How will the Volcker Rule affect banks operating outside the US?

Although the Volcker Rule is not yet completely finalised, most global banks are likely to be captured by it.

Banks and their affiliates will have to put in place significant processes and controls, reporting and compliance programmes to meet the Volcker Rule requirements, including their operations outside of the US, as early as 21 July 2012. Although implementation could be delayed, banks should not rely on that; at a minimum, banks and their affiliates should have a firm plan in place for complying with the Volcker Rule ahead of the July deadline.

Are you affected by the Volcker Rule?
Even if a bank has no presence in the US, it may still be subject to the Volcker Rule The Volcker Rule applies where any party to a trade is resident in the US, so foreign subsidiaries of US companies are caught, as well as US subsidiaries of non-US banks. So for example, a German bank with no US presence that trades with a US company’s German subsidiary could be caught by the Volcker Rule. The proprietary trading restrictions apply to trading in a wide range of securities (including options) and derivatives, and commodities for future delivery.

A bank may be impacted even if it has no activity in the scope of the Volcker Rule
Banks which currently have no activities covered by the Volcker Rule need to ensure they have controls in place designed to prevent them from conducting such activities in future. A bank that does not do proprietary trading must have written policies and procedures in place to prevent it from engaging in proprietary trading.

Any stage of a trade touching the US may trigger the Volcker Rule
The exemption for trades “wholly executed” outside the US remains unclear, but it may require all steps necessary to execute a transaction to be conducted outside the US. For example, a non-US bank that trades in any US listed security could potentially be covered by the Volcker Rule, including trades where a US security is embedded in a structured product. Also, any transactions transferring payment through a US payment system may be caught by the Volcker Rule.

What do banks operating outside the US need to do now?
Understand your potential exposure. Conduct a preliminary ‘vulnerability assessment’ to identify the trading/business areas most impacted by, or sensitive to the Volcker Rule prohibitions.

Assess your readiness to comply with reporting and compliance obligations at 21 July 2012. Review the bank’s current metric reporting capabilities against the future requirements.

Design the future control requirements. Analyse the gaps between the requirements and your current policies, reporting and other relevant controls in the Front Office, Risk Management, Finance, Operations, Compliance and Technology functions.

Get in touch with one of our specialists to find out how we can help you prepare to meet the Volcker Rule requirements.

Strategic and operational impacts of the Volcker Rule for non-US banks
Which parts of a non-US bank will the Volcker Rule affect?