On December 10, 2013, five federal agencies issued final rules developed jointly to implement section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Volcker Rule”). The final Volker Rules prohibit FDIC insured depository institutions and companies affiliated with insured depository institutions from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments, for their own account. The final rules also impose limits on banking entities’ investments in, and other relationships with, hedge funds or private equity funds. The multi-agency rules provide a multitude of exemptions for certain activities, including market making, underwriting, hedging, trading in government obligations, insurance company activities, and organizing and offering hedge funds or private equity funds. Reactions to these long awaited final rules were mixed, with some worried they are too complex and cumbersome, while others applauded the rules, and still others felt they did not go far enough.
According to the Wall Street Journal, President Obama, and Senators Merkeley and Levin, who proposed the provision in the provision in Dodd-Frank requiring the Volker Rule were very pleased with the final rules.
President Barack Obama: “Our financial system will be safer and the American people are more secure because we fought to include this protection in the law.
Former Fed Chairman Paul Volcker, who conceived of the rule in 2009, takes on the critics: “I don’t see anything here that is going to harm the basic investment processes in the economy. Before the crisis we had lots of trading, lots of liquidity. … What happened? We had a big balloon.”
Sens Jeff Merkley (D., Ore.) and Carl Levin (D., Mich.), who pushed for the Volcker rule as part of the Dodd-Frank financial-overhaul law: “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.”
But the Wall Street Journal also reports that not everyone in Washington was pleased:
Fed. Gov. Daniel Tarullo: “Many of us — myself included — had hoped for a final rule substantially more streamlined than the 2011 proposal. I think we need to acknowledge that it has been only modestly simplified.”
SEC Commissioner Daniel Gallager, who voted against the rule Tuesday: Regulators were under “intense pressure” to meet an “utterly artificial, wholly political” year-end deadline. “Not until five days ago did we have anything even resembling a voting draft, giving us less than a week to review the nearly one thousand pages of the adopting rule.”
Rep Jeb Hensarling (R., Texas), chairman of the House Financial Services Committee: “The Volcker rule will make it harder for businesses and consumers everywhere to get the credit they need.”
The New York Times editorial page is bullish on the regulations:
In a hopeful sign that regulators mean business, the final version of the rule is stronger than earlier drafts in crucial ways. In particular, it is better at distinguishing impermissible self-serving speculation from allowable trading designed to lessen bank risk and serve clients.
The Economist takes the position that "the final rule could have been more onerous than it was," and that the new rules leave more questions than answers.
The final rule could have been more onerous than it was. An earlier draft had proposed prohibiting banks from buying securities unless they knew that their clients wanted to buy them. In effect, this would have prevented “market-making”, whereby banks keep a supply of securities on hand, so that they can sell them to a customer on demand, or buy them from one even when they do not have another client lined up to pass them on to.
Where, precisely, the line will be drawn between market-making and proprietary trading, or between legitimate and specious hedging, is anyone’s guess.
Despite the Dissenting opinion of fellow SEC Commissioner Daniel Gallagher who voted against the regulations, SEC Chair Mary Jo White approves of the complex set of new Volker Rules, but feels that the work is not yet complete without vigorous enforcement.
Our work does not end with today’s rule. We begin a new phase of monitoring and responsive engagement to ensure that the Volcker rule is a strong, workable framework that achieves the objectives set for us.
Senator Elizabeth Warren, long an advocate of bringing back the depression-era Glass-Steagal Act felt that the new Volker Rules do not go far enough.
I think that Glass-Steagall 2.0, Glass-Steagall for the 21st Century, is something we still need. Because it addresses both 'too big' and the risks associated with 'to fail,' and so long as we've got this much risk in the system, and this much concentration in the system, I'm still pushing for Glass-Steagall. I still think it's what we need.
The new multi-agency rules are complex, and the SEC has issued a helpful Fact Sheet to clarify some of the broader points.