Wall Street has won a key concession in the drafting of the so-called Volcker rules aimed at reining in risk-taking by big banks in trading.
US regulators on Tuesday are set to vote on the Volcker rule, which prohibits banks from making risky trades from their own accounts. The rule comes nearly four years after President Barack Obama first endorsed the measure in 2010.
Treasury secretary Jack Lew put pressure on the five agencies involved in writing the rule to finish it before the end of the year. It is one of the hallmarks of the Dodd-Frank financial reform legislation.
A draft of the Volcker rule puts additional burdens on banks to evaluate their efforts to mitigate risks.
However, it does not explicitly prohibit banks from making trades to hedge risks in specific circumstances. Banks had feared the draft might be tougher, especially after the $6bn derivatives trading loss suffered by JPMorgan in 2012. Mr Lew has said the Volcker rule would prevent such an incident.
Banks will have to set up ways for “ongoing recalibration of the hedging activity” to prove “specific, identifiable” risks, the draft says. But it does not explicitly ban hedging as long as it is done under certain conditions.
Still a backlash against the overall Volcker package of rules is expected to intensify after Tuesday’s vote, with banks stepping up legal and lobbying efforts to water it down or legally stop it.
However, Barney Frank, who spearheaded the US post-crisis reform of financial regulations, predicted that legal challenges to delay or overturn the rule would fail because of changes last month to the Senate’s filibuster rule that make it easier for Mr Obama to appoint his choice of judges.
“By the time those suits come up there will be three new judges on the DC district court, [correcting] the rightwing anti-regulatory bias,” he said.
While banks fear the draft of the new rules will be too tough and their critics worry it will not be tough enough, people familiar with the matter say Wall Street has won flexibility on some aspects while other provisions are more stringent.
For example, market-making activities in which banks buy and sell securities and bonds on behalf of clients will be exempt based on “historical” and “near term” demands of customers.
That is more burdensome than banks have to deal with at present but less than the severe restrictions on market-making activities feared by Wall Street.
To ensure accountability, chief executives will have to “annually attest” that their firm has systems in place to enforce and review compliance with the rule.
Although the Federal Reserve is assessing whether to delay the compliance date for the rule to July 2015, regulators are gearing up to monitor and enforce activities under the rule by then.
One regulatory official expressed concerns that agencies may not be up to the task, since they are facing additional duties because of other Dodd-Frank mandates and are strapped for resources.
Additional reporting by Tom Braithwaite in New York