After Congress passed the Dodd-Frank financial reforms last year, newly empowered regulators were given the task of interpreting and enforcing the law’s 2,300+ pages of provisions. The scope of many of the rules has not yet been decided.
Among the most controversial of these provisions is the Volcker Rule, named after Paul Volcker, former Federal Reserve Chairman and the rule’s biggest proponent. The rule will generally restrict banks and bank holding companies from engaging in proprietary trading, as well as certain hedge fund and private equity activities. As with much of Dodd-Frank, many provisions of the Volcker Rule have not yet been interpreted or put in place.
[Volcker, himself, is expected to step down from his role as a top advisor to President Obama.]
Regulators active in the new Financial Stability Oversight Council will soon release their first outline covering how the Volcker Rule should be interpreted and enacted. The outline will have major implications on how banks manage or divest their private equity, hedge fund and merchant banking functions.
The F.S.O.C.’s deadline for releasing the report is January 22nd, six months plus a day after the Dodd-Frank was signed into law by President Obama. The Treasury did not offer details on the exact date of the report’s release.
Gregory Lyons, a partner at Debevoise & Plimpton, and an attorney advising clients on the Volcker Rule, said many investment banks and financial institutions have already begun to spin off their lucrative proprietary trading desks in anticipation of remaining bank holding companies, and, consequently, staying subject to the Volcker Rule.
Just this week, the Wall Street Journal reported that Morgan Stanley planned to spin off one of its proprietary trading desks in 2012. About 60 of its traders will follow chief trader Peter Muller when the spin off goes into effect.
While proprietary trading will clearly be impacted by the Volcker Rule, it is not yet clear how deep it will impact investment banks’ private equity and merchant banking operations.
Lyons said that certain financial institutions, including insurance companies that also own banks or thrift institutions, may want to shed these banking operations to have a freer hand with their investments, and escape being regulated by the Volcker Rule.