Jung Yeon-Je/Agence France-Presse — Getty ImagesThe Volcker Rule was championed by Paul A. Volcker, the former Federal Reserve chairman.
Federal regulators are planning to vote next week on plans to prohibit banks from making certain lucrative, yet risky trades, the latest step toward reining in risk-taking on Wall Street in the aftermath of the financial crisis.
As the Federal Deposit Insurance Corporation prepares Tuesday to vote on the so-called Volcker Rule, some clues have emerged on the details of the proposal. The American Banker on Wednesday published a document on its Web site that appeared to be the latest version of the proposed rules. The proposal spelled out the scope of the rule’s ban on proprietary trading — and its broad exemptions for more routine business practices that can be mistaken for riskier trades.
But the 205-page draft proposal, dated Sept. 30 and labeled confidential, left many details to be developed in coming months. Indeed, the draft posed dozens of questions for the public and the financial industry to address, leaving the window open for significant changes.
People close to the rulemaking cautioned late Wednesday that regulators could even make adjustments to the rule over the next week, before the F.D.I.C. votes on Tuesday. And three other federal agencies must also vote on the proposal for it to advance into a public comment period that will end in December.
Still, the F.D.I.C.’s vote will start what is sure to be a long fight over the minutiae of the Volcker Rule, a centerpiece of the Dodd-Frank financial regulatory overhaul and one of the law’s most contentious provisions. Major banks have railed against the rule, saying it will eat into profits without making the financial system much safer. Many lawmakers, however, see the rule as a way to prevent future bailouts of Wall Street, which nearly collapsed during the financial crisis.
Named after Paul A. Volcker, the former Federal Reserve chairman who championed the rule as part of Dodd-Frank, it would order banks to limit their investments in hedge funds and private equity shops. More significant, the Volcker Rule would prohibit federally insured banks from trading for their own benefit rather than for clients, a strategy known as proprietary trading. The rule, Mr. Volcker and Democratic lawmakers say, will prevent banks from using their own capital to place bets while the government guarantees their deposits.
“Financial firms have been engaged in high-risk high-jinks that have threatened the U.S. and worldwide economy and economic recovery,” Senator Carl Levin, the Democrat from Michigan who co-sponsored the Volcker Rule in Congress, said on Wednesday. “The Volcker Rule is essential to protect taxpayers from banks’ excessive financial risk-taking, conflicts of interest, and from the resulting billion-dollar bailouts. I look forward to reviewing the proposed rule and hope the regulators reject efforts to weaken the law.”
Banks have spent more than a year preparing for life under the Volcker Rule. Goldman Sachs was among the first major Wall Street firm to close its proprietary trading desk. JPMorgan Chase and Citigroup announced similar plans to spin off their desks, and Bank of America declared over the summer that its proprietary trading operation had closed.
But truly banning proprietary trading will take more than closing a few trading desks. The Volcker Rule exists in a gray area, where the line is often blurred between when a trade is proprietary or part of a bank’s routine market-making activity, which can include buying securities with an eye toward later selling them to clients.
Dodd-Frank provides several exemptions from the ban, including underwriting, hedging and market making. The draft proposal that emerged on Wednesday would exempt even more varieties of hedging than originally expected. This summer, noting the difficulty in detecting proprietary trading, a Government Accountability Office report painted the Volcker Rule as cumbersome and tough to enforce. At the time, Mr. Levin called the G.A.O. report “woefully incomplete.”
Article source: http://feeds.nytimes.com/click.phdo?i=5d10896cfe66eb5a193a7bd9a43445bf
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