Financial regulators unveil long-awaited Volcker Rule
By James O'Toole @jtotoole December 10, 2013: 10:53 AM ET
Former Federal Reserve chairman Paul Volcker (left) with President Obama.
Although the outline of the rule was set out in the Dodd-Frank financial reform law over three years ago, financial executives, lobbyists and reform advocates have been anxiously awaiting the full text.
Named for former Fed chairman Paul Volcker, the rule harkens back to the Glass-Steagall Act, a Depression-era law that separated commercial and investment banking but was repealed by Congress in 1999.
Reform advocates say that with federally insured banks reined in, taxpayers won't be forced to bail them out in the future.
The rule restricts banks with federally insured deposits from engaging in risky investment activities undertaken for their own benefit, a practice known as proprietary trading, as well as from taking ownership stakes in hedge funds and private equity funds.
Banks have called for the rule to protect "market making," in which firms hold securities to facilitate customer transactions. They also want to preserve their ability to trade for the purpose of hedging -- offsetting risks elsewhere.
There are exceptions for hedging and market making in the Volcker Rule. The key to the rule's impact will be how banks and regulators define those practices and how they're distinguished from proprietary trading.
Most major banks have already shut down their proprietary trading desks, which functioned like internal hedge funds. The problem is that even outside of proprietary trading desks, it can be difficult to tell when a trade is made for hedging or market making and when it's made for purely speculative purposes.
JPMorgan (JPM, Fortune 500), for example, claimed its $6 billion "London whale" trading loss last year resulted from a hedge. But the failed trade, which drew on federally insured deposits, prompted fresh concerns about the industry's stability, and government officials have said it's exactly the kind of activity the Volcker rule will prevent.
The proposal has generated furious lobbying from advocacy groups and big-spending Wall Street firms over the past few years. Regulators have receivedover 18,000 comment letters on the subject, among the highest for any provision of Dodd-Frank. They have also held dozens of meetings with interested parties, the vast majority of which were affiliated with the financial industry, according to a recent paper from Duke University law professor Kimberly Krawiec.
Major banks are required to report data pursuant to the rule starting next year, with full compliance required by July 2015. The rule could be delayed further by lawsuits from the financial industry, as other aspects of Dodd-Frank have been.
"This provision of the Dodd-Frank Act has the important objective of limiting excessive risk taking by depository institutions and their affiliates," Federal Reserve chairman Ben Bernanke said Tuesday. "Getting to this vote has taken longer than we would have liked, but five agencies have had to work together to grapple with a large number of difficult issues and respond to extensive public comments."
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NEW YORK (CNNMoney)
Banking regulators on Tuesday unveiled a central element of the sweeping 2010 reform law Congress passed in response to the financial crisis.
Known as the Volcker Rule, the provision introduces a variety of guidelines to limit risk-taking by banks with federally insured deposits. Five federal regulatory agencies are set to approve the draft on Tuesday.Although the outline of the rule was set out in the Dodd-Frank financial reform law over three years ago, financial executives, lobbyists and reform advocates have been anxiously awaiting the full text.
Named for former Fed chairman Paul Volcker, the rule harkens back to the Glass-Steagall Act, a Depression-era law that separated commercial and investment banking but was repealed by Congress in 1999.
Reform advocates say that with federally insured banks reined in, taxpayers won't be forced to bail them out in the future.
The rule restricts banks with federally insured deposits from engaging in risky investment activities undertaken for their own benefit, a practice known as proprietary trading, as well as from taking ownership stakes in hedge funds and private equity funds.
Banks have called for the rule to protect "market making," in which firms hold securities to facilitate customer transactions. They also want to preserve their ability to trade for the purpose of hedging -- offsetting risks elsewhere.
There are exceptions for hedging and market making in the Volcker Rule. The key to the rule's impact will be how banks and regulators define those practices and how they're distinguished from proprietary trading.
Most major banks have already shut down their proprietary trading desks, which functioned like internal hedge funds. The problem is that even outside of proprietary trading desks, it can be difficult to tell when a trade is made for hedging or market making and when it's made for purely speculative purposes.
JPMorgan (JPM, Fortune 500), for example, claimed its $6 billion "London whale" trading loss last year resulted from a hedge. But the failed trade, which drew on federally insured deposits, prompted fresh concerns about the industry's stability, and government officials have said it's exactly the kind of activity the Volcker rule will prevent.
The proposal has generated furious lobbying from advocacy groups and big-spending Wall Street firms over the past few years. Regulators have receivedover 18,000 comment letters on the subject, among the highest for any provision of Dodd-Frank. They have also held dozens of meetings with interested parties, the vast majority of which were affiliated with the financial industry, according to a recent paper from Duke University law professor Kimberly Krawiec.
Major banks are required to report data pursuant to the rule starting next year, with full compliance required by July 2015. The rule could be delayed further by lawsuits from the financial industry, as other aspects of Dodd-Frank have been.
"This provision of the Dodd-Frank Act has the important objective of limiting excessive risk taking by depository institutions and their affiliates," Federal Reserve chairman Ben Bernanke said Tuesday. "Getting to this vote has taken longer than we would have liked, but five agencies have had to work together to grapple with a large number of difficult issues and respond to extensive public comments."
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