Countdown to Volcker Rule

Terry Flanagan

Federal agencies have set December 10 as the date on which they will adopt final versions of the Volcker Rule, one of the most controversial provisions of the Dodd-Frank Act.

The Volcker Rule, officially known as Section 619 under FinReg, forces financial institutions to ring fence their proprietary trading, hedge fund and private equity operations. In anticipation of the rule, many firms have shed these operations already.

With the vote on the Volcker Rule coming on, financial institutions would have to reassess their existing conformance plans and make the necessary amendments, said Manmeet Brar, senior manager at Sapient Global Markets.

The Federal Reserve, the only agency with the mandate to determine the effective date for Volcker Rule, is expected to postpone the compliance date by at least a year to July 2015.

“It is widely anticipated that the revised draft should incorporate further scrutiny into the hedging exemption, and more clarity on what constitutes marketing making vs. proprietary trading,” said Brar. “The firms that know they are involved in proprietary trading, however you define it, have already segregated those activities into separate legal entities. The firms that are not explicitly conducting proprietary trading and may fall in the net are the ones who will need to pay careful attention to the revised rules.”

Five federal agencies are charged with implementing the rule, and the Treasury Department is coordinating the process. Each agency must promulgate a final rule that satisfies its own mission and obligations.

“Finalizing this rule is a Herculean task, but it will be done, said SEC commissioner Kara Stein in a speech. “To be clear, the rule that we are evaluating now is not the rule that I would have written. It is not, nor will it ever be, perfect. But, my hope is that when it comes time to vote on it, that the rule will be strong enough, and faithful enough to Congress’s direction, that I will be able to support it. I hope that by the time you are back here next fall, we won’t be discussing when the Volcker Rule might be finalized, but instead how it is working, and what we should be doing to make it work better.”

The Capital Markets Task Force of the Bipartisan Policy Center’s (BPC) Financial Regulatory Reform Initiative recommends an improved alternative solution to the proposed Volcker Rule on proprietary trading and the Lincoln Amendment on “pushing-out” dealing on swaps.

The task force’s recommendations stress the importance of a functional, data-driven model that takes account of the significant differences across asset classes, products, and markets. This approach focuses on tailored, data-driven metrics to help define what constitutes impermissible proprietary trading as well as the use of safe harbors to promote clarity regarding clearly permissible activity.

An iterative, phased-in approach with access to a robust set of data maximizes the ability of regulators to fine-tune implementation and to continue to adjust in the future, the task force said in a report.

In line with the task force’s view that regulators should take an informed and nuanced approach to proprietary trading under the Volcker Rule, the agencies should do the same with regard to applying the rule in a multinational context, focusing on protecting U.S. jurisdiction consistent with the intent of the legislation and avoiding an overbroad application of the Volcker Rule regulations to non-U.S. entities.

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