On Monday, September 16, the Commodity Futures Trading Commission (the “CFTC” or the “Commission”) announced that it has approved final regulations (the “final rule”) that will streamline and clarify the Volcker Rule – a statutory provision that generally prohibits banking entities from engaging in proprietary trading, or from taking an ownership interest in, sponsoring, or having certain other relationships with hedge funds or private equity funds (collectively “covered funds”). The final rule has already been approved by the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, but remains to be approved by the Securities and Exchange Commission and the Board of Governors of the Federal Reserve System.

The CFTC approved the final rule by a vote of three to two along party lines; four of the commissioners released statements explaining their votes. Chairman Heath P. Tarbert, Commissioner Brian D. Quintenz, and Commissioner Dawn D. Stump, all Republicans, voted in favor of the final rule, while Democratic Commissioners Rostin Behnam and Dan M. Berkovitz voted against the final rule. The commissioners that voted in favor praised the final rule for adopting a tailored, risk-based approach that will simplify and clarify the Volcker Rule’s compliance requirements. The commissioners that dissented criticized the final rule for weakening the Volcker Rule’s protections and giving too much discretion to banking entities.

The final rule makes substantial changes to the existing Volcker Rule regulation’s proprietary trading restrictions and compliance program requirements, particularly for banking entities that do not have significant trading assets and liabilities. These changes are intended to provide greater clarity and certainty about the activities that are prohibited, and to improve the effective allocation of compliance resources. While the final rule also includes a limited number of changes to the regulatory framework’s covered fund provisions, most covered funds-related issues were deferred for future consideration, with the agencies indicating that they intend to address those aspects in a separate, forthcoming proposed rulemaking.

With respect to derivatives, the final rule adds new exclusions from the definition of “proprietary trading” for customer-driven matched derivative transactions and hedges of mortgage servicing assets, and expands an existing regulatory exclusion for liquidity management activities to include certain foreign exchange and cross-currency transactions.