Thursday, December 12, 2019

Wall Street Receives Volcker Rule Clarity

Posted by OnCourse Staff April 30, 2012 3:50pm

Photo Credit: jscreationzs

Source: The New York Times

Photo Credit: jscreationzs / FreeDigitalPhotos.net

 

Wall Street can exhale.

Regulators on Thursday announced a formal clarification that Wall Street need not immediately comply with a new rule banning banks from trading with their own money, sending sighs of relief across the financial industry. The guidance, delivered by the Federal Reserve and other financial regulators, explained that the Dodd-Frank regulatory overhaul law grants banks two years to fully comply with the Volcker Rule, which regulators have yet to finalize.

While the Dodd-Frank Act called for a two-year compliance period until 2014 for the Volcker Rule, the fine print of the law left some room for interpretation. Banks claimed to be jittery about what would happen this July 21 when the rule technically takes effect, fearing that they would have to scramble to comply before a final draft spelled out the nitty-gritty of their obligations.

The Fed’s announcement on Thursday addressed those concerns, clarifying what banks must do over the next two years.

Banks must show “good-faith planning efforts” to gear up for the rule until July 2014. And in a statement on Thursday, the regulators said they can extend the deadline further, until as late as 2017.

One of Wall Street’s most influential lobbying groups, the Securities Industry and Financial Markets Association, praised the announcement as “entirely appropriate and necessary.” It was a rare moment of appreciation from Wall Street, which has chastised regulators for their handling of the Volcker Rule.

The rule, one of the most contentious provisions of Dodd-Frank, takes effect on July 21, even though regulators have yet to put the finishing touches on the draft. The rule has faced repeated delays as regulators grapple with the complexity of the proposal and widespread discontent from the financial industry, reflected in thousands of comment letters from banks and lobbyists.

On Thursday, regulators said that banks could enact reporting and recordkeeping requirements in preparing for the new regime. It is unclear when regulators will finalize the plan.

The announcement drew praise from Wall Street. “Today’s guidance that firms subject to Volcker will be able to use the full two year conformance period to come into compliance with the rule as provided for by the statute is critically important because it alleviates concerns over potentially having to comply with a rule whose details had not yet been made clear,” Kenneth E. Bentsen, Jr., a SIFMA executive, said in a statement.

Of course, the financial industry still loathes the rule itself, which will eat into profits and force the industry to overhaul its trading operations. Named for Paul A. Volcker, the former chairman of the Federal Reserve who campaigned for a crackdown on risky trading on Wall Street, the rule bans so-called proprietary trading at banks.

Under the rule, aimed at reducing the likelihood of another financial crisis, banks can no longer place bets with their own money. Supporters of the rule argue that banks should not make risky wagers while enjoying the backstop of government deposit insurance.

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