The Obama administration has finalised the proposed legislative language for its controversial Volcker rule, which aims to prevent deposit-taking institutions from engaging in proprietary trading and owning or investing in private equity and hedge funds.
US president Barack Obama sent the text to Congress yesterday, where it will be debated by the Senate and the House of Representatives with a view to including it in Obama’s financial reform package.
Crucially, the text clarifies that the proposed ban on proprietary trading will not apply to positions in financial instruments assumed on behalf of customers “as part of market making activities, or otherwise in connection with or in facilitation of a customer relationship (including hedging activities related to the foregoing).”
The rule, named after former Federal Reserve chairman and senior White House economic advisor Paul Volcker, had been heavily criticised for not clearly defining proprietary trading since the plan to introduce it was first revealed on 21 January.
According to the new draft presented to Congress, the rule would also apply quantitative limits and additional capital requirements on the proprietary trading activities of non-bank financial firms. These non-bank entities would face more stringent capital and liquidity requirements and be required to provide more information about their risks.
Under the rule, banks will also be prevented from investing in or sponsoring hedge funds and private equity funds, and from lending, providing prime brokerage services to or bailing out private funds advised by the firm.
Earlier this week, Lord Adair Turner, chairman of UK financial regulator the Financial Services Authority, said that the Financial Stability Board – established in April 2009 to promote stability in key financial centres – supported the US on limiting deposit-taking banks’ proprietary trading activities.
“Having discussed this with Paul Volcker, I believe we are in full agreement on the means and that capital requirements for trading activities will be key,” Turner told a Treasury Select Committee hearing in the UK’s House of Commons.