Five US federal agencies issued final rules developed jointly to implement section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Volcker Rule"). Banking organisations covered by section 619 will be required to conform their activities and investments fully by July 2015.
The final rules prohibit insured depository institutions and companies affiliated with insured depository institutions (“banking entities”) from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments, for their own account. The final rules also impose limits on banking entities’ investments in, and other relationships with, hedge funds or private equity funds.
“The final rule faithfully and strongly implements the statutory prohibitions on proprietary trading by US banks and their affiliates and the limitations on the ability of such entities to sponsor or invest in hedge funds or private equity funds – called “covered funds” in the rule", SEC Chair Mary Jo White said in her statement.
Like the Dodd-Frank Act, the final rules provide exemptions for certain activities, including market-making, underwriting, hedging, trading in government obligations, insurance company activities and organising and offering hedge funds or private equity funds. The final rules also clarify that certain activities are not prohibited, including acting as agent, broker, or custodian.
The compliance requirements under the final rules vary based on the size of the banking entity and the scope of activities conducted. Banking entities with significant trading operations will be required to establish a detailed compliance programme and their CEOs will be required to attest that the programme is reasonably designed to achieve compliance with the final rule. Independent testing and analysis of an institution’s compliance programme will also be required.
The final rules reduce the burden on smaller, less-complex institutions by limiting their compliance and reporting requirements. Additionally, a banking entity that does not engage in covered trading activities will not need to establish a compliance programme. “Today’s adoption is a step forward in reining in speculative risk-taking by banking entities and preventing future crises", Commissioner Luis A Aguilar said in his statement. “By reining in excessive proprietary trading by deposit-taking institutions, the goal of the Volcker Rule is to restore integrity to the financial system and maintain the vibrancy of the US financial market.”
Full press release
Final Rule
Final Rule - Preamble
Fact Sheet
Volcker Rule Memo
Commissioner Barnier, commented:
"I would like to congratulate the US regulators and Secretary Jack Lew for the decisive step taken today in implementing the Volcker law, i.e. structural reform of banks. This is the conclusion of a long process that has lasted several years in the United States. We had expressed concerns. We will look in detail at what has been announced today. Overall, I share the concerns expressed and which Volcker wants to address with regard to banks which are ‘too big to fail, too complex to resolve, too big to save’ - we also have such banks in Europe. I confirm that we will present in the coming weeks - at the beginning of January - a proposal on the structure of banks.
Full statement
EBF fears negative impact of Volcker Rule
The EBF takes note of the release of the final Volcker rule by US legislators and especially that some of the elements contained in earlier drafts of the rule leading to extraterritorial effects for non-US banks and capital markets appear to have been relaxed, by allowing for proprietary trading also in foreign government bond subject to certain limits. The EBF however needs to analyse further the final rule to assess the overall impact on non-US banks and non-US capital markets as well as European banks with presence in the US.
“The EBF supports the proposal from IMF that a global cost-benefit analysis needs to be done, taking into account extra-territorial implications to assess the added-value of structural reforms as an across-the-board measure”, said Guido Ravoet, EBF Chief Executive.
Press release
Association of German Banks fears negative consequences of Volcker Rule
Michael Kemmer, General Manager of the Association of German Banks, said: "We still need to analyse very carefully to what extent the redrafted conditions for the business of non-US banks outside the US will adversely affect the financial marketplaces globally." It would also have to be examined whether - despite the fact that proprietary trading in government bonds of further countries besides the US was also permitted now to a limited extent - other countries were still put at a disadvantage.
The adoption of the Volcker Rule meant, moreover, a setback for the G20 process aimed at establishing globally compatible financial market regulation. "Internationally uncoordinated initiatives such as the Volcker Rule, Germany’s Bank-Separation Law or the outstanding European Commission proposal for a European dual banking system lead to multiple and conflicting requirements for banks and financial markets", Mr Kemmer stressed. All the more reason for the Association of German Banks to endorse the words of warning from the IMF, which sees a globally coordinated approach as the only way to ensure the success of structural reform of the banking sector.
Press release
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