Here is the official memo of the meeting on the SEC’s website: http://www.sec.gov/comments/s7-41-11/s74111-74.pdf
Here are the minutes from the meeting.
Section 619(f)(3)(A)(iii) of the statute instructs that The Board may permit a banking entity to enter into a prime brokerage transaction with a covered fund if:
“The Board has determined that such transaction is consistent with the safe and sound operation and condition of the banking entity.”
The proposed rule reverses the logic and intent of the statute, stating instead that a banking entity may enter into a prime brokerage transaction with a covered fund if:
“The Board has not determined that such transaction is inconsistent with the safe and sound operation and condition of the covered banking entity.”
Question: The language of the rule has inverted the language of the statue. Why?
This is a question for the Fed
under 13(f), general prohibition on a transaction… then two paragraphs later, it says board may permit a PB transaction…
Take that and look at the NPR, it scopes out what it means to be a permitted prime brokerage transaction.
Understand there’s a different approach.
PB exemption has three conditions: organizing and offering, CEO certif, Board determination that it’s not safe.
– Question: Repos are not mentioned in the statute. Where did the exemption come from? And why grant a specific exemption for repos when there is already an exemption for liquidity management? Why are repos given special treatment?
Answer: ask the Fed about repos
Are you concerned that banks could house prop trades inside of a repo?
– The language of the Loan Securtizations exemption in § _. 13(d)(2) and § _. 14(a)(2)(v)(B). Do you believe CDS, total return swaps, and repos are included in this definition?
§ _. 13(d)(2) and § _. 14(a)(2)(v)(B) both allow for a banking entity to retain an ownership interest in “a covered fund that is an issuer of asset-backed securities, the assets or holdings or which are solely comprised of: (1) loans (2) contractual rights or assets directly arising from these loans and supporting the asset-backed securities; and (3) Interest rate or foreign exchange derivatives…”
Question: Do you believe § _. 13(d)(2) can be interpreted to include credit default swaps, total return swaps and repurchase agreements?
Answer: none of the people in this room are securitziation experts. We would not anticipate/it is not the intention to cover CDS or CDO-squared in 13(d)(2). Original concern was SPV holds contracts and not necessarily loans. Residual interest that represents the contractual rights over the assets. We would welcome alternate language.
– What is the current plan in terms of how ownership interests in ABS issuers are counted towards the 3% of Tier 1 capital limit?
Answer: The 5% risk retention minimum required by 941 is not included in the 3% aggregate calculation, nor in the single fund calculation.
Question: If a BE had 25% of an ABS issuer, would the 20% be counted?
Answer: If they went above 5%, the incremental amount above 5% is counted towards the 3% aggregate limit.
Would welcome comment… types of ABS, not always going to apply to every type of SPV.
– Definition of derivative
– Regarding Suppart D: How to ensure consistency between banking entities’ quantatative measurements (how to account for different financial models)
Look at it as supplementing. We are asking for the metrics to provide some uniformity among the firms. It will be a couple of years of learning to figure out which metrics we should be asking which firms for. We want things that would be indicative of proprietary trading. Risk as an indicia of prop trading.
Cathy: I don’t see enough rules to force banks to tell you the true answer. I don’t see lookback window. As a risk expert, I don’t see how you’re going to be able to figure out if they’re prop trading. They can game it.
We’re looking for comments such as yours, for areas where we may need to take a different approach. Looking for areas where we can do a deeper dive.
Entire compliance program that is also required. Asking for data behind the metrics.
Cathy: I know from experience working with large portfolios, that the work doesn’t get done. I’m definitely going to make detailed comments on this special aspect. On how you could ask for sufficiently enough metrics.
We would welcome comments like that.
– Penalties for violations: is this limited to what is currently contained in the BHC Act, § 1847?
statute provides very limited ability for anything… we added an SEC section where we added record keeping, etc, and we’d have our typical authority.
Banking regulators would have more.
anti-evasion, there’s a possibility of not allowing them to use permitted activities, like market making
Can you tell us about the actual process for reading the comment letters, with respect to the questions? Are the questions split up and distributed? Are summary documents read by all of the relevant staffers, or should we be reiterating broad points throughout the document?
Question 113. Is the requirement that the compensation arrangements of persons performing risk-mitigating hedging activities at a banking entity be designed not to reward proprietary risk-taking effective?
How is this impacted, and what is meant by the Footnote: Proposed Appendix B – Commentary regarding identification of permitted market making-related activities:
 The Proposed commentary does not contemplate explanatory facts and circumstances for the compensation incentives factor, given that the choice of compensation incentives provided to trading personnel is under the full control of the banking entity.
What is meant by extending this requirement (given § __.5(b)(2)(v))? Would this serve to limit the type of hedges that are considered appropriate? For example, would an equity option become an inappropriate hedge for a cash equity position, since significant exposures can arise out of the option in the future?
Question 111. Is the requirement that the transaction not give rise, at the inception of the hedge, to significant exposures that are not themselves hedged in a contemporaneous transaction effective? Should the requirement that no significant exposure be introduced be extended for the duration of the hedging position? If so, why?
Sixth, § __.5(b)(2)(v) Such review, monitoring, and management must: (i) be consistent with the banking entity’s written hedging policies and procedures; (ii) maintain a reasonable level of correlation, based upon the facts and circumstances of the underlying and hedging positions and the risks and liquidity of those positions, to the risk or risks the purchase or sale is intended to hedge or otherwise mitigate; and (iii) mitigate any significant exposure arising out of the hedge after inception.
This is based on portfolio market making.
Why is there a specific exemption for MM-related hedging that is Identical in substance to the other hedging exemption? Are there expected to be trades that do not meet the Risk-Mitigating hedging exemption, but meet this Market-Making hedging exemption?
Question 318. With respect to the CEO (or equivalent officer) certification required under section 13(f)(3)(A)(ii) of the BHC Act and § _.16(a)(2)(ii)(B) of the proposed rule, what would be the most useful, efficient method of certification (e.g., a new stand-alone certification, a certification incorporated into an existing form or filing, Web site certification, or certification filed directly with the relevant Agency)?
Question for the SEC- Do the existing Sox certifications already cover this? Would the current certification of the effectiveness of internal controls already cover the proposed certification, since adequate internal controls need to be in place to ensure that the Volcker Rule restrictions are being adhered to.
If SOX certification does not already cover the proposed certification requirements, then the SOX certification should be modified to include the proposed certifications.
What is the SECs view on this?
FYI- Akshat’s response:. For any banking entity that relies on any exclusion from the general Volcker prohibition (market-making, government securities, exempted funds, etc.), the Agencies should also require that the CEO specifically certify that the banking entity’s activities do not result in a material exposure of the banking entity to high-risk assets or high-risk trading strategies, and further do not pose a threat to the financial stability of the banking entity or the United States. Although the limitations on high-risk activities are already embedded in the Rule, these provisions will actually benefit from real-world enforcement if CEOs are held personally accountable.
Answer: CEO certification tracks what’s in the statue. NPR does not contain an overall certification. There is a question asked whether or not CEO certification should be a part of the final rule.
Most of SOX goes towards financial statements as opposed to metrics.
The SEC asked us, What exactly would a CEO certification sound like?
In appendix C, responsibility of complaince program, Board of Directors must use and approve compliance program.