Federal regulators are poised to approve a tougher-than-expected version of the so-called Volcker Rule, adopting a harder line in recent weeks against Wall Street risk-taking, according to a copy of the rule reviewed by The New York Times.
The rule, which comes to a vote on Tuesday, is a symbol of the Obama administration’s post-financial-crisis crackdown on Wall Street. In particular, it bans banks from trading for their own gain, a practice known as proprietary trading.
In doing so, the Volcker Rule takes aim at the sort of risk-taking responsible for a $6 billion trading blowup last year at JPMorgan Chase. The bank claimed it was trading to hedge its broader risks, but instead built a position that racked up large profits before spinning out of control.
To prevent such blowups, the rule will require banks to deploy “independent testing designed to ensure that the positions, techniques and strategies that may be used for hedging may reasonably be expected to demonstrably reduce†the risks, according to the version reviewed by The Times. And the risks, the rule says, must be “specific, identifiable†rather than theoretical and broad.
When five federal agencies initially proposed the rule in October 2011, those requirements were softer. But even in the last two weeks, the regulators continued to adopt harsher language, people briefed on the matter said.
For example, the rule requires banks to conduct an “ongoing recalibration of the hedging activity by the banking entity to ensure†that the activity is “not prohibited proprietary trading.†The idea is to further banks from masking proprietary trading as a hedge.
The Volcker Rule, a centerpiece of the Dodd-Frank Act of 2010, also imposes requirements on top executives. In part, chief executives must attest that they have established compliance programs for the rule.
“The C.E.O. of the banking entity must, annually, attest†to regulators that a bank “has in place processes to establish, maintain, enforce, review, test and modify the compliance program.â€
In an October 2011 version of the rule, regulators did not include such a mandate, in contrast with the tougher tone of the final version.
The five agencies writing the rule - the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation and the Comptroller of the Currency - were divided over how tough to make the final version. While some officials at the Federal Reserve and the S.E.C. have wanted to give banks significant flexibility to carry out trading that is considered important for their health and the functioning of markets, the commodity commisson and Kara M. Stein, a Democratic commissioner at the S.E.C., sought to extract additional restrictions.
The votes on Tuesday, which are being taken more than a year after Congress required the agencies to complete the Volcker Rule, offer Wall Street a degree of clarity that once seemed remote. Until recent days, regulators appeared unlikely to meet the recommendation of Treasury Secretary Jacob J. Lew, who urged the agencies to complete the rule in 2013.
The passage of the regulation would represent a turning point in financial reform. Although it counted as only one of 400 rules under Dodd-Frank â€" with nearly two-thirds of the regulations remaining unfinished - the Volcker Rule became synonymous with Dodd-Frank itself and a litmus test for the overall strength of the law.
