On January 11, 2012, the CFTC proposed its version of Dodd-Frank rules prohibiting and restricting proprietary trading activities by federally insured depository institutions (IDIs), bank holding companies (BHCs), and IDI and BHC subsidiaries and affiliates, commonly known as the Volcker Rule. The CFTC's proposed rule is substantially similar to the Volcker Rule proposed by four other federal regulators on October 11, 2011 (the joint Volcker Rule). For detailed information on the joint Volcker Rule, see Legal Update, Agencies Issue Proposed Regulations Implementing the Volcker Rule.

CFTC chairman Gary Gensler described the CFTC's Volcker Rule text as entirely consistent with the joint rule proposed by the other financial regulators. Indeed, much of the language included in the CFTC's version of the Volcker Rule mirrors the joint rule proposed by the other financial regulators. The CFTC's version of the Volcker Rule would apply to activities of banks over which it has jurisdiction, such as non-security-based swap dealing and futures trading.

Like the joint Volcker Rule, under the CFTC's version of the Volcker Rule banking entities would, to a large extent, be responsible for their own compliance. Banking entities would be required to establish internal compliance programs designed to monitor and ensure compliance with the prohibitions and restrictions of Section 619 of the Dodd-Frank Act and its implementing regulations. Firms with "significant trading operations," which means banking entities with assets equal to or greater than $1 billion as measured on the last day of each of the four prior calendar quarters, would also have to report certain quantitative measurements designed to assist the CFTC and the banking entities themselves in distinguishing prohibited proprietary trading from permitted activities.

The proposed rule would also exempt certain activities from its prohibition on proprietary trading, including:

The proposed rule also includes regulatory commentary intended to assist banking entities in distinguishing permitted market making activities from prohibited proprietary trading activities and in identifying permitted activities involving hedge funds and private equity funds.

Section 619 of Dodd-Frank also prohibits banking entities from entering into any transaction or engaging in any activity that would:

Many in the financial industry have pushed back on the self-regulatory aspects of the joint Volcker Rule in public comment letters submitted to regulators, as well as in advocacy and lobbying efforts. They assert that this may impose debilitating expenses on banks and financial institutions required to comply. The CFTC's version of the rule is likely to create similar concerns.

The proposed rule will be open for public comment for 60 days following its publication in the Federal Register.

For more information on the Volcker Rule, see Practice Note, Summary of the Dodd-Frank Act: The Volcker Rule and the CFTC's fact sheet on the proposed rule. For more information on the regulation of derivatives under the Dodd-Frank Act, see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives.