One of Dodd-Frank's most well-known provisions was completed Tuesday, three and a half years after President Obama signed the sweeping financial-reform law.
Five agencies passed a final version of the so-called Volcker Rule on Tuesday. Three of the 20 regulators who voted on the law opposed it.
The Volcker Rule, named for the cigar-loving former Federal Reserve Chairman Paul Volcker, bans banks from making certain speculative bets with their own money. It was an attempt, through the 2010 financial-reform law, to curb risky behavior at financial institutions.
The provision has drawn substantial advocacy and lobbying on both sides of the aisle. Pro-reform advocates worried it would be too weak to guard against reckless behavior and taxpayer bailouts of Wall Street firms; Wall Street feared it would put U.S. banks at a disadvantage with their foreign counterparts and stop financial firms from engaging in what they viewed as essential activities. The release of a 298-page draft proposal in 2011 garnered nearly 500 "substantive and unique" public-comment letters and roughly 18,000 in total, according to a Fed document.
The final version may bring a similar outpouring of commentary, although things appeared relatively calm Tuesday morning as lawyers and lobbyists began to sift through the 71-page rule and its nearly 900 pages of accompanying preamble.
The U.S. Chamber of Commerce's David Hirschmann, who heads the group's Center for Capital Markets Competitiveness and who has fought against the Volcker Rule, focused on the rule-writing process rather than its substance in his initial comments. Hirschmann said he was "disappointed" that the regulators didn't re-propose the rule for further comment before finalizing it.
"We will now have to carefully examine the final rule to consider the impact on liquidity and market-making, and take all options into account as we decide how best to proceed," he said in a statement. Hirschmann told National Journal that his colleagues would spend the next few days trying to get a clearer picture of what the rule would mean in practice for the chamber's members.
The financial-reform advocates at Better Markets, on the other hand, offered cautious optimism. "Today's finalization of the Volcker Rule ban on proprietary trading is a major defeat for Wall Street and a direct attack on the high risk 'quick-buck' culture of Wall Street that focuses on big short-term gains regardless of the risks to others," Better Markets President Dennis Kelleher said in a statement after the final rule was released.
Sens. Jeff Merkley, D-Ore., and Carl Levin, D-Mich., who pushed for the provision to be included in the financial-reform law, struck a similar tone. "Early indications suggest that persistence and common sense can prevail in the face of even the fiercest special-interest lobbying campaigns: Hedging looks tougher, market-making looks simpler, trader compensation remains appropriately structured, and CEOs are required to set the tone at the top," they said in a joint statement.
The main difficulty in writing the rule, regulators said, was differentiating between market making and hedging, which are allowed, and proprietary trading, which is not. This is hard, Fed Gov. Dan Tarullo said, because the same trade can be allowed in one context or circumstance, but forbidden in another. The final rule also contains a number of exemptions to the proprietary trading ban, such as trading in various government obligations. Regulators also said they would be open to tweaking the rule as time went on as they received feedback.
There's still much to be done to implement the rule and ensure banks are complying, in addition to the minefield of possible lawsuits and other challenges. But on Tuesday, Fed General Counsel Scott Alvarez turned to the Beatles to explain how the regulators who have been working on the rule since its inception are feeling: "We made it through truly an 'Octopus Garden' of issues and a thicket of comments in the 'Norwegian Wood,' and finally we can say, 'Here Comes the Sun.' "