FDIC approves changes to Volcker Rule


The Federal Deposit Insurance Corporation (FDIC) approved a rule to change the requirements the Volcker Rule, which prohibits banks from engaging in proprietary trading and from owning or controlling hedge funds or private equity funds.

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The Volcker Rule was established as part of the Dodd-Frank Act. It was a key provision that was designed to curb the type of speculative investments that led to the financial crisis of 2007-2008.

The new changes would alter the rule’s compliance requirements based on the size of a firm’s trading assets and liabilities. The most stringent requirements would be applied to banks with the most trading activity. It would also retain the short-term intent prong of the “trading account” definition only for banks that are not subject to the market risk capital rule prong. Further, it would replace the rebuttable presumption that instruments held for fewer than 60 days are covered under the short-term intent prong with a rebuttable presumption that instruments held for 60 days or longer are not covered.

In addition, the rule changes stipulate that banks that trade within internal risk limits are engaged in permissible market making or underwriting activity. It also streamlines the criteria that apply when a bank seeks to rely on the hedging exemption from the proprietary trading prohibition. Finally, it limits the impact of the rule on the foreign activities of foreign banking organizations and simplifies the trading activity information that banks are required to provide to the agencies.

“One of the post-crisis reforms that has been most challenging to implement for regulators and industry is the Volcker Rule, which restricts banks from engaging in proprietary trading and from owning hedge funds and private equity funds. Distinguishing between what qualifies as proprietary trading and what does not has proven to be extremely difficult. Meanwhile, banks that do relatively little trading are required to go through substantial compliance exercises to ensure that activities that have long been considered traditional banking activities do not run afoul of the Volcker Rule,” FDIC Chair Jelena McWilliams said.

The rule changes, if approved by all federal regulators, would be effective Jan. 1, 2020 with a compliance date of Jan. 1, 2021. The Office of the Comptroller of the Currency also approved the changes. The Federal Reserve Board, Securities and Exchange Commission, and Commodity Futures Trading Commission have not yet weighed in.

The American Bankers Association applauded the proposed reforms to the Volcker Rule.

“These improvements will allow bank supervisors to focus on systemic risk while providing the tailored and precise oversight that was the Volcker Rule’s original purpose,” Rob Nichols, ABA president and CEO, said. “We also applaud regulators for dropping the proposed accounting test, which was overly broad and unworkable. The decision to instead make meaningful improvements to the 60-day rebuttable presumption is consistent with the agencies’ focus on bright-line rules. We look forward to providing additional input that would simplify and streamline restrictions on covered fund investments while excluding funds that are clearly outside the Volcker Rule’s intent. These further reforms and exclusions will benefit a wide range of bank customers while improving efficiencies at banks subject to the rule.”

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