Volcker Rule Ushers in Era of Increased Oversight of Trades
Wall Street faces more intensive government scrutiny of trading after U.S. regulators issued what they billed as a strict Volcker rule Tuesday, imposing new curbs designed to prevent financial blowups while leaving many details to be worked out later.
The Federal Reserve, Federal Deposit Insurance Corp. and three other agencies planned by the end of the day to complete formal adoption of the proprietary trading ban, which has been contested by JPMorgan Chase & Co., Goldman Sachs Group Inc. and their industry allies for more than three years.
Wall Street's lobbying efforts paid off in easing some provisions of the rule. Regulators granted a broader exemption for banks' market-making desks, on the condition that traders aren't paid in a way that rewards proprietary trading. The regulation also exempts some securities tied to foreign sovereign debt.
At the same time, regulators said the final version imposed stricter restrictions on hedging, providing banks less leeway for classifying bets as broad hedges for other risks. To pursue a hedge, banks would need to provide detailed and updated information for review by on-site bank supervisors.
"This provision of the Dodd-Frank Act has the important objective of limiting excessive risk-taking by depository institutions and their affiliates," Fed Chairman Ben S. Bernanke said in a statement. "The ultimate effectiveness of the rule will depend importantly on supervisors, who will need to find the appropriate balance while providing feedback to the board on how the rule works in practice."
The Volcker Rule Explained
The Fed gave banks a delay until July 21, 2015, to comply with the rule. Beginning June 30, 2014, banks with $50 billion in consolidated assets and liabilities must report quantitative information about their trading.
The rule is named for Paul Volcker, the former Fed chairman credited with taming rampant inflation in the 1970s and who served as a top adviser to President Barack Obama. Volcker, 86, proposed the ban as a means of restoring stability to Wall Street following the 2008 financial crisis, arguing that banks that benefit from federal deposit insurance and discount borrowing shouldn't be permitted to take risks that could trigger a taxpayer-funded government bailout.
The rule, enshrined by the Dodd-Frank Act of 2010, allows exemptions for market-making and some hedging, and defines limits for banks' investments in private equity and hedge funds. The version issued Tuesday is 71 pages long, with an additional 850-page preamble.
"This rule is so complex and massive that it is essential that the regulators not conflate inadvertent mistakes with purposeful violations," H. Rodgin Cohen, senior chairman of the Sullivan & Cromwell LLP law firm, which represents Wall Street banks, said in an e-mailed statement.
With Wall Street banks having already shut proprietary trading desks in anticipation of the rule, its remaining impact rests largely in the fine print—how regulators will conduct oversight of other banking activities, primarily market-making and hedging.