Volcker Rule Presents Compliance Challenges

Terry Flanagan

The Volcker Rule imposes detailed reporting requirements on all banks with significant trading assets and liabilities. The goal is to help regulators identify prohibited trading and high risk trading strategies. Information is required for each trading desk of a banking entity and for each trading date (although the reports are done on a monthly or quarterly basis).

“Banks engaging in proprietary trading or in permissible funds activities must implement a compliance program for the Volcker Rule,” said Patrick Sweeney, chair of the investment management group at law firm Herrick Feinstein.

The requirements for compliance programs vary based on the size and complexity of the bank. Banks with assets of $10 billion or less may satisfy the compliance program requirement by adding applicable Volcker Rule requirements to their existing compliance policies, while banks with assets of $10 billion or more must establish separate policies that incorporate the regulations in full.

For these larger entities, the rules mandate six compliance program elements: trading and exposure limits; internal controls; management responsibility for compliance; independent testing and audit; training and recordkeeping. Banks with U.S. assets of $50 billion or more (including banks headquartered outside the U.S.) must satisfy additional requirements related to risk management, independent testing and certification by the chief executive officers of the banks.

“Banking entities must meet myriad baseline requirements that include development and implementation of a comprehensive compliance program, changes to corporate governance, refinements in management structure, new business practices, modified risk management and internal control measures, new compensation policies, and new reporting metrics,” said Woodbine Associates research analyst Sean Owens. “The breadth and detail of these requirements will require substantial effort and necessitate changes far beyond the explicit requirements.”

Banks must be in full compliance with the Volcker Rule by July 21, 2015; however, certain reporting requirements will apply to larger institutions as early as June 30, 2014. The July 21, 2015 deadline is a one-year extension from the deadline contemplated under Dodd-Frank, and accordingly the Federal Reserve has stated that it expects banks to make “good faith” efforts to comply without further extensions.

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