The Federal Reserve Board (Fed) proposed Wednesday a rule to simplify and tailor compliance requirements relating to the “Volcker rule.”
The Volcker rule, named after former Fed Chair Paul Volcker, was established by the Dodd-Frank Act to prohibit banks from engaging in proprietary trading and from owning or controlling hedge funds or private equity funds.
However, since the rule went into effect in 2013, there have been compliance issues related to the complexity of the rule, according to the Fed. The proposed changes eliminate or modify requirements the Fed has deemed not necessary to implement the statute effectively.
“The agencies responsible for implementing the rule see many opportunities to simplify it and improve it in ways that will allow firms to conduct appropriate activities without undue burden and without sacrificing safety and soundness,” Fed Chairman Jerome Powell said. “The proposal will address some of the uncertainty and complexity that now make it difficult for firms to know how best to comply, and for supervisors to know that they are in compliance.”
The proposed changes were developed and approved by the five agencies that oversee it — the Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission.
Specifically, the proposed changes would tailor the rule’s compliance requirements based on the size of a firm’s trading assets and liabilities. The most stringent requirements would be applied to firms with the most trading activity. It would also revise the definition of “trading account” in the rule to make it clearer.
Further, the changes would clarify that firms that trade within internal risk limits are engaged in permissible underwriting activity; streamline the criteria that apply when banks seek to rely on the hedging exemption from the proprietary trading prohibition; limit the impact on the foreign activity of foreign banks; and simplify the trading activity information that banks are required to provide to the agencies.
“The specific elements of this proposal are drawn from experience–the shared experience of all five responsible agencies and of policymakers at those agencies with wide and varied backgrounds during the four years that the Volcker rule regulations have been in force,” Randal Quarles, the Fed’s vice chairman for supervision, said. “By focusing the application of the rule on those firms with the highest levels of activity covered by the statue, and by clarifying and simplifying the compliance regime, we can promote safety and soundness while reducing unnecessary burdens.”
The recently enacted Economic Growth, Regulatory Reform, and Consumer Protection Act also made several changes to the Volcker rule. The significant difference is that it exempted banks with less than $10 billion in total consolidated assets from the Volcker rule restrictions.
The American Bankers Association (ABA) supports the proposed changes.
“From the moment the Volcker Rule was first unveiled, regulators and banks have struggled with its lack of clarity. With the passage of legislation last week and today’s proposed rulemaking, policymakers are now taking sensible steps to better tailor regulations consistent with risk,” ABA President and CEO Rob Nichols said. “We are encouraged that today’s proposed rulemaking begins to address some of the complexity and uncertainty that has created needless compliance burdens and will allow banks to better serve their customers.”