Volcker Rule Under Revamp

Wall Street watchdogs are poised to take a major step toward overhauling Volcker Rule limits on banks’ ability to trade with their own funds, according to four people familiar with the effort, moving to ease post-crisis safeguards reviled by the industry.

Regulators responsible for the Dodd-Frank Act rule could complete work as soon as next week on revisions that include loosening restrictions on banks investing their own money in private equity and hedge funds, according to the people, who requested anonymity because the process isn’t public.

The group of five agencies led by the Federal Reserve has focused on a new definition of “proprietary trading”—which is specifically banned by Dodd-Frank. They’ve chosen to implement the changes without re-proposing the rule and seeking comment, according to three of the people, a step that could open the process to legal challenges.

The final definition would remove an “accounting prong” that was floated last year as a new way for determining which types of trading would be permitted, the people said. Regulators agreed to scrap the concept from their Volcker 2.0 plan after it drew sharp criticism from bank lobbyists. They will instead lean on easier-to-digest models, one of the people said.

In creating the rule named for former Fed Chairman Paul Volcker, who championed the idea, Congress and the regulators banned short-term trades that couldn’t be shown to meet exemptions for things such as hedging or market making. The rule has assumed that trades are banned unless banks show they aren’t.

The new version is expected to up-end that by generally giving banks the benefit of the doubt that they’re in compliance, the people said. Regulators have said they expect to have more confidence that banks are abiding by the rules because the standards will be clearer, allowing firms to plan portfolios with more certainty.

Approving a final rule without further delay would let Wall Street banks adapt trading practices to the new approach sooner. The agencies are, however, planning a phase-in period, according to one of the people, so the change won’t be instant.

One major topic that the 2018 proposal didn’t fully address was restrictions on banks’ stakes in private equity, hedge funds, and other investment funds. The pending revision is expected to propose some easing of those limitations, one of the people said.

Less Burdensome Bank Regulations

The final changes must be approved by the Federal Reserve, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corp. (FDIC), Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC). Top Fed officials have said they’ve taken to heart banks’ complaints about the difficulties in complying with the rule, and the heads of other agencies have also supported taking a less “burdensome” approach.

While the revisions won’t narrow the rule’s scope and won’t cause a seismic shift in banks’ trading, by providing clarity about what banks can stockpile for customers, the changes may alleviate concerns about potential violations. The most dramatic effect of the overhaul is likely to be a reduction of expensive compliance headaches.

The Fed, FDIC, OCC, and CFTC declined to comment on Volcker Rule progress. The SEC didn’t respond to a request for comment.

Randal Quarles, the Fed’s vice chairman for supervision, said last month that the next step would include the changes to the “proprietary trading” definition and the addition of proposals on the funds side of the rule. He didn’t get into specifics on whether the agencies would finalize the new trading definition. According to federal regulatory practice, a re-proposal is typically required if dramatic changes are made to an earlier proposal.

“Regulators cannot simply rewrite the scope of the Volcker Rule and the kinds of trades it covers without giving the public the chance to comment on the details of those changes,” said Marcus Stanley, policy director of the consumer advocacy group Americans for Financial Reform. “If they are going to throw out the approach they proposed in 2018, they need to do a new proposal.”

Though the regulators moved in a relatively rapid fashion to propose the overhaul of Volcker last year, the industry greeted the effort with jeers and lobbied against it. The process got bogged down as multiple agencies worked to address those concerns, but there are reasons to try to finish in the coming months. At this stage in President Donald Trump’s administration, there’s some possibility that rules which aren’t completed by the first few months of 2020 could face congressional removal if Democrats win the White House and Senate in next year’s elections.

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