Volcker rule finalisation puts end to risky bank trading bets
How effective will the Volcker rule be in addressing the greater shortcomings of the US’ financial system? December 13, 2013 | Magessan RajUS banking regulators recently finalised one of the most important provisions of the 2010 Dodd-Frank Wall Street financial reform law – the Volcker rule, clamping down on banks’ risky trading bets, a hugely profitable business prior to the 2012 financial crisis. The rule seeks to halt banks from engaging in proprietary trading – speculative betting on financial markets for banks’ own gain. Signed off by all five major US regulatory agencies – the Federal Reserve, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Securities and Exchange Commission, and Commodity Futures Trading Commission – on December 10th, 2013, Wall Street banks lobbied heavily against the initial draft, and played a large part in delaying the unveiling of the final rule, warning that an overly restrictive law could damage market liquidity and limit their ability to hedge risk. However, JPMorgan’s disastrous trading loss in 2012, in which traders working on a portfolio of the bank’s own money allegedly hid billions in losses from their superiors, seemed to be the straw that broke the camel’s back, with the “London Whale” saga motivating regulators to introduce a tougher version of the rule initially tabled by Paul Volcker in 2010. Expanding on what the Volcker rule meant for banks, Bart Chilton, CFTC commissioner, said “You (banks) can’t just say, ‘Ah, oh, that? Hmm, it was a hedge’. Nope, we aren’t going to let you play that game. The position needs to be correlated with the risk.” Intended as a measure that will better protect the country’s financial system and taxpayers, the Volcker rule will require banks to set up internal compliance programmes and monitor their trading. The rule also addresses portfolio hedging – allowing it, but only in the event that a hedge is “designed to reduce, and demonstrably reduces or significantly mitigates, specific, identifiable risks of individual or aggregate... Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
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