Fed unveils ‘Volcker Rule’ rewrite to allow banks to engage in risky trading

By Michelle Price and Pete Schroeder

WASHINGTON (Reuters) – U.S. regulators on Wednesday unveiled a proposal to ease rules reining in banks’ risky trading, outlining changes that will cut compliance costs but stopping far short of allowing firms to return to their gambling days seen before the 2007-2009 financial crisis.

The Federal Reserve’s long-anticipated proposal to alter the so-called Volcker Rule marked another step by Trump administration regulators to ease banking rules in a bid to boost lending and economic growth.

Part of the 2010 Dodd-Frank financial reform law, the Volcker Rule had been aimed at preventing banks from making market bets while accepting taxpayer-insured deposits. It has forced many Wall Street banks to overhaul their trading operations and hive off billions of dollars worth of hedge funds and private equity funds.

Banks have long complained that the rule, which took four years to write and runs at more than 1,000 pages, is vague and complex, creating a disproportionate compliance burden and limiting their ability to facilitate investments and hedges for investors.

Wednesday’s proposal aims to make life easier for both banks and the regulators who enforce the rule, by clarifying how banks can show trades qualify for certain safe harbors, especially when facilitating client trades and hedging risks, and expanding those exemptions.

The proposal would also create a tailored regime according to the size of an institution, with the most active trading firms with more than $10 billion in trading assets facing the most rigorous set of rules.

Banks with trading assets between $10 billion and $1 billion would enjoy a simpler compliance framework, while banks with less than $1 billion in trading assets would be presumed compliant with the rule.

The proposal would also scrap a subjective standard which assumes banks’ short-term trading is profit-seeking unless they can prove otherwise, replacing this short-term trading measure with an accounting test.

Regulatory officials said on Wednesday there was a broad consensus among the agencies that the rule could be revised without negatively affecting safety and soundness.

(Reporting by Michelle Price and Pete Schroeder; additional reporting by Patrick Rucker and David Henry in New York; Editing by Meredith Mazzilli)