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 The Volcker rule, named after former Federal Reserve Chairman Paul
Volcker, who championed the reform, prohibits banks from betting on
financial markets with their own money, a practice known as
proprietary trading.
The rule, which has now mushroomed into 800 pages, will also bar
them from owning more than 3 percent of hedge funds or private
equity funds.
The final version of the crackdown is expected to be tougher than
when it was proposed two years ago, after JPMorgan Chase & Co's $6
billion loss in 2012 — nicknamed the London Whale after the bank's
huge positions — highlighted the perils of speculative trading.
Banks worry the rule will erode profits, and make it harder to
engage in businesses that are exempt under the law such as hedging
against market risks, facilitating client trading — or market-making — and security underwriting.
"The challenge is to prevent the impermissible activities, while
promoting the underwriting, the market making, everything that
everyone regards as important to financial markets," said Robert
Maxant, a partner at Deloitte & Touche.
The rule is one of the most hotly debated parts of the 2010
Dodd-Frank Wall Street reform act, aimed at preventing the taxpayer
bailouts of large investment banks that happened during the
2007-2009 credit collapse.
The three U.S. bank regulators, as well as the Securities and
Exchange Commission and the Commodity Futures Trading Commission,
will unveil details of the final rule at 9.30 a.m. (1430 GMT).
They are then expected to adopt the rule later in the day, although
some officials are expected to dissent to the way the final rule is
crafted.
The rule could cost the largest investment banks billions in
revenues, and lawyers will be poring over the details of the text to
find any weaknesses that would enable them to sue regulators and get
the courts to strike down the rule.
Banks will particularly focus on how strict the requirements are for
them to prove that any risky positions they take on are on behalf of
clients.
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In market making, for instance, they have inventories of shares or
other securities in order to quickly satisfy client orders, but
banks fear new limits on how long they can hold these may make it
harder to stock up.
Banks are also worried regulators will clip their wings when it
comes to entering risky positions to mitigate financial risk arising
in their business, so-called risk hedging.
This can still be done when there is a direct connection to the
underlying risk, but banks are used to doing this in multiple and
often loosely defined ways — so-called portfolio hedging — and fear
this will no longer be allowed.
JPMorgan initially explained its London Whale trades as portfolio
hedges and regulators have since made it clear the final rule will
render such trades impossible.
While the narrowing of the Volcker rule trading exemptions is
expected to bite, banks have already wound down their proprietary
trading since the crisis.
Morgan Stanley in January 2011 said it would spin off its
proprietary trading unit Process Driven Trading, which had 60
employees around the world.
Goldman Sachs Group Inc said it had shut down two proprietary
trading desks, one known as GSPS and another that did global macro
trading, by February 2011.
And Citigroup said it had shuttered a money-losing proprietary group
that had traded stocks.
(Additional reporting by David Henry in
New York; editing by Karey
Van Hall and Tim Dobbyn)
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