Agencies Issue Sweeping Proposal for Volcker Revisions
Last updated: August 1, 2019
The Volcker Rule: The Rule went into effect on July 21, 2015, and prohibits banking institutions from engaging in proprietary trading activities for their own accounts. The Rule is meant to protect taxpayers from volatile earnings related to proprietary trading and principal investing. Five agencies, including the Fed, FDIC, OCC, SEC and CFTC, are responsible for rulemaking and oversight of the Rule.
The Rule and Securitization:
Securitization underwriting and market-making activities are specifically exempt from the scope of the Rule under the statute, though restrictions on inventory levels have practically caused a contraction in market making.
Difficulty in Defining Market-Making vs. Proprietary Trading:
The definitions within the final Rule are vague, overly broad, and complicated, largely because there is no clear delineation between market making activity and proprietary trading. Therefore, it is difficult for banks to prove a “negative,” or to prove conclusively that they are not making a proprietary trade, and are in compliance with the Rule.
General Agreement that the Rule is Inefficient:
The 2017 Treasury reports on regulatory reform (see below under “CREFC Resources”) highlighted a broadly-held criticism that the Rule goes too far, affecting institutions and markets that should be excluded.
Agencies Issue Proposal:
In early June 2018, the five agencies that administer the Rule published proposed revisions focusing on all aspects of the proprietary trading prohibitions. The agencies were less specific about revisions on the covered funds aspect of the Rule, yet they did invite broad recommendations on the subject. Overall, the proposal may allow some operational and compliance relief for medium and smaller banks, though the net effects for the banks with the largest trading platforms could be immaterial in terms of how they allocate their balance sheets.