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CFTC Votes 3-2 to Propose Volcker Rule Proprietary Trade Ban

The U.S. Commodity Futures Trading Commission proposed limits on banks’ proprietary trading and hedge fund investments under the Dodd-Frank Act’s Volcker rule.

The CFTC voted 3-2 to propose the ban, becoming the last of five regulators to seek public comment on the proposal. Today’s vote opens the measure to 60 days of public comment.

The rule, named for former Federal Reserve Chairman Paul Volcker, was included in Dodd-Frank to rein in risky trading at banks that benefit from federal deposit insurance and Fed discount window borrowing privileges.

The CFTC didn’t participate when the Fed, Federal Deposit Insurance Corp., Securities and Exchange Commission and Office of Comptroller of the Currency released a joint proposal last year. Those four agencies extended the comment period on their proposal until Feb. 13 after financial-industry groups and lawmakers cited the complexity of the rule and the lack of coordination with the CFTC in seeking an extension.

The proposed rule would ban banks from making trades for their own accounts while allowing them to continue short-term trades for hedging or market-making. It also would limit banks’ investments in private-equity and hedge funds. Dodd-Frank sets a July 21 effective date for the Volcker rule ban on proprietary trading at banks.

Swap Units

The CFTC proposed a version of the rule that is largely the same as the other agencies and sought additional feedback on how the rule would affect derivatives market participants under its jurisdiction. The CFTC would have authority over banks’ subsidiaries, such as swap-dealing units and futures brokerages.

“I think our role here is important, it’s significant, but it’s actually just a supporting member,” CFTC Chairman Gary Gensler said at the meeting. “The bank regulators have the lead role.”

Republican commissioners Scott O’Malia and Jill E. Sommers voted against the proposal, citing the rule’s complexity and difficulty to enforce.

“This rule is so bad it really merits re-proposal,” O’Malia said at the meeting. The regulation would have “unpredictable consequences” for liquidity in the $708 trillion global swaps market, he said.

The House Financial Services Committee has scheduled a Jan. 18 hearing on oversight of the Volcker rule.

‘Overly Complex’

“The current proposal twists a simple concept into an overly complex and burdensome regulation,” Representative Randy Neugebauer, a member of the committee, said in a Dec. 20 letter urging a delay in the implementation of the rule. “Going significantly beyond Congressional intent, this proposal will make it difficult for banking entities to manage risk prudently,” the Texas Republican said in the letter signed by 121 House lawmakers, including four Democrats.

The Volcker rule will affect banks’ standalone proprietary trading desks and trading for their own accounts conducted elsewhere in the companies.

Standalone proprietary-trading groups at six bank holding companies -- Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley -- had a net loss of about $221 million from June 2006 through the end of 2010, according to a July 13 Government Accountability Office report.

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