The Federal Reserve took the lead in unveiling Wednesday a much-anticipated revision of the Volcker Rule nearly five years after the prohibition on bank proprietary trading.
The 373- page proposal, jointly developed with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, is intended, said Fed Chairman Jerome Powell “to simplify and improve it in ways that will allow firms to conduct appropriate activities without undue burden, and without sacrificing safety and soundness.”
Senator Elizabeth Warren, the Democrat from Massachusets, is not convinced. “Even as banks make record profits, their former banker buddies turned regulators are doing them favors by rolling back a rule that protects taxpayers from another bailout. This kind of corruption is common in Trump’s Washington,” Warren said in a statement sent to reporters.
The Fed’s 3-member board approved the proposal unanimously. It’s now subject to a 60-day public comment period. The proposal also requires approval by the other agencies.
Read: Fed to propose changes to crisis-era rule that limited bank risky trading
After nearly five years of banks trying to comply with the rule, and regulators trying to enforce compliance, a memo to the Fed’s Board of Governors from the Fed’s vice chairman for supervision Randall Quarles said “supervision and implementation of the 2013 final rule can be substantially improved.”
For purposes of the Volcker Rule, proprietary trading generally means purchasing or selling financial instruments with the intent to profit from short-term price movements. Proprietary trading by banks will still be prohibited, but agency officials on a briefing call with reporters said that the proposal is intended to clarify for banks and regulators what is covered under this prohibition.
The proposal creates categories of banks based on the size of their trading assets and liabilities, and uses those categories to tailor compliance requirements. The first category includes banks with “significant trading assets and liabilities,” defined as those with consolidated gross trading assets and liabilities of at least $10 billion. These banks will be required to have a comprehensive Volcker Rule compliance program.
The second category with consolidated gross trading assets and liabilities of between $1 billion and $10 billion have “moderate trading assets and liabilities,” and will benefit from reduced compliance requirements that align with their relatively smaller and less complex trading activities.
Finally, banking entities that have “limited trading assets and liabilities,” that is, less than $1 billion of consolidated gross trading assets and liabilities will enjoy a “presumption of compliance” with the Volcker Rule that will be verified as required via the regulatory examination process.
This “presumption of compliance” will effectively cover less than 2% of all bank trading assets and all but 40 banks, according to the proposal. Agency officials told reporters that 18 banks in the “significant trading assets and liabilities” category account for 95% of all bank trading assets and liabilities.
The Fed said dealers and market makers would be exempt, as long the value of each trading desk’s portfolio was limited.
Underwriting and market-making on certain trading desks within certain internal risk limits is currently exempt from Volcker Rule prohibitions on proprietary trading. The Fed’s proposal allows for banks to establish, implement, maintain, and enforce their own internal risk limits for underwriting and market making trading desks. Banks with significant trading assets and liabilities would continue to be required to have a comprehensive internal compliance program but would eliminate these requirements for banks with moderate or limited trading assets and liabilities.
The proposal does change the definition of “covered fund,” a contentious topic that covers bank owned private equity and hedge funds but seeks comment on whether the definition should be further tailored and exclude certain additional types of funds.
The rule also would expand the exclusion for liquidity management to allow foreign exchange forwards, foreign exchange swaps, and physically-settled cross-currency swaps.
The proposal would also eliminate the enhanced documentation requirements for hedging activities under certain conditions. The agencies also want to reduce the impact of Volcker Rule rule on foreign banking organizations’ operations outside of the United States by “focusing on where the principal risk and actions of the purchase or sale take place,” according the proposal.
Foreign banks would be exempt if their home regulator subjects it to overlapping capital adequacy rules.
The rule currently allows foreign banks to engage in proprietary trading if it occurs solely outside of the United States. The exemption is proposed to be expanded for foreign banks even if the trade initiated outside of the U.S. goes through a U.S. branch or affiliate or is financed by one.
Major banks including Bank of America BAC, -1.06% , Citi C, -0.37% , Goldman Sachs GS, -1.46% and JPMorgan Chase JPM, -0.93% finished higher on a day where the broader market enjoyed strong gains.