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Fed unveils proposal to soften Volcker rule

Requests comment from interested parties

The Federal Reserve unveiled its plan Wednesday to soften regulations within the Volcker rule, which imposes limits on large banks in proprietary investment activities.

Back in 2013, as part of the Dodd-Frank Act, regulators including the Federal Reserve and the Federal Deposit Insurance Corpapproved of the final rule after years of deliberation.

Now, however, as the Trump administration continues to deregulate the finance industry, the Fed put forth its proposal to soften some parts of the Volcker rule.

The Federal Reserve explained it is seeking to reducing banks’ compliance costs while maintaining the rule’s effectiveness and consistency.

The new proposal would make several changes including tailoring the rule to the size of a bank’s trading activities. Banks with trading assets and liabilities of more than $10 billion would still be required to follow the rule’s most extensive requirement set.

However, banks with less than $10 billion and more than $1 billion in trading assets and liabilities would still be subject to regulation, but the compliance obligations would be lessened. Finally, banks with less than $1 billion in trading assets and liabilities would be subject to the lowest level of regulatory compliance.

Now, the Fed is asking for comment on the proposed rule to “simplify and tailor compliance requirements.” In its release, the Fed explained that by statute, the Volcker rule generally prohibits banking entities from engaging in proprietary trading and from owning or controlling hedge funds or private equity funds.

The Fed explained that since its finalization in 2013, the complexity of the rule created compliance uncertainty for firms subject to the rule. Its new proposed changes could streamline the rule by eliminating of modifying requirements that “are not necessary to effectively implement the statute.”

“The agencies responsible for implementing the rule see many opportunities to simplify it and improve it in ways that will allow firms to conduct appropriate activities without undue burden and without sacrificing safety and soundness,” Federal Reserve Chairman Jerome Powell said. “The proposal will address some of the uncertainty and complexity that now make it difficult for firms to know how best to comply, and for supervisors to know that they are in compliance.”

The new proposal would also provide more clarity by revising the definition of trading account by relying on commonly used accounting definitions. It would clarify that firms that trade within appropriately developed internal risk limits are engaged in permissible market making or underwriting activity.

It would also streamline the criteria for when a bank relies on hedging exemption from the proprietary trading prohibition, limit the rule’s impact on foreign activity and simplify the trading activity information banks are required to provide to the agencies.

“The specific elements of this proposal are drawn from experience: the shared experience of all five responsible agencies and of policymakers at those agencies with wide and varied backgrounds during the four years that the Volcker rule regulations have been in force,” said Randal Quarles, Federal Reserve Board vice chairman for supervision. “By focusing the application of the rule on those firms with the highest levels of activity covered by the statue, and by clarifying and simplifying the compliance regime, we can promote safety and soundness while reducing unnecessary burdens.”

The Federal Reserve announced comments will be accepted for 60 days after the proposal’s publication in the Federal Register.

“The Volcker Rule created a massive internal compliance and reporting structure that, as a practical matter, should have been limited in the first instance to the several dozen banks that engage in significant amounts of proprietary trading,” said Joseph Lynyak, partner at international law firm Dorsey & Whitney. “The proposal adopts trading volume and would assume compliance for the majority of banks on a go-forward basis, including the elimination of the duty by most banks to prove that a trade was Volcker compliant.”

“In light of the recent regulatory reform legislation that eliminated compliance with the Volcker Rule for bank with assets of less than $10 billion, and total trading assets and trading liabilities that are not more than 5% of total consolidated assets, the proposal is a useful first step to considering additional modifications to the Volcker Rule and the elimination of excessive and wasteful compliance," Lynyak said.

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