Goldman Sachs 2015 Annual Report Download - page 92

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis
There has been increased regulation of, and limitations on,
our activities, including the Dodd-Frank Act prohibition on
“proprietary trading” and the limitation on the sponsorship
of, and investment in, “covered funds” (as defined in the
Volcker Rule). In addition, there is increased regulation of,
and restrictions on, OTC derivatives markets and
transactions, particularly related to swaps and security-
based swaps.
See “Business — Regulation” in Part I, Item 1 of the 2015
Form 10-K for more information about the laws, rules and
regulations and proposed laws, rules and regulations that
apply to us and our operations. In addition, see Note 20 to
the consolidated financial statements for information about
regulatory developments as they relate to our regulatory
capital and leverage ratios.
Volcker Rule
The provisions of the Dodd-Frank Act referred to as the
“Volcker Rule,” became effective in July 2015 (subject to a
conformance period, as applicable). The Volcker Rule
prohibits “proprietary trading,” but permits activities such
as underwriting, market making and risk-mitigation
hedging, requires an extensive compliance program and
includes additional reporting and record keeping
requirements. The initial implementation of these rules did
not have a material impact on our financial condition,
results of operations or cash flows. However, the rule is
highly complex, and its impact may change as market
practices further develop.
In addition to the prohibition on proprietary trading, the
Volcker Rule limits the sponsorship of, and investment in,
covered funds 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 in “Business — Regulation”
in Part I, Item 1 of the 2015 Form 10-K. Covered funds
include our private equity funds, certain of our credit and
real estate funds, our hedge funds and certain other
investment structures. 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.
Beginning in July 2015, our investments in applicable
covered funds purchased after December 2013 are required
to be deducted from Tier 1 capital. See “Fully Phased-in
Capital Ratios” above for further information about our
Tier 1 capital and the deduction for investments in covered
funds.
We continue to manage our existing interests in such funds,
taking into account the conformance period under the
Volcker Rule. We plan to continue to conduct our investing
and lending activities in ways that are permissible under the
Volcker Rule.
Our current investment in funds that are measured at NAV
is $7.76 billion. In order to be compliant with the Volcker
Rule, we will be required to reduce most of our interests in
these funds by the end of the conformance period. See
Note 6 to the consolidated financial statements for further
information about our investment in funds measured at
NAV and the conformance period for covered funds.
Although our net revenues from our interests in private
equity, credit, real estate and hedge funds may vary from
period to period, our aggregate net revenues from these
investments were approximately 3% and 5% of our
aggregate total net revenues over the last 10 years and
5 years, respectively.
Total Loss-Absorbing Capacity
In October 2015, the Federal Reserve Board issued a
proposed rule which would establish a new total loss-
absorbing capacity (TLAC) requirement for U.S. bank
holding companies designated as G-SIBs. The TLAC
proposal has been designed so that, in the event of a G-SIB’s
failure, there will be sufficient external loss-absorbing
capacity available in order for authorities to implement an
orderly resolution of the G-SIB. The proposal would
require G-SIBs to maintain an amount of regulatory capital
and eligible long-term debt (i.e., debt that is unsecured, has
a maturity greater than one year from issuance and satisfies
certain additional criteria) to cover a percentage of RWAs
and/or leverage exposure (the denominator in the
supplementary leverage ratio).
Under the proposed rule, eligible long-term debt would
exclude, among other instruments, debt securities that
permit acceleration for reasons other than insolvency or
payment default, as well as structured notes, as defined in
the TLAC proposal, and debt securities not governed by
U.S. law. The senior long-term debt of U.S. G-SIBs,
including Group Inc., typically permits acceleration for
reasons other than insolvency or payment default, and
therefore would not qualify as eligible long-term debt under
the proposed rule.
80 Goldman Sachs 2015 Form 10-K