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IMA Tax Policy Blog

Addressing Wall Street’s Concerns, U.S. Financial Regulators Discuss Volcker Rule

By Lauren Randle

Winston & Strawn LLP is an IMA member law firm…

U.S. financial regulators are tackling one of Wall Street’s biggest concerns by discussing the Volcker Rule. The Volcker Rule governs banks’ speculative trading by implementing a ban on certain types of trading activities. The rule was originally proposed by American economist and former United States Federal Reserve Chairman, Paul Volcker, to restrict United States banks from making certain kinds of speculative investments that do not benefit their customers. Regulators adopted the Rule as a result of the 2010 Dodd-Frank financial overhaul. It aimed to reduce risks by simplifying bank structures to make them more transparent and to reduce the conflicts of interest that arise when divisions of a bank have different priorities. The Rule is often referred to as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank’s own accounts.

Keith Noreika, Acting Comptroller of the Currency, expressed a belief that regulators need to do a better job of clarifying what trading activities are permitted under the Volcker Rule. It seeks to make banks mere facilitators of their clients’ trading activities. However, banks complain that the line between the approved and prohibited trading is not clear. Mr. Noreika recommended regulators catalogue types of transactions and investments, then evaluate whether to grant regulatory exemptions for each category to provide clarity. He stressed in a recent interview with the Wall Street Journal that “The ultimate problem with the Volcker rule is no one knows what prop trading is.”

The Federal Reserve also recognized problems with the Volcker Rule. In a speech, Daniel Tarullo, the Federal Reserve’s former point man for the Rule, stated the Rule covers more banks than it was intended to, imposing unnecessary costs on community banks which do not do speculative trading. Moreover, it has negatively impacted key sectors of the financial markets, such as corporate bonds, by frightening banks out of making markets due to the unclear regulatory line between making markets and speculating, consequently, making it more expensive for companies to raise money through the bond market. Finally, the Volcker Rule has proven legally impossible to enforce because it requires supervisors to guess what was going through bankers’ minds when they made particular trades.

While previously political analysts thought any change in the Volcker Rule would likely be part of a broader rewriting of Dodd-Frank, Mr. Noreika made clear his agency could take unilateral actions to reinterpreting the definition of proprietary trading. Rich Foster, senior vice president at the Financial Services Roundtable trade group, called this “a good sign that the [Trump] administration is taking a fresh look at something that has had negative impacts on our industry.”


For more information, visit the Winston and Strawn LLP website.