December 4, 2013

Word of the Day: Volcker Rule

Better late than never? The hotly debated, so-called Volcker Rule, which would ban banks from trading for itself (proprietary trading) and place restrictions on investments in hedge funds, will get a vote next week say federal officials. The rule, which was part of the financial reform bill known as Dodd-Frank that passed in 2010, will be voted on by five agencies after a tentative agreement has been reached. The five agencies are the Commodity Futures Trading Commission, the Federal Reserve, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Office of the Comptroller of the Currency. The Volcker Rule, named for the former Federal Reserve Chairman Paul Volcker, has been strongly contested in Washington, as major banks and lobbying firms fought against its implementation, and at one point the regulation alone stood at over 1,000 pages.


"Five federal agencies plan to approve the so-called Volcker Rule next week, eking out a vote before the year is up. While the vote for the complex rule will come more than a year after a Congressional deadline passed, it still will meet the recommendation of Treasury Secretary Jacob J. Lew, who urged the federal agencies to finish writing the rule in 2013.

The Commodity Futures Trading Commission, one of the five agencies, announced on Tuesday that it would vote on Dec. 10. Three other agencies — the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency — also announced plans to approve the rule on Dec. 10. The final agency involved in the rule, the Securities and Exchange Commission, has said it will vote on or about that time.

The rule, which would ban banks from trading for their own gain and limit their ability to invest in hedge funds, is not yet a done deal. Regulators continue to put the finishing touches on the rule, a centerpiece off the Dodd-Frank overhaul law that Congress adopted after the financial crisis, and talks could still breakdown."

The rule named for former Federal Reserve Chairman Paul Volcker, who championed it as an adviser to President Barack Obama, is aimed at preventing banks with insured deposits and access to discount borrowing from engaging in speculative trading that could threaten their stability.

Banks currently have until July 21 to implement the rule, even though regulators are behind the schedule outlined by Dodd-Frank. Industry representatives have been assured by regulators that that deadline will probably be extended, according to three people involved in the discussions.

In a letter sent to regulators last week, the U.S. Chamber of Commerce said the rule should be re-proposed because “many fundamental issues” have emerged since the comment period closed. Specifically, the chamber said there had been reports of changes to the proposal’s hedging provision after JPMorgan Chase & Co. $6.2 billion trading loss.

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