Industry Impact: Regulators Revise Volcker Rule

The Federal financial regulatory agencies recently announced that they finalized revisions to simplify compliance requirements relating to the "Volcker rule."

Under the revised rule, firms that do not have significant trading activities will have simplified and streamlined compliance requirements, while firms with significant trading activity will have more stringent compliance requirements. Community banks generally are exempt from the Volcker rule by statute. The revisions continue to prohibit proprietary trading, while providing greater clarity and certainty for activities allowed under the law. With the changes, the agencies expect that the universe of trades that are considered prohibited proprietary trading will remain generally the same as under the agencies' 2013 rule.

“The Federal Reserve, FDIC, OCC, SEC and CFTC have all appropriately simplified the Volcker Rule to reduce compliance burdens and provide certainty for markets,” said Mike Crapo, Chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs in a statement. “I continue to encourage the agencies to consider further revisions to the ‘covered funds’ definition’s overly-broad application to venture capital, other long-term investments and loan creation, which are necessary to improve market liquidity and preserve access to diverse sources of capital for businesses.”

Earlier this year, some banks complained that the Volcker Rule’s provision which forced banks to prove that their short-term trades, were allowable under the law was burdensome and restricted legitimate trading, and is now scrapped.

The changes have been supported by the banking industry, MarketWatch reports, but the rule’s namesake, former Fed Chairman Paul Volcker, opposed the changes.

“The new rule amplifies risk in the financial system, increases moral hazard and erodes protections against conflicts of interest that were so glaringly on display during the last crisis,” Volcker wrote in a letter to Fed Chairman Jerome Powell in August.

The rules will be effective on January 1, 2020, with a compliance date of January 1, 2021.