U.S. regulators are seeking comments on proposed regulations to implement the so-called Volcker Rule, which aims to restrict banks’ trading activities.
The U.S. Federal Reserve Board published a proposed regulation implementing the rule, named after former Fed chief Paul Volcker, which contains two basic prohibitions. It prohibits insured depository institutions, bank holding companies, and their subsidiaries from engaging in short-term proprietary trading of securities, derivatives, and certain other financial instruments, for its own account. It also prohibits owning, sponsoring, or having certain relationships with, a hedge fund or private equity fund.
The proposal, which was developed jointly with the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, clarifies the scope of the act’s prohibitions and provides certain exemptions to these prohibitions. It is anticipated these agencies will issue comparable proposals.
The proposed rule would require banks that engage in these activities to establish an internal compliance program that is designed to ensure compliance with the statute’s prohibitions. It also provides commentary intended to assist banks in distinguishing permitted market making-related activities from prohibited proprietary trading activities.
The proposal also requires banks with significant trading operations to report to federal supervisory agencies certain data designed to assist the regulators and banks in identifying prohibited proprietary trading, and it includes a number of elements intended to reduce the burden of the proposal on smaller, less-complex banks.