October 12, 2011 / 3:31 PM / in 6 years

SEC proposes Volcker rule, swap dealer plan

WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission agreed on Wednesday to seek comments on a major plan that would restrict banks from trading for their own profits or investing in hedge funds.

The SEC’s proposal, approved in a 4-0 vote, would implement the so-called Volcker Rule, a provision in the 2010 Dodd-Frank Wall Street overhaul law that was championed by former Federal Reserve Chairman Paul Volcker. The provision aims to curb the excessive risk-taking seen during the 2007-2009 financial crisis.

The SEC also proposed a second major rule in a 3-1 vote, which would require dealers and major traders of security-based swaps to register with regulators. The registration rule is a key Dodd-Frank provision designed to establish the first uniform regulatory regime for swap dealers.

Under that plan, dealers would need to fill out forms similar to those that stock brokers submit to the SEC today. A dealer would also need to have a knowledgeable, senior officer on hand who can attest to the firm’s financial, operational and compliance capabilities.

Troy Paredes, a Republican commissioner at the SEC, dissented on the plan, saying it was “too flawed and problematic.” Most notably, he feared the certification requirements for the senior officer are too vague and create uncertainty.


Few if any surprises came out of the SEC’s Volcker Rule proposal, which federal banking regulators first unveiled on Tuesday.

The SEC is proposing the Volcker Rule jointly with the banking regulators. It is still unclear if the Commodity Futures Trading Commission will follow suit.

Even before regulators unveiled the long-awaited Volcker Rule this week, lobbyists and Capitol Hill staffers got an early peek at it last week after a similar draft was leaked to the press.

That draft has received a mixed reaction. Some banks say it is unworkable, while consumer groups have decried it as too weak.

The plan by the SEC and banking regulators will ask the industry to weigh in on hundreds of questions, including how the government should write exemptions that allow banks to still make markets for their customers and hedge risk in their portfolios.

The sheer amount of questions being asked has prompted some banks to say they feel the Volcker plan is a bit murky.

The roughly 400 questions for the public is “one reason why the Volcker rule seems to be producing more uncertainty than answers for dealers,” Citigroup analysts wrote in a note on Wednesday that examined the Volcker rule.

Regulators have acknowledged it will be hard to police a proprietary trading ban.

“Crafting a rule to achieve the objectives set by Congress presents a considerable challenge,” said SEC Commissioner Luis Aguilar in prepared remarks.

“Giving life to this provision is not easily done and, as reflected in numerous press reports, there are different, and strongly held, views about the approach that should be taken.”

Paredes said he has “significant reservations” about the Volcker plan, saying it could drive up compliance costs, hurt competition for U.S. banks and adversely impact market liquidity and capital formation.

Reporting by Sarah N. Lynch; additional reporting by Dave Clarke in Washington and Lauren LaCapra in New York; Editing by Lisa Von Ahn, Dave Zimmerman

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