The final Volcker rule received support from regulators on Tuesday and will restrict market making activity deemed proprietary trading, but will not come into force until July 2015.
The Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and Federal Reserve Board, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission all backed the rule during Tuesday votes, although two of five SEC commissioners – both Republicans – did not support the rule.
The final Volcker text comes two years after an initial draft and three years after President Obama passed the Dodd-Frank Act into law, which included provisions for the rule.
Under version of the rule passed today, banks will face some restrictions in trading on behalf of clients.
The final rules prohibit banks from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments, for their own account, while limits would be set on banks’ investments in hedge and private equity funds, FDIC said in a statement on Tuesday.
“The final rules provide exemptions for certain activities, including market making, underwriting, hedging, trading in government obligations, insurance company activities, and organising and offering hedge funds or private equity funds,” the statement read.
Several banks have suggested they already comply with most of the rule’s aims as they have wound down prop trading activity in recent years.
Speaking at a conference in New York today, Daniel Moynihan, CEO of Bank of America Corporation, said his firm had already wound down its proprietary trading activities when the Volcker rule was first drafted.
Banks that have traditionally derived a high proportion of profits from prop trading may push to challenge some segments of the rule through US courts, specifically the definitions that separate market making and hedging activity from prop trading.
Andrew Olmem, partner, financial services for US law firm Venable, and former Republican chief counsel and deputy staff director at the Senate Banking Committee, told theTRADEnews.com regulators behind the rule has would have adequately solidified its legal standing to avoid such challenges.
“Most rules are upheld by the courts, but courts will intervene if regulators deviate from the text of a statute or don’t follow the Administrative Procedure Act,” he said.
He said despite the focus on large banks, the Volcker rule would affect a wide net of market participants.
“It is important to remember that the Volcker rule will impact not only large institutions, but also medium and smaller-sized institutions by increasing their compliance costs and potentially limiting their ability to manage risks,” Olmem said.