Volcker rule ushers in era of increased U.S. oversight of trades

Wall Street faces intrusive new government oversight of trading after U.S. regulators issued what they billed as a stricter Volcker rule today, imposing restrictions designed to prevent blowups while leaving many of the details to be worked out later.

The Federal Reserve, the Federal Deposit Insurance Corp. and three other agencies are set to sign off today on the proprietary trading ban, which has been contested by JPMorgan Chase & Co., Goldman Sachs Group Inc. and their industry allies for more than three years. Agencies were proceeding with plans to release the rule in Washington even as a snowstorm forced the federal government to close.

Wall Street’s lobbying paid off in part. Regulators granted a broader exemption for banks’ market-making desks, on the condition that traders aren’t paid in a way that rewards proprietary trading, according to the final rule released today. The regulation also exempts some securities tied to foreign sovereign debt. At the same time, regulators gave banks less leeway for bets considered hedges for other risks.

“This provision of the Dodd-Frank Act has the important objective of limiting excessive risk-taking by depository institutions and their affiliates,” Fed Chairman Ben Bernanke said today in a statement. “The ultimate effectiveness of the rule will depend importantly on supervisors, who will need to find the appropriate balance while providing feedback to the board on how the rule works in practice.”

The Fed gave banks a delay until July 21, 2015 to comply with rule. Beginning June 30, 2014, banks with $50 billion in consolidated assets and liabilities must report quantitative information about their trading.

Volcker’s Idea

The rule is named for Paul Volcker, the former Fed chairman credited with taming rampant inflation in the 1970s and who served as a top adviser to President Barack Obama. Volcker, 86, proposed the ban as a means of restoring stability to Wall Street following the 2008 financial crisis, arguing that banks that benefit from federal deposit insurance and discount borrowing shouldn’t be permitted to take risks that could trigger a taxpayer-funded government bailout.

The rule, enshrined by the Dodd-Frank Act of 2010, allows exemptions for market-making and some hedging, and defines limits for banks’ investments in private equity and hedge funds. The version issued today is 71 pages long, with an additional 850-page preamble.

“Nobody went to jail after the Wall Street meltdown,” said Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia Ltd. in Hong Kong. “And maybe, the particular way they’re wording this ensures that nobody is ever going to go to jail. You’re getting diplomatic immunity and you don’t even have to be a foreign diplomat. Fantastic.”

The biggest U.S. banks slid in pre-market trading. JPMorgan Chase & Co. declined 0.4% to $56.28 at 8:56 a.m. in New York, and Bank of America Corp. shares fell 0.3% to $15.53. Goldman Sachs Group Inc. slid 0.7% to $166.45 and Morgan Stanley fell 0.2% to $30.32.

Fine Print

With Wall Street banks having already shut proprietary trading desks in anticipation of the rule, its impact rests largely in the fine print -- how regulators address other banking activities, primarily market-making and hedging.

The rule by the Fed, FDIC, Securities and Exchange Commission, Commodity Futures Trading Commission and Office of the Comptroller of the Currency sets parameters for how banks may buy and sell financial products for clients and manage their own risks in the process.

Wall Street’s five largest firms had as much as $44 billion in revenue at stake on the outcome of just one part of the debate -- how market-making is defined and exempted -- according to data for the year ended Sept. 30. JPMorgan, the biggest U.S. lender by assets, had as much as $11.4 billion riding on the answer.

Here are summaries of five of the rule’s major provisions:

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