Final Volcker Rule UnveiledBanker Resource
December 12, 2013 — 1,249 views
After three long years, five federal agencies have finally managed to unveil one of the most sought after rules. The agencies recently managed in implementing a ban that will stop banks from playing with the money of thousands of US taxpayers.
End of a Long and Tiring Process
Banking and securities regulators came out with an almost 71 page report describing how they plan on bringing in a balance in proprietary trading while giving enough flexibility to banks to continue in engaging in their market-making activities.
This controversial ban, which has been enacted in accordance with the Dodd-Frank Act, is being considered to be amongst the most challenging provisions to be implemented in terms of financial reform laws. This forced five of the agencies involved in it to work closely throughout the lengthy process.
The five agencies involved in the approval of the final Volcker Rule were the Federal Deposit Insurance Corp., the Securities and Exchange Commission, Federal Reserve Board, the Commodity Futures Trading Commission and Office of the Comptroller of the Currency.
Regulators Address Various Issues
Though this final rule has banned proprietary trading, it has also given out a few exemptions. One of them includes allowing banks in engaging in trade which is designed to safeguard against loss in ‘portfolio hedging’. Hereon, banks will need to document every transaction, while providing a validation for such transactions which pose a high compliance risk. This provision has been included to prevent trading losses.
Regulators have also granted some discretion to institutions for determining whether certain trades can be classified as market-making activities or not. While drafting this final rule, they have tried to avoid certain constraining markets where policymakers might still want banks to participate.
This rule also forbids banks from sponsoring and owning any sort of equity funds which can be referred as covered funds. However it does exclude certain covered funds like joint ventures, wholly-owned subsidiaries and acquisition vehicles. Also, bank executives of large firms will now be needed to annually certify that their company is running in accordance with the regulation. This certification will also be applicable on executives of smaller firms but the compliance regime will be much simpler in comparison.
Regulators have agreed on providing institutions with an extra year for complying with the new rules. The final rule will not come out until July 2015, which means that institutions will have enough time to get familiar with the provisions of the law.