Volcker rule
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The Volcker Rule is the nickname of Section 619 of the Dodd-Frank Act, which addresses prohibitions and restrictions on proprietary trading and certain interests in, and relationships with, hedge funds and private equity funds. The rules were addressed in a joint rule proposed by the Securities and Exchange Commission, U.S. Department of the Treasury and Federal Reserve Board in October 2011.[1] Final rules were expected by July 2012, and followed by a two-year implementation phase-in, but such rules have been subsequently delayed. In September 2012, several trade and lobbying associations, including the American Bankers Association and SIFMA, have called for an outright repeal of the Volcker Rule.[2]
For more information on the contents of the proposed rules, additional news, and links to comment letters and research papers on the Volcker Rule, visit the Volcker Rule page in MarketsReformWiki.
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Background
The Volcker Rule was approved by the U.S. Senate in May 2010, and would have banned U.S. banks from trading with their own capital and running hedge funds.[3] It is named after former Federal Reserve Chairman Paul Volcker. By the time it was included in the final draft of Dodd-Frank, the Volcker Rule had softened a bit. The legislation will allow banks to invest in private-equity and hedge funds, although they will be limited to providing no more than 3 percent of the fund’s capital. They also cannot invest more than 3 percent of their Tier 1 capital.[4] Regulatory agencies such as the FDIC, Treasury Department, Federal Reserve and CFTC, however, would be tasked with creating the framework for and implementation of the rule.
President Barack Obama introduced the rule in January 2010 with Volcker standing beside him. Because it was after the House had already passed its version of financial reform, the Volcker rule was included in the Senate package only, guided through the chamber by Senate Banking Committee Chairman Christopher Dodd. [5]
A Bloomberg report out in late June 2010, citing a person close to Volcker, said the former Federal Reserve Chairman was disappointed with what he considered to be a diluted final version of the rule that bears his name. Initially, the Volcker rule would have banned banks from running private-equity and hedge funds but last minute congressional negotiations aimed at winning Republican support led to a compromise that allows banks to invest up to 3% of their capital in such funds. Volcker was said to be content with language that bans banks from trading with their own capital.[6]
Volcker said in a statement released June 28, 2010 that the bill agreed upon by congressional negotiators provides a constructive legal framework for reform of the financial system. He said that among the bill's provisions "are strong restraints on proprietary trading by commercial banking organizations, a point that has been of particular interest to me."[7]
Banks Express Concern About Rule
Soon after the passage of Dodd-Frank, banks and other financial institutions began a lobbying effort to water down or repeal the Volcker Rule.
In June 2011, Goldman Sachs - whose business is weighted toward trading - released an estimate of at least $3.7 billion in annual revenue would be lost under the new regime. One big area of concern for Goldman is that regulators who are interpreting the Volcker Rule will severely limit the amount of time a bank can hold a security or derivative.[8]
Other banks including Bank of New York Mellon Corp. and State Street Corp. also lobbied to stop the rule from going into effect. The banks were concerned that it might curtail their asset-management activities, since many of their funds could be considered hedge funds.
In January 2011, many of the big investment banks on Wall Street testified to Congress against the Volcker rule opposing the notion that prohibits any banking activity that doesn't directly service the customer. These activities include proprietary trading, investment banking advisory services as well as hedge fund or private equity involvement. Experts believe that even if Volcker does not succeed, the banking and speculative industry will experience much stricter markets. [9]
George Bollenbacher of Kinetix Trading Solutions & Kim Olson of Deloitte & Touche Discuss the Volcker Rule
Section 619 of the Dodd-Frank Act, the so-called "Volcker Rule,” would prohibit banking entities from engaging in proprietary trading of and limit the ownership or sponsorship of hedge funds and other private funds, subject to certain narrow exceptions. The statutory effective date is July 21, 2012, followed by a two-year conformance period. There has been much discussion recently on the potential impact of the Volcker Rule and the timing of the statutory effective date. George Bollenbacher of Kinetix Trading Solutions and Deloitte & Touche’s Kim Olson discussed the regulatory response to the Volcker Rule comment letters, the key challenges associated with the Volcker Rule, and how banks are preparing for the rule’s implementation. Published April 12, 2012.
References
- ↑ SEC Jointly Proposes Prohibitions and Restrictions on Proprietary Trading. SEC.
- ↑ Even After ‘Whale’ Losses, Bankers Hammer Volcker. Wall Street Journal.
- ↑ Volcker Sidelined as Obama Reshapes Advisory Panel. Bloomberg.
- ↑ Biggest Wall Street Revamp Since 1930s Approved. Bloomberg Businessweek.
- ↑ Volcker Rule Under Attack as Lawmakers Seek Loophole. Bloomberg.
- ↑ Volcker Said to Be Unhappy With New Version of Rule. Bloomberg.
- ↑ Volcker Said to Be Unhappy With New Version of Rule. Bloomberg.
- ↑ Goldman lobbying hard to weaken Volcker rule. Reuters.
- ↑ Wall Street Takes Aim at Volcker Rule. The Street.
