Federal Reserve Governor Daniel Tarullo said a new rule preventing banks from engaging in proprietary trading will be further developed as supervisors implement the new standards.
“The fundamental challenge is to distinguish between proprietary trading, on the one hand, and either market-making or hedging, on the other,” Tarullo said in a statement released prior to the Board of Governor’s meeting today where they will vote on adopting the rule. “Implementation will be particularly important” in shaping the rule in future, he said.
Called the Volcker Rule, after former Fed Chairman Paul Volcker who promoted it, the new regulation prohibits banks from engaging in short-term proprietary trading of securities, derivatives, commodity futures and options for their own account and from owning or sponsoring hedge funds or private equity funds.
In a separate statement, Fed Chairman Ben S. Bernanke said writing the rule “has taken longer than we would have liked.”
“The ultimate effectiveness of the rule will depend importantly on supervisors, who will need to find the appropriate balance while providing feedback to the Board on how the rule works in practice,” he said.
Tarullo said JPMorgan Chase & Co.’s so-called London Whale trading loss “allowed staff to test the procedural and substantive requirements of the proposed rule against a real-world example of what should not happen in a banking organization.”
He said the part of the rule dealing with proprietary trading has been “simplified somewhat” by “reducing the number of metrics that will be used in the reporting and analysis” of trading data.