The Federal Reserve Board is giving banks more time to comply with the Volcker rule’s demand that they extricate themselves from investments in hedge funds and private equity funds and wind down speculative positions held on their own behalf, rather than for clients.
On Thursday, its Board of Governors issued an order that gives banks until July 21, 2016 to conform their investments in, and relationships with, covered and foreign funds that were in place prior to Dec. 31, 2013. The Board also announced its intention to grant banks an additional year to bring ownership interests in legacy covered funds into compliance. That extension, to July 21, 2017, will be made official in early 2015.
The Volcker rule prohibits insured depository institutions and any company affiliated with those banks, from engaging in proprietary trading. It also prohibits acquiring or retaining ownership interests in a hedge fund or private equity fund. The rule initially provided banks a grace period until July 21, 2014 to conform to those requirements, but also empoered the Fed’s Board of Governors to extend the deadline for one year at a time, up to three additional years. The Board already extended compliance deadlines to July 21, 2015.
The Fed previously issued a statement in April 2014 that detailed its intent to grant two additional one-year extensions for banks to split off sponsorships and interests in collateralized loan obligations that are backed by non-loan assets and were in place as of Dec. 31, 2013. The announcement this week extends the compliance deadline into 2017 for other types of legacy covered funds as well.
The extensions, according to the Fed, “will allow banking entities to terminate existing activities and divest existing investments in an orderly manner” and “reduce the potential disruptive effects that significant divestitures of covered funds could have on markets” and on the investments of others not covered by the rule.