Six years after the financial crisis began and more than three since it was mandated by Congress, U.S. regulators have approved the Volcker rule, barring banks from proprietary trading and strictly limiting their alternative investment activities.
The Commodity Futures Trading Commission, Federal Deposit Insurance Corp., Federal Reserve Board and Securities and Exchange Commission all voted to approve the rule today. The Fed also approved an extension giving banks until July 2015 to come into compliance with the new regulation.
The FDIC and Fed—both of which include U.S. Comptroller of the Currency Thomas Curry, who will formally sign off on the rule later today—voted unanimously in favor of the rule. Republican members of both the CFTC and SEC voted against it.
Still, the rule's approval was assured earlier today when outgoing CFTC Commissioner Bart Chilton, who had criticized an earlier draft of the rule, said he would support it.
Daniel Gallagher, one of the SEC's two Republicans, complained that regulators did not have enough time to review the rule, whose final version was released only this morning. He blasted the "utterly artificial, wholly political" year-end deadline pushed by President Barack Obama and Treasury Secretary Jacob Lew.
Obama praised today's votes, saying that the Volcker rule "makes sure big banks can't make risky bets with their customer's deposits."
The rule approved today is tougher than the one on the table just weeks ago. After complaints from SEC Commissioner Kara Stein and CFTC Chairman Gary Gensler, the language dealing with hedging was tightened, and bank CEOs will have to certify that their firms are not prop. trading. But banks will be permitted to trade sovereign debt and will have some discretion in deciding which trades are for market making, which is permitted.
For the alternative investments industry, many of the effects have already been felt. Banks have been selling or spinning off their hedge fund and private-equity businesses and exiting proprietary trading. The latter has had quite a salutary effect for hedge funds, as talented prop. traders seek new jobs and competition for trades is reduced.