March 26, 2012

Volcker Rule Ban on Prop Trading Finally Finalized

Finally, five years after the financial crash and more than 3 years since the financial reform law was passed, on December 10, five financial regulators voted to approve the Volcker Rule to ban the high risk proprietary trading at the biggest banks on Wall Street. In a statement, Better Markets CEO Dennis Kelleher called the vote “a major defeat for Wall Street and a direct attack on the high risk ‘quick-buck’ culture of Wall Street that focuses on big short-terms gains regardless of the risks to others.” He also appeared on PBS Newshour to discuss whether or not the new rule will change the culture of Wall Street.

Though the final rule will not end all gambling activities on Wall Street, it should limit them and reduce the risk to Main Street. But make no mistake about it: regulators now own the Volcker rule. They have to aggressively enforce it, ensure it is complied with or answer for any future blowups. Accountability on Wall Street and Washington is essential. If regulators fail again, then they must pay for that failure with their jobs.

Here are some of the key articles that explain what you need to know about the final rule:

In a positive sign, the final rule is stronger than the original draft and stronger than Wall Street hoped and expected. But Wall Street, after relentlessly fighting the Volcker Rule ban for the past 3 years, will inevitably seek to try to evade the rule. The regulators will need to be vigilant to ensure that the ban is working and they must not hesitate to enforce it aggressively if it is violated.

The Fight for the Final Rule

In the three years since the Volcker Rule was created as part of the financial reform law, Wall Street and its Washington allies have aggressively lobby to weaken, delay or kill the rule.

For three years, Better Markets led the charge for a strong Volcker Rule against relentless Wall Street lobbying to allow a few big banks to keep their ability to place bets for their own accounts – while backed by taxpayer guarantees.

Industry’s last attack was an effort by the Chamber of Commerce and other Wall Street allies to force regulators to delay the rule. That effort is why Better Markets sent a November letter to financial regulators to rebut these bogus claims. As part of our advocacy for a strong rule throughout the summer and fall of 2013, we made this presentation to SEC Chair Mary Jo White and other SEC officials and this presentation to other regulators. We also gave them actual language suggestions which would accomplish these goals.

In December 2012, Better Markets President and CEO Dennis Kelleher testified before the House Financial Services Committee on the Volcker Rule. His Opening Statement can be read here; his full written testimony can be read here; and, the press release can be read here and the full transcript from the lively hearing can be read here. A video of the hearing is available here.

Mr. Kelleher also gave an opening keynote speech in March 2012 on the need for a strong Volcker Rule at the Brussels’ based-Finance Watch’s conference. Here is Mr. Kelleher’s PowerPoint presentation from conference.

To reinforce the points in our five comment letters (listed below), we also met as often as possible with the regulators to encourage them to pass a strong, enforceable rule as quickly as possible. This was never rocket science and a rule that works well for market participants and regulators should have been finalized a long time ago. Only Wall Street lobbying and bogus arguments from its allies prevented this.

Since that December 2012 House Financial Services Committee hearing, the Volcker Rule remained in agency limbo while Wall Street’s megabanks continued their flagrant reckless behavior. In a welcome development, administration officials, most notably Treasury Secretary Jack Lew, publicly stated that financial reforms including the Volcker Rule, would be implemented by the end of 2013, or other measures will be taken to end too-big-to-fail. Better Markets welcomed the strong words from Secretary Lew, but reminded financial regulators that “strong words must be followed by stronger action.”

With the vote December 10, it was clear that regulators took Secretary Lew’s words to heart. “But,” as Dennis Kelleher said in a statement that was generally supportive of the action, “make no mistake about it: regulators now own the Volcker rule. They have to aggressively enforce it, ensure it is complied with or answer for any future blowups. Accountability on Wall Street and Washington is essential. If regulators fail again, then they must pay for that failure with their jobs.”

For our part, Better Markets will continue to push regulators to make sure the ban is enforced. As the FT quoted Dennis Kelleher from our November letter to financial regulators, “the Volcker Rule is an essential measure to stop large, too-big-to-fail [Wall Street banks] from making huge, highly-leveraged, swing-for-the-fences bets to inflate their bonuses, while shifting the risk of catastrophic loss to the public.”

Volcker Rule Resources

Better Markets filed the following four comment letters on the regulators’ proposed Volcker Rule:

November 5, 2010 comment letter to the FSOC on a 2011 study of the Volcker Rule.
February 13, 2012 comment letter to the Federal Reserve and the FDIC
April 16, 2012 comment letter to the CFTC
June 19, 2012 comment letter to the SEC
January 8, 2013 comment letter to the OCC

Here’s our March 25, 2012 Bloomberg op-ed: “Ban Prop Trading Under Other Names.”

The Better Markets Newsroom has compiled a complete list of news resources related to the Volcker Rule.

Here are a handful of Better Markets Blog posts on the Volcker Rule and its implications:

Regarding one of the specific objections to the Volcker Rule, Better Markets has argued that foreign governments’ objections to the rule’s trading ban on non-US sovereign debt are meritless. These two blog posts explain why:

In addition, here are a few key articles on that same subject: