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Volcker rule proposal only first step in adjustments, regulators say

U.S. regulators took another step May 31 in advancing a proposal to revise parts of the Volcker rule, but agency leaders say that plan is just the start of their work on adjusting the post-crisis safeguard.

Five regulatory agencies released a long-awaited proposal May 30 to tweak the Volcker rule, which bans proprietary trading at banks. The Federal Deposit Insurance Corp.'s board of directors signed off on the proposed changes May 31, a day after the Federal Reserve took the first step in seeking public comments on it.

But more changes are coming beyond the 373-page plan, regulators say, noting that they will consider further revisions based on stakeholders' comments and that they are also seeking more feedback on any other changes they can make to the current framework. The agencies, for example, are seeking comments on whether they should adjust the portion of the Volcker rule that restricts banks' investments and relationships with hedge funds and private equity firms.

At the Federal Reserve's May 30 meeting, Fed Vice Chairman for Supervision Randal Quarles said the plan was the agencies' "best first effort at simplifying and tailoring the Volcker rule." Comptroller of the Currency Joseph Otting also said May 31 that the proposal lays the groundwork for further reforms.

"It demonstrates the progress — makes me even more optimistic of what we would like to achieve," Otting said at the FDIC board meeting.

The FDIC signed off on the proposal at the meeting, and Otting said he also approved it on behalf of his agency May 30. The two other agencies responsible for implementing the Volcker rule — the Commodity Futures Trading Commission and the Securities and Exchange Commission — are holding open meetings to discuss the issue June 4 and June 5, respectively.

The Fed, which went first in approving the proposal, is taking comments on it for a 60-day period.

To a certain extent, Congress got ahead of the agencies by passing a Dodd-Frank revision law that exempts banks with less than $10 billion in total assets from the Volcker rule entirely, said David Freeman, a partner at the law firm Arnold & Porter. The proposal relieved some 5,000 banks and thrifts from having to comply with the requirement, according to an S&P Global Market Intelligence analysis.

Regulators have billed their proposal as one that removes unnecessarily complex elements of the current Volcker rule framework, following their years of experience in implementing it and noticing some difficulties.

"It's really just sort of trying to streamline some of the ways in which banks establish and operate their compliance programs. ... It's not really reducing the statutory restrictions in the rule," Freeman said.

The proposal, for example, creates three categories of banks that will see different requirements based on how large their trading operations are: those with at least $10 billion in eligible trading assets and liabilities; those between $1 billion and $10 billion; and those with less than $1 billion. It also simplifies the metrics that banks have to report to regulators and gives banks more flexibility to meet the rule's requirements.

But a significant part of the proposal consists of regulators asking for comments on changes they can make to the "covered fund" part of the Volcker rule, the portion relating to banks' relationships with hedge funds and private equity firms.

The area is one that is "ripe for clarification," as the legal language on what is allowed under the rule has led to significant confusion in the industry, said Anna Pinedo, a partner at the law firm Mayer Brown.

In their 2013 framework for implementing the Volcker rule, the agencies adopted a formal definition of the covered funds that are subject to the restrictions. But they had also laid out several exemptions for some companies, and now regulators are looking for feedback on whether "the definition should be further tailored and exclude certain additional types of funds."

The American Investment Council, which represents private equity firms, submitted a letter in September to the OCC suggesting several possible changes to the current rules. Among them is a permanent clarification that non.-U.S. banks can invest in funds that are not offered to U.S. investors, called foreign excluded funds.

In July 2017, regulators said they would not take action for a one-year period on any foreign excluded funds that meet certain criteria. This week's proposal would extend that no-action period by another year and would seek comments on how regulators can better address the issue.