July 2014 Compliance for Volcker Rule
Named for former United States Federal Reserve Chairman Paul Volcker, the Volcker Rule forms part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, designed to prevent banks in the US from making speculative investments that would not be in the best interests of their customers. The Dodd-Frank Act stipulated a 2014 compliance deadline, but some of the law’s fine print relating to the Volcker Rule appeared open to interpretation, prompting bank officials to request clarification from financial regulators. The clarification came yesterday in the form of an announcement that Wall Street need not comply immediately with the Volcker Rule banning banks from trading with their own money.
While conceding that they can extend the deadline through to 2017, regulators noted that banks must show good-faith in their planning efforts to comply with the rule in July 2014. The Securities Industry and Financial Markets Association (SIFMA) – one of the most influential Wall Street lobbying groups – expressed their satisfaction at the announcement, referring to the communication as being ‘entirely appropriate and necessary’.
It must be noted, however, that the rule is still a draft awaiting final approval. The proposal has drawn criticism from the financial industry, causing a number of delays as regulators worked on solutions to various problems. While it is unclear as to when the Volckers Rule will be finalized, banks have been instructed to implement recordkeeping and reporting procedures to comply with the rule.
While expressing relief at the two-year implementation period, the financial industry nonetheless dislikes the Volckers Rule which calls for an overhaul of its trading operations and is sure to impact negatively on profits. The objective of the rule is to prevent risky trading on Wall Street and thereby minimize the likelihood of triggering another financial crisis. Proponents of the rule point out that banks should be prevented from making risky wagers, particularly in light of the fact that they are operating with the assistance of government deposit insurance. When the Volcker Rule was proposed and publicly endorsed by President Obama in January 2010, the president announced that it was his intention to end the “too big to fail” mentality of financial institutions – time will tell if this goal will be achieved.