Rule to curb risky trades by banks in US is finally passed

New York

Nearly four years after President Obama first proposed curbs to rein in the risky bets on Wall Street, US regulators have finally ratified a strict new regime aimed at stopping banks from making speculative trades that could cause another meltdown.

But the final text of the Volcker rule, so called after the former Federal Reserve chair Paul Volcker, the reform's chief proponent inside the administration at the time, also made important concessions to the financial industry, which has been lobbying against the proposals.

The rule was published as all the regulatory agencies involved in drafting the reform, including the Federal Reserve, the Securities and Exchange Commission, moved to ratify the text.

The aim of the reform was to end the practice of large banks making bets on the markets, often using arcane financial instruments, for their own gain and from their own accounts. It was also meant to limit their involvement in riskier corners of Wall Street, such as hedge funds.

"If financial firms want to trade for profit, that's something they're free to do," the President said in January 2010. "But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people."

The final text of the rule, which was mandated by the Dodd-Frank financial reform law passed by Congress in 2010, does impose firm restrictions on most kinds of propriety bets – but it stops short of calling for a blanket ban.

Instead, banks can still make risky bets if they are acting for clients or if they are hedging (or protecting themselves) against clearly defined risks – something that, it is hoped, will prevent another trading implosion like the so-called "London Whale" fiasco that rocked JP Morgan, run by its chief executive, Jamie Dimon, last year.

Hedging against broad risks will be curbed. Banks will also have to make sure that their compensation practices are such that traders are not encouraged to make risky propriety bets.

The rule allows banks to buy up securities such as shares if, for example, they are engaged as market makers – in other words, if they are doing so for their clients, not for themselves. It does, however, demand that the inventory of securities should not go beyond "the reasonable expected near-term demands of customers."

Other exceptions cover proprietary trading in certain government securities, and positions connected to a bank acting as an underwriter in a public or private offering of shares.

The reform will also require chief executives at large banks to tell regulators every year that their institutions have processes in place to ensure they comply with the rules.

The prospect of reform has already led to changes on Wall Street, with banks moving over the last two and half years to shed their propriety trading desks. And although the final text was published yesterday, they still have time to change or adapt their practices as the regime is not due to take effect until 2015. Questions also remain about enforcement, which analysts say will determine how far the new rules will succeed in limiting large trading-related losses.

peopleFrankie Boyle responds to referendum result in characteristically offensive style
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvHe is only remaining member of original cast
Arts and Entertainment
tvHighs and lows of the cast's careers since 2004
New Articles
Life and Style
Couples have been having sex less in 2014, according to a new survey
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam