U.S. Markets

U.S. considering 'material changes' to 'Volcker Rule': Fed's Quarles

WASHINGTON (Reuters) - The chief regulator for the U.S. Federal Reserve said Monday the nation’s regulators are actively considering a significant rewrite of the “Volcker Rule.”

Randal Quarles, Federal Reserve board member and Vice Chair for Supervision, takes part in a swearing-in ceremony for Chairman Jerome Powell at the Federal Reserve in Washington, U.S., Febuary 5, 2018. REUTERS/Aaron P. Bernstein

Fed Vice Chair for Supervision Randal Quarles told bankers gathered in Washington that regulators want to make “material changes” to streamline and simplify several aspects of the ban on certain bank trading, put in place after the 2007-2009 financial crisis.

His comments are the most explicit endorsement yet of regulators rewriting one of the central post-crisis rules, which bans banks from making profit-seeking trades on their own account. But its current form, completed in 2013, has been pilloried by bank executives as complex, opaque and unworkable, and Quarles agrees.

“I believe the regulation implementing the Volcker rule is an example of a complex regulation that is not working well,” said Quarles, according to prepared remarks. “I have heard nothing but support from all of my regulatory colleagues for the proposition that the regulation is overly complex and would benefit from streamlining.”

Quarles said all five regulators sharing responsibility for the rule are cooperating with the rewrite effort, and hopes to produce a new proposed rule “with dispatch.”

Quarles’s comments before the Institute of International Bankers come after Reuters reported regulators were considering several changes Wall Street had sought for years to the rule.

Specifically, Quarles said regulators are working to simplify key terms that define the rule’s boundaries, including “proprietary trading” and “covered fund.” Banks say the current definitions are muddy and accidentally envelop activity never intended to be captured by the rule.

He also said regulators are attempting to clarify the test that determines if a bank is permitted to trade to ensure liquid markets or not – that is, whether the trading is needed to meet “reasonably expected near-term demands” of markets.

“We want banks to be able to engage in market making and provide liquidity to financial markets with less fasting and prayer about their compliance with the Volcker rule,” said Quarles.

He also hinted that the five regulators, who enforce the rule jointly, may work together to simplify supervision standards, saying currently banks sometimes cannot get a consistent answer from the group on tricky issues.

While regulators engage in the lengthy process of rewriting the rule, Quarles said foreign funds traded outside the U.S. but covered by the rule due to ties to banks with U.S. operations could expect relief. Regulators exempted those funds for one year in July, and Quarles said he expects that would continue while regulators consider changes.

Reporting by Pete Schroeder; Editing by Chizu Nomiyama