Banking Regulators to Impose Restrictions on US Banks on Short Term Trades

October 07 00:00 2011

New York, October 7 ( – A draft of the so-called Volcker Rule indicates that restrictions under a proprietary trading ban are likely to be imposed on US banks trying to gain from or hedge against short-term price movements in securities and derivatives markets. The regulation is being written by four federal banking regulators and Federal deposit Insurance Corp. and is likely to be released on Oct. 11.

The definition of ‘short-term’ has not been provided in the draft by the financial regulators but they wrote that “it is often difficult to clearly identify the purpose for which a position is acquired or taken and whether that purpose is short-term in nature.”

The Volcker rule seeks to reduce the chance of risky investments with their own capital by banks that might endanger their deposits. It was part of the Dodd-Frank financial overhaul enacted last year, and policy makers are drafting regulations to enforce it.

Preparations are being made by banks like JPMorgan, Goldman Sachs and Morgan Stanley to deal with the rule by shutting or making plans to spin off stand-alone proprietary trading groups.

According to the draft, the rule will cover foreign banks if they have US-based staff involved in the restricted trades. Complaints have been made by overseas lenders that this provision might force them to fire or relocate US employees.

Banks would also have to institute compliance programs to monitor when traders are moving towards banned positions.