Despite Dissent, CFTC Moves Forward With Volcker Rule

Yesterday the Commodity Futures Trading Commission (CFTC) unveiled the latest iteration of regulations required under Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the “Volcker Rule.” Named for former Federal Reserve Chairman Paul Volcker, the rule restricts banking entities from engaging in short-term proprietary trading for their own accounts and from sponsorship of hedge or private equity funds.

Under the proposed rule, banks would be required to establish internal compliance programs designed to monitor compliance with Section 619 and the accompanying regulations. Firms will also be required to report “certain quantitative measurements” to regulators to assist them in distinguishing prohibited proprietary trading from permitted activities.

The rule is almost identical to the Joint Volcker Rule proposed by the Federal Reserve, the Office of the Comptroller of the Currency, Treasury, the Federal Deposit Insurance Corporation, and the Securities and Exchange Commission in October 2011. Those rules have come under fire even by Volcker himself, in recent months for their length and complexity. "It's much more complicated than I would like to see," Volcker said in November. 


The CFTC voted for the proposed rules 3-2. The two dissenting Commissioners, Jill Sommers and Scott O’Malia, had harsh words for the Commission, calling the proposed rules “unworkable.” 
"Unfortunately, we are proposing rules that are virtually identical to the other agencies' proposed rules well after they have been widely criticized and after many have called for those agencies to start over, including Paul Volcker," Sommers said. "It seems as if we have put ourselves on a separate track, which I fear will needlessly complicate an already convoluted and likely unworkable set of rules," she added.

O’Malia echoed her concerns saying, "I do not support the commission's version of the Volcker rule. It is an unworkable solution that is entirely too complex and provides the commission with little or no means to enforce or to deter violations of this rule. Obviously we have to comply with the statute and do so in a responsible way, [but] my concern with this fatally flawed rule [is that] this rule does not do that."

One of the more controversial proposals included in Dodd-Frank, the Volcker Rule was first proposed in January 2010, when the financial regulatory overhaul was in its infancy. Sens. Jeff Merkley (D-OR) and Carl Levin (D-MI) introduced the original Volcker Rule as an amendment to the Senate version of Dodd-Frank, but Sen. Richard Shelby (R-AL), blocked the amendment from ever coming to a vote.

Although the language eventually made its way into the bill, Sen. Scott Brown (R-MA) used his position as the swing vote to insist that the proprietary trading ban be changed to allow banks to invest in hedge and private equity funds. The final, watered-down rule allows banks to invest up to three percent of their Tier 1 capital in private equity and hedge funds but bars banks from owning more than a three percent stake in any private equity group or hedge funds. Since then, there have been several legislative attempts to scale back or delay the rules, but none has been successful. 

The proposed rules are open for public comment for the next 60 days. While the rules have yet to be finalized, many large banks are actively divesting their proprietary trading desks to prepare for the July 21, 2012 implementation date. 

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