(a) Underwriting
activities.
(1) Permitted underwriting activities. The
prohibition contained in section 248.3(a) does not apply to a banking
entity’s underwriting activities conducted in accordance with this
paragraph (a).
(2) Requirements. The underwriting activities
of a banking entity are permitted under paragraph (a)(1) of this section
only if:
(i) The
banking entity is acting as an underwriter for a distribution of securities
and the trading desk’s underwriting position is related to such distribution;
(ii) (A) The amount
and type of the securities in the trading desk’s underwriting position
are designed not to exceed the reasonably expected near term demands
of clients, customers, or counterparties, taking into account the
liquidity, maturity, and depth of the market for the relevant types
of securities; and
(B) Reasonable efforts
are made to sell or otherwise reduce the underwriting position within
a reasonable period, taking into account the liquidity, maturity,
and depth of the market for the relevant types of securities;
(iii) In the case of a banking entity
with significant trading assets and liabilities, the banking entity
has established and implements, maintains, and enforces an internal
compliance program required by subpart D of this part that is reasonably
designed to ensure the banking entity’s compliance with the requirements
of paragraph (a) of this section, including reasonably designed written
policies and procedures, internal controls, analysis and independent
testing identifying and addressing:
(A) The products, instruments or exposures
each trading desk may purchase, sell, or manage as part of its underwriting
activities;
(B) Limits for each trading
desk, in accordance with paragraph (a)(2)(ii)(A) of this section;
(C) Written authorization procedures,
including escalation procedures that require review and approval of
any trade that would exceed a trading desk’s limit(s), demonstrable
analysis of the basis for any temporary or permanent increase to a
trading desk’s limit(s), and independent review of such demonstrable
analysis and approval; and
(D) Internal
controls and ongoing monitoring and analysis of each trading desk’s
compliance with its limits.
(iv) A banking entity with significant trading
assets and liabilities may satisfy the requirements in paragraphs
(a)(2)(iii)(B) and (C) of this section by complying with the requirements
set forth in paragraph (c) of this section;
(v) The compensation arrangements of
persons performing the activities described in this paragraph (a)
are designed not to reward or incentivize prohibited proprietary trading;
and
(vi) The banking entity is
licensed or registered to engage in the activity described in this
paragraph (a) in accordance with applicable law.
(3) Definition
of distribution. For purposes of this paragraph (a), a distribution
of securities means:
(i) An offering of securities, whether or not subject to registration
under the Securities Act of 1933, that is distinguished from ordinary
trading transactions by the presence of special selling efforts and
selling methods; or
(ii) An offering
of securities made pursuant to an effective registration statement
under the Securities Act of 1933.
(4) Definition
of underwriter. For purposes of this paragraph (a), underwriter means:
(i) A person
who has agreed with an issuer or selling security holder to:
(A) Purchase securities from the issuer
or selling security holder for distribution;
(B) Engage in a distribution of securities
for or on behalf of the issuer or selling security holder; or
(C) Manage a distribution of securities for
or on behalf of the issuer or selling security holder; or
(ii) A person who has agreed to
participate or is participating in a distribution of such securities
for or on behalf of the issuer or selling security holder.
(5) Definition
of selling security holder. For purposes of this paragraph (a), selling security holder means any person, other than an issuer,
on whose behalf a distribution is made.
(6) Definition
of underwriting position. For purposes of this section, underwriting
position means the long or short positions in one or more securities
held by a banking entity or its affiliate, and managed by a particular
trading desk, in connection with a particular distribution of securities
for which such banking entity or affiliate is acting as an underwriter.
(7) Definition
of client, customer, and counterparty. For purposes of this paragraph
(a), the terms client, customer, and counterparty, on a collective
or individual basis, refer to market participants that may transact
with the banking entity in connection with a particular distribution
for which the banking entity is acting as underwriter.
(b) Market making-related activities.
(1) Permitted market making-related activities. The prohibition contained in section 248.3(a) does not apply to
a banking entity’s market making-related activities conducted in accordance
with this paragraph (b).
(2) Requirements. The market making-related
activities of a banking entity are permitted under paragraph (b)(1)
of this section only if:
(i) The trading desk that establishes
and manages the financial exposure, routinely stands ready to purchase
and sell one or more types of financial instruments related to its
financial exposure, and is willing and available to quote, purchase
and sell, or otherwise enter into long and short positions in those
types of financial instruments for its own account, in commercially
reasonable amounts and throughout market cycles on a basis appropriate
for the liquidity, maturity, and depth of the market for the relevant
types of financial instruments;
(ii) The trading desk’s market-making related activities are designed
not to exceed, on an ongoing basis, the reasonably expected near term
demands of clients, customers, or counterparties, taking into account
the liquidity, maturity, and depth of the market for the relevant
types of financial instruments;
(iii) In the case of a banking entity with significant trading assets
and liabilities, the banking entity has established and implements, maintains,
and enforces an internal compliance program required by subpart D
of this part that is reasonably designed to ensure the banking entity’s
compliance with the requirements of this paragraph (b), including
reasonably designed written policies and procedures, internal controls,
analysis and independent testing identifying and addressing:
(A) The financial instruments each trading
desk stands ready to purchase and sell in accordance with paragraph
(b)(2)(i) of this section;
(B) The
actions the trading desk will take to demonstrably reduce or otherwise
significantly mitigate promptly the risks of its financial exposure
consistent with the limits required under paragraph (b)(2)(iii)(C)
of this section; the products, instruments, and exposures each trading
desk may use for risk management purposes; the techniques and strategies
each trading desk may use to manage the risks of its market making-related
activities and positions; and the process, strategies, and personnel
responsible for ensuring that the actions taken by the trading desk
to mitigate these risks are and continue to be effective;
(C) Limits for each trading desk, in accordance
with paragraph (b)(2)(ii) of this section;
(D) Written authorization procedures, including
escalation procedures that require review and approval of any trade
that would exceed a trading desk’s limit(s), demonstrable analysis
of the basis for any temporary or permanent increase to a trading
desk’s limit(s), and independent review of such demonstrable analysis
and approval; and
(E) Internal controls
and ongoing monitoring and analysis of each trading desk’s compliance
with its limits.
(iv) A banking entity with significant trading assets and liabilities
may satisfy the requirements in paragraphs (b)(2)(iii)(C) and (D)
of this section by complying with the requirements set forth in paragraph
(c) of this section.
(v) The
compensation arrangements of persons performing the activities described
in this paragraph (b) are designed not to reward or incentivize prohibited
proprietary trading; and
(vi)
The banking entity is licensed or registered to engage in activity
described in this paragraph (b) in accordance with applicable law.
(3) Definition of client, customer, and counterparty. For purposes of this paragraph (b), the terms client, customer,
and counterparty, on a collective or individual basis refer to
market participants that make use of the banking entity’s market making-related
services by obtaining such services, responding to quotations, or
entering into a continuing relationship with respect to such services,
provided that:
(i)
A trading desk or other organizational unit of another banking entity
is not a client, customer, or counterparty of the trading desk if
that other entity has trading assets and liabilities of $50 billion
or more as measured in accordance with the methodology described in
section 248.2(ee) of this part, unless:
(A) The trading desk documents how and why
a particular trading desk or other organizational unit of the entity
should be treated as a client, customer, or counterparty of the trading
desk for purposes of paragraph (b)(2) of this section; or
(B) The purchase or sale by the trading desk
is conducted anonymously on an exchange or similar trading facility
that permits trading on behalf of a broad range of market participants.
(ii) [Reserved]
(4) Definition of financial exposure. For purposes
of this section, financial exposure means the aggregate risks
of one or more financial instruments and any associated loans, commodities,
or foreign exchange or currency, held by a banking entity or its affiliate
and managed by a particular trading desk as part of the trading desk’s
market making-related activities.
(5) Definition of market-maker positions. For the purposes of this section, market-maker positions means
all of the positions in the financial instruments for which the trading
desk stands ready to make a market in accordance with paragraph (b)(2)(i)
of this section, that are managed by the trading desk, including the
trading desk’s open positions or exposures arising from open transactions.
(c) Rebuttable presumption
of compliance.
(1) Internal limits.
(i) A banking entity shall be presumed
to meet the requirement in paragraph (a)(2)(ii)(A) or (b)(2)(ii) of
this section with respect to the purchase or sale of a financial instrument
if the banking entity has established and implements, maintains, and
enforces the internal limits for the relevant trading desk as described
in paragraph (c)(1)(ii) of this section.
(ii) (A) With respect to underwriting activities
conducted pursuant to paragraph (a) of this section, the presumption
described in paragraph (c)(1)(i) of this section shall be available
to each trading desk that establishes, implements, maintains, and
enforces internal limits that should take into account the liquidity,
maturity, and depth of the market for the relevant types of securities
and are designed not to exceed the reasonably expected near term demands
of clients, customers, or counterparties, based on the nature and
amount of the trading desk’s underwriting activities, on the:
(1)
Amount, types, and risk of its underwriting position;
(2) Level of exposures to relevant
risk factors arising from its underwriting position; and
(3) Period of time a security may
be held.
(B) With respect
to market making-related activities conducted pursuant to paragraph
(b) of this section, the presumption described in paragraph (c)(1)(i)
of this section shall be available to each trading desk that establishes,
implements, maintains, and enforces internal limits that should take
into account the liquidity, maturity, and depth of the market for
the relevant types of financial instruments and are designed not to
exceed the reasonably expected near term demands of clients, customers,
or counterparties, based on the nature and amount of the trading desk’s
market-making related activities, that address the:
(1)
Amount, types, and risks of its market-maker positions;
(2) Amount, types, and risks of the
products, instruments, and exposures the trading desk may use for
risk management purposes;
(3) Level of exposures to relevant risk factors arising from its financial
exposure; and
(4) Period of
time a financial instrument may be held.
(2) Supervisory review and oversight. The limits
described in paragraph (c)(1) of this section shall be subject to
supervisory review and oversight by the Board on an ongoing basis.
(3) Limit
breaches and increases.
(i) With respect to any limit set pursuant
to paragraph (c)(1)(ii)(A) or (B) of this section, a banking entity
shall maintain and make available to the Board upon request records
regarding:
(A) Any limit
that is exceeded; and
(B) Any temporary
or permanent increase to any limit(s), in each case in the form and
manner as directed by the Board.
(ii) In the event of a breach or increase
of any limit set pursuant to paragraph (c)(1)(ii)(A) or (B) of this
section, the presumption described in paragraph (c)(1)(i) of this
section shall continue to be available only if the banking entity:
(A) Takes action as promptly
as possible after a breach to bring the trading desk into compliance;
and
(B) Follows established written
authorization procedures, including escalation procedures that require
review and approval of any trade that exceeds a trading desk’s limit(s),
demonstrable analysis of the basis for any temporary or permanent
increase to a trading desk’s limit(s), and independent review of such
demonstrable analysis and approval.
(4) Rebutting the presumption. The presumption
in paragraph (c)(1)(i) of this section may be rebutted by the Board
if the Board determines, taking into account the liquidity, maturity,
and depth of the market for the relevant types of financial instruments
and based on all relevant facts and circumstances, that a trading
desk is engaging in activity that is not based on the reasonably expected
near term demands of clients, customers, or counterparties. The Board’s
rebuttal of the presumption in paragraph (c)(1)(i) must be made in
accordance with the notice and response procedures in subpart D of
this part.
