More than a year after they began crafting details of the Dodd-Frank Act’s ban on proprietary trading by U.S. banks, regulators released their first version of the so-called Volcker rule while acknowledging that hundreds of questions remain unanswered.
The proposal written by four regulatory agencies and issued for public comment Tuesday would ban banks from making trades for their own accounts, allowing them to continue short-term trades for hedging or market-making. Banks also would face limits on investments in hedge funds and private equity funds.
Within the rule’s 298 pages, regulators seek feedback instead of offering precise definitions for many of the banned activities, which may leave financial firms uncertain about how to prepare for the final adoption of the rule next year.
“There aren’t bright lines on many questions and that will make it difficult for banks to put in place their compliance regime,” said Kim Olson, a principal at Deloitte & Touche LLP, who formerly worked at the bank-supervision department in the Federal Reserve Bank of New York.
The rule, named for former Federal Reserve Chairman Paul Volcker, was included in last year’s regulatory overhaul to rein in the risky trading that helped fuel the 2008 credit crisis. The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency worked with the Securities and Exchange Commission, which is to vote on the rule Oct. 12. The Commodity Futures Trading Commission also is due to vote on the regulation.
In their proposal, regulators said it was difficult to define permitted activities because that “often involves subtle distinctions that are difficult both to describe comprehensively within regulation and to evaluate in practice.”
Still, regulators will have to do better before a final rule goes into effect on July 21 because the proposal includes substantial compliance requirements for banks, said Thomas Pax, head of the bank-regulatory practice at the Clifford Chance law firm in New York.
