It’s Official: The Volcker Rule Has Been Finalized

Paul Volcker testifies during a hearing before the Financial Institutions and Consumer Protection Subcommittee of Senate Banking, Housing and Urban Affairs Committee May 9, 2012 on Capitol Hill in Washington, DC.
National Journal
Catherine Hollander
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Catherine Hollander
Dec. 10, 2013, 9:04 a.m.

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.’ “

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