Federal regulators have reached a tentative agreement to finalize a rule aimed at Wall Street risk-taking, federal officials said Tuesday, overcoming internal squabbling and an onslaught of Wall Street lobbying that stymied them for years.
Five federal agencies plan to approve the so-called Volcker Rule next week, eking out a vote before the year is up. While the vote for the complex rule will come more than a year after a congressional deadline passed, it still will meet the recommendation of Treasury Secretary Jacob J. Lew, who urged the federal agencies to finish writing the rule in 2013.
The Commodity Futures Trading Commission, one of the five agencies, announced on Tuesday that it would vote on Dec. 10. Three other agencies – the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency – are also expected to approve the rule that day. The final agency involved in the rule, the Securities and Exchange Commission, has said it will vote on or about Dec. 10.
The rule, which would ban banks from trading for their own gain and limit their ability to invest in hedge funds, is not yet a done deal. Regulators continue to put the finishing touches on the rule, a centerpiece off the Dodd-Frank overhaul law that Congress adopted after the financial crisis, and talks could still breakdown.
But the trading commission’s announcement on Tuesday signals that regulators have all but completed a final draft, a prospect that once seemed remote.
Of all the 400 regulations to arise from Dodd-Frank, regulators struggled most with the Volcker Rule, which at one point spanned more than 1,000 pages. The challenge underscored the importance of the rule, which became something of a barometer for the overall strength of Dodd-Frank.
The Volcker Rule – named for Paul A. Volcker, a former chairman of the Federal Reserve who championed the rule when serving as an adviser to President Barack Obama – was politically charged from the beginning. Some Democrats said that it could prevent future trading blowups on Wall Street, a position that gained traction when JPMorgan Chase sustained a $6 billion trading loss in London last year, but Republicans complained that it might undercut economic growth.
Big banks and other Wall Street groups echoed the Republican concerns, blitzing the agencies with comment letters, private studies and in-person lobbying appeals. The agencies collectively received several thousand comment letters about the rule.
As the process dragged on, regulators formed their own battle lines. Some officials at the Federal Reserve and the SEC have at times tamed aspects of the rule, fearing it might inhibit banks from activities that are considered important for their health and the functioning of markets. The CFTC and Kara M. Stein, a Democratic commissioner at the SEC who favors a strict Volcker Rule, conversely pushed to close potential loopholes.
The tension largely centered on how to distinguish legitimate practices from proprietary trading, a lucrative yet risky practice in which banks trade for their own gain. The Volcker Rule prevented banks that have deposit insurance and other government support from proprietary trading, but the rule does not ban types of trading that are thought to be part of a bank’s basic business. For example, banks are still allowed to buy stocks and bonds for their clients – a process known as market-making – and place trades that are meant to hedge their risks.
Stein and Gary Gensler, CFTC chairman, worried that the market-making and hedging exemptions were too generous to Wall Street. They urged fellow regulators to insert language that would limit banks from stockpiling large bulks of stock under the guise of market-making.
Underscoring tension surrounding the rule, other regulators complained that Gensler’s agency should have raised concerns sooner. The agency instead spent most of the last few years completing dozens of other new rules under Dodd-Frank.
For Gensler, who is leaving his agency when his term expires on Jan. 3, the Volcker Rule is likely to be one of his final acts as a regulator.
“This is one of the most challenging rules to get done in a balanced way, but everyone is working in good faith along that path,” Gensler said in an interview last month.