Under the proposed Volcker Rule, final details of which were unveiled early Tuesday, banks would beprohibited from buying and selling most investments for their own accounts. But there are broad exemptions: Banks can own securities when it's necessary to serve trading and investment banking clients, can own U.S. government debt, and can own securities that hedge other positions the banks legally own.
The new rule, named for former Federal Reserve Chairman Paul Volcker who conceived it, forces banks to prove that their trading is reasonably related to client needs, and that any hedging strategies are directly related to offsetting a specific, identifiable risk. That represents a compromise between banks that wanted more leeway to hedge, and regulators who thought a broader loophole would let banks flout the rule by trading routinely and making up a hedging rationale only if they were caught.
"A specific trade may be either permissible or impermissible depending on the context and circumstances within which that trade is made,'' Federal Reserve Gov. Daniel Tarullo said in remarks prepared for delivery Tuesday morning. ``While the proposal before us articulates standards for making those distinctions, those standards will necessarily be developed further as they are applied.''
The rules are set to be approved by the Fed, the CFTC, the Federal Deposit Insurance Corp., the Comptroller of the Currency, and the Securities and Exchange Commission today. All of the agencies are set to act despite a Washington snowstorm that has shut most local government operations for the day.
Regulators hope the rules mean banks take less risk, operate with less leverage and have more consistent financial results in the future, CLSA banking analyst Mike Mayo said last week.
The agencies ! devoted two years to studying 18,000 public comments, agency officials said. The 70-page rule itself is accompanied by an 850-page preamble that addresses the comments and lays out the rationale for the rules.
The rules require CEOs of large banks to attest that their institution have risk controls in place to enforce compliance with the new standards, but do not force them to swear that the banks do not own any prohibited investments, officials said.
Details of the rules also discourage direct investments, even in some cases where they are allowed, by forcing banks to deduct their value from the amount of capital they are required to hold, officials said. Bank regulators worldwide have stiffened capital requirements since 2008 to prevent banks from making risky, highly leveraged bets with borrowed money
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