Federal Regulators Revise Volcker Rule

Two federal regulators, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), agreed to revise the Volcker Rule, a key component of the Dodd-Frank Act. 

The Volcker Rule is a federal regulation aimed at reducing risk in the financial services sector by restricting speculative investment. It generally prohibits short-term proprietary trading of certain vehicles, like securities and derivatives, and disallows banks to own or control hedge funds or private equity funds. 

According to the FDIC, the final rule will do the following:

• Tailor the rule’s compliance requirements based on the size of a firm’s trading assets and liabilities, with the most stringent requirements applied to banking entities with the most trading activity;
• Retain the short-term intent prong of the “trading account” definition from the 2013 rule only for banking entities that are not, and do not elect to become, subject to the market risk capital rule prong;
• Replace the rebuttable presumption that instruments held for fewer than 60 days are covered under the short-term intent prong with a rebuttable presumption that instruments held for 60 days or longer are not covered;
• Clarify that banking entities that trade within internal risk limits set under the conditions in this final rule are engaged in permissible market making or underwriting activity;
• Streamline the criteria that apply when a banking entity seeks to rely on the hedging exemption from the proprietary trading prohibition;
• Limit the impact of the rule on the foreign activities of foreign banking organizations; and
• Simplify the trading activity information that banking entities are required to provide to the agencies.

According to the FDIC, the final rule will go into effect on January 1, 2020 with a compliance date of January 1, 2021.

According to FDIC Chairman Jelena McWilliams, the final rule will help clarify regulatory compliance for both the industry and federal regulators. “One of the post-crisis reforms that has been most challenging to implement for regulators and industry is the Volcker Rule, which restricts banks from engaging in proprietary trading and from owning hedge funds and private equity funds. Distinguishing between what qualifies as proprietary trading and what does not has proven to be extremely difficult,” siad Chairman McWilliams. “Meanwhile, banks that do relatively little trading are required to go through substantial compliance exercises to ensure that activities that have long been considered traditional banking activities do not run afoul of the Volcker Rule.”

Comptroller of the Currency Joseph Otting agreed, adding that the final rule would keep intact the good parts of the old rule while removing the bad stuff. “The limits and protections put in place by the prior version of the “Volcker Rule” remain to ensure inappropriate risk practices do not recur,” said Otting. “At the same time, we have made substantial progress eliminating ineffective complexity and addressing aspects of the rule that restrict responsible banking activity based on our experience with the rule.”

Critics of the rewrite are worried that federal regulators are removing important pieces of the regulatory structure built after the 2008 Financial Crisis in order to prevent another financial crisis from taking place. Fortunately for the FDIC and the OCC, the federal regulators aren’t scheduled to testify in front of Congress anytime soon.