Controversial Volcker Rule passed

US federal reserveBanks in the US will no longer be able to engage in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments, regulators ruled yesterday, thereby

imposing limits on how to deal with hedge funds or private equity funds.

Industry players are exploring the scope of the controversial Volcker Rule, which took longer than expected to pass because of the complexity of the regulation.

It is still unclear how exactly the rule will affect European players. There are concerns that foreign banks that want to trade from their home countries with subsidiaries of US companies would also be subject to the Volcker Rule.

Named after former US Federal Reserve chairman Paul Volcker, the Volcker Rule is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act that aims to prevent another bailout of banks by taxpayers.

In a joint statement, five federal agencies say insured depository institutions and companies affiliated with insured depositary institutions are no longer allowed to engage in short-term proprietary trading of certain instruments.

These stricter-than-expected rules also affect what type of relationships banking entities can have with hedge funds and private equity funds.

Federal Reserve chairman Ben Bernanke says in a statement that this provision of the Dodd-Frank Act “has the important objective of limiting excessive risk”.

There are, however, exemptions for activities such as market-making, underwriting, hedging, trading in government obligations, insurance company activities, and organising and offering hedge funds or private equity funds.

As a result of the Volcker Rule, compliance requirements are changing. Banks with significant trading operations are required to implement comprehensive compliance measures, including independent testing and analysis of these measures, while smaller, less complex institutions will have fewer compliance and reporting requirements.

The ruling was issued by the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission.

“Getting this vote has taken longer than we would have liked, but five agencies have had to work together to grapple with a large number of difficult issues and respond to extensive public comments,” Bernanke says.

ICI Global managing director Dan Waters says in a statement that it will take some time to understand the full scope and impact of the final Volcker Rule.

“In our initial reading, we are pleased that regulators have been attentive to our concerns about the rule’s potential impact on the ability of regulated non-US retail funds around the globe to serve investors,” Waters says.

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