Fed vice chairman Quarles says Volcker rule revision in the works

The Federal Reserve is working with other financial regulators to produce a proposed rule to inject more clarity and transparency into the Volcker rule, Fed Vice Chairman for Supervision Randal Quarles said during a speech Monday before the Institute of International Bankers Annual Washington Conference in Washington, D.C.

Quarles said the Fed and other four agencies with Volcker rule responsibilities have resumed a process begun last fall under the Administrative Procedures Act. Regulators are working to develop a proposal for public comment that would make material changes to the Volcker rule regulations.

“In that process,” Quarles said, “we will take account of our own experience with the regulations since implementation, and we also want to take account of the views of market participants and other interested parties with views on the Volcker rule, including what is working and what is not. We expect this process will proceed with dispatch.”

The Volcker rule, created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in the wake of the financial crisis, generally requires that banks having access to Federal Deposit Insurance Corp. (FDIC) insurance and the Federal Reserve discount window not engage in risky, speculative trading for their own account.

While rooted in statute, the rule is “exceedingly complex,” Quarles noted, and “we have to ask how to improve the framework of the implementing regulation to make it more workable and less burdensome in practice from both a compliance and supervisory perspective.”

Some things can’t be changed without a change in the law. Quarles noted, for example, the broad support that currently exists for exempting community banks from the Volcker rule. “Short of a statutory exemption, we can only do our best to mitigate burden,” he said.

Along that line, he said, regulators could be clearer and more transparent regarding which activities are subject to the Volcker rule’s implementing regulation. “The definition of key terms like ‘proprietary trading’ and ‘covered fund’ should be as simple and clear as possible,” he said. “It should not be a guessing game or require hours of legal analysis of complex banking and securities regulations to determine if a particular entity is a covered fund.”

The implementing regulation, he said, also could be improved by prescribing a clearer test for activities designed not to exceed the “reasonably expected near-term demands” (RENT’D) of clients, customers or counterparties – one of the key exemptions from the prohibition on proprietary trading. “We want banks to be able to engage in market making and provide liquidity to financial markets with less fasting and prayer about their compliance with the Volcker rule,” Quarles said.

This work on the Volcker rule will also address impacts on foreign banking organizations (FBOs), he said. He noted, for example, the fact that certain foreign funds – those organized outside the United States by foreign banks in foreign jurisdictions and offered solely to foreign investors – are subject to the Volcker rule due to Bank Holding Company Act control principles. Regulators issued a stay of enforcement last summer, and Quarles said he expects that stay would continue as regulators consider regulation improvements.

Regulators will also look at how to simplify the rule’s exemptions for FBOs trading and engaging in covered fund activities solely outside the U.S. and are considering broad revisions to the Volcker rule compliance regime. “We will be looking for ways to reduce the compliance burden of the Volcker rule for foreign banks with limited U.S. operations and small U.S. trading books.”

Fed Vice Chairman Quarles speech on the Fed’s regulatory agenda for foreign banking organizations