The Financial Stability Oversight Council (FSOC), which was created by the Dodd-Frank Wall Street Reform Act, has requested comments from the public to assist it in making recommendations to help federal agencies develop regulations to bar banks from engaging in proprietary trading and from maintaining certain relationships with hedge funds and private equity funds.

The new financial reform law, which President Obama signed in July, calls on the FSOC to study and make recommendations on implementing the so-called “Volcker Rule,” which prohibits a bank or institution that owns a bank from engaging in proprietary trading that isn’t at the behest of its clients, and from owning or investing in a hedge fund or private equity fund, as well as limiting the liabilities that the largest banks can hold (see NGI, July 26). Public comments are due by Nov. 5.

The reform law gave the council six months from the date of enactment to conduct the study and make recommendations to implement the Volcker Rule. The Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Comptroller of the Currency will be required to consider the recommendations in the council’s study when developing and adopting new regulations.

The council poses 12 questions for the public to consider, but only two are especially pertinent to banks and their proprietary energy trading desks. The council wants to know what “key factors and considerations” should be taken into account in making recommendations on implementing the Volcker Rule’s prohibition on proprietary trading by banks, including energy trading.

It further asks what “key factors and considerations” should be weighed in restricting the ability of banking entities to invest in, sponsor or have certain other covered relationships with private equity and hedge funds.

In addition to the study, a responsibility of the FSOC in the months ahead will be to designate which clearing organizations are systemically important, thus requiring heightened oversight by the CFTC.

The FSOC was created to identify and respond to emerging threats to financial stability. A key responsibility of the council is to promote information sharing and coordination among the federal agencies, which in the past was almost nonexistent. It is made up of 10 voting members –nine federal financial regulatory agencies (including the CFTC and SEC) and an independent member with insurance expertise — and five nonvoting members.

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