Wall Street watchdogs are poised to take a major step towardoverhauling Volcker Rule limits on banks’ ability to tradewith their own funds, according to four people familiar with theeffort, moving to ease post-crisis safeguards reviled by theindustry.

Regulators responsible for the Dodd-Frank Act rule couldcomplete work as soon as next week on revisions that includeloosening restrictions on banks investing their own money inprivate equity and hedge funds, according to the people, whorequested anonymity because the process isn’t public.

The group of five agencies led by the Federal Reserve hasfocused on a new definition of “proprietary trading”—whichis specifically banned by Dodd-Frank. They’ve chosen to implementthe changes without re-proposing the rule and seeking comment,according to three of the people, a step that could open theprocess to legal challenges.

The final definition would remove an “accounting prong” that wasfloated last year as a new way for determining which types oftrading would be permitted, the people said. Regulators agreed toscrap the concept from their Volcker 2.0 plan after it drew sharp criticismfrom bank lobbyists. They will instead lean on easier-to-digestmodels, one of the people said.

In creating the rule named for former Fed Chairman Paul Volcker,who championed the idea, Congress and the regulators bannedshort-term trades that couldn’t be shown to meet exemptions forthings such as hedging or market making. The rule has assumed thattrades are banned unless banks show they aren’t.

The new version is expected to up-end that by generally givingbanks the benefit of the doubt that they’re in compliance, thepeople said. Regulators have said they expect to have moreconfidence that banks are abiding by the rules because thestandards will be clearer, allowing firms to plan portfolios withmore certainty.

Approving a final rule without further delay would let WallStreet banks adapt trading practices to the new approach sooner.The agencies are, however, planning a phase-in period, according toone of the people, so the change won’t be instant.

One major topic that the 2018 proposal didn’t fully address wasrestrictions on banks’ stakes in private equity, hedge funds, andother investment funds. The pending revision is expected to proposesome easing of those limitations, one of the people said.

Less Burdensome Bank Regulations

The final changes must be approved by the Federal Reserve,Office of the Comptroller of the Currency (OCC), Federal DepositInsurance Corp. (FDIC), Securities and Exchange Commission (SEC),and Commodity Futures Trading Commission (CFTC). Top Fed officialshave said they’ve taken to heart banks’ complaints about thedifficulties in complying with the rule, and the heads of otheragencies have also supported taking a less “burdensome”approach.

While the revisions won’t narrow the rule’s scope and won’tcause a seismic shift in banks’ trading, by providing clarity aboutwhat banks can stockpile for customers, the changes may alleviateconcerns about potential violations. The most dramatic effect ofthe overhaul is likely to be a reduction of expensive complianceheadaches.

The Fed, FDIC, OCC, and CFTC declined to comment on Volcker Ruleprogress. The SEC didn’t respond to a request for comment.

Randal Quarles, the Fed’s vice chairman for supervision, saidlast month that the next step would include the changes to the“proprietary trading” definition and the addition of proposals onthe funds side of the rule. He didn’t get into specifics on whetherthe agencies would finalize the new trading definition. Accordingto federal regulatory practice, a re-proposal is typically requiredif dramatic changes are made to an earlier proposal.

“Regulators cannot simply rewrite the scope of the Volcker Ruleand the kinds of trades it covers without giving the public thechance to comment on the details of those changes,” said MarcusStanley, policy director of the consumer advocacy group Americansfor Financial Reform. “If they are going to throw out the approachthey proposed in 2018, they need to do a new proposal.”

Though the regulators moved in a relatively rapid fashion topropose the overhaul of Volcker last year, the industry greeted theeffort with jeers and lobbied against it. The process got boggeddown as multiple agencies worked to address those concerns, butthere are reasons to try to finish in the coming months. At thisstage in President Donald Trump’s administration, there’s somepossibility that rules which aren’t completed by the first fewmonths of 2020 could face congressional removal if Democrats winthe White House and Senate in next year’s elections.

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