Feds Approve Volcker Rule, Bringing in New Era of Financial Regulation

“Federal regulators voted on Tuesday to approve a rule that strikes at the heart of Wall Street risk-taking, a moment that punctuates three years of internal squabbling and bank lobbying over an effort to reshape the financial landscape.” (Ben Protess and Peter Eavis, New York Times)

Earlier today, the five federal agencies responsible for writing the long-awaited Volcker Rule – the Federal Deposit Insurance Corporation, Securities and Exchange Commission, Federal Reserve Board, Commodity Futures Trading Commission, and Comptroller of the Currency – voted to approve the rule designed to reign in risky behavior at Wall Street banks.

For your reference, a roundup of recent commentary and analysis of the regulation, from lawyers writing on JD Supra:

Ready for the Volcker Rule? What to Look For (Shearman & Sterling LLP):

“[T]he most important points to look for in a final regulation are: the definition of market-making. The Volcker Rule prohibits the conduct of proprietary trading for the account of a bank but allows market-making to satisfy customer demand. What will the final regulation require banks to do in order to show that market-making is not disguised proprietary trading? What impact on market liquidity and prices will the final decision have, and do the agencies indicate any concern about this?” Read on>>

The Volcker Rule’s Impact on Foreign Banking Organizations (Morrison & Foerster LLP):

“The Volcker Rule, as embodied in the Dodd-Frank Act and reflected in proposed regulations, generally prohibits ‘banking entities’ from engaging in proprietary trading and from investing in or sponsoring private equity and hedge funds. These ‘banking entities’ include foreign banks that maintain branches or agencies in the U.S. or that own U.S. banks or commercial lending companies in the United States. These banks, as well as their parent holding companies, are referred to in U.S. regulations as ‘foreign banking organizations.’” Read on>>

A Christmas Wish: Fix Dodd-Frank – Just a Little (Dechert LLP)

“Fix the Volcker Rule. This ambitious effort to roll back the hand of time to a simpler banking world doesn’t work in innumerable ways. It does not provide useful guidance to distinguish risky investments by banks with depositors’ money (e.g., taxpayers’ money) from customary and reasonable banking actions. It has become demonstrably clear that the regulators are unable to ring wall proprietary trading and Congress should give better guidance here or give it up. Remember that prop trading had just about nothing to do with the credit crisis. Moreover, the blanket and unthoughtful restrictions on bank investment funds and other vehicles is not supported by risk and loss data and is damaging capital formation.” Read on>>

2013 Outlook for Insurance Regulation (Sutherland Asbill & Brennan LLP):

“One of the explicit permitted activities in the Volcker Rule is investment activity for the general account of a regulated insurance company, and Dodd-Frank clearly indicates that the regulations implementing the Volcker Rule should ‘appropriately accommodate the business of insurance.’ Nevertheless, the proposed regulations are problematic for insurers in certain respects, and hopefully the final regulations in 2013 will be more accommodating to the business of insurance. Specifically, the proposed regulations would exempt insurance company general account investment activity only from the ban on proprietary trading, and not from the restrictions on covered fund activity.” Read on>>

Extraterritoriality: The Volcker Rule (Morrison & Foerster LLP):

“As the U.S. bank regulatory agencies continue their efforts to implement the Volcker Rule under increasing political pressure to stiffen the Rule’s requirements, it is worth revisiting how the Rule, in its current proposed form, might affect non-U.S. banks and their activities even outside the United States. The full impact of the Volcker Rule on non-U.S. trading and fund businesses is only now coming into focus, as the U.S. bank regulators expect banking firms, including non-U.S. firms, to begin to develop compliance programs.” Read on>>

Volcker Rule: Guidance on the Conformance Period (Morrison & Foerster LLP):

“The purpose of the guidance is to confirm that July 21, 2014, (and not July 21, 2012) is the date on which activities prohibited by the Volcker Rule must cease. By statute, the Volcker Rule takes effect on July 21, 2012, and covered banking entities have until July 21, 2014, to conform their trading operations and sponsorship or ownership of hedge funds or private equity funds to the requirements of the Rule, including the cessation of prohibited trading or fund activities. The statute is explicit on this point, but the Volcker regulations proposed by the Agencies created some uncertainty for the industry on whether the Agencies expected banking entities to end those activities by July 21, 2012.” Read on>>

CFTC Commissioner Says Volker Rule May Be On Life Support (Leonard, Street and Deinard):

“CFTC Commissioner Bart Chilton made the following interesting remarks before the Institute of International Bankers, at The Yale Club, in New York City: “First Volcker:  It’s a huge issue that, frankly, might be on life-support. Now, before you folks get all ‘yeah, yeah, yeah’ and start knuckle bumping, I’ll give you fair warning. If Volcker isn’t finished in a robust fashion, that’s gonna be big trouble for banks. Here’s why a weak Volcker Rule would be big trouble. As we noted, people are mad as hell. Many folks in fairly high levels of government—presidents of Federal Reserve Banks, Members of the House and Senate and others—want to break up the banks. Legislation has been introduced to do just that. Some want to go back to Glass-Steagall.” Read on>>

Holistic Medicine Needed To Revive Securitisation (Morrison & Foerster LLP):

“The Volcker Rule may affect a number of securitisation vehicles that would (unless the final rule provides clarification) be considered ‘covered funds’. A related rule would prohibit material conflicts of interest relating to certain securitisations. Securitisation participants are grappling with various aspects of US derivatives regulations, including the potential characterisation of securitisation as ‘commodity pools’, margin requirements, and capital requirements.” Read on>>

As Volcker Rule Implementation Lumbers On – Some Practical Considerations (Orrick, Herrington & Sutcliffe LLP):

“The principles underlying the Volcker Rule may be relatively easy to state, but its implementation is very difficult because it is such an ambitious piece of legislation. It intends to prohibit Banking Entities from engaging in significant trading and investment activities that they have been conducting for a long period of time, on a global basis and through increasingly integrated financial markets. Moreover, in order to achieve a more integrated and coordinated regulatory framework, the Volcker Rule mandates joint rulemaking by the banking, securities and commodities regulators and contemplates full discussion with affected Banking Entities and ‘international harmonization’ of regulatory reforms. In effect, the Volcker Rule requires a fundamental re-examination, both domestically and internationally, of the entire structure and regulation of financial institutions and trading markets.” Read on>>

Dodd-Frank Rulemaking: Volcker Rule and SIFI Proposals (Skadden, Arps, Slate, Meagher & Flom LLP):

The Volcker Rule, as embodied by the proposed implementing regulations, can be viewed as an attempt to recreate the division between banks and securities firms established by the Glass-Steagall Act in 1933 (and repealed in 1999). […] In the proposed nonbank SIFI standards, the Financial Stability Oversight Council has established an analytical framework to determine whether a particular nonbank institution is a SIFI in accordance with the factors specified in Dodd-Frank. The proposed rule illuminates some aspects of the process for designating nonbank SIFIs, but leaves the Council with significant discretion.” Read on>>

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