A new rule prohibiting FDIC-insured banks from trading
securities to profit from their own accounts cleared the five federal banking
and securities regulators on Dec 10.
Volcker Rule supporters say the ban will reduce the size
of systemically important financial institutions and eliminate the possibility
that tax-insured FDIC protection could be used to cushion against risky
behavior. In a statement, President Obama commended its passage last Tuesday. “Our
financial system will be safer and the American people are more secure because
we fought to include this protection in the law,” President Obama said.
Opponents—including many treasurers and finance executives—say
the rule will increase borrowing costs.
“U.S. regulators have ignored repeated warnings from
corporate treasurers that the complicated Volcker Rule, which approaches 1,000
pages in length, will have significant unintended consequences, including increased
cost of capital and reduced liquidity, which are needed by American businesses,”
said Jim Gilligan, CTP, assistant treasurer of Great Plains Energy Inc. and Chairman of the AFP Government Relations Committee.
Some industry representatives expressed relief that the rule
was finalized after three years of deliberation, and others have reserved judgment
until final implementation. “What’s going to be important is the details, and
the details will include the documentation to justify or demonstrate [the
banks]... should receive exemptions,” said John Gerspach, CFO of Citigroup.
The Volcker Rule takes effect July 21, 2015. The bulk of
enforcement responsibilities will reside with the CFTC, SEC and OCC.
Named for former Federal Reserve Chairman Paul Volcker, who first
suggested it during the crafting of Dodd-Frank, the Volcker Rule mandates that banks
rid themselves of trading desks that engage in proprietary activity.
Hedges, Market-Making Allowed
Two caveats from Congress led to the three-year hold-up:
that the proprietary trading bar interfere with neither hedging, nor “market-making.”
Bank hedges will have to be itemized to account for specific risks, ending the practice
of hedging broadly-grouped risk pools. Industry representatives had urged
policymakers to retain hedging in the final rule, citing its importance for
The Volcker Rule also exempts market-making. For bank clients,
typically corporate treasury and finance professionals, market-making is a
crucial tool ensuring that firms hold certain securities available in inventory
to keep markets liquid.
Market-making will face new constraints and required documentation.
Banks will need to determine their positions based on historical demand and
disclose their analysis and inventory with regulators. Sovereign debt bonds are
exempt from market-making limits.
In addition, banks will no longer be able to own or
support more than three percent of hedge funds or private equity firms.
Compensation practices are also addressed under the final rule, an area given
particular scrutiny in recent years. The Volcker Rule outlines that any
compensation arrangements for traders not “reward or incentivize prohibited