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December 13, 2013 5:17 pm
US regulators this week approved the long-awaited Volcker rule aimed at stopping banks from making risky bets that could hurt the financial system.
The Volcker rule, named after former Federal Reserve chairman Paul Volcker, bans banks from making speculative bets from their own accounts, a practice known as proprietary trading. The rule is one of the critical provisions of the landmark Dodd-Frank financial reform legislation of 2010.
Despite its importance, it has taken almost four years for the rule to be finalised, partly because of arguments between five regulatory agencies about the wording of the legislation. Jack Lew, Treasury Secretary, ordered the agencies in July to finish the measure by the end of the year.
Now that the Volcker rule is finally a reality, banks are pouring over the text to digest how it will affect their businesses. The final version of the rule gave banks more flexibility on market making activities in which they buy and sell securities and bonds on behalf of clients.
But it is more stringent when it comes to hedging, mainly because of the desire to prevent another loss of the order of the one JPMorgan took in 2012. The bank lost more than $6bn in a derivatives trade that went awry.
The rule also puts investment restrictions on banks when it comes to hedge funds and private equity funds. It also requires chief executives to attest in writing that their companies are setting up appropriate procedures to comply with Volcker provisions.
Wall Street lawyers are studying the rule to see if it is vulnerable to a legal challenge. A lawsuit could be led by Eugene Scalia, a partner at law firm Gibson Dunn and son of Supreme Court Justice Antonin Scalia, who has successfully sued regulatory agencies in the past.
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