How does the Volcker Rule define "trading assets and liabilities" for foreign banking entities?
Examine the specific definition and criteria for "trading assets and liabilities" as applied to foreign banking entities under the Volcker Rule.
The Volcker Rule defines "trading assets and liabilities" broadly to encompass various financial instruments and positions held by banking entities, including foreign banking entities. These definitions are intended to capture assets and liabilities that are relevant to the Volcker Rule's restrictions on proprietary trading and covered fund activities. While the rule does not provide a specific definition of "trading assets and liabilities" for foreign banking entities, it uses general categories to encompass various financial instruments. Here are some key elements of how the Volcker Rule defines trading assets and liabilities:
Financial Instruments: Trading assets and liabilities generally include a wide range of financial instruments, such as stocks, bonds, derivatives (e.g., options, futures, swaps), commodities, and foreign exchange instruments.
Short-Term Positions: The rule considers certain short-term positions in financial instruments, including those held for the purpose of short-term resale or to profit from short-term price movements, as trading assets and liabilities.
Market Risk Capital: The rule links the definition of trading assets and liabilities to the calculation of market risk capital under the banking entity's regulatory capital rules. This connection helps determine which positions should be classified as trading assets and liabilities for regulatory purposes.
Hedging and Market Making: While trading assets and liabilities are generally subject to the rule's restrictions on proprietary trading, there are exceptions for activities related to hedging and market making. These exceptions allow banking entities to engage in certain activities to manage risk and facilitate customer transactions.
Covered Funds: The definition also encompasses certain investments in covered funds that engage in trading activities. These investments may be subject to specific limitations and requirements under the rule.
It's important to note that the definition of trading assets and liabilities under the Volcker Rule is quite broad, and the rule provides for certain exemptions and exceptions to accommodate legitimate trading activities conducted by banking entities. Additionally, the rule has been subject to regulatory guidance and interpretations, which may provide further clarification on specific instruments and positions.
Foreign banking entities operating in the United States are generally subject to the same core provisions of the Volcker Rule as domestic banking entities, with some additional considerations related to the extraterritorial application of the rule and the coordination of compliance with foreign regulatory requirements.
For precise and up-to-date guidance on the application of the Volcker Rule to foreign banking entities and how trading assets and liabilities are defined in their specific contexts, it's advisable to consult regulatory authorities and legal experts familiar with the rule's requirements.
Defining "Trading Assets and Liabilities" in the Volcker Rule for Foreign Banking Entities.
The Volcker Rule applies to all banking entities, including foreign banking entities with a significant presence in the United States. For foreign banking entities, the Volcker Rule defines trading assets and liabilities as follows:
Trading assets include:
- Any financial instrument that is held for trading purposes, including securities, derivatives, and commodity futures
- Any investment in a hedge fund or private equity fund
- Any other asset that is held for trading purposes, as determined by the applicable regulatory agency
Trading liabilities include:
- Any liability that is incurred for trading purposes, including short-term borrowings and repurchase agreements
- Any liability that is incurred to finance an investment in a hedge fund or private equity fund
- Any other liability that is incurred for trading purposes, as determined by the applicable regulatory agency
The Volcker Rule also provides a number of exemptions for certain types of trading assets and liabilities. For example, foreign banking entities are exempt from the Volcker Rule's restrictions on proprietary trading to the extent that they engage in such trading on behalf of their non-US customers.
Here are some examples of trading assets and liabilities for foreign banking entities under the Volcker Rule:
Trading assets:
- Securities, such as stocks, bonds, and exchange-traded funds
- Derivatives, such as futures contracts, options, and swaps
- Commodity futures contracts
- Investments in hedge funds and private equity funds
- Other assets that are held for trading purposes, such as repurchase agreements and margin loans
Trading liabilities:
- Short-term borrowings, such as commercial paper and interbank loans
- Repurchase agreements
- Liabilities incurred to finance investments in hedge funds and private equity funds
- Other liabilities incurred for trading purposes, such as margin calls and broker-dealer margin debt
It is important to note that the Volcker Rule is a complex regulation and there are a number of nuances to the definition of trading assets and liabilities. Foreign banking entities should consult with an attorney or other qualified professional to ensure that they are in compliance with the Volcker Rule's requirements.