By Emily Stephenson and Douwe Miedema
WASHINGTON Dec 10 U.S. banks will no longer be
able to make big trading bets with their own money after
regulators on Tuesday finalized the Volcker rule and shut down
what was a hugely profitable business for Wall Street before the
After struggling for more than two years to craft the
complex rule, five regulatory agencies signed off on the nearly
900-page reform that included new tough sections narrowing
carve-outs for legitimate trades.
The rule is expected to eat into revenues at large
investment banks such as Goldman Sachs and Morgan Stanley
, even if many have already wound down some of their
trading desks in anticipation of the rule's release, and may
spark legal challenges.
Reform advocates cheered the changes in a sign they were
tougher than the original proposal in November 2011, but much of
the impact will be down to how regulators police banks to make
sure they do not try to pass off speculative bets as permissible
"At some point someone is going to have to write up a manual
for examiners on what to look for and ... how to enforce that
stuff. That's going to be a really important document," said
Bradley Sabel, a lawyer at Shearman and Sterling in New York.
Better Markets, a pressure group critical of large banks,
reacted positively to the final rule, calling it a "major defeat
for Wall Street."
Bank of America CEO Brian Moynihan said at a
conference on Tuesday that it cost his bank up to $500 million
of revenue per quarter when it exited the trading activity
banned under the Volcker rule.
But he said the final text should not force the bank to make
any further significant adjustments. "I don't think it changes
anything dramatically," Moynihan said.
Championed by former Federal Reserve Chairman Paul Volcker,
the rule bans proprietary trading, or speculative trading by
banks for their own profit, and is a central part of the 2010
Dodd-Frank Wall Street reform act.
In the final rule, regulators strictly defined carve-outs
for trades executed to serve clients' interests or protect
against market risks.
Regulators are eager to prevent a repeat of trading debacles
such as JPMorgan's $6 billion trading loss in 2012,
dubbed the "London Whale" because of the huge positions the bank
took in credit markets.
Regulators have struggled for years to agree on a text that,
while prohibiting risky activities, would still allow banks to
take on risk on behalf of clients as market-makers, to hedge
risk, or when underwriting securities. Banks have argued these
functions are critical to markets.
In the final wording, banks could still engage in
market-making and take on positions to help clients trade but
their inventories should not exceed "the reasonably expected
near-term demands of customers," the regulators said.
The regulators also seek to put an end to portfolio hedging,
a practice in which banks entered all kinds of trades that were
supposed to hedge risk elsewhere in the business but that could
be used as veiled speculation.
Another addition will make bank managers attest that their
banks have appropriate programs in place to achieve compliance
with the rule, though they would not themselves have to confirm
their banks are in compliance.
Further, traders could no longer be paid big bonuses for
taking on undue risk and compensation should be "designed not to
reward ... prohibited proprietary trading."
Regulators also eased the rule in some areas, for instance
including a wider exemption for the trading of government bonds,
which will now be permitted for foreign sovereign fixed-income
instruments and not just for U.S. bonds, after complaints from
They also scaled back their definition of which hedge funds
and private equity funds fall under a rule limiting banks'
investment to a maximum of 3 percent of funds' total value and 3
percent of the banks' total core capital.
The industry complained the previous proposed definition of
so-called "covered funds" was too broad, and that it would
capture securitized loans, investment vehicles often used by
corporations like joint ventures, registered funds based
overseas and commodity pools.
The rule explicitly exempts many of those kinds of funds and
also more narrowly defines commodity pools so that only those
operating most like hedge funds are captured.
Regulators also extended the deadline by which banks have to
fully comply with the new regulations by one year to July 2015,
a widely expected move after they repeatedly missed deadlines
for the rule. Further delays were also possible, the regulators
said in the text of the rule.
Even before the five regulators adopted the rule on Tuesday,
lawyers were looking for weak spots, preparing for a potential
fight in court to try to knock out the legislation - possibly
helped by dissent within the agencies.
Scott O'Malia, a Republican member of the Commodity Futures
Trading Commission, said he had only three weeks to review the
lengthy document, which he said flouted proper rulemaking.
Dan Gallagher at the Securities and Exchange Commission
likened the rule to President Barack Obama's flawed launch of
the HealthCare.gov website, accusing regulators of pressing
ahead with "massive, untested governmental intrusion."
Such remarks, laid down in written dissenting statements,
can be a powerful tool during later lawsuits and lay out a
possible roadmap banks could use to challenge the rule.
Legal experts are generally expecting a court challenge, for
instance from Wall Street trade groups, though none of these
have so far announced any plans to do so.
Banks have already done away with many of the riskiest
trading operations common before the crisis.
Morgan Stanley in January 2011 said it would spin off its
proprietary trading unit Process Driven Trading, which had 60
employees around the world.
Goldman Sachs said it had shut down two proprietary trading
desks, one known as GSPS and another that did global macro
trading, by February 2011. And Citigroup has closed a
loss-making unit that had traded stocks.
These banks have such sprawling legal structures engaging in
different financial activities that the rule needs to be adopted
by a patchwork of U.S. agencies: three bank watchdogs and two
The Volcker rule applies only to banks that have access to
the Federal Reserve's discount window or other government
backstops. Financial firms that do not have access, such as
Jefferies, can continue to own hedge funds or engage in