The Volcker Rule Must Stop Speculation: CFTC’s Chilton


Although there’s a thin line between hedging and speculating, regulators should crack down if banks are making unusually large profits on their hedging activities, CFTC Commissioner Bart Chilton told CNBC’s “Squawk Box” on Friday.

Bart Chilton | Commissioner U.S. Commodity Futures
Bloomberg via Getty Images

The Volcker Rule, named after former Fed Chairman Paul Volcker aims to limit banks’ proprietary trading, “should be clear and concise and common sense to reflect what the banks are actually doing so they can trade the propriety risk,” . “But at the same time, they don’t go over that line and into speculating.”

Chilton sent a letter to Federal ReserveChairman Ben Bernanke to encourage him to move forward with formulating the Volcker Rule so it is strong, as well as clear and concise to reflect what the banks are actually doing.

Chilton is worried that hedging activity could easily turn into market speculation, warning about a thin line between the two.

Dear Fed, ...Warning Letter to Bernanke

“If over time that hedging of your risk continues to result in large profits and you’re making a lot more money than the risks that you’re losing, then you have to say there’s a presumption that they’re willful and trying to be evasive and we should go after them with the full extent of the law,” he said.

He added, that “we want to ensure that they don’t get into speculating, they don’t bet against their customers so we don’t have systemic risk and they don’t just put their money in the darkest corners of the financial market.”

While the Volcker Rule, a part of theDodd-Frankregulatory reform, hasn’t been finalized, some have argued that it would have prevented the massive trading loss at JPMorgan Chase earlier in the year. (Read More:JPM Actions Would Not Be Permitted Under Volcker: Sen. Levin.)

The biggest Wall Street firms like Goldman Sachs and Morgan Stanley that have made profits betting their own money are likely to be most affected by the rules when the eventually go into place. (Read More: Which Banks Would the Volcker Rule Affect?)