Although it will be signed into US law this week, the Dodd-Frank bill is not close to effecting the reforms to the financial system that its thousands of pages contain. There is no clear timescale for implementation and once it is in place, failure to implement international coordination of the ”Volcker' rule could hamper its effect.
A variation of the rule, originally proposed by former chairman of the Federal Reserve Paul Volcker to restrict banks engaging in speculative activities, was included in the Dodd-Frank bill. It banned deposit taking institutions from proprietary trading and prohibited banks from investing more than 3% of their capital in hedge funds and private equity firms.
The US rules will not change overnight. In a speech at the Regulatory Reform Summit in New York on 15 July 2010, Gary Gensler, chairman of US derivatives regulator the Commodities Futures Trading Commission explained that his organisation had between 90 and 360 days to write the rules that it was now mandated to enforce.
This model will be replicated, with deadlines for activity stretching up to three years, by the 14 other regulators or government bodies charged with interpreting and implementing the new rules. According to the Securities and Financial Markets Association, an industry representative body, the Securities and Exchanges Commission (SEC) has 124 actions to follow as a result of the bill, which will include enforcement of rules around proprietary trading and fund investment.
And there are reasons to expect unscheduled delays and activities to crop up. “If the SEC and the Financial Standards Accounting Board have a different definition of what constitutes ”capital' as mentioned in the Dodd-Frank bill, you can expect a long conversation to ensue,” explains Selwyn Blair-Ford, head of global regulatory policy at compliance service provider FRSGlobal.
Speaking to a House of Representatives committee on financial services on 20 July 2010, SEC chairman Mary Schapiro said that the regulator would work “expeditiously” to deliver the reforms, but was not able to provide a timeline for implementation.
Even assuming that all runs smoothly, the difference in the rules being enforced between US and European regulators will create an unstable system.
In Europe, regulators and politicians are keen to show solidarity. European commissioner for internal markets and services Michel Barnier welcomed the US reforms in a statement on 16 July 2010, saying that, “Europe is making equally good progress in the implementation of the G20 roadmap. It is essential that the G20 commitments are translated into practice at the same time at international level.”
However the nature of the reforms being put in place on either side of the Atlantic is quite different and a ban on proprietary trading in Europe would seem unenforceable. “There is a more formal and national market system in the US and a ban has to be made against an established set of practices – that would be hard to enforce in Europe where we have different systems,” says Anthony Kirby director for the regulatory and risk management practice at Ernst and Young.
“There might be appetite in London for something similar, but on continental Europe people will not let go of the universal banking model. I can't see Germany allowing a ban on Deutsche Bank or Commerzbank's proprietary trading operations,” adds Blair-Ford.
With Goldman Sachs making over 80% of its 2009 revenue from trading and principal investments according to its latest annual report, it would seem unlikely to voluntarily stop proprietary trading in Europe, just to keep in line with its US operations. Other banks would also compete.
The Financial Stability Board, a body set up to co-ordinate regulation globally, has not answered questions on this apparent gap in regulatory approaches. In the absence of regulatory guidance to the contrary, it would appear that the speculative activities restricted in the US would not be restricted in Europe drastically limiting their effectiveness.