Financial regulators on Tuesday handed down the Volcker Rule, enacting significant new curbs on Wall Street trading that will likely be challenged in court.
Five federal agencies voted to adopt the regulations, closing the books on years of work, countless meetings, and intense lobbying by the financial industry and its critics.
President Obama hailed the final rule, saying it would protect Americans and curb risk-taking on Wall Street.
“The Volcker Rule will make it illegal for firms to use government-insured money to make speculative bets that threaten the entire financial system, and demand a new era of accountability from CEOs who must sign off on their firm’s practices,” Obama said in a statement.
“Our financial system will be safer and the American people are more secure because we fought to include this protection in the law.”
Treasury Secretary Jack LewJack LewOvernight Finance: House GOP plans short-term spending bill | Senate Republicans not happy | Yellen intends to finish term Lew: Don't paint Wall Street execs with 'broad brushstroke' Dumping Obama’s faux foreign tax legislation should be high on Trump's to-do list MORE, who pushed regulators to finish the rule by the end of the year, touted the new regulatory system as “tough but workable.”
Industry groups offered a measured but decidedly negative take, as they sifted through the roughly 900 pages that the regulators produced.
The Chamber of Commerce said it was “disappointed” with the regulations and plans to take “all options into account” in determining its next move.
The American Bankers Association said it appreciated the effort from regulators to minimize headaches, but nonetheless found the regulations overly complicated and burdensome. Many observers expect industry groups to challenge the Volcker Rule in court.
Meanwhile, Wall Street critics, who are never shy about second-guessing regulators, appeared to be elated.
The financial reform advocacy group Better Markets called the trading limits a “major defeat” for Wall Street. And Bart Chilton, a liberal member of the Commodity Futures Trading Commission who had criticized an earlier version of the rule, called the final product “rigorous and robust.”
The final rule attempts to tackle a number of highly contentious issues that have bedeviled regulators — topics Volcker Rule skeptics have argued are subjective and unworkable.
Broadly speaking, regulators took a fairly tough approach on many of those contentious issues, opting for further restrictions on banks in most cases.
For example, banks will not be permitted to engage in so-called “portfolio hedging,” which they argued should be permitted. While the rule blocks banks from making trades to obtain their own profits, the industry argued they should be granted broad leeway to make trades to protect against broad economic threats to their portfolio.
Instead, regulators sided with reform advocates by allowing banks to only make hedging trades when connected to a “specific, identifiable” risk to a specific or aggregated position held by the bank, limiting Wall Street’s ability to pursue its own trades. Banks would also be required to provide documentation justifying such a hedging trade and analysis explaining its strategy.
JPMorgan, after suffering billions of dollars in losses due to its “London Whale” trade, had argued those disastrous trades had been part of a portfolio hedging strategy.
However, banks would be permitted to continue proprietary trading in obligations issued by the federal, state and local governments, as well as some foreign sovereign debt. Furthermore, trading by foreign banking entities would not be limited under the Volcker Rule so long as the trading decisions and ensuing risk occur outside the United States.
Another difficult challenge for regulators was balancing the trading ban with so-called “market making,” which is when banks make their own trades to keep a market liquid and accessible. Under the final rule, a trading desk would only be allowed to make such trades in order to meet the “reasonably expected near-term demand” of customers. That demand would be set based on historical precedent and other market factors.
In order to comply with the new rule, regulators are putting in place a sliding scale based on the size of each bank and the complexity of its trading activities. The largest, most active institutions will be required to submit to the most detailed oversight, and CEOs will be required to verify every year they have the tools in place to comply with the new rules.
Smaller banks will have to meet a simpler regime, and regulators are prepared to modify the required metrics in order to obtain the appropriate data about trading activities.
The unveiling of the final rule isn’t the end of the fight, however.
Industry groups like the Securities Industry and Financial Markets Association (SIFMA) said they plan to take a deep dive into the Volcker Rule in the days ahead.
“As the rule is contained in a 900 page document, SIFMA will review the final document in detail with our members and provide further
comments,” said SIFMA President Ken Bentsen.
— This story was first posted at 9:30 a.m. and has been updated.