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. 

Keep the Volcker Rule Brief, Let the Regulators Referee

Regulations to implement the Volcker Rule have hit the street. Now a new phase of the battle to reign-in proprietary trading by banks is at hand. If past is prologue, a tough and divisive battle looms. Meanwhile, the industry, regulators and customers will be dealing with the uncertainty that has bedeviled all concerned since Dodd-Frank was enacted.

How did we get here? How did a ten-page provision in legislative language end up being a 298 page proposed rule? When the industry, its lobbyists, its supporters on Capitol Hill and regulators all do what they do best, a complicated, lengthy and unwieldy set of rules is the result.
From the beginning, the banking industry has been openly opposed to the Volcker Rule. The effort to sidetrack it was unsuccessful, but the legislation did provide for exceptions to the rule to be developed by regulators.

That created the opening, and ever since enactment of the bill, industry representatives have been working to ensure the proposed regulations define, as generously as possible, the types of exceptions under which banks may trade through their own accounts. Regulators made an attempt to deal with all these issues. The resulting rules regarding market making trades, trades with and for international customers and others will allow limited proprietary trading to take place.

Now the rule is under attack by some for being too weak and others for being too cumbersome and unwieldy. Congressional hearings and proposals to repeal the Volcker Rule can be expected. A classic Washington stand-off is unfolding.

All of this will extend the uncertainty hanging over this process. The industry and its supporters may well harbor hopes that a Republican victory in the 2012 election would result in both Houses of Congress and the White House being in the hands of those supporting Volcker Rule repeal. So it may well be deep into 2013 before anyone can confidently assert the Volcker Rule process is complete.

Isn’t there a better way to write and enforce rules like this? Since we’re in the midst of football season, it occurs to this writer that we need look no farther than the regulation of play in the National Football league to know that the answer is "yes!"

As the Volcker Rule is one of many, many rules regulating the playing field in the banking industry, let's isolate one of the many rules governing play in professional American football and see if it offers us any guidance. Here is how the Digest of NFL Rules (as cited on describes the rule against roughing the passer:

"No defensive player may run into a passer of a legal forward pass after the ball has left his hand (15 yards). The Referee must determine whether opponent had a reasonable chance to stop his momentum during an attempt to block the pass or tackle the passer while he still had the ball."

There, in fifty-one words, some very complicated concepts are laid out. One can only imagine if a rule like that were published today and subjected to the process we now see unfolding in the Volcker Rule debate. The representatives of defenders would hire lobbyists to explore the potential that terms such as "momentum," "reasonable chance" and "run into" provided an opening for exceptions to be granted. The resulting interpretation of the rule would most likely resemble something a lot like what we see proposed in Federal Register now on proprietary trading.

But that's not what happened in the NFL. What happened is a very simple rule was promulgated and well trained referees have been deployed to enforce it. They watch the game closely with a knowledge of previous interpretations of the rule, the history of the players and the exigencies of the current situation. Making a determination of whether a defender had a "reasonable chance" to avoid contact requires him to consider all of these factors and make a decision that allows the game to be played for the benefit of the customer (i.e. fans) while protecting the health of the players and the integrity of the game.

Is it too late to roll-back the proposed rule, revert to a much simpler restatement of the Volcker legislative language and then actually put in place a sufficient number of savvy regulators to watch over the proprietary trading practices of the industry? Maybe, but it wouldn’t be a bad way to cut through all the uncertainty surrounding this issue and just get down to business.

Peter A. Peyser is a managing principal at Blank Rome Government Relations LLC.

Reprinted with permission from the October 24, 2011 web edition of American Banker © 2011 American Banker and SourceMedia, Inc. All Rights Reserved. For more information, visit


House Republicans Gear Up for Volcker Rule Fight

After the Federal Deposit Insurance Corporation released its proposed “Volcker Rule,” Republicans on the House Financial Services Committee were quick to announce hearings on the proposed regulations.

It’s a Dodd-Frank paradigm that we have come to know all too well: regulators continue to make slow progress to implement the many rulemakings required under the financial reform law, and with each new regulation, Republicans haven’t been far behind, working to repeal, scale back or defund every move the regulators have made. The hotly-contested Volcker Rule has proven to be no exception.

A House Financial Services Committee spokesman said the hearing will look at the economic impact and competitiveness of the proposed rule. The hearing will likely take place in early November.

The draft rule, which was formally released by the FDIC on October 11th and was approved by the Securities and Exchange Commission this morning, is 205 pages and seeks to ban banks or institutions that own banks from engaging in proprietary trading that isn’t at the behest of their clients and from owning or investing in hedge funds or private equity funds. The rule would also limit the liabilities the largest banks could hold and preclude those banks from gaining from or hedging against short-term price movements in the securities and derivatives markets. The proposal includes exceptions for market making for customers and for hedging against risky trades made on customers’ behalf.

Proponents say that the rule will eliminate the need for future bailouts, though some are already making the case that the rule doesn’t go far enough, and it defined proprietary trading too narrowly. Major financial firms, including Goldman Sachs, JPMorgan Chase and Bank of America have already closed their proprietary trading desks in anticipation of the rule, though firms continue to argue that the rule is unnecessary, difficult to implement, and will harm their ability to compete in the global market. The GAO released a report this past summer on the Volcker Rule, noting the difficulty in detecting proprietary trading and calling it “cumbersome” and “difficult to enforce.”
The rule will be open for comment until January 2012 and would take effect on July 21, 2012 – the second anniversary of Dodd-Frank; though some say certain banks would have until 2017 to fully comply.

The Volcker Rule is a proposal by former Federal Reserve Chairman Paul Volcker to restrict U.S. banks from making certain kinds of speculative investments that do not benefit their customers. Volcker argued that this kind of proprietary trading, where deposits are used to trade on the bank’s personal accounts, played a key role in the 2008 financial crisis.

The Commodity Futures Trading Commission has said that it may put forth its own version of the Volcker rule. Scott O’Malia, a Republican commissioner at the CFTC, said he spoke to CFTC Chairman Gary Gensler on Friday and quoted the chairman as saying, "We might, if it's the will of the commission, put forward ... a virtually identical proposal with the other regulators, or we could go it alone." O’Malia continued, "He's not committing either way."

Rep. Barney Frank (D-MA), for whom Dodd-Frank is named, as well as Sens. Jeff Merkley (D-OR) and Carl Levin (D-MI), who first introduced the Volcker rule during the Dodd-Frank debate last summer, have yet to publicly comment on the proposed rule.

Full Speed Ahead

After gaveling in day six of financial reform conference negotiations, House Financial Services Committee Chairman Barney Frank (D-MA) reaffirmed this afternoon his goal of completing conference negotiations by June 24, stating that conferees will “stay [on Thursday] until we’re finished.”

Despite a handful of controversial issues that await consideration this week—including the scope of the so-called “Volcker Rule,” heightened banking capital standards and more stringent regulations for financial derivatives—both Frank and Senate Banking Committee Chairman Christopher Dodd (D-CT) appear increasingly determined to wrap up conference negotiations before President Obama travels to Toronto for this weekend’s G-20 Summit. According to Frank, any potential delays would undercut the president’s leverage at the G-20 and cause further uncertainty for global financial markets. If Frank and Dodd meet their timeline it will likely set up House and Senate floor consideration of a conference report next week.

Consumer advocates secured a significant victory on Tuesday, as conferees came to a general agreement regarding the size and scope of a newly-created Consumer Financial Protection Bureau (CFPB), which will be housed in the Federal Reserve and will be funded independently. An agreement also appears imminent regarding an exemption from CFPB regulation for auto dealers. Although House conferees are seeking a blanket exemption, Chairman Dodd has offered to allow the CFPB to issue rules that apply to auto dealers under the Truth in Lending Act, while the Federal Reserve would have discretion as to whether or not it enforces such rules.

Today, conferees are examining prudential banking regulation under Title 6 of the bill—which includes the Volcker Rule. Conferees are expected to consider an amendment offered by Senators Carl Levin (D-MI) and Jeff Merkley (D-OR) that would explicitly prohibit banks and bank holding companies from engaging in proprietary trading activities, as opposed to the current Senate language that provides latitude to regulators over the Volcker Rule’s implementation. In addition, Senator Scott Brown (R-MA)—who was one of only four Republicans to vote for the financial reform bill in the Senate—is lobbying conferees to include an exemption from the Volcker Rule for non-bank mutual funds and insurance companies.