Finance industry participants have expressed concern over the burden of complying with the proprietary trading restrictions in the Volcker Rule and the potential effects of those restrictions on the competitiveness of U.S. banks. The proposed regulations impose significant new recordkeeping and reporting requirements to provide data for banking entities and regulators to police the boundaries between prohibited proprietary trading and permitted activities. In the proposed regulations, the agencies have provided exceptions prescribed by statute to the prohibition against proprietary trading, with the objective of allowing banking entities to continue to provide traditional client-oriented financial services, including underwriting, market making and asset management services, and to engage in hedging and liquidity management activities designed to enhance the safety of their operations.2 Regulators face considerable pressure from the financial services industry to preserve the scope of these activities, which are difficult to distinguish, both in regulatory language and in practice, from the prohibited proprietary trading activities.
These challenges have been compounded by the level of interagency cooperation required for the formulation of the proposed regulations. Representatives of individual agencies involved in the rulemaking process have publicly expressed reservations about the end result. Moreover, the Commodity Futures Trading Commission (CFTC), the agency that will develop and enforce the new regulatory regime for swap transactions imposed by the Dodd-Frank Act, did not join in issuing the proposed regulations and is expected to adopt its own version of the Volcker Rule.5 The CFTC will enforce its formulation of the Volcker Rule with respect to entities for which the CFTC is the “primary financial regulatory agency.” Its abstention illustrates the difficulties the agencies would face in assembling and maintaining a consistent regulatory and enforcement approach, especially in areas where the regulatory boundaries between the CFTC and banking agencies are not well defined. In a regulatory area as complex and nuanced as this one, enforcement would be especially vulnerable to localized failures of will or of budget.
Despite the volume and specificity of the proposed regulations, these difficulties make it unlikely that the proposed regulations, as released, are in their final form. The agencies signaled that revisions are likely by including requests for public comment on hundreds of topics bearing on virtually every aspect of the regulations. The public comment period will end on January 13, 2012.
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