Fed’s Tarullo Says Volcker Rule Will Prevent More London Whales

Federal Reserve Governor Daniel Tarullo said regulators are writing a final version of the Volcker rule to block any repeats of JPMorgan Chase & Co.’s $6.2 billion in losses last year from derivative bets by a trader dubbed the London Whale.

“One of the key mandates to the staff from all the five agencies working on the final rule has been to ensure that London Whale, in substantive and procedural terms, couldn’t happen again,” Tarullo said yesterday in response to audience questions after a speech in Washington. He called the JPMorgan losses “a real-world case” that allows them to backtest the Volcker rule, which bans proprietary trading at banks.

Tarullo, 60, is the Fed governor in charge of bank supervision and regulation and is overseeing the central bank’s implementation of the Dodd-Frank financial regulation overhaul - - including Volcker. He said the proposed version would’ve prevented the losses by JPMorgan trader Bruno Iksil because it requires banks to show how trades work as hedges instead of as proprietary trades.

The Fed and four other U.S. financial regulatory agencies are working to finish a final version of the rule before the end of this year. Volcker is the last major rule of a series of Dodd-Frank provisions meant to improve the strength of the U.S. financial system after the 2008 credit crisis.

‘Herculean Task’

In a separate speech, U.S. Securities and Exchange Commission member Kara Stein said the effort to complete the Volcker rule is a “Herculean task” that regulators will complete with imperfections.

The current version “is not the rule I would have written,” Stein said in a speech yesterday at an American Bar Association conference in Washington, without saying she would oppose the proposal as it stands.

“My hope is when it comes time to vote on it, that the rule will be strong enough and faithful enough to Congress’ direction that I will be able to support it,” she said.

Stein has pushed for tightening an exemption that would let banks classify some trading as permitted hedging activity, according to three people familiar with the negotiations.

Tarullo also said in his speech to the Americans for Financial Reform and Economic Policy Institute that large banks should be subject to higher capital requirements if they rely heavily on non-deposit funding.