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Volcker Rule Enforcement May Come After the Fact, Bingham Says

Paul Volcker
Paul Volcker, former chairman of the U.S. Federal Reserve. Photographer: Rich Clement/Bloomberg

Oct. 19 (Bloomberg) -- Regulators may have to enforce restrictions on financial firms engaging in proprietary trading after transactions are completed, creating confusion for banks, according to a summary of the proposed Volcker rule by Bingham McCutchen LLP.

“This lack of a ‘bright line’ creates a significant degree of uncertainty for the financial community that may only be clarified once the regulators have had the opportunity to apply the proposed regulations,” the Boston-based law firm said in the Oct. 18 summary of the Volcker rule. The lack of clarity is “raising the potential danger of rule interpretation through enforcement.”

The rule, named for former Federal Reserve Chairman Paul Volcker, was part of last year’s Dodd-Frank Act financial markets overhaul to rein in risky trading by firms whose customer deposits are federally insured. Banks are growing concerned that it will sometimes prove impossible to distinguish between proprietary transactions and trading done for the benefit of clients.

The regulators who drafted the proposal -- the Federal Reserve, the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, and Securities and Exchange Commission -- conceded that telling the difference between a trade made for the bank’s own account and on behalf of a customer is hard.

“Although the purpose and function of these two activities are markedly different - market making-related activities provide intermediation and liquidity services to customers, while proprietary trading involves the generation of profit through speculative risk-taking - clearly distinguishing these activities may be difficult in practice,” the draft proposal said.

Market Concern

Lawmakers who crafted Dodd-Frank exempted market making from the Volcker rule, along with certain forms of hedging and underwriting, because of concern that banning all proprietary trading could bring some activities to a halt. Goldman Sachs Group Inc., Citigroup Inc. and Morgan Stanley serve as market makers when they accept risk to facilitate client orders.

Banks including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley have already shut or plan to spin off proprietary trading units.

The proposal allows trading for meeting the near-term needs of clients. Banks must have compliance, record keeping and monitoring programs to identify and root out speculation designed to profit from price changes which will no longer be permitted, the agencies said. In contrast, so-called “bona fide” market making supplies liquidity to clients and generates revenue mainly through fees, commissions and the difference between buy and sell prices.

The proposal was released on Oct. 11. The public can comment until Jan. 13. A final version is slated to take effect on July 21, 2012.

To contact the reporter on this story: Matthew Leising in New York at

To contact the editor responsible for this story: Alan Goldstein at

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