Volcker Rule Ushers in Era of Increased Oversight of Trades

Finally, the Volcker rule is being implemented, after 3 years of debate and modifications.  Although it’s not as originally proposed, today is the first day the rule is being enforced.  It’s questionable though, how much this rule will actually impact the markets.  Banks are now not doing proprietary trading, but other entities will.  What this rule does is similar to Glass-Steagall in that it separates risk taking from depository institutions, but in a much more specific way.  Banks can still take risks, but not those which are listed in the Volcker rule.  Since the rule has been proposed, banks have been spinning off and selling their prop units, which have opened new companies and reorganized.  So the supposed risky trading in question will still exist, but it will be done by a hedge fund, prop shop, individual, or other entity, rather than a bank.  Arguably, this sounds like a good idea.  But did anything really change?  From Bloomberg:

Wall Street faces more intensive government scrutiny of trading after U.S. regulators issued what they billed as a strict Volcker rule today, imposing new curbs designed to prevent financial blowups while leaving many details to be worked out later.

The Federal Reserve, Federal Deposit Insurance Corp. and three other agencies formally adopted the proprietary trading ban. The rule has been contested by JPMorgan Chase & Co., Goldman Sachs Group Inc. and their industry allies for more than three years.

Wall Street’s lobbying efforts paid off in easing some provisions of the rule. Regulators granted a broader exemption for banks’ market-making desks, on the condition that traders aren’t paid in a way that rewards proprietary trading. The regulation also exempts some securities tied to foreign sovereign debt.

At the same time, regulators said the final version imposed stricter restrictions on hedging, providing banks less leeway for classifying bets as broad hedges for other risks. To pursue a hedge, banks would need to provide detailed and updated information for review by on-site bank supervisors.