Wall Street faces intrusive new government oversight of trading after U.S. regulators issued what they billed as a stricter Volcker rule today, imposing restrictions designed to prevent blowups while leaving many of the details to be worked out later.
The Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), and three other agencies are set to sign off today on the proprietary trading ban, which has been contested by JPMorgan Chase & Co., Goldman Sachs Group Inc., and their industry allies for more than three years. Agencies were proceeding with plans to release the rule in Washington even as a snowstorm forced the federal government to close.
Portfolio hedging. In the final rule, regulators require banks to demonstrate on an ongoing basis that their trades hedge specific risks in order to win an exemption from the Volcker rule.
The banks must analyze and independently test that their hedges “may reasonably be expected” to reduce the identified risk, the draft says. Banks will need to show that a hedge “demonstrably reduces or otherwise significantly mitigates one or more specific, identifiable risks,” the rule says.
In an effort to limit the provision’s impact, bank representatives told regulators too many types of investments were included in the 2011 proposal. The draft restrictions went beyond traditional private equity and hedge funds, they said.
Bankers argued that using such a broad definition would capture investment vehicles used when loans are bundled into securities, as well as commodity pools and funds based overseas. In a February 2012 letter to regulators, lobbying groups for the largest banks called the covered funds definition the “most far-reaching flaw” in the proposal.