Banks will have time to comment on Volcker rule

The Volcker rule had been widely leaked before the official version was released yesterday and it did not differ much from the drafts.

The key elements are unchanged. Banks will be banned from making short-term trades in securities on their own account – so-called proprietary trading – and will have strict limits placed on ownership or investment in hedge funds and private equity firms.

The rule is meant to curtail risk taking that helped to fuel the financial crisis. It is based on a proposal pressed by Paul Volcker, the respected former head of the US central bank, that banks with deposits insured by the federal government should not be allowed to put those funds at risk.

Yesterday's release of the rule was accompanied by 350 questions that regulators want the public and the financial industry to comment on in a three-month consultation period.

That time period leaves plenty to play for as investment banks and their opponents seek to reshape the rule to their wishes. The rule's terms also leave room for interpretation and potential avoidance. Hedging to reduce risk and trading on behalf of customers will be allowed, as will underwriting and market making.

The regulators said that drawing a line between prohibited and permitted trading "often involves subtle distinctions difficult to describe within regulation and to evaluate in practice."