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Text Of Volcker Rule Proposal

Submitted by Tyler Durden on 03/03/2010 17:38 -0400

Administration Releases Legislative Language to Restrict Size and Risky Activities of Financial Firms

In
January, the President announced a proposal to limit the size of
financial firms and the risky activities of banks. Today, the Treasury
has delivered proposed legislative text to implement these reforms to
Capitol Hill. These proposals are part of a comprehensive package of
reforms to create a safer, more resilient financial system. This
legislative language adds to existing activity restrictions for banking
firms by prohibiting such firms from engaging in proprietary trading
and from investing in or sponsoring hedge funds or private equity
funds. This language would also supplement and strengthen existing
financial sector concentration limits.

Banking firms would be banned from proprietary trading:
We need to bolster existing restrictions on banking firms’ activities
to make the system safer and protect the taxpayer and keep banking
firms focused on serving their customers. The proposed legislation
would ban banking firms from engaging in “purchasing or selling, or
otherwise acquiring and disposing of, stocks, bonds, options,
commodities, derivatives, or other financial instruments for the
institution’s or company’s own trading book, and not on behalf of a
customer, as part of market making activities, or otherwise in
connection with or in facilitation of a customer relationship
(including hedging activities related to the foregoing).”

Banking firms would be banned from investing or sponsoring hedge funds and private equity funds:
Banking firms would also be banned from investing in or sponsoring
hedge funds, private equity funds, or other similar funds that are
exempt from registration under Investment Company Act. The prohibition
on sponsoring these private funds would include acting as a managing
member or general partner of a fund, controlling the management of a
fund, or sharing the firm’s name with a fund.

Banking
firms would be banned from lending or providing prime brokerage
services to, or bailing out, private funds advised by the firm.
Banking firms would continue to be able to serve as investment adviser
to private funds, but would be prohibited from lending, providing prime
brokerage services, or engaging in any transactions that provide
support to a private fund advised by the banking firm. Investors in
private funds advised by banking firms must have no expectation that
the banking firm would bail out the funds in times of stress.

Quantitative limits and additional capital requirements for major non-bank financial firms engaged in proprietary trading: The
proposed legislation would allow non-bank firms to continue to engage
in proprietary trading and hedge fund and private equity activities,
but would not allow major financial firms to escape tough supervision
and oversight. These firms will be under tough consolidated
supervision, more stringent capital and liquidity requirements, and be
required to provide more information to the market about their risks.
Moreover, any financial firm that is identified for heightened
supervision under the Administration’s regulatory reform proposal would
be subject to additional capital and quantitative limits on these
activities.

Financial firms would not be allowed to grow by acquisition above 10% of the liabilities of the financial system:
The existing cap on deposit concentrations has become less effective as
large banking firms have increasingly relied on other sources of
funding, and has given these firms an incentive to shift towards
riskier sources of funding. We need to update existing concentration
limits to check future growth of our largest financial institutions and
to make the system safer. The proposal would not allow a financial firm
to acquire another company if the resulting firm would have more than
10% of the liabilities of the financial system.

- advertisements -

Wed, 03/03/2010 - 17:46 | 252861 faustian bargain

They left out auditing the Fed.

Wed, 03/03/2010 - 17:47 | 252863 Bob

Anybody know what percentage of the "financial system's liabilities" GS, for example, has? Is there really any way to know, given all the off-book swaps and such. Does the FED's shit get rolled in or or or or or . . .

Something tells me this is a great idea that's gonna effectively be vapour.

Wed, 03/03/2010 - 17:56 | 252877 Anonymous

Good stuff. Let's see some action out of this.

Also,

How much you wanna bet a LOT of this will be watered down by the time it gets hammered down into a bill?

Wed, 03/03/2010 - 18:10 | 252888 Anonymous

...These firms will be under tough consolidated supervision...
Who supervises them? That is the quadrillion dollar question.

Wed, 03/03/2010 - 18:10 | 252889 Mr Lennon Hendrix

I will guess this will never pass on Capitoline Hill.

Wed, 03/03/2010 - 18:24 | 252906 Anonymous

You are absolutely correct. It will be exactly as the TBTF guarantee. Too much talk and no results. This is what happens when people vote for repesentatives that represent the interests of someone else.

Wed, 03/03/2010 - 18:29 | 252912 masterinchancery

10% sounds high. Are they allowed to trade CDS's?

How about this rule, which would have averted several decades of havoc? 1--Banks and retail brokerages are not allowed to trade anything for their own account except US treasury bonds; 2--Investment banks may trade anything they want, but may not serve any retail customers, and their holdings shall be marked to the market on a weekly basis and publicly reported; 3--Banks above certain sizes shall be required to hold proportionately more reserves than smaller banks.

Wed, 03/03/2010 - 18:29 | 252913 BlackBeard

awesome. market's gonna tank tomorrow and then pop when congress votes it down.

Wed, 03/03/2010 - 19:07 | 252973 Fritz

The squid is toast under this plan.

Therefore, this plan has a snowballs chance in hell.

Wed, 03/03/2010 - 21:25 | 253082 seventree

Major pushback from the UK (per Financial Times):

Lord Mandelson knocks ‘Volcker rule’ as too difficult

“Trying to apply sweeping rules about the structure, content and range of activities of banking entities is too difficult to do.”

“It’s the principle and practice of regulation you have to focus on, not the size of banks,” he added.

http://www.ft.com/cms/s/0/78ce471c-2707-11df-8c08-00144feabdc0.html

Wed, 03/03/2010 - 21:50 | 253162 masterinchancery

what a dweeb

Wed, 03/03/2010 - 20:51 | 253105 Anonymous

One can only imagine the state the country's finances are in when Paul Volcker makes sense.

Thu, 03/04/2010 - 00:28 | 253292 Anonymous

Would include that all ibanks should be partnerships, like the old days. No limited liability makes for an enormous incentive to maintain effective risk controls.

Thu, 03/04/2010 - 03:02 | 253364 Alexandra Hamilton

Financial firms would not be allowed to grow by acquisition above 10% of the liabilities of the financial system:

That does not apply to those that are already above that limit nor to those who grow other than by acquisition. The right phrasing would have been:

Financial firms would not be allowed to grow by acquisition above 10% of the liabilities of the financial system:

Besides 10% is way to high. Try 2%.

Fri, 04/16/2010 - 09:12 | 303731 mark456

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Text Of Volcker Rule Proposal

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