Volcker rule passed by US finance regulators

11 December 2013

All five US financial regulators have approved the final text for the US Volcker rule, which has been designed to limit the finance industry in the aftermath of the financial crisis and ban prop trading.

The regulation bans banks from using their own funds for trading activities and is named after the former Federal Reserve chairman Paul Volcker.

The rule has formed an integral part of the 2010 banking reform legislation known as Dodd-Frank, but has faced implementation difficulties, due to fierce on-going opposition from the banking industry.

The rule covers proprietary trading, banning the use of the banks' own funds to make trades. Banks had been hoping for a less strict interpretation of the US regulation but this has not come to pass with yesterday's final regulatory text adopting a maximal approach. This has no doubt been spurred on by the desire to preven bank trading desks from using alledged risk hedges to hide prop trading deals, an activity that lead to the $6bn worth of losses at JPMorgan thanks to the so-called 'London Whale' trader.

Although banks have been preparing for the US Volker rule for some time, the stricter-than-expected stipulations could still hurt profits in the near term.

Individual banks are not expected to sue to stop the implementation of the Volcker rule, but some analysts expect industry groups representing them, such as the US Chamber of Commerce, to engage in litigation to block the measure, and indeed such legal challenge measures are understood to be underway.

By Claire Archer and Neil Ainger

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