Banking entities that will be required to conform to the upcoming Volcker Rule should start focusing on the existing compliance programs and procedures they already have in place to set the tone for the tiered programmatic compliance regime that will be mandated by the rule later, say regulatory compliance experts at Deloitte & Touche.

They say the first step banking entities can take now is to clearly identify which existing activities are covered by the rule. Next, they should map trading and funds activity to exemption criteria defined in the proposed rule at the trading desk level and analyze the trading and revenue effects of the proposed rule. Lastly, banking entities should conduct evaluations on tiered compliance programs, quantitative metrics, and reporting requirements.

Jeannie Lewis, a principal at Deloitte, said during a recent Deloitte Webcast on the Volcker Rule that banking entities must realize they will need an effective compliance program prior to completing these tasks. “Compliance does not happen overnight. While you are conforming to bring the covered activities in line with the rule, you need procedures in place to determine the activities,” she said.

She added that although there are still questions on the conformance period, the 298-page notice of proposed rulemaking released on Oct. 11 strongly suggested that banking entities identify the types of activities that will need to conform. Although the rule takes effect on July 21 of next year, there is a window for the existing activities' conformance period built into the proposal. The conformance period does not end until July 21, 2014.

The Volcker Rule will restrict banking entities from profiting through proprietary trading activities, unless those activities fall under the permissible exclusion provided by the rule. It will also require banks to step up compliance programs and recordkeeping for trading activities that have been identified as permissible trading activities. A separate set of rules was also introduced to address concerns in private equity and hedge fund investment  activities.

In regard to compliance programs required by the rule for permissible trading activities, banks must first identify the level of compliance these programs will require, said Kim Olson, a partner at the Deloitte. “If banking entities do not engage in any act under the rule, then they only need to make sure they have a preventive compliance program in place,” she said.

The level of compliance required will increase depending on the size of the trading activities the banks are involved in. Banks that are involved in trading for more than $1 billion will need to set up a tiered programmatic compliance regime and supply regulators with quantitative metrics to satisfy the Volcker Rule's requirements. Those who have  an interest of more than $5 billion will have a higher standard to conform to.

The programmatic compliance regime will result in banking entities introducing programs that address the key components below.

Internal written policies and procedures

-          document, describe, and monitor covered trading activities

Internal controls

-          to ensure conformance with authorized risks, restrictions, policies, and procedures

Responsibility and Accountability

-          top management to set the tone on compliance culture

Independent Testing

-          evaluate overall adequacy of the program

Training

-          educate trading personnel to make informed day-to-day decisions

Recordkeeping

-          create records to support the operations and effectiveness of the compliance programs

Regulators are still accepting comments on the proposed rule. Feedback from the public will be accepted until Jan. 13 of next year.