The Federal Reserve on May 30 joined with four other federal bank regulatory agencies in rolling out a 373-page proposed rule to simplify and relax some of the regulatory burdens of the Volcker Rule restrictions on proprietary trading by financial institutions. The new rule, which won unanimous approval at the Fed's Wednesday board meeting, would seek to tailor restrictions based on a firm's level of trading activity. The changes are intended to provide banks with more flexibility and lower compliance costs and are part of an ongoing revision of the regulatory regime intended to boost lending and economic growth. Under the banking regulatory reform bill signed into law on May 24 by President Trump, banks with less than $10 billion in assets are now exempted from the Volcker probation on depository institutions engaging in riskier investments.

Key provisions of the proposed multi-agency rule include: 

  • Creating three tiers for banks based on their level of trading activity, with those having $10 billion or more in trading assets and liabilities deemed to have "significant" activity, banks in the $1 billion to $10 billion range, defined as having "moderate" activity and those under $1 billion presumed to be in compliance, though they would still have to report their net trading gains and losses
  • Providing more clarity by revising the definition of "trading account" in the rule, in part by relying on commonly used accounting definitions
  • Clarifying that firms that trade within appropriately developed internal risk limits are engaged in permissible market making or underwriting activity
  • Streamlining the criteria that apply when a banking entity seeks to rely on the hedging exemption from the proprietary trading prohibition
  • Limiting the Volcker Rule's impact on the foreign activity of foreign banks
  • Simplifying the trading activity information that banking entities are required to provide to the agencies. 

Enacted as part of Dodd-Frank, the rule named for former Fed Chair Paul Volcker was intended to prevent banks that receive taxpayer backing in the form of deposit insurance from engaging in risky trading activities. But a consensus has emerged among industry stakeholders and regulators that the rule in practice has been marred by unclear enforcement metrics and differing interpretations by overlapping agencies charged with administering it. The new proposed rule does not overturn the Volcker Rule; as Fed Chair Jerome Powell noted, it remains "faithful to both the text and the spirit of the [Dodd-Frank] law." The other agencies charged with enforcement of Volcker – the FDIC, OCC, SEC and CFTC – are also expected to approve the rule change in the coming days. Comment will be accepted for 60 days after the proposal's publication in the Federal Register.