How does the Volcker Rule define "trading desks" for foreign banking entities?
Investigate the specific definition and criteria for "trading desks" as applied to foreign banking entities under the Volcker Rule.
The Volcker Rule, which is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, defines "trading desks" for foreign banking entities in a manner consistent with its overall purpose of restricting proprietary trading activities and mitigating systemic risk. The rule is designed to prevent financial institutions, both domestic and foreign, from engaging in excessive proprietary trading. While the rule primarily applies to U.S. banks and their affiliates, it also includes certain provisions that apply to foreign banking entities with operations in the United States.
The Volcker Rule defines a "trading desk" in Section 248.2 of the rule as follows:
"A trading desk means any department, division, unit, or group (including as applicable, personnel) of a banking entity that is engaged in proprietary trading or covered fund activities."
Here's a breakdown of the key components of this definition:
Department, Division, Unit, or Group: The definition is intentionally broad and encompasses various organizational structures within a banking entity. It can include specific business units or teams within the institution.
Engaged in Proprietary Trading or Covered Fund Activities: A trading desk is any part of the banking entity that is involved in either proprietary trading or covered fund activities. Proprietary trading refers to trading activities conducted for the bank's own profit, while covered fund activities involve investments in certain types of hedge funds and private equity funds.
It's worth noting that foreign banking entities with operations in the United States must comply with the Volcker Rule's restrictions on proprietary trading and covered fund activities, just like U.S. banks. However, there are certain exemptions and distinctions based on the size and nature of the foreign entity's U.S. operations, as well as whether the entity is a banking entity under the rule.
Foreign banking entities should carefully assess their trading activities and operations in the United States to determine their specific obligations and compliance requirements under the Volcker Rule. Additionally, regulatory guidance and interpretations may provide further clarity on how the rule applies to foreign banking entities in practice.
Defining "Trading Desks" for Foreign Banking Entities in the Volcker Rule.
The Volcker Rule defines a "trading desk" as "a unit of a bank that engages in proprietary trading." Proprietary trading is trading for the bank's own account and profit.
The Volcker Rule does not specifically define "trading desk" for foreign banking entities. However, the Federal Reserve Board has issued guidance on how foreign banking entities should define "trading desk" for purposes of the Volcker Rule.
The Federal Reserve Board's guidance states that "a trading desk" for a foreign banking entity is a unit of the entity that:
- Engages in proprietary trading of financial instruments.
- Has the authority to make its own trading decisions.
- Has the ability to take on risk on the entity's behalf.
The Federal Reserve Board's guidance also states that the following factors should be considered when determining whether a unit of a foreign banking entity is a "trading desk":
- The unit's organizational structure.
- The unit's independence from other units of the entity.
- The unit's resources and expertise.
- The unit's trading activities.
Foreign banking entities should carefully consider the Federal Reserve Board's guidance when defining "trading desk" for purposes of the Volcker Rule.
Here are some specific examples of units that may be considered "trading desks" for foreign banking entities:
- A unit that engages in proprietary trading of foreign exchange.
- A unit that engages in proprietary trading of derivatives.
- A unit that engages in proprietary trading of commodities.
- A unit that engages in proprietary trading of equities.
- A unit that engages in proprietary trading of debt securities.
Foreign banking entities should also consider the following factors when defining "trading desk" for purposes of the Volcker Rule:
- The size and complexity of the entity's trading activities.
- The entity's risk management procedures.
- The entity's compliance with the Volcker Rule.
Foreign banking entities should consult with their legal counsel to ensure that their definition of "trading desk" is consistent with the Federal Reserve Board's guidance and the Volcker Rule.