SIFMA AMG Writes to FRB about Volcker Rule Interpretations Regarding Foreign Public Funds and Foreign Non-Covered Funds
Commentary by Scott Cammarn
The Asset Management Group of SIFMA ("SIFMA AMG") wrote a letter to the General Counsel of the Board of Governors of the Federal Reserve System ("FRB") requesting guidance with respect to the treatment of foreign public funds and foreign non-covered funds under the Volcker Rule.
Specifically, SIFMA AMG requested guidance to the effect that (i) in certain circumstances, foreign public funds and foreign non-covered funds will not be treated as "banking entities" under the Volcker Rule, and (ii) extensions of the initial one-year seeding period for foreign public funds will be available in a streamlined manner.
Additionally, SIFMA AMG requested that the FRB grant a one-year extension of the conformance period with respect to all foreign funds "as promptly as practicable." According to SIFMA AMG, the extension would help to "alleviate concerns arising out of the current lack of clarity with respect to the Volcker Rule treatment of foreign fund structures."
The letter (i) provides a background on foreign public funds and foreign non-covered funds, (ii) explains why these funds should not be treated as banking entities, (iii) explains why a streamlined process for extensions of the initial one-year seeding period for foreign public funds is important, and (iv) asks the FRB to grant an extension of the conformance period.
See: SIFMA Letter to FRB.
Related news: SIFMA Submits Letter to FRB Regarding Extension of Volcker Rule Conformance Period (October 9, 2014).
Commentary
The application of the Volcker Rule to foreign public funds and foreign non-public funds - in particular, whether such funds are "banking entities" - is just one of many issues involving the application of the Volcker Rule to foreign banking organizations. The failure of the regulators promptly to resolve this particular issue will likely trigger exemption requests on behalf of thousands of non-U.S. funds, the management of which fund was selected by a foreign banking organization or in which a foreign banking organization maintains a material amount of the non-U.S. fund's nonvoting equity. Either scenario would cause the non-U.S. fund to be considered a "banking entity" subject to the Volcker Rule. All of these exemption requests must be filed with the Federal Reserve by January 2015.
This particular situation highlights a significant and pervasive problem with the original Dodd-Frank legislation -- the difficulty of exporting U.S. bank holding company concepts, such as the Bank Holding Company's definition of "control," to jurisdictions outside the U.S. where such concepts do not currently exist and are not reflected in existing industry practices. Another example of this problem is the push-out clause, Section 716 (also known as the Lincoln Amendment). While U.S. banks can push swaps into an affiliate in order to comply, foreign banking organizations - which typically are not organized in a bank holding company structure and have the bank as the top tier entity - have no entity to which they can push the swaps business in a manner fully compliant with Dodd-Frank -- inasmuch as the push-out clause purports to bar the foreign banking organization from acquiring an "equity interest" in a swap dealer.