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Federal Regulators Move to Ease Volcker Rule Restrictions

More than four years after they issued final rules developed jointly to implement the Volcker Rule, which limits risk-taking by banks with federally insured deposits, the Commodity Futures Trading Commission (CFTC) and four other federal agencies proposed Wednesday to ease those regulations.

At a meeting in Washington, DC, the Board of Governors of the Federal Reserve System voted unanimously to publish a 373-page proposed rule in the Federal Register, opening the door to public comment on the issue and its eventual adoption.

The proposal was issued jointly by the Federal Reserve, CFTC, the Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and  the Securities and Exchange Commission (SEC), the same agencies which simultaneously issued final rules developed to implement the Volcker Rule in December 2013. The reform measure, several years in the making, barred banks from making trades for their own profit and imposed limits on banking entities' investments in, and other relationships with, hedge funds or private equity funds. CFTC voted out the rule, which was originally proposed by economist and former Federal Reserve Chairman Paul Volcker in the wake of the 2008 banking crash, in January 2012.

The final rules barred federally insured depository institutions and their affiliates from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on those instruments. Like the Dodd-Frank Act, the final rules provide exemptions for certain activities, including market making, underwriting, hedging, trading in government obligations and insurance company activities.

The proposed rule would:

  • Create categories of banking entities based on the size of their trading assets and liabilities that would be used to tailor certain requirements of the rule;
  • Clarify restrictions related to certain proprietary trading activities, revise and define terms relevant to proprietary trading activity, and reduce and tailor the criteria that apply when a banking entity seeks to rely on exemptions from the proprietary trading prohibitions;
  • Clarify the prohibitions on banking entity's ability to acquire ownership interests in, and maintain certain relationships with, hedge funds or private equity funds; and
  • Tailor compliance programs to amend the CEO attestation requirement.

The proposed rule would focus the most comprehensive compliance regime on firms that do the most trading, while firms that do more modest amounts of trading would face fewer requirements, according to Federal Reserve Board of Governors Chairman Jerome Powell.

"We have had almost five years of experience in applying the Volcker rule," Powell said. "The agencies responsible for implementing the rule see many opportunities to simplify and improve it in ways that will allow firms to conduct appropriate activities without undue burden, and without sacrificing safety and soundness.

"The proposal will address some of the uncertainty and complexity that now make it difficult for firms to know how best to comply, and for supervisors to know that they are in compliance. Our goal is to replace overly complex and inefficient requirements with a more streamlined set of requirements."

The agencies will accept public comment on the proposed rule for 60 days following publication in the Federal Register.

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