The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve requested public comment this week on restrictions in the Dodd-Frank Act that would severely limit the ability of banks to own or sponsor private equity and hedge funds and ban them from making short-term trades for their own accounts.
The Volcker rule, the draft of which was published yesterday and could have major implications for the real estate investment platforms of banks such as Goldman Sachs and Morgan Stanley, was in part created to combat “systemic risk”.
Former Federal Reserve chairman Paul Volcker developed the rule, which originally called for US banks to choose between running private equity and private equity real estate operations and taking deposits. The rule also would ban banks from taking positions held for 60 days or less, change the way traders involved in market-making are compensated and make senior bankers responsible for compliance.
The proposal includes a number of exemptions regarding trading. A bank could be free of the Volcker rule restrictions if it is hedging a specific position or a portfolio of risks across multiple trading desks. However, if a bank does engage in those exempted behaviours, it must set up an internal compliance programme to ensure it stays within the boundary of the Volcker rule and its regulations. Banks with major trading operations also must provide data to regulators allowing them to identify potential Volcker violations or other high-risk trading or assets.
The FDIC and Fed worked on the draft rule with the US Securities and Exchange Commission. A final version is slated to take effect on 21 July 2012.