Regulators roll out Volcker Rule regulations

Financial regulators rolled out one of the larger chunks of the Dodd-Frank financial reform law Tuesday, proposing regulations for the hotly contested Volcker Rule.

That rule, named after former Federal Reserve Chairman and Obama adviser Paul Volcker, seeks to ban proprietary trading — i.e., a bank trading for its own profit and not for its clients — as well as extensive relationships between banks and hedge funds or private equity funds.

The idea behind the rule is to prevent banks from engaging in risky trades that could endanger client holdings. Now, with a nearly 300-page rules proposal, regulators are trying to find a way to put those protections into place.

The Treasury Department, Federal Deposit Insurance Corp. (FDIC), Federal Reserve and Securities and Exchange Commission (SEC) signed off on that proposal, which was posted on the Fed's website. The FDIC's board is also expected to approve the proposal Tuesday.

However, the Commodity Futures Trading Commission (CFTC) did not sign off on the joint proposal, even though it has a role to play in Volcker implementation. The CFTC will either have to eventually join the broader effort, or issue its own take that later will have to be harmonized with the proposal from other regulators.

As written, the proposed rule includes several exemptions — for example, federal debt and state and local debt are exempt from the restrictions, and the proposal allows banks to engage in certain activities that would otherwise be banned, such as market marking and hedges intended to mitigate risk.

However, if a bank does engage in those exempted activities, it must set up an internal compliance program specifically tailored to ensure it stays within the boundary of the Volcker Rule and its regulations.

Banks with major trading operations must also provide data to regulators allowing them to identify potential Volcker violations or other high-risk assets or trading.

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