Progress Is Seen in Advancing a Final Volcker Rule
A major new rule that has drawn the ire of Wall Street is on track for completion sooner than some bankers had expected, dashing the hopes of financial industry lobbyists, who have pressed for a delay.
Regulators are making significant progress on a final draft of the regulation, the Volcker Rule, and some officials expected to complete it by September and possibly as early as this summer, people with direct knowledge of the matter said. The people, who spoke on the condition of anonymity, cautioned that regulators have not set a firm date for completing the rule.
The Volcker Rule aims to rein in risky trading on Wall Street. Named for Paul A. Volcker, the former chairman of the Federal Reserve, it would ban banks from placing bets with their own money, a practice known as proprietary trading.
On Wednesday, the chief executives of six large banks voiced concerns about new regulations like the Volcker Rule at a meeting with Daniel K. Tarullo, a Federal Reserve governor. The gathering, held at the Federal Reserve Bank of New York in Lower Manhattan, was arranged by Mr. Tarullo and JPMorgan Chase’s chief executive, Jamie Dimon, who has criticized elements of the Volcker Rule.
When regulators first proposed a version of the rule last year, they received a torrent of criticism from the financial industry, which complained about the length and complexity of the proposal. It was the most hostile response to any provision of the Dodd-Frank financial overhaul law, which created the Volcker Rule with the notion that banks should not make risky wagers while enjoying government deposit insurance and other types of backing.
Some opponents of the Volcker Rule urged regulators to tear up the draft and start from scratch. That tactic, which even gained support among some high-level regulators, was seen by some as a ploy to delay the rule-writing process until after the 2012 election, which might end the Democratic control of the Senate and the White House.
“Reproposal is necessary for several reasons,” the Securities Industry and Financial Markets Association, an influential Wall Street lobbying group, said last month in a letter to regulators. “First, the changes to the proposal needed to correctly implement the Volcker Rule mandate and to avoid serious harm to our financial markets are so extensive that reproposal will be required as a matter of administrative law.”
But regulators driving the rule-writing process have not discussed scrapping the draft and currently have no plans to repropose a new version, the people briefed on the matter said. In fact, regulators are moving forward on the wording of critical provisions, like exemptions that allow banks to hold a certain amount of securities for customers.
Much of the headway has been made at weekly meetings about the Volcker Rule at the Treasury Department, the people said. Coordinated by Mary J. Miller, the Treasury under secretary for domestic finance, the meetings have included senior lawyers from the agencies writing the rule: the Federal Reserve, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission and the Office of the Comptroller of the Currency.
While top regulatory lawyers like Robert Cook, head of the S.E.C.’s trading and markets division, attend the meetings, their deputies are holding conference calls and sifting through thousands of comment letters about the rule.
The progress might come as a surprise to the rule’s opponents. Wall Street grew optimistic earlier this year when Mr. Tarullo told Congress there was a “real possibility” regulators would not meet the July deadline set forth in Dodd-Frank for completing the rule.
Even as banks began gearing up for the new regulations, selling or spinning off their stand-alone proprietary trading desks, they pressed for more time. Their hopes for delay were further bolstered last month when regulators clarified that banks have until 2014 to fully comply with the rule.
As Wall Street sees it, the Volcker Rule threatens the health of the financial industry and the broader economy. The banks’ concerns center on the imprecise nature of proprietary trading, which can be blurred with the role of market-making — taking positions in stocks and bonds in order to sell them to clients.
Those fears were echoed by foreign governments, as well as by corporations big and small.
At Wednesday’s meeting in New York with Mr. Tarullo, the bank chieftains underscored the danger to markets if market-making were to be constrained, according to a summary of the meeting. The meeting with Mr. Tarullo included Mr. Dimon; Lloyd C. Blankfein, the Goldman Sachs chief executive; and James P. Gorman, the chief executive of Morgan Stanley, among others.
The executives on Wednesday highlighted statements in their earlier Volcker Rule comment letters, where they warned that if regulators adopted a broad interpretation of the crackdown, it could hurt market liquidity.
Mr. Tarullo declined to “respond or reply to views expressed by the bank representatives,” the summary said.
The early draft of the Volcker Rule sought to distinguish between positions for proprietary trading and genuine market-making, which is exempt under Dodd-Frank. Supporters have urged regulators to adopt a strict final version of the rule, arguing that a bank could trade speculatively for its own account under the guise of market-making.
Regulators have not reached final agreement on a definition of market-making, though some said that the talks were advancing. The agencies have agreed not to apply a uniform definition of market-making to all varieties of securities.