Goldman Sachs 2013 Annual Report Download - page 58

Management’s Discussion and Analysis
Volcker Rule. In December 2013, the final rules to
implement the provisions of the Dodd-Frank Act referred to
as the “Volcker Rule” were adopted. We are required to be
in compliance with the rule (including the development of
an extensive compliance program) by July 2015 with
certain provisions of the rule subject to possible extensions
through July 2017.
The Volcker rule prohibits “proprietary trading,” but will
allow activities such as underwriting, market making and
risk-mitigation hedging. In anticipation of the final rule, we
evaluated this prohibition and determined that businesses
that engage in “bright line” proprietary trading were most
likely to be prohibited. In 2010 and 2011, we liquidated
substantially all of our Global Macro Proprietary and
Principal Strategies trading positions.
Based on what we know as of the date of this filing, we do
not expect the impact of the prohibition of proprietary
trading to be material to our financial condition, results of
operations or cash flows. However, the rule is highly
complex, and its impact will not be known until market
practices are fully developed.
In addition to the prohibition on proprietary trading, the
Volcker rule limits the sponsorship of, and investment in,
“covered funds” (as defined in the rule) by banking entities,
including Group Inc. and its subsidiaries. It also limits
certain types of transactions between us and our sponsored
funds, similar to the limitations on transactions between
depository institutions and their affiliates as described
below under “— Transactions with Affiliates.” Covered
funds include our private equity funds, certain of our credit
and real estate funds, and our hedge funds. The limitation
on investments in covered funds requires us to reduce our
investment in each such fund to 3% or less of the fund’s net
asset value, and to reduce our aggregate investment in all
such funds to 3% or less of our Tier 1 capital. In
anticipation of the final rule, we limited our initial
investment in certain new covered funds to 3% of the
fund’s net asset value.
We continue to manage our existing funds, taking into
account the transition periods under the Volcker Rule. As a
result, in March 2012, we began redeeming certain interests
in our hedge funds and will continue to do so.
For certain of our covered funds, in order to be compliant
with the Volcker Rule by the prescribed compliance date, to
the extent that the underlying investments of the particular
funds are not sold, the firm may be required to sell its
investments in such funds. If that occurs, the firm may
receive a value for its investments that is less than the then
carrying value as there could be a limited secondary market
for these investments and the firm may be unable to sell
them in orderly transactions.
Although our net revenues from investments in our private
equity, credit, real estate and hedge funds may vary from
period to period, our aggregate net revenues from these
investments were not material to our aggregate total net
revenues over the period from 1999 through 2013.
Swap Dealers and Derivatives Regulation. The Dodd-
Frank Act also provides for significantly increased
regulation of and restrictions on derivative markets, and we
have registered certain subsidiaries as “swap dealers” under
the U.S. Commodity Futures Trading Commission (CFTC)
rules. See “Business — Regulation” in Part I, Item 1 of the
2013 Form 10-K for a discussion of the requirements
imposed by the Dodd-Frank Act and the status of SEC and
CFTC rulemaking, as well as non-U.S. regulation, in this
area. The full application of new derivatives rules across
different national and regulatory jurisdictions has not yet
been fully established.
56 Goldman Sachs 2013 Annual Report