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Sunday, September 11, 2011

Given its complexity, Volcker Rule remains months away

A WSJ article on the Volcker Rule discussed how complex implementation of a rule that prohibits banks from trading for their own accounts is.

Regular readers know that one of the advantages of requiring financial institutions to disclose their current asset and liability-level data is that it is simple and not subject to a lot of interpretation.  Financial institutions report exactly what their computer systems track.
U.S. financial regulators are likely to miss an October deadline for the Volcker rule, a hotly contested part of last year's financial-overhaul law that limits financial firms from trading with their own money. 
According to the Dodd-Frank law, regulators have until Oct. 18 to "adopt rules to carry out" the provision. But regulators haven't agreed yet on even a draft proposal of the rule, which is named for former Federal Reserve Chairman Paul Volcker, who first proposed the trading curbs.... 
The slip is a sign of the Volcker rule's complexity and controversy. 
Depending on how regulators write the regulations, reining in the ability of banks to engage in so-called proprietary trading for their own account could cost billions of dollars in annual revenue, according to analyst estimates. 
The Securities Industry and Financial Markets Association and consulting firm Oliver Wyman warned in a December study that the Volcker rule could lead to "higher funding and debt costs for U.S. companies" and increased inefficiencies in trading that would lead to "lower returns over time for investors."... 
Lawmakers from both political parties have said they would prefer that U.S. regulators write rules carefully rather than get them done fast simply for the sake of meeting deadlines.... 
"The rule must be written right. If a small delay will help that process, it is acceptable," said Julie Edwards, a spokeswoman for Sen. Jeff Merkley (D., Ore.), who was one of the provision's proponents in Congress. "The important thing is that we have a strong rule that provides stability and certainty to Main Street." 
Under the law, the Volcker rule is supposed to take effect no later than July 21, 2012, exactly two years after the passage of Dodd-Frank. Financial firms affected by the Volcker rule will have at least two years—and possibly several more—to bring their trading activities into compliance. 
Wall Street firms are hoping for a flexible standard that allows regulators to judge firms' risk-taking on a case-by-case basis. Under this approach, firms could make arguments about why a particular trading position is a legitimate hedge designed to reduce the risk of suffering losses. 
Still, other firms are gearing up for a proposal that gives more prescriptive guidelines about the type of trades that would run afoul of the Volcker rule. Some industry executives expect the draft rule to err on the stricter side, but they believe regulators will use industry comments to justify softening the rule before making it final.

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