Banks have long complained that steep compliance burdens make it almost impossible to use an important break they got in the Volcker Rule to hedge against losses.
In their coming overhaul, the Federal Reserve and other regulators are expected to address Wall Street’s grievance, another way the landmark post-crisis rule is shifting in the industry’s favor under President Donald Trump.
At issue is what’s known as the hedging exemption included in Volcker, which stipulated that banks aren’t violating the rule’s restrictions on speculative trading as long as they can show transactions offset market risk.
To make it much easier to take advantage of the exemption, Trump-appointed regulators intend to eliminate some requirements that firms document their hedges and the market positions they’re tied to, said three people familiar with the proposal. Instead, regulators would allow more general assurances from banks that they’re keeping track of risks, said two of the people who asked not to be named because the proposal isn’t public.
Volcker 2.0
The revamp, known within agencies as Volcker 2.0, is the latest effort by financial regulators to soften rules that the Trump administration blames for holding back economic growth. Volcker, one of the most sweeping demands that followed the 2008 financial crisis, banned banks from trading purely for their own benefit.
In another key change reported by Bloomberg News last week, regulators plan to scrap a presumption in Volcker that all short-term trading violates the rule. That revision would give banks more leeway to conclude that their buying and selling complies with Volcker, putting the onus on regulators to challenge such judgments. Federal agencies are also likely to make it easier for lenders to stockpile assets that their customers might want to buy in the near term.
Taken together, the tweaks could blunt the edges of Volcker, which named after former Fed Chairman Paul Volcker. Its advocates say the rule was necessary to make the industry safer after the crisis. But critics say the regulation is overly complex and difficult to comply with.
The ability to hedge was one of the few exemptions that the Fed and other agencies granted banks when they approved Volcker in 2013. Still, lenders have said that the many hoops they have to jump through to rely on it are unreasonable. In response, regulators are now considering removing language in the rule that says hedges must “demonstrably" reduce specific risks, said two of the people.
Revamp coming
The five agencies that oversee this core section of the 2010 Dodd-Frank Act — the Fed, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., Securities and Exchange Commission and Commodity Futures Trading Commission — are expected to propose their overhaul as early as next week. The banking agencies are set to be the first to sign off on the proposal, with the SEC and CFTC following soon after, the people said.
Spokesmen for the Fed, OCC, FDIC and SEC declined to comment. A CFTC spokeswoman didn’t respond to a request for comment.
How much latitude banks should have to hedge became a focus of intense debate after a JPMorgan Chase trader known as the London Whale lost $6.2 billion betting on credit derivatives in 2012. JPMorgan characterized the trades as part of a strategy to balance risks on the bank’s balance sheet, but lawmakers expressed outrage over the magnitude of the losses. When regulators approved Volcker in December 2013, they included tougher restrictions on hedging than originally proposed.
Since then financial executives have argued the documentation and compliance requirements are too onerous. A sign that Wall Street was making headway came in June 2017, when Trump’s Treasury Department issued a report that said some of the demands were "unnecessarily burdensome.”
The unveiling of the regulators’ plan will be the first step in a lengthy process that will include votes at the agencies on whether to seek public comment on the proposal followed by what could be months of rewriting before a final round of votes on making the changes official.
