PwC's Managing upstream risk: Regulatory reform review - An asian perspective December 2013 | Page 16

• Metrics: The number of metrics needed to
demonstrate Volcker conformance has been
reduced from 17 to seven, but banks may
need to provide regulators with additional
firm-developed metrics to demonstrate that
their particular strategies comply with the
rule (further evidencing the theme that the
onus is on the banks to prove compliance).
Metrics reporting begins on June 30, 2014
for banks with trading assets and liabilities of
$50 billion or more.
• SOTUS: Foreign banks won a more riskbased than transaction-based exemption
from the rule’s extraterritorial reach in both
trading and covered fund activities, i.e.,
expansion of the solely outside the United
States exemption (“SOTUS”). Foreign banks
meeting certain SOTUS requirements now
have more freedom to invest or sponsor
foreign covered funds and to conduct their
non-US trading activities and will still
have conditional access to US clients and
counterparties through US exchanges and
intermediaries. US banks were not provided
with a similar relaxation of the rule on
their activities outside of the US – Volcker
will apply fully to those activities. The
competitive equality arguments of US banks
fell on deaf ears with regard to SOTUS.
• Sovereign debt: US branches and agencies
of foreign banks are allowed to trade in
the sovereign debt of their home country.
Similarly, a foreign bank or foreign broker
dealer owned by a US banking entity is
permitted to trade in the sovereign debt of its
foreign chartering authority.
• Covered funds: The definition of covered
funds no longer captures, as examples,
foreign retail funds (e.g., European UCITS
funds), certain loan securitisation vehicles,
or most commodity pools. This change
was meant to limit the overbreadth of the
definition and to level the playing field
between US and global funds – however, to
the consternation of some issuers, a loan
securitization vehicle’s underlying assets
must be strictly limited to loans in order for
the vehicle to fall outside of the covered fund
definition.

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• Super 23A: A major disappointment is
the final rule’s failure to apply certain key
exemptions of the affiliate transaction
restrictions of section 23A to a banking
entity’s transactions with a covered fund that
it sponsors, manages, or advises.
• CEO certification: CEOs of banking entities
that are subject to enhanced compliance
standards must attest annually that their
controls and processes are “reasonably
designed” to ensure compliance with Volcker.
The attestation must be based on a “review
by the CEO,” which should be supported by
an auditable, reproducible process that may
leverage the independent testing required
under the rule as well as a bank’s internal
audit function. While the attestation is not
a blanket guarantee of compliance, it will
nevertheless require evidentiary support.

Regulatory Reform Review | Banking