September 19, 2019 / 6:13 PM / 3 months ago

Volcker rule dissenters have common theme: big banks now have too much latitude

NEW YORK(Thomson Reuters Regulatory Intelligence) - The few U.S. regulators who have voted in dissent against revising the Volcker rule are sending a common message that banks have taken over the driver’s seat in defining proprietary trading, an outcome that makes nearly impossible supervision and enforcement of the post-financial crisis rule aimed at limiting the risky activity.

Former U.S. Federal Reserve Board Chairman Paul A. Volcker speaks at a news conference in New York, June 8, 2015.

On Monday, a vote on the rule by the Commodity Futures Trading Commission (CFTC) passed by a 3 to 2 margin, with commissioners Rostin Behnam and Daniel Berkovitz dissenting. In their statements, both regulators took aim at the new definition of the “trading account” and its implication going forward.

With the Office of the Comptroller of Currency, the FDIC and the CFTC having formally approved the final rule{here}, the only two regulators left to cast their ballots are the Federal Reserve and the Securities and Exchange Commission. Once they have acted, the final rule will be published in the Federal Register.

“The most troubling aspect of today’s rule ... is something new,” said Behnam in a statement{here}. “The final rule includes changes to the definition of ‘trading account’ that will significantly reduce the scope of financial instruments subject to the Volcker Rule’s prohibition on proprietary trading.”

By narrowing the scope of financial instruments that fall within the universe of what is now subject to the rule’s prohibition on proprietary trading, Behnam said the changes “now limits the scope of the Volcker rule so significantly that it no longer will provide meaningful constraints on speculative proprietary trading by banks.”

Large banks have lobbied U.S. regulators over the 2013 version of the rule, arguing that it was too complex and burdensome, and extended its reach into markets well beyond where firms do most of their market making for clients. In addition, they bristled at 2018 proposed changes which introduced a so-called “accounting prong” that extended the scope of the rule even further.

But Behnam and his fellow commissioner Berkovitz argue that regulators have responded to those criticisms by swinging the regulatory pendulum too far in the other direction{here}. Berkovitz, in his dissent, summarized what he believes the changes mean in practice.

“How much proprietary trading can occur under the market-making exemption in the revised Volcker Rule will be determined by the risk limits set for each trading desk,” said the commissioner. “The risk limits are to be established at the discretion of each banking entity and ... the scope of a trading desk also will be determined by the banking entity within broad criteria.”

“Because these determinations will be established by the banking entity and presumed to be compliant, it will be difficult for any regulator to challenge them or take any enforcement action – even if a banking entity experiences large losses from proprietary trading – so long as the trading is found to be within the set limits,” Berkovitz added.


The two CFTC commissioners are not alone in their concerns. At the Federal Deposit Insurance Corporation, one of the three primary banking regulators, Martin Grunberg, a director on the board, shared similar worries when dissenting in late August{here}. The FDIC approved the rule changes by a 3 to 1 margin.

Grunberg, a veteran regulator, underscored that under the 2013 version of the Volcker rule, a total of nearly $1.2 trillion of financial instruments were subject to a ban on proprietary trading at the bank level. Under the final rule now agreed by regulators $635 billion of financial instruments would fall under its scope – a cut of nearly half.

“The fact is that fair valued financial instruments, such as those recorded on the bank balance sheet as available for sale securities, equities, and derivatives not held for trading, were included within the scope of the Volcker Rule prohibition under both the 2013 current rule and the 2018 (revised proposal) because they are used for proprietary trading by banks and bank holding companies,” said Grunberg.

“By excluding these financial instruments from the Volcker Rule, the final rule before the Board today opens up vast new opportunity – hundreds of billions of dollars of financial instruments - at both the bank and bank holding company level, for speculative proprietary trading funded by the public safety net,” Grunberg added.

(Henry Engler, Regulatory Intelligence, New York)

*To read more by the Thomson Reuters Regulatory Intelligence team click here:

This article was produced by Thomson Reuters Regulatory Intelligence - - and initially posted on Sept. 18. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

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