by Regulation NN, also known as “Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds,” is a regulation issued by the Federal Reserve Board in the United States. It is part of the Volcker Rule, which is a set of regulations designed to limit the amount of proprietary trading that banks can engage in, and to restrict their ability to invest in hedge funds and private equity funds.
The scope of the Regulation NN is mainly for the banks, as it prohibits and restrict proprietary trading and certain interests in, and relationships with, hedge funds and private equity funds by the banking entities. It applies to all banking entities that are supervised by the Federal Reserve, including banks, savings associations, and bank holding companies. The regulation applies to all forms of proprietary trading, including trading in securities, derivatives, and other financial instruments.
Additionally, by restricting the ability of banks to invest in hedge funds and private equity funds, it helps to reduce the potential for conflicts of interest between the bank and its customers. Banks may be less likely to act in the best interests of their customers if they are also trying to maximize returns on their own investments in hedge funds and private equity funds.
The regulation is also important because it helps to ensure that banks have sufficient capital to absorb losses in the event of a downturn in the market. By limiting the amount of proprietary trading that banks can engage in, it ensures that banks are not using large amounts of leverage to make trades, which could put them at risk of becoming insolvent in the event of a market downturn.
Overall, the Regulation NN is an important measure for the financial stability and the protection of the customer’s interest, it helps to reduce the risk of a financial crisis and to increase the transparency and accountability of banks.
It’s important to note that the regulation does not prohibit banks from engaging in all forms of trading activities, only proprietary trading, and it also does not prohibit them from investing in hedge funds or private equity funds entirely, but it limits their ability to do so and subject them to additional compliance and reporting requirements.
The main provisions of Regulation NN include:
- Prohibitions on proprietary trading: Banks are prohibited from engaging in proprietary trading, which is trading for the bank’s own account rather than on behalf of customers.
- Restrictions on investments in hedge funds and private equity funds: Banks are limited in their ability to invest in hedge funds and private equity funds, and are required to maintain certain records and reports related to these investments.
- Compliance program requirements: Banks are required to establish and maintain compliance programs that are designed to ensure compliance with the regulation.
- Recordkeeping and reporting requirements: Banks must keep records and make reports to the Federal Reserve regarding their compliance with the regulation.
