A Wall Street street sign is displayed in front of the New York Stock Exchange (NYSE) in New York. (Photographer: Michael Nagle/Bloomberg)

Volcker 2.0 to Face Do-Over After Wall Street Complaints

(Bloomberg) -- U.S. regulators are poised to scrap their proposal for revising Volcker Rule restrictions on banks’ trading in favor of a newer version as they respond to a misstep that drew fire from Wall Street lobbyists, according to people familiar with the effort.

The Federal Reserve and other financial regulators are working on changes to their Volcker 2.0 plan that will likely require the agencies to re-propose the rule, said two people who requested anonymity because the process isn’t yet public. No final decision has been made to abandon the earlier proposal, the people said.

In writing last year’s proposal, the agencies inserted a new standard for transactions that they’d consider banned as proprietary trading. That measure drew vigorous criticism from bankers, who said it would make the often-criticized rule even more burdensome than the existing version. It isn’t clear what would replace the accounting standard that drew the complaints.

A new Volcker proposal would require approval by five separate agencies. Bryan Hubbard, a spokesman for the Office of the Comptroller of the Currency, said no decision has yet been made on re-proposing. Spokesmen for the Fed, Federal Deposit Insurance Corp. and Securities and Exchange Commission declined to comment, and a spokeswoman for the Commodity Futures Trading Commission didn’t respond to a request for comment.

Big Priority

Simplifying the rule was a big priority for the group of agency chiefs installed by President Donald Trump, and they moved relatively quickly to get out the initial revision in May.

Fed Chairman Jerome Powell told lawmakers last week that he’s heard the industry’s worries about the proposed new standard and also that the current restrictions unnecessarily hamper investments in certain funds. He said the Fed is “looking carefully” at ways to address the complaints.

Comptroller of the Currency Joseph Otting was more pointed in January, when he said, “I think we have to step back and think through that again,” and that the agencies may have “overshot.”

Goldman Sachs Group Inc. -- one of the banks most affected by the regulation -- had called Volcker 2.0 “highly problematic” in an October letter to the agencies. Goldman urged the regulators to try again.

One of industry’s grievances about the current version of the rule is that positions held for fewer than 60 days are presumed to be banned. Regulators tried to fix that concern by replacing it with a new standard linked to accounting rules. Specifically, banks would be barred from trading anything that fits within an accounting category that ties the value of securities to market prices. Bankers argued that it could ban a wider range of transactions than the original.

The measure, named for former Fed Chairman Paul Volcker, was among the government’s most significant and contentious responses to the 2008 crisis. It was a central component of the 2010 Dodd-Frank Act, and the first version took more than three years to write. If the agencies return to the drawing board for the overhaul, it could add several months to the process, which would require another round of public comment.

Treasury Secretary Steven Mnuchin in late 2018 blamed the Volcker rule and high-frequency traders for year-end market volatility. The rule has been linked in some studies to reducing bond-market liquidity.

©2019 Bloomberg L.P.