Volcker Rule Gets New Teeth, Vote

Dec 4 2013 | 12:36pm ET

Five U.S. regulators are set next week to approve a tougher version of the Volcker rule than countenanced just a few weeks ago.

The Federal Reserve, Commodity Futures Trading Commission, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency will vote on the rule on Tuesday, they said yesterday. The Securities and Exchange Commission will vote "on or about" the same day, Chairman Mary Jo White said.

But the rule that they'll vote on will not be the one they were previously considering. Instead, it will include a much tougher definition of hedging to further rein in banks.

The basics of the rule, proposed nearly four years ago, are the same: Banks will be barred from proprietary trading and strictly limited in their alternative investments activities. But over the years, other portions of the rule—including that on hedging—have been watered down.

Removing a requirement that hedges be "reasonably correlated" with other holdings came at the SEC's behest. The return of similar language can be traced to the same agency, as newly-minted Commissioner Kara Stein threatened to vote against the rule—which would prevent its adoption—if the hedging exception were not more clearly defined. CFTC Chairman Gary Gensler also backed the tougher language.

The rule that will go to a vote next week requires that hedging should be related to "one or more specific, identifiable risks," and that hedges should not create "significant new or additional risk that is not itself hedged." The rule would also bar setting up traders' compensation "to reward or incentivize prohibited proprietary trading."

The tighter language is designed to keep banks from hiding trades designed solely to turn a profit for themselves as trades made to hedge risks or on behalf of customers.

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