* Volcker rule bans proprietary trading by banks
* Regulators to release report on rule later this month
By Dave Clarke
WASHINGTON, Jan 7 (Reuters) - U.S. regulators are considering using a three-part approach to determine if banks are complying with a ban on proprietary trading included in the new financial reform law, according to a Financial Times report.
This ban is known as the Volcker Rule, named after former Federal Reserve Chairman Paul Volcker, and it is one of the more contentious parts of the new law.
The rule would prohibit banks from trading for their own profit in securities, derivatives and certain other financial instruments, and ban their investing in or sponsoring hedge funds or private equity funds.
Under the three-tiered approach being considered for enforcing the rule, bank compliance departments would first use "tripwires" to determine if proprietary trades are being made by looking at such things as how long a trader holds a position, the size of the trade and its riskiness, the Financial Times reported late on Thursday.
If a problem is detected, the second step would be for bank compliance and risk management departments to interview the trader.
The third step, according to the report, would be for inspectors from the regulators who are on-site at banks to have access to the "tripwire" information so they can monitor compliance.
The Financial Stability Oversight Council is expected to issue a report later this month on how regulators believe the rule should be implemented. Nine months after the study is released regulators are required to issues regulations implementing the rule. The rules go into affect a year after the rules are issued or two years from the date the law was enacted, whichever comes first.
Bank of America (BAC.N), Morgan Stanley (MS.N) and Goldman Sachs (GS.N) have backed out of or scaled back their proprietary trading and private equity businesses in anticipation of the Volcker rule roll-out. (Reporting by Dave Clarke, Editing by Dave Zimmerman)