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Federal Regulators Issue Final "Volcker Rule"

Board of GovernorsThe Federal Reserve Board and other financial regulators on December 10 issued a final rule implementing section 16 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Commonly called the "Volcker Rule," the regulation prohibits insured depository institutions and their affiliates from proprietary trading and from owning and sponsoring hedge funds or private equity funds. Certain activities such as market making, risk-mitigating hedging, and trading in certain government securities are excluded from the rule, and banks are still permitted to act as agents, brokers, or custodians.

Compliance programs called for
The Volcker Rule also calls for banks to establish internal compliance programs, the requirements of which vary according to the firm's size and the scope of its activities. Banks with larger trading operations will be subject to more detailed requirements, including a written statement from their CEOs attesting that "the program is reasonably designed to achieve compliance with the final rule."

Defining the line between proprietary trading and market-making and hedging is a key challenge associated with the new rule, noted Fed Governor Daniel Tarullo, head of the Board's bank supervision and regulation committee. "The difficulty in doing so inheres in the fact that a specific trade may be either permissible or impermissible depending on the context and circumstances within which that trade is made," he explained.

A lengthy path to fruition
Five financial regulators, including the Federal Reserve, first proposed their versions of the Volcker Rule in 2011 and 2012. The proposals generated more than 18,000 comment letters. "Getting to this vote has taken longer than we would have liked," said Fed Chairman Ben Bernanke, adding that "five agencies have had to work together to grapple with a large number of difficult issues and respond to extensive public comments."

The Federal Reserve requires banks to be fully compliant with Volcker Rule by July 21, 2015.

December 23, 2013