Rule to curb risky trades by banks in US is finally passed
Nikhil Kumar is The Independent's New York correspondent. He was formerly assistant editor on the foreign desk and has also done a variety of jobs on the city desk, where he wrote about markets, commodities and other business and economics topics.
Wednesday 11 December 2013
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.
- 1 BBC election debate: The one photo that summed up the whole 90-minute leaders debate
- 2 18th century sex toy found in 'toilet of sword fighting school' in Poland
- 3 'I wish my teacher knew...': Young students share their 'heartbreaking' worries in notes
- 4 Rebecca Francis accuses Ricky Gervais of using 'influence' to target female hunters after receiving barrage of death threats
- 5 Australian student Tommy Connolly, 23, adopts his pregnant, homeless 17-year-old cousin to give her a chance at 'a better life'
General Election 2015: David Cameron catching up in polls – but he badly needs a clear lead
South Africa xenophobic attacks: Shops looted and violence on streets of Johannesburg as foreigners are forced to hide in police stations
Earthworms rain down from skies over Norway, puzzling scientists
18th century sex toy found in 'toilet of sword fighting school' in Poland
'I wish my teacher knew...': Young students share their 'heartbreaking' worries in notes
The only black face in the Ukip manifesto is on the page about overseas aid
Ukip is the only main political party to not address LGBT rights in its manifesto
If I’m being racially abused I don’t need a stranger with a saviour complex to rescue me
BBC election debate: The one photo that summed up the whole 90-minute leaders debate
Religion isn't growing, it is becoming vigorous in its demise, says philosopher AC Grayling
General Election 2015: Polish prince challenges Nigel Farage to a duel over immigration question
iJobs Money & Business
£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...
£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...
£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...
£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...