Some Preliminary Thoughts on the New “Final” Volcker Rule

There was only one way that the five regulatory agencies tasked with drafting the Volcker Rule – the provision of Dodd‐​Frank limiting proprietary trading by banks – were ever going to meet the year‐​end deadline and give meat to a poorly drafted statutory provision. That was if they retained maximum ex post facto discretion to decide whether bank activity is permissible or not under the rule. Unsurprisingly, this appears to be exactly what they have done.


I have some particular concerns:


The rule will require a “maze of regulators” (via the Wall Street Journal)


You thought the debate over the extraterritorial application of cross border derivatives (i.e., the fight between the Securities and Exchange Commission and the Commodities Futures Trading Commission)was contentious? Volcker is going to be five times worse. The rule still requires ongoing monitoring and enforcement by FIVE separate agencies and, as Wayne Abernathy of the American Bankers Association noted, there is still no mechanism for coordination built into the rule.


The rule lacks “bright line distinctions” (per Janet Yellen)


Basically banks won’t know if they’re in compliance or not until their regulator determines it. Ominously, SEC chairman Mary Jo White said that the regulators would be available to add “clarification.” Needless to say, a final rule should not need clarification.


The devil is in the enforcement


Several of the regulators noted that the key to “successful” implementation of the rule is ongoing monitoring and enforcement. But how do you monitor and enforce a rule that doesn’t have a bright line? So much for the rule of law.


The rule contains an exception for sovereign debt


In other words, banks can trade in as much sovereign debt as they want for their own account, but if they were to engage in similar activity with respect to investment grade corporate debt – Exxon Mobil for example – this will be illegal proprietary trading. (I feel safer already!)


Much of the “new final” rule does not have the benefit of public input


The two SEC commissioners who voted against the rule both complained they did not have sufficient time to review the contents – one labeled the year‐​end deadline “wholly political” – and were concerned that many of the new provisions did not have the benefit of public comment. They are correct that, at the very least, the rule should have been re‐​proposed as a draft.


For a full transcript of the final rule and Volcker related materials, see here.