“WASHINGTON—Regulators are set to usher in a new era of tough banking oversight on Tuesday that drills to the core of Wall Street’s profitable markets and trading businesses, according to a draft of the rule reviewed by The Wall Street Journal.
The so-called Volcker rule will put in place new hurdles for banks that buy and sell securities on behalf of clients, known as market making, and will restrict compensation arrangements that encourage risky trading, according to the draft.
Five U.S. financial regulatory agencies are expected to approve the rule, which bans banks from making bets with their own money and limits their ability to invest in certain trading vehicles, such as hedge funds and private-equity vehicles.
The approval would bring to an end a 2½-year effort to complete the 2010 Dodd-Frank provision. The final language of the Volcker rule could change before Tuesday’s vote. Regulators have told firms that they don’t expect to strictly enforce the rule’s provisions until 2015.
The rule, which hasn’t been publicly released, will require banks to provide “demonstrable analysis of historical customer demand” for financial assets they buy and sell on behalf of clients. That essentially requires a firm to prove it has engaged in a certain type of trading previously. It is an effort to keep banks from attempting to disguise bets made for a profit—so-called proprietary trading, which would be banned—as permissible market-making activity.
Multiple new requirements in the recent copy of the rule reviewed by the Journal are designed to discourage traders from hunting for loopholes to engage in proprietary trading. It states that “compensation arrangements” for traders should be designed “not to reward or incentivize prohibited proprietary trading.”
Bank chief executives, meanwhile, will be required to “attest in writing…that the banking entity has in place processes to establish, maintain, enforce, review, test and modify the compliance program” set up for the Volcker rule.
The draft of the rule shows how regulators are trying to push Wall Street to curb risky trading activity that critics say puts customer deposits at risk….”
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