Federal regulators voted today to approve a new version of the Volcker Rule, a cornerstone of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) that strikes at how banks take risks with their own capital.
As expected, all five of the Federal regulatory agencies responsible for implementation and enforcement, the Federal Reserve, the Securities and Exchange Commission (SEC), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Commodity Futures Trading Commission (CFTC), approved a tougher version of the rule than many on Wall Street had hoped. In particular the rule bars banks from trading for their own gain, limits their ability to invest in hedge funds and requires banks to change their compensation policies so that they don't inadvertently reward the kind of proprietary activity the rule specifically aims to end.
The newly-approved version also requires banks to identify the exact risk that they're aiming to hedge when they make certain trades or investment that they allege are aimed at alleviating risks. This ties back directly to JP Morgan Chase's $6 billion trading loss from 2012, wherein the bank alleged that it had taken certain steps in order to broadly hedge their risks, when in reality the trades were speculative and ultimately ended in the aforementioned loss. The regulators don't want banks hiding behind risk-hedging in order to make risky profit-driven trades, hence this provision's inclusion in the final rule.
CEOs of covered institutions must also attest to regulators, on an annual basis, that the bank itself has taken steps to comply with the new Volcker Rule, which is a new provision designed to make it harder for banks to find loopholes around the rule. However, reports noted that this provision could've been even tougher if it required CEOs to attest that their institutions were actually in compliance with the rule, rather than merely certify that they were making an attempt to comply.
Find out more about the new Volcker Rule and what it means for you in this week's upcoming edition of NACM's eNews.
- Jacob Barron, CICP, NACM staff writer