The Volcker rule, a centerpiece of the 2010 Dodd-Frank financial law aimed at stopping some of the risky banking practices that contributed to the economic meltdown, was approved by five key regulators on Tuesday, clearing the way for its implementation.
The U.S. Commodity Futures Trading Commission became the fifth and final body to approve the rule. The Federal Reserve and the Federal Deposit Insurance Corp. were also among the agencies that gave the green light.
"As part of this Wall Street reform, we fought to include the Volcker Rule — a rule that makes sure big banks can't make risky bets with their customer's deposits," President Obama said in a statement on Tuesday. "The Volcker Rule will make it illegal for firms to use government-insured money to make speculative bets that threaten the entire financial system, and demand a new era of accountability from CEOs who must sign off on their firm's practices.
"Our financial system will be safer and the American people are more secure because we fought to include this protection in the law," the president said.
Treasury Secretary Jack Lew said the task of financial regulatory reform "is an ongoing exercise in remaining vigilant against market behavior that threatens the stability of our financial system. Nevertheless, completion of this rule is an important milestone."
"The 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. The Fed also approved an extension to give banks until July 2015 to comply with the rule, though firms will be expected to make 'good faith' efforts to get into compliance earlier."
As The Associated Press points out, market making "has been very lucrative for big banks like JPMorgan Chase, Bank of America and Citigroup."
The New York Times' DealBook says that although the Volcker rule represents just one of 400 rules under Dodd-Frank, it has become "synonymous with the law itself."
"In some crucial areas, regulators adopted a harder line than Wall Street had hoped. Under the rule, which bars banks from trading for their own gain and limits their ability to invest in hedge funds, the regulation includes new wording aimed at the sort of risk-taking responsible for a $6 billion trading loss at JPMorgan Chase last year. The rule also requires banks to shape compensation packages so that they do not reward 'prohibited proprietary trading.'
"In addition, it requires chief executives to attest to regulators every year that the bank 'has in place processes to establish, maintain, enforce, review, test and modify the compliance program,' a provision that did not appear in an October 2011 draft of the rule."
NPR's John Ydstie, speaking on Here & Now, said that under the rule, banks will still be able to buy and sell securities for their customers, and they will be able to trade securities as a hedge against risks.
"The problem here is that it's very tricky figuring out whether any given trade is a hedge or simply an attempt to make a profit," Ydstie said. "The Volcker rule ... says that any trade has to be tied to a certain asset and to be defensible as a hedge, designed to reduce one or more specific, identifiable risks. ...
"The rule also bans something called portfolio hedging, which can involve a huge variety of assets," he said, adding that's the kind of trading that got JPMorgan in trouble.
Over the past three years, the Volcker rule has gone through numerous drafts, debates and was the subject of intense lobbying by Wall Street banks.
In a statement, former Federal Reserve Chairman Paul Volcker, who the rule was named after, said getting it approved was "a long and arduous process."
"I look forward to a process, called for by the new regulation, in which the boards of directors and the top management of our leading commercial banks will cooperate closely in implementing the new rules within the institutions for which they are responsible," Volcker said. "Appropriate internal controls and practical 'metrics' for identifying proprietary trading are central to a workable and effective administration of the regulation."