Chief executive officers and directors of Wall Street banks would have to personally approve compliance with a ban on proprietary trading under the so-called Volcker rule, according to a draft of the proposal.
Financial regulators would require senior management to establish detailed programs for ensuring their banks are following the new rules, according to the 288-page proposal dated Sept. 30 and labeled “confidential and predecisional.” A copy was obtained by Bloomberg News.
Each bank’s CEO and board would be “responsible for setting an appropriate culture of compliance” and the board would be responsible for ensuring compensation structures are aligned with the rule, according to the draft.
The Volcker rule, which is named for its original champion, former Federal Reserve Chairman Paul Volcker, is intended to prevent banks from making investments with their own capital that put their deposits at risk. The provision was part of the 2010 Dodd-Frank Act, and policy makers are drafting regulations to enforce it.
The draft, which has a 205-page preamble and an 83-page text, is being written by four federal agencies and is scheduled to be released for comment on Oct. 11 by the Federal Deposit Insurance Corp.
Public attestation by CEOs that compliance standards would be met was one of the recommendations in a January study on the Volcker rule by the Financial Stability Oversight Council, a 10-member board that includes the chairmen of each of the banking regulatory agencies. The draft rule does not explicitly require the CEOs to attest publicly to the effectiveness of the compliance regime.
“The CEO public attestation requirement will serve as a strong deterrent from evading the Volcker Rules,” Glenn Schorr, a senior analyst with Nomura Holdings Inc., said in an Oct. 6 note.
Banks including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley have shut or made plans to spin off stand-alone, proprietary-trading groups to prepare for the rule.
Bloomberg News previously reported that the draft proposal also includes guidelines for exemptions from the rule in hedging and market-making activities.
The proposal includes a series of exemptions for trades designed to hedge credit, interest rate or other specific risks. A bank could be free of the Volcker restrictions if it is hedging a specific position or a portfolio of risks across multiple trading desks.
Hedging trades would need to have a “reasonable,” not a full, correlation with the underlying risk. Banks could also win exemptions if they are hedging a risk they are “highly likely” to face in the future.
The draft rule also would exempt trades related to market-making as long as the activity met at least seven standards, or principles. One principle would be that traders get paid from fees and the spread of the transactions rather than the appreciation or profit from their positions.