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March 05, 2018

Randal K. Quarles, the Vice Chairman for Supervision at FED, spoke at the Institute of International Bankers Annual Washington Conference in Washington, D.C. He shared his perspective on the appropriate regulatory environment for foreign banks operating in the United States, in addition to thoughts on the specific elements of the regulatory regime. He discussed his initial thoughts on how the Volcker rule can be improved, both generally and in its application to foreign banking organizations (FBOs). He also discussed the application of enhanced prudential standards to FBOs, including the flexibility in implementing certain aspects of these standards, and offered initial thoughts on opportunities for further tailoring that regime for FBOs. He outlined the implications of the intermediate holding company (IHC) structure, to which the post-crisis regulatory reforms apply, for foreign firms.

Mr. Quarles said that "the regulation implementing the Volcker rule is an example of a complex regulation that is not working well." He added that the framework of the implementing regulation must be improved "to make it more workable and less burdensome in practice from both a compliance and supervisory perspective." FED is actively working with the fellow regulators in seeking ways to further tailor and to reduce burden, particularly for firms that do not have large trading operations and do not engage in the sorts of activities that may give rise to proprietary trading. He outlines the following possible improvements to the regulation:

  • It should be clearer and more transparent what is subject to the Volcker rule's implementing regulation and what is not
  • Definition of key terms like "proprietary trading" and "covered fund" should be as simple and clear as possible. It has happened that the supervised firms ask questions about whether a particular derivative trade is subject to the rule and "we cannot give them our own answer or a consistent answer across the five responsible agencies." Supervisors need to be able to provide clear and transparent guidance on what is covered by the Volcker rule and what is not. This would benefit not only the firms, but the supervisors at the agencies as well.
  • With respect to the exemption for market making-related activities, "the rule contains a gaggle of complex regulatory requirements, but the statute contains merely one—that the market making-related activities are designed not to exceed the reasonably expected near-term demands of clients, customers, or counterparties, otherwise known as RENT'D. We are considering different ways to use a clearer test for RENT'D. 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."
  • The statute contains exemptions to allow foreign banks to continue trading and engaging in covered fund activities solely outside the United States. The regulation again has a complex series of requirements that a foreign bank must meet to make use of these exemptions. A number of foreign banks say that complying with these requirements is unworkable in practice and the FED is considering ways to address this impracticality. 
  • FED is considering broad revisions to the Volcker rule compliance regime. It would like Volcker rule compliance to be similar to compliance in other areas of the supervisory regime. FED will be looking for ways to reduce the compliance burden of the Volcker rule for foreign banks with limited U.S. operations and small U.S. trading books.

He concluded that the areas he "...discussed today are important components of the exercise of improving our regulations as they apply to FBOs and are part of a larger overall agenda to critically evaluate and improve our regulations to promote financial stability while fostering the conditions for solid economic activity. Some of these exercises will require more effort and time than others, but each one of them is a high priority ... [for FED]."


Related Link: Speech

Keywords: Americas, US, Banking, Foreign Banks, Volcker Rule, Regulatory Regime, IHC, FED

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