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Proposal making 'material changes' to Volcker rule in works, Quarles says

Federal regulators are working on a proposal that would make "material changes" to the Volcker rule, Federal Reserve Vice Chairman for Supervision Randal Quarles said March 5.

Quarles said the rule is an example of "a complex regulation that is not working well." He has previously mentioned an ongoing review from five regulatory agencies on simplifying the rule but said March 5 they would put out a proposal for comment "relatively soon, in Washington time."

Part of the Dodd-Frank regulatory framework that followed the financial crisis, the Volcker rule bans proprietary trading at banks. It has been in effect since 2014.

Banks spend "far too much time and energy" analyzing whether individual transactions comply with the rule, Quarles said at an Institute of International Bankers event in Washington, D.C. That, he added, is partly because the definitions of key terms such as "proprietary trading" are not clear enough.

"It should not be a guessing game or require hours of legal analysis of complex banking and securities regulations ... to determine if a particular entity is a covered fund," he said. "It should not happen — although it has happened — that our supervised firms come to us and ask questions about whether a particular derivative trade is subject to the rule, and we cannot give them our own answer or a consistent answer across the five responsible agencies."

An area that might get tweaked, Quarles said, is the "complex series of requirements" that foreign-owned banks face if they want to continue such trading outside the United States. Regulators, he added, are also looking at making the compliance process easier for foreign banks "with limited U.S. operations and small U.S. trading books."

Quarles reiterated his support for a Senate bill aimed at lessening requirements for smaller banks, particularly a provision that would exempt banks with less than $10 billion in assets from the Volcker rule. He also indicated the Fed still would room to simplify requirements for those institutions.

He also pushed back against the notion that the Fed thinks the postcrisis regulatory framework "went too far." He said Dodd-Frank brought about sensible regulations and that a review of whether they can be simplified is necessary, just like in any organization that reviews major undertakings to ensure they are working smoothly.

"I don't view that as relaxing regulation," he said. "I view that as improving it."