Wall Street banks will need to demonstrate on an ongoing basis that their trades hedge specific risks in order to win an exemption from the Volcker rule ban on proprietary trading, according to a text of the final measure.
The rule, poised for approval at five U.S. financial regulators tomorrow, narrows banks’ ability to engage in hedges for broad portfolios of risks. Banks will need to show that a hedge “demonstrably reduces or otherwise significantly mitigates one or more specific, identifiable risks,” according to the text.
U.S. regulators have faced pressure to limit the Volcker rule’s exemption for hedging after JPMorgan Chase & Co. (JPM)’s London Whale trades cost $6.2 billion. The trades, nicknamed for their size in the market, were described by bank executives as portfolio hedging.
“The rule prohibits risky trading bets like the ‘London Whale’ that are masked as risk-mitigating hedges,” Treasury Secretary Jacob J. Lew said in a Dec. 5 speech in Washington. The Federal Reserve, the Federal Deposit Insurance Corp., Commodity Futures Trading Commission and two other regulators must complete the rule.
The final rule requires banks to have an “ongoing recalibration of the hedging activity by the banking entity to ensure that the hedging activity” is not prohibited proprietary trading.
The rule, named for former Fed Chairman Paul Volcker, who championed it as an adviser to President Barack Obama, is meant to keep banks that benefit from federal deposit insurance and discount borrowing from taking risks that could threaten their stability.
With Wall Street banks having already shut proprietary trading desks in anticipation of the rule, its impact rests largely on how regulators deal with other banking activities.
To contact the reporter on this story: Silla Brush in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Maura Reynolds at email@example.com