Several years after being introduced, five regulatory agencies approved the so-called Volcker Rule on Tuesday bringing in a new era of oversight for Wall Street traders. Banks and others affected will now begin the process of implementing and journalists scrambled to cover all the angles.
Bloomberg’s story began with the idea that Wall Street would now face stricter rules now that agencies had approved the provisions:
Wall Street faces more intensive government scrutiny of trading after U.S. regulators issued what they billed as a strict Volcker rule today, imposing new curbs designed to prevent financial blowups while leaving many details to be worked out later.
The Federal Reserve, Federal Deposit Insurance Corp. and three other agencies formally adopted the proprietary trading ban. The rule has been contested by JPMorgan Chase & Co., Goldman Sachs Group Inc. and their industry allies for more than three years.
Wall Street’s lobbying efforts paid off in easing some provisions of the rule. Regulators granted a broader exemption for banks’ market-making desks, on the condition that traders aren’t paid in a way that rewards proprietary trading. The regulation also exempts some securities tied to foreign sovereign debt.
At the same time, regulators said the final version imposed stricter restrictions on hedging, providing banks less leeway for classifying bets as broad hedges for other risks. To pursue a hedge, banks would need to provide detailed and updated information for review by on-site bank supervisors.
“This provision of the Dodd-Frank Act has the important objective of limiting excessive risk-taking by depository institutions and their affiliates,” Fed Chairman Ben S. Bernanke said in a statement. “The ultimate effectiveness of the rule will depend importantly on supervisors, who will need to find the appropriate balance while providing feedback to the board on how the rule works in practice.”
The New York Times story pointed out that banks will have a tougher time justifying hedging, but they did get more time to comply with the new provisions:
In some crucial areas, regulators adopted a harder line than Wall Street had hoped. Under the rule, which bars banks from trading for their own gain and limits their ability to invest in hedge funds, the regulation includes new wording aimed at the sort of risk-taking responsible for a $6 billion trading loss at JPMorgan Chase last year. The rule also requires banks to shape compensation packages so that they do not reward “prohibited proprietary trading.”
In addition, it requires chief executives to attest to regulators every year that the bank “has in place processes to establish, maintain, enforce, review, test and modify the compliance program,” a provision that did not appear in an October 2011 draft of the rule.
But the rule, which aims to draw a line between everyday banking and risky Wall Street activities, has its limits. For example, the regulation leaves it largely up to the banks to monitor their own trading. Some critics of Wall Street also wanted chief executives to attest that their bank was actually in compliance with the rule, not just that it was taking steps to comply.
And in another concession to Wall Street, regulators will delay the effective date of the rule to July 2015. Until then, bank lawyers are expected to scour the rule for loopholes and to consider bringing lawsuits against the regulators.
The Wall Street Journal pointed out that the rules wouldn’t apply to banks with less than $10 billion in assets. Stock investors seemed to shrug off the news:
The Fed now will move to apply the rule to the large bank holding companies it oversees, but not “community banks” with less than $10 billion in assets, which will be exempt from the rule if they don’t engage in most of the activities covered by it.
Some banks affected by the rule said they believed they are already in compliance with the regulation, while others said they were still studying the nearly 1,000-page document to assess its impact.
Bank of America Corp. Chief Executive Brian Moynihan said Tuesday the rule won’t dramatically change how the nation’s second-largest bank does business and that the company ended proprietary trading—making bets with the bank’s own money—two years ago. He said the bank has been selling its hedge-fund and private-equity holdings over the past four years.
“That’s not a big part our company,” he said to investors at a Goldman Sachs Group Inc. conference in New York. “We’ll have to work through it, but in the end if we serve our customers, there’s a business there.”
U.S. financial stocks, meanwhile, appeared to be taking the Volcker rule in stride, with many financial stocks rising. Goldman Sachs was higher even though Goldman was touted by analysts as the firm most likely to be affected by the new rule.
Some top financial regulators, who have spent 2 ½ years trying to finalize the Volcker rule, expressed support for the final version but noted its effectiveness will depend on its enforcement by banking and market regulators.
And that’s ultimately the main point for any new regulation. It all comes down to enforcement and how regulators will oversee and interpret any perceived violations. Now banks’ compliance departments will get all the fun as they start to digest the final version of the rule.
