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US bank regulators roll out revisions to Dodd-Frank proprietary trading rules

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US bank regulators roll out revisions to Dodd-Frank proprietary trading rules

Federal regulators proposed May 30 to ease requirements for banks under the Volcker rule, saying their new framework would remove many of the rule's complexities while keeping a strong safeguard against risky trading.

The effort marks a major step in revising the Dodd-Frank Act-mandated rule, which bans proprietary trading at U.S. banks and restricts their investments in hedge funds and private equity firms.

One major proposed change would eliminate and replace a key assumption under the definition of proprietary trading: the "rebuttable presumption" standard. Under this, banks' financial positions held for fewer than 60 days are deemed proprietary trading and not allowed, unless they can prove that those transactions meet certain exemptions.

The proposal would replace the current standard with an accounting-based one, requiring banks to determine their net gains and losses for each trading desk daily. Companies that had fluctuations above $25 million over a 90-day period would need to show regulators that they are complying with the law's prohibition of proprietary trading. Those below that threshold "would not have to demonstrate their compliance with the proprietary trading restrictions on an ongoing basis," Fed staff said in a memo.

Regulators also proposed reducing compliance standards for firms with more-limited trading activities, setting up different expectations for firms in three categories.

Companies with at least $10 billion in trading assets and liabilities would see the most stringent compliance requirements. The Federal Reserve said there are 18 of those firms and that they account for roughly 95% of the trading assets and liabilities among U.S. banks.

Those that fall between a proposed $1 billion and $10 billion threshold would see more moderate requirements. Meanwhile, regulators would assume that firms with less than $1 billion in such activity are complying with the rule. Those companies would see their reporting requirements drop substantially, though the proposal says agencies can "rebut the presumption of compliance" if it notices that the firms are engaging in prohibited activities.

Fed Chairman Jerome Powell said at a May 30 meeting that the proposal is the result of months of work from federal regulators to find ways to simplify some of the "uncertainty and complexity" for companies that are subject to it.

The Fed worked on the proposal with the four other agencies responsible for the implementation of the Volcker rule: the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Securities and Exchange Commission, and the Commodity Futures Trading Commission.

The Fed is taking comments on the plan and seeking feedback on further improvements it can make. Fed Vice Chairman for Supervision Randal Quarles, for example, said the plan is "not the completion of our work" to simplify the rule. One of the topics the agencies are hoping to get comments on is whether it may be more effective to have a "single point of collection" for the metrics companies have to report, rather than spread out that responsibility between five agencies.

The Fed's Board of Governors unanimously approved sending the proposal to a public comment period, which will last 60 days. The FDIC Board of Directors has scheduled a meeting for May 31 to discuss Volcker rule changes.

The changes are in addition to lawmakers' efforts to pare back the Volcker rule. The recently passed Dodd-Frank revision bill exempts banks with less than $10 billion in total assets from the rule, and House Republicans have sought additional adjustments.

Industry groups generally praised the Fed's effort. Kenneth Bentsen, president and CEO of the Securities Industry and Financial Markets Association, said he welcomed the "growing recognition by policymakers of the unintended negative impact" of overly complex regulations. He added that his group would offer several recommendations.

Progressive groups, along with Sen. Elizabeth Warren, D-Mass., said the plan would weaken a critical part of Dodd-Frank and increase the risk of firms' failure.