption of compliance with no obligation to demonstrate
compliance on an ongoing basis. However, if an Agency discovers that a LIMITED banking entity was or is non-
compliant with the requirements, the banking entity would be treated as a MODERATE category and be required
to adhere to the relevant level of compliance requirements.
CHANGE 8: CEO ATTESTATION
With the elimination of Appendix B, the only element that survives is the CEO attestation
requirement but only for the SIGNIFICANT and MODERATE firms.
With the previously stated elimination of Appendix B of the 2013 final rule, the CEO attestation requirement
would not be eliminated entirely. The CEO attestation requirement would be required to be submitted by both
SIGNIFICANT and MODERATE sized banking entities.
Potential Impact for Banking Entities and Nonbank Financial Companies
The impact of the proposed rule changes does not change the core goal of the Volcker rule which was to
effectively eliminate proprietary trading by banking entities and nonbank financial companies (excluding certain
governmental securities of course) but rather to reduce the complexity of the rule and make it easier to comply
with the requirements. The changes open up the ability for these institutions to more efficiently make markets
and hedge investments in an environment that is less costly and onerous.
Conclusion and next steps
The Agencies have provided for a 60 day comment period which begins from the date of publication of the notice
into the Federal Register which as of July 6th
, has not occurred. In preparation for the final release, in scope
banking entities and nonbank financial companies should assess the rule changes as noted herein and, assuming
the proposed rule changes are largely unchanged, be prepared to consider the following items:
1. Quantify the global trading assets and liabilities to determine which Category your firm will fall under;
2. Assess the strategy for each Volcker Unit and the businesses overall to determine what changes, if any,
are needed to enhance the desk’s operational efficiency and performance;
3. Review the third party covered funds transactions;
4. Develop the new P&L tracking and monitoring process for the newly created Accounting prong;
5. Update the suite of metrics, including the elimination of some (e.g. RENTD);
6. Adjust the compliance programs to tailor to the new requirements based on Categorization;
7. Assess the impact on the ability to rely on the Basel requirements outside the US;
8. Assess the impact for changes in certain TOTUS activities;
9. Revise Volcker Rule policies and procedures based on rule changes’ impact; and
10. Develop a training program which communicates the changes to the rules (e.g. trading requirements,
reporting, hedging, ownership/sponsorship of covered funds, etc.).
The impact of these proposed changes have diverse effect on the firms subject to the rules. Smaller firms will
see lower costs and a less intrusive compliance program associated with the reduced compliance requirements
while the midsized and larger firms will find the changes significantly enhance their ability to transaction and
manage their risks. While the proposed rule change does not eliminate the core mandate of the Volcker Rule, it
does increase slightly the risk of non-compliance (e.g. less monitoring may allow increased bad actors to take
advantage, etc.) however, the changes allow firms to operate more effectively and efficiently. The intent is to
restore a little bit of the liquidity to the markets that was taken away by the original rule. There are those that
say that Volcker 2.0 brings the markets closer to more sensible balance.

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Senior Manager Consultant
+1 (917) 969 8457 +1 (914) 299 1611
christopher.pearson@sia-partners.com stephen.perez@sia-partners.com
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