(a) Prohibition. Except as otherwise provided in this subpart, a banking entity may
not engage in proprietary trading. Proprietary trading means
engaging as principal for the trading account of the banking entity
in any purchase or sale of one or more financial instruments.
(b) Definition of trading account.
(1) Trading account means:
(i) Any
account that is used by a banking entity to purchase or sell one or
more financial instruments principally for the purpose of short-term
resale, benefitting from actual or expected short-term price movements,
realizing short-term arbitrage profits, or hedging one or more of
the positions resulting from the purchases or sales of financial instruments
described in this paragraph;
(ii) Any account that is used by a banking entity to purchase or
sell one or more financial instruments that are both market risk capital
rule covered positions and trading positions (or hedges of other market
risk capital rule covered positions), if the banking entity, or any
affiliate with which the banking entity is consolidated for regulatory
reporting purposes, calculates risk-based capital ratios under the
market risk capital rule; or
(iii) Any account that is used by a banking entity to purchase or
sell one or more financial instruments, if the banking entity:
(A) Is licensed or registered,
or is required to be licensed or registered, to engage in the business
of a dealer, swap dealer, or security-based swap dealer, to the extent
the instrument is purchased or sold in connection with the activities
that require the banking entity to be licensed or registered as such;
or
(B) Is engaged in the business of
a dealer, swap dealer, or security-based swap dealer outside of the
United States, to the extent the instrument is purchased or sold in
connection with the activities of such business.
(2) Trading account application for certain banking
entities.
(i)
A banking entity that is subject to paragraph (b)(1)(ii) of this section
in determining the scope of its trading account is not subject to
paragraph (b)(1)(i) of this section.
(ii) A banking entity that does not calculate risk-based capital
ratios under the market risk capital rule and is not a consolidated
affiliate for regulatory reporting purposes of a banking entity that
calculates risk based capital ratios under the market risk capital
rule may elect to apply paragraph (b)(1)(ii) of this section in determining
the scope of its trading account as if it were subject to that paragraph.
A banking entity that elects under this subsection to apply paragraph
(b)(1)(ii) of this section in determining the scope of its trading
account as if it were subject to that paragraph is not required to
apply paragraph (b)(1)(i) of this section.
(3) Consistency
of account election for certain banking entities.
(i) Any election or change to an
election under paragraph (b)(2)(ii) of this section must apply to
the electing banking entity and all of its wholly owned subsidiaries.
The primary financial regulatory agency of a banking entity that is
affiliated with but is not a wholly owned subsidiary of such electing
banking entity may require that the banking entity be subject to this
uniform application requirement if the primary financial regulatory
agency determines that it is necessary to prevent evasion of the requirements
of this part after notice and opportunity for response as provided
in subpart D of this part.
(ii)
A banking entity that does not elect under paragraph (b)(2)(ii) of
this section to be subject to the trading account definition in (b)(1)(ii)
may continue to apply the trading account definition in paragraph
(b)(1)(i) of this section for one year from the date on which it becomes,
or becomes a consolidated affiliate for regulatory reporting purposes
with, a banking entity that calculates risk-based capital ratios under
the market risk capital rule.
(4) Rebuttable
presumption for certain purchases and sales. The purchase (or
sale) of a financial instrument by a banking entity shall be presumed
not to be for the trading account of the banking entity under paragraph
(b)(1)(i) of this section if the banking entity holds the financial
instrument for sixty days or longer and does not transfer substantially
all of the risk of the financial instrument within sixty days of the
purchase (or sale).
(c) Financial instrument.
(1) Financial instrument means:
(i) A security, including an option
on a security;
(ii) A derivative,
including an option on a derivative; or
(iii) A contract of sale of a commodity
for future delivery, or option on a contract of sale of a commodity
for future delivery.
(2) A financial instrument does not include:
(i) A loan;
(ii) A commodity that is not:
(A) An excluded commodity (other than
foreign exchange or currency);
(B)
A derivative;
(C) A contract of sale
of a commodity for future delivery; or
(D) An option on a contract of sale of a commodity for future delivery;
or
(iii) Foreign
exchange or currency.
(d) Proprietary trading. Proprietary trading
does not include:
(1) Any
purchase or sale of one or more financial instruments by a banking
entity that arises under a repurchase or reverse repurchase agreement
pursuant to which the banking entity has simultaneously agreed, in
writing, to both purchase and sell a stated asset, at stated prices,
and on stated dates or on demand with the same counterparty;
(2) Any purchase or sale of one or more
financial instruments by a banking entity that arises under a transaction
in which the banking entity lends or borrows a security temporarily
to or from another party pursuant to a written securities lending
agreement under which the lender retains the economic interests of
an owner of such security, and has the right to terminate the transaction
and to recall the loaned security on terms agreed by the parties;
(3) Any purchase or sale of a security,
foreign exchange forward (as that term is defined in section 1a(24)
of the Commodity Exchange Act (7 U.S.C. 1a(24)), foreign exchange
swap (as that term is defined in section 1a(25) of the Commodity Exchange
Act (7 U.S.C. 1a(25)), or cross-currency swap by a banking entity
for the purpose of liquidity management in accordance with a documented
liquidity management plan of the banking entity that:
(i) Specifically contemplates and
authorizes the particular financial instruments to be used for liquidity
management purposes, the amount, types, and risks of these financial
instruments that are consistent with liquidity management, and the
liquidity circumstances in which the particular financial instruments
may or must be used;
(ii) Requires
that any purchase or sale of financial instruments contemplated and
authorized by the plan be principally for the purpose of managing
the liquidity of the banking entity, and not for the purpose of short-term
resale, benefitting from actual or expected short-term price movements,
realizing short-term arbitrage profits, or hedging a position taken
for such short-term purposes;
(iii) Requires that any financial instruments purchased or sold for
liquidity management purposes be highly liquid and limited to financial
instruments the market, credit, and other risks of which the banking
entity does not reasonably expect to give rise to appreciable profits
or losses as a result of short-term price movements;
(iv) Limits any financial instruments
purchased or sold for liquidity management purposes, together with
any other financial instruments purchased or sold for such purposes,
to an amount that is consistent with the banking entity’s near-term
funding needs, including deviations from normal operations of the
banking entity or any affiliate thereof, as estimated and documented
pursuant to methods specified in the plan;
(v) Includes written policies and procedures,
internal controls, analysis, and independent testing to ensure that
the purchase and sale of financial instruments that are not permitted
under section 248.6(a) or (b) of this subpart are for the purpose
of liquidity management and in accordance with the liquidity management
plan described in this paragraph (d)(3); and
(vi) Is consistent with the Board’s
supervisory requirements regarding liquidity management;
(4) Any purchase or sale of one or
more financial instruments by a banking entity that is a derivatives
clearing organization or a clearing agency in connection with clearing
financial instruments;
(5) Any excluded
clearing activities by a banking entity that is a member of a clearing
agency, a member of a derivatives clearing organization, or a member
of a designated financial market utility;
(6) Any purchase or sale of one or more
financial instruments by a banking entity, so long as:
(i) The purchase (or sale) satisfies
an existing delivery obligation of the banking entity or its customers,
including to prevent or close out a failure to deliver, in connection
with delivery, clearing, or settlement activity; or
(ii) The purchase (or sale) satisfies
an obligation of the banking entity in connection with a judicial,
administrative, self-regulatory organization, or arbitration proceeding;
(7) Any purchase or sale
of one or more financial instruments by a banking entity that is acting
solely as agent, broker, or custodian;
(8) Any purchase or sale of one or more financial instruments by
a banking entity through a deferred compensation, stock-bonus, profit-sharing,
or pension plan of the banking entity that is established and administered
in accordance with the law of the United States or a foreign sovereign,
if the purchase or sale is made directly or indirectly by the banking
entity as trustee for the benefit of persons who are or were employees
of the banking entity;
(9) Any purchase
or sale of one or more financial instruments by a banking entity in
the ordinary course of collecting a debt previously contracted in
good faith, provided that the banking entity divests the financial
instrument as soon as practicable, and in no event may the banking
entity retain such instrument for longer than such period permitted
by the Board;
(10) Any purchase
or sale of one or more financial instruments that was made in error
by a banking entity in the course of conducting a permitted or excluded
activity or is a subsequent transaction to correct such an error;
(11) Contemporaneously entering into
a customer-driven swap or customer-driven security-based swap and
a matched swap or security-based swap if:
(i) The banking entity retains no more
than minimal price risk; and
(ii) The banking entity is not a registered dealer, swap dealer,
or security-based swap dealer;
(12) Any purchase or sale of one or more
financial instruments that the banking entity uses to hedge mortgage
servicing rights or mortgage servicing assets in accordance with a
documented hedging strategy; or
(13) Any purchase or sale of a financial instrument that does not
meet the definition of trading asset or trading liability under the
applicable reporting form for a banking entity as of January 1, 2020.
(e) Definition of other terms
related to proprietary trading. For purposes of this subpart:
(1) Anonymous means
that each party to a purchase or sale is unaware of the identity of
the other party(ies) to the purchase or sale.
(2) Clearing agency has the same
meaning as in section 3(a)(23) of the Exchange Act (15 U.S.C. 78c(a)(23)).
(3) Commodity has the same
meaning as in section 1a(9) of the Commodity Exchange Act (7 U.S.C.
1a(9)), except that a commodity does not include any security;
(4) Contract of sale of a commodity
for future delivery means a contract of sale (as that term is
defined in section 1a(13) of the Commodity Exchange Act (7 U.S.C.
1a(13)) for future delivery (as that term is defined in section 1a(27)
of the Commodity Exchange Act (7 U.S.C. 1a(27))).
(5) Cross-currency swap means a
swap in which one party exchanges with another party principal and
interest rate payments in one currency for principal and interest
rate payments in another currency, and the exchange of principal occurs
on the date the swap is entered into, with a reversal of the exchange
of principal at a later date that is agreed upon when the swap is
entered into.
(6) Derivatives
clearing organization means:
(i) A derivatives clearing organization
registered under section 5b of the Commodity Exchange Act (7 U.S.C.
7a-1);
(ii) A derivatives clearing
organization that, pursuant to CFTC regulation, is exempt from the
registration requirements under section 5b of the Commodity Exchange
Act (7 U.S.C. 7a-1); or
(iii)
A foreign derivatives clearing organization that, pursuant to CFTC
regulation, is permitted to clear for a foreign board of trade that
is registered with the CFTC.
(7) Exchange, unless the context
otherwise requires, means any designated contract market, swap execution
facility, or foreign board of trade registered with the CFTC, or,
for purposes of securities or security-based swaps, an exchange, as
defined under section 3(a)(1) of the Exchange Act (15 U.S.C. 78c(a)(1)),
or security-based swap execution facility, as defined under section
3(a)(77) of the Exchange Act (15 U.S.C. 78c(a)(77)).
(8) Excluded clearing activities means:
(i) With
respect to customer transactions cleared on a derivatives clearing
organization, a clearing agency, or a designated financial market
utility, any purchase or sale necessary to correct trading errors
made by or on behalf of a customer provided that such purchase or
sale is conducted in accordance with, for transactions cleared on
a derivatives clearing organization, the Commodity Exchange Act, CFTC
regulations, and the rules or procedures of the derivatives clearing organization,
or, for transactions cleared on a clearing agency, the rules or procedures
of the clearing agency, or, for transactions cleared on a designated
financial market utility that is neither a derivatives clearing organization
nor a clearing agency, the rules or procedures of the designated financial
market utility;
(ii) Any purchase
or sale in connection with and related to the management of a default
or threatened imminent default of a customer provided that such purchase
or sale is conducted in accordance with, for transactions cleared
on a derivatives clearing organization, the Commodity Exchange Act,
CFTC regulations, and the rules or procedures of the derivatives clearing
organization, or, for transactions cleared on a clearing agency, the
rules or procedures of the clearing agency, or, for transactions cleared
on a designated financial market utility that is neither a derivatives
clearing organization nor a clearing agency, the rules or procedures
of the designated financial market utility;
(iii) Any purchase or sale in connection
with and related to the management of a default or threatened imminent
default of a member of a clearing agency, a member of a derivatives
clearing organization, or a member of a designated financial market
utility;
(iv) Any purchase or
sale in connection with and related to the management of the default
or threatened default of a clearing agency, a derivatives clearing
organization, or a designated financial market utility; and
(v) Any purchase or sale that is required
by the rules or procedures of a clearing agency, a derivatives clearing
organization, or a designated financial market utility to mitigate
the risk to the clearing agency, derivatives clearing organization,
or designated financial market utility that would result from the
clearing by a member of security-based swaps that reference the member
or an affiliate of the member.
(9) Designated financial market utility has the same meaning as in section 803(4) of the Dodd-Frank Act
(12 U.S.C. 5462(4)).
(10) Issuer has the same meaning as in section 2(a)(4) of the Securities Act
of 1933 (15 U.S.C. 77b(a)(4)).
(11) Market risk capital rule covered position and trading position means a financial instrument that meets the criteria to be a covered
position and a trading position, as those terms are respectively defined,
without regard to whether the financial instrument is reported as
a covered position or trading position on any applicable regulatory
reporting forms:
(i) In the case of a banking entity that is a bank holding company,
savings and loan holding company, or insured depository institution,
under the market risk capital rule that is applicable to the banking
entity; and
(ii) In the case
of a banking entity that is affiliated with a bank holding company
or savings and loan holding company, other than a banking entity to
which a market risk capital rule is applicable, under the market risk
capital rule that is applicable to the affiliated bank holding company
or savings and loan holding company.
(12) Market risk capital rule means
the market risk capital rule that is contained in 12 CFR part 3 with
respect to a banking entity for which the OCC is the primary financial
regulatory agency, 12 CFR part 217 with respect to a banking entity
for which the Board is the primary financial regulatory agency, or
12 CFR part 324 with respect to a banking entity for which the FDIC
is the primary financial regulatory agency.
(13) Municipal security means a
security that is a direct obligation of or issued by, or an obligation
guaranteed as to principal or interest by, a State or any political
subdivision thereof, or any agency or instrumentality of a State or
any political subdivision thereof, or any municipal corporate instrumentality
of one or more States or political subdivisions thereof.
(14) Trading desk means a unit of
organization of a banking entity that purchases or sells financial
instruments for the trading account of the banking entity or an affiliate
thereof that is:
(i) (A) Structured by the banking entity
to implement a well-defined business strategy;
(B) Organized to ensure appropriate setting,
monitoring, and management review of the desk’s trading and hedging
limits, current and potential future loss exposures, and strategies;
and
(C) Characterized by a clearly
defined unit that:
(1) Engages in coordinated trading
activity with a unified approach to its key elements;
(2) Operates subject to a common and
calibrated set of risk metrics, risk levels, and joint trading limits;
(3) Submits compliance reports
and other information as a unit for monitoring by management; and
(4) Books its trades together;
or
(ii) For a banking entity that calculates risk-based capital ratios
under the market risk capital rule, or a consolidated affiliate for
regulatory reporting purposes of a banking entity that calculates
risk-based capital ratios under the market risk capital rule, established
by the banking entity or its affiliate for purposes of market risk
capital calculations under the market risk capital rule.
