Risk & Compliance

The Fed Proposes Significant Volcker Rewrite

Proposed changes would ease the rule's strict limits on proprietary trading by banks.
William SprouseMay 31, 2018
The Fed Proposes Significant Volcker Rewrite

The Federal Reserve is proposing a rewrite of the Volcker Rule, one of the central pieces of the Dodd-Frank financial reform legislation implemented after the financial crisis. The rule banned most proprietary trading by banks.

The Fed’s changes would relax rules that only permit trades related to market-making and underwriting, by making it easier for banks to show that trades met near-term demand from clients.

The proposal also calls for repealing a standard that assumes that when a bank is short-term trading, it is profit-seeking unless it can prove otherwise. The standard would be replaced with an accounting test.

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Additionally, the Fed would create a tiered framework putting the strictest oversight on the institutions that do the most active trading while giving more latitude to smaller, less-complex banks. Banks with less than $1 billion in trading assets would be presumed compliant.

Eighteen banks with more than $10 billion in trading assets face the most rigorous rules. Those banks account for 95% of all trading activity.

“I view this proposal as an important milestone in comprehensive Volcker Rule reform, but not the completion of our work,” said Randal Quarles, the Fed’s vice chair for supervision, in a statement. He added that the objective was to simplify and tailor the rule but noted that further reforms are possible.

Former Fed chairman Paul Volcker, for whom the rule is named, said in a statement Wednesday that he welcomed proposals to simplify it.

“What is critical is that simplification not undermine the core principle at stake — that taxpayer-supported banking groups, of any size, not participate in proprietary trading at odds with the basic public and customers’ interests,” Volcker said.

Democratic Senator Elizabeth Warren of Massachusetts said, “Even as banks make record profits, their former banker buddies turned regulators are doing them favors by rolling back a rule that protects taxpayers from another bailout.”

The three-member Federal Reserve Board approved the proposal unanimously.