Fed to hold open meeting on Volcker Rule on 30th January

The Fed is to hold an open meeting on Volcker Rule on 30th January. The Volcker Rule is a federal regulation that generally prohibits banks from conducting certain investment activities with their own accounts and limits their dealings with hedge funds and private equity funds, also called covered funds.

What is the Volcker Rule?

It is a rule that aims to protect bank customers by preventing banks from making certain types of speculative investments that contributed to the 2008 financial crisis.

In August of 2019, the Office of the Comptroller of the Currency voted to amend the Volcker Rule in an attempt to clarify what securities trading was and was not allowed by banks.  The revised rules offer regulatory relief, however, especially for smaller banks. Banks with “significant” trading assets, were still subject to the toughest Volcker Rule requirements, but the threshold for what is considered significant will be raised to $20 billion from $10 billion. Until now, the Trump administration’s regulatory agenda has delivered more benefits for mid-size and smaller banks while there have been fewer regulatory changes for the largest banks.

In October last year, the US Federal Reserve has approved a final rule simplifying the Volcker Rule ban on proprietary trading, becoming the fifth and final regulator to sign off on the changes. The simpler version – labelled Volcker 2.0 – went live on 1 January 2020, with banks being given a year to comply.

“Under the revised rule, firms that do not have significant trading activities will have simplified and streamlined compliance requirements, while firms with significant trading activity will have more stringent compliance requirements,” the Fed wrote in a statement.

“Community banks generally are exempt from the Volcker rule by statute,” it continues. “The revisions continue to prohibit proprietary trading, while providing greater clarity and certainty for activities allowed under the law.”

Market implications

US President Donald Trump has been a vocal critic of the Volcker Rule and the Dodd-Frank Act. Trump has argued that the rules are too restrictive on banking activities, and made loosening the rules a high priority since he took office. Most of the board at the Fed have been nominated by Trump, bar Lael Brainard, so it will be interesting to see what comes of such meetings over time. Wall Street certainly would prefer looser restrictions.