Of Special Interest

20th September 2011

Laying down the rules for Volcker

The Financial Times reports on draft Volcker Rules which may weaken the principle of preventing US banks from any financially significant proprietary trading. The newspaper has seen draft rules which would allow banks to conduct proprietary trades in almost all areas other than futures. Specifically they allow:

- positions arising under certain repurchase and reverse repurchase agreements

- securities lending transactions

- 'bona fide' liquidity management

- positions in loans, spot foreign exchange or commodities (taken with other clauses this may be to a limited degree).

An overall requirement that the bank not engage in trading activities that "significantly increase the likelihood that the banking entity would incur a substantial financial loss or would fail" may remain. However it appears the requirement for the CEO to confirm the bank is not engaging in such activity (and therefore he personally being on the line for any infringements) is thought to be dropped. The creation of a central data repository of deals so the regulators could satisfy themselves of what deals are been done also looks likely to be dropped.

Most agree that the interpretation of the Volcker rules within the Dodd-Frank Act are not easy to translate through into usable regulation. There is a feeling however in some quarters that the lobbying by the banks that they would suffer unfair competition from foreign banks seems to have some success and may have contributed to a looser interpretation of proprietary trading.