The U.S. agencies responsible for enforcing the Volcker Rule issued  A ONE YEAR REPRIEVE FOR CERTAIN FOREIGN BANKS & INVESTMENT FUNDS,  via a joint statement on July 21, 2017.

What does this mean for the year?

  • This year is a grace period allowing agencies time to amend Volcker.
  • Foreign banking entities that engage in activities or investments with a “qualifying foreign excluded fund” within their control, will NOT be found to be in violation of the Volcker Rule.
  • A “qualifying foreign excluded fund” acquired, sponsored, or owned by foreign banking entities will NOT be treated as a bank entity,[1] therefore avoiding the impairments of Volcker.[2]
  • Non-bank entities are NOT subject to the prohibition on proprietary trading with covered funds (e.g., certain hedge funds, private equity funds, etc.).

A “qualifying foreign excluded fund” is defined as an entity that:

  • is organized, offered and sold outside of the U.S.;
  • would be a covered fund had it established itself in the US or collected funds from investors mainly to invest in financial instruments for resale, other disposition, or for trading;
  • is NOT otherwise considered a banking entity except by virtue of a foreign banking entity’s acquisition or retention of an ownership in, or sponsorship of, the entity;
  • is established and operated as part of an asset management business; and,
  • is NOT operated in a manner that enables a foreign banking entity to dodge the requirements of the Volcker Rule.

How do you figure out if you qualify for relief?

  • Are you a foreign bank that has investments in or sponsorship of “qualifying foreign excluded funds”?
  • Can you meet the “Solely Outside the United States” (SOTUS) exemption requirements?
    • The banking entity is not organized or “controlled” by a banking entity organized in the U.S.;
    • The activity or investment by banking entity is pursuant to Sec. 4(c), paragraphs (9) or (13) of the BHC Act;
    • No ownership interest in the covered fund is offered for sale or sold to a U.S. resident; and,
    • The activity or investment occurs solely outside of the United States.

It's only a temporary fix:

  • How will agencies prevent unintended consequences such as extraterritorial reach?
  • Foreign banks and funds are left asking, “Who will ultimately be subject to the Volcker Rule?”