Financial regulators approve roadmap for implementing Volcker Rule

By Cullen Dirner

Jan 18, 2011 5:02pm

From ABCNews’ Arlette Saenz:

Top financial regulators approved recommendations on how to implement the Volcker Rule, which intends to keep government backed banks from engaging in speculative and risky activities by prohibiting banking entities from conducting proprietary trading and limiting investments in hedge funds and private equity.

In its third public meeting, the Financial Stability Oversight Council approved an 81 page study outlining several measures for implementing the rule, from performing quantitative analysis to detect proprietary trading to establishing a compliance regime which would require CEOs to vouch for the regime’s effectiveness.

The study was required by the Dodd-Frank Wall Street reform law enacted last summer as a means of determining how to turn the rule into legislation.

The key measures detailed in the study consist of the use of quantitative methods to identify trends in trade activity that may be consistent with proprietary trading; the employment of a “basket of metrics” to identify prohibited activity, among which would require the categorization of trade as either customer initiated or trader initiated; the monitoring of an internal compliance regime by supervisors and CEOs; and the prohibition of banks from investing in hedge funds or private equity funds and requiring banks to disclose any exposure to these funds.

The council acknowledged that some banks have already started to limit proprietary trading in anticipation of the Volcker provision.

Fed Chair Ben Bernanke called the recommendations a “starting point” and acknowledged that developing the rules and official guidance will require “a lot more work.”  He cited the development of quantitative measures as a key challenge in enacting the Volcker Rule.

The release of the study acts as a road map for implementing the Volcker Rule.  Regulators will consider the council’s recommendation and will have nine months to develop the final rules for implementation.
The council also approved a study that presented recommendations to establish concentration limits that would keep financial institutions from controlling more than 10% of liabilities and endorsed a study that revealed criteria for determining when non-bank companies would undergo stricter regulation due to the systemic risk they pose to the economy.

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