After months of trying to balance the Volcker Rule’s basic goal of banning commercial banks from proprietary trading on the one hand, and industry groups’ concerns on the other, the CFTC has announced a roundtable on the controversial measure, which may clarify the details of the rule’s final implementation.
The roundtable, scheduled for May 31, will bring together reform advocates, industry groups and former regulators, will focus on what types of trading should be exempt from the ban. As currently written, the rule bans proprietary trading but allows hedging and market-making for customers seeking to trade securities.
Industry groups have been seeking broader exemptions, but their efforts have stalled since JPMorgan Chase announced a loss of at least $2 billion on a trade that may or may not (depending on who you ask) have been allowed had the Volcker Rule already been in effect. Proponents of stricter regulation have used the loss as ammunition in the argument that the rule should define hedging as conservatively as possible, in order to prevent banks from engaging in proprietary trading masked as hedging. One issue, for example, is whether banks should have to hedge each position individually, or be allowed to engage in portfolio hedging, which was the approach that led to JPMorgan’s trade.
The underlying problem, of course, is that there is a gray area between hedging and proprietary trading, and the dividing line will depend on which side can prevail in the debate. Industry groups are on the defensive at the moment, but it is far from clear that they will lose the war. Next Thursday may provide some insight into how the Volcker Rule will look in its finalized form.
