By John M. Pachkowski, J.D.
At its just–concluded board meeting, the Federal Deposit Insurance Corporation has unanimously approved regulations implementing section 619 of the Dodd-Frank Act. The Federal Reserve Board was meeting at the same time as the FDIC and also approved the final rule (Text of Common Rule and Preamble).
The purpose of the statutory Volcker Rule, codified at 12 U.S.C. §1851, and the final rule is to limit the type and amount of speculative risk that can be undertaken by entities that are supported by the public safety net. In order to achieve that goal, the provision places prohibitions and restrictions on the ability of bank holding companies, insured banks and their subsidiaries and affiliates to engage in proprietary trading or investing in or having relationships with hedge funds and private equity funds.
The final rule becomes effective on April 1, 2014. The Fed also approved an extension of the conformance period until July 21, 2015.
In a presentation prior to the vote, FDIC staff noted that it reviewed over 18,000 comment letters and “reasonably responded” to issues raised in those letters. The staff also noted that the final rule results in a “better balance” and preserves legitimate market making and hedging activities. To reduce regulatory burden, the staff stated that community banks will be exempt from the regulation’s requirements if those banks are not engaged in the covered activities.
A banking entity would not be allowed to engage in so-called micro hedging, but will be allowed to continue to engage in proprietary trading in certain government obligations.
In remarks during the meeting, FDIC Chairman Martin J. Gruenberg noted, the “heart” of the final rule is the compliance framework and that compliance and recordkeeping requirements in the final rule vary based on size and the degree of involvement in the covered activities.
Vice Chairman Thomas M. Hoenig noted that the final rule will “mitigate the moral hazard and misaligned incentives.”
Comptroller of the Currency, Thomas J. Curry, noted that the Office of the Comptroller of the Currency “will be especially vigilant in developing a robust regulation and enforcement program that ensures the largest institutions remain compliant with the Volcker Rule.” He added the he would be “signing this rule later on behalf of the [OCC].”
RegulatoryActivity: BankingOperations DoddFrankAct FinancialStability SecuritiesDerivatives VolckerRule
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