The five main US regulatory agencies have issued final rules [see Footnote 1], implementing Section 619 of Dodd-Frank - the Volcker Rule.
Implementation is delayed by a year, giving banks until 21st July 2015 to be fully compliant. However, the order specifies that proprietary trading operations should be closed “promptly” and that the largest banks must begin reporting various specified hedging/trading metrics from 30th June 2014.
The final rule is 71 pages long, but is virtually unchanged from the Dodd-Frank original. The detail-devil is in the 900 or so pages of explanation and guidance. These will doubtless be the subject of many long nights, lawsuits, and legal fees - a preliminary wheat/chaff gleaning follows:
- Proprietary-trading is banned from 21st July 2015
- “Risk-mitigating hedging” and market-making continues to be allowed
- Risk-mitigating hedges may be aggregated, but the risks must be independently identifiable, specific and fully-documented.
- Desk-specific exemptions will apply for market-making activities and its specific risks. Note that the exemption is only “intra-desk”; if the risk is transferred in the organisation, the extra controls applicable to risk-mitigating hedges will apply.
- All banks with US operations in excess of $50bn in assets will compile reports of seven metrics with respect to Volcker Rule compliance.
The, albeit delayed, implementation of Section 619, “Volcker Rule” - “Glass-Steagall-lite” - represents a landmark, “centre piece of the jigsaw moment” for the Dodd-Frank reform package.
On the one hand, the rule has preserved the significant profits derived from market-making while subjecting them to increased oversight and compliance costs.
On the other, post-London Whale fiasco, the requirement to identify risks and document hedges is likely to extinguish the final embers of proprietary trading. This is, of course, just the beginning - the rule will be inevitably be subject to protracted legal challenge, intensive loophole-ferreting, subsequent refinement and questions as to efficacy of enforcement. As with all fundamental things Dodd-Frank, only time will tell, but we may be sure that the telling will be a long time coming.
[Footnote 1] Volcker Rule: Volcker Rule Text; Fact Sheet of the Final Rule; Volcker Rule Memo; SEC Press Release
Statements: FRB Chairman Bernanke; SEC Chair White; (Dissent) SEC Commissioner Gallagher; (Support) CFTC Chairman Gensler; (Support) CFTC Commissioner Wetjen; (Dissent)- CFTC Commissioner O’Malia; CFTC Commissioner Chilton; SIFMA Letter.
Michael Beaton is a lawyer and managing partner of Derivatives Risk Solutions LLP. He can be contacted at email@example.com