Federal regulators' proposal to tweak the Volcker rule would remove some compliance requirements, but the cost savings banks would likely see is difficult to quantify, analysts say.
The proposal makes many simplifications to the Dodd-Frank requirement, which prohibits proprietary trading at banks and limits their investment in hedge funds and private equity firms. Regulators say their plan would remove some of the unnecessary complications they have noticed in the current framework, helping both banks and regulators. They also say firms with smaller trading activities should face fewer compliance requirements.
The five agencies responsible for implementing the Volcker rule have now signed off on sending their plan to a 60-day comment period, though three of those agencies' voting members opposed the proposal and cautioned against easing the current framework.
It is too early to determine how banks will respond to the proposed changes and whether they would see significant savings, analysts say. Peter Nerby, senior vice president at Moody's, said the Volcker rule is "too small a part of a big puzzle" of postcrisis regulations, making it hard to come up with specific estimates.
The proposal may also see substantial changes in the coming months as regulators read through the comments they receive, noted Raj Trehan, a Deloitte managing director. Regulators have said that more changes are coming and asked specific questions on their proposal more than 300 times, he pointed out.

Institutions with 'significant' trading operations
The top category of banks is sure to include those with larger trading operations, such as JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., Wells Fargo & Co., Morgan Stanley and Goldman Sachs Group Inc.
Fed officials say the top category includes 18 institutions, which account for 95% of banks' U.S. trading activity. The agency did not say what banks would make the list, and any U.S. government debt is excluded from the $10 billion calculation. That makes it difficult to say with precision what banks would fall under the top category. The above six companies, however, would likely make the cut, according to an S&P Global Market Intelligence analysis of their total trading assets and liabilities. HSBC North America Holdings Inc., DB USA Corp. and Barclays US LLC are also potential candidates.
Those banks would benefit from some of the simplifications that regulators are seeking. For instance, the proposal would ensure that any transactions that banks make accidentally but then correct do not count as proprietary trading.
These banks would have more flexibility to conduct permitted underwriting activities and any market-making transactions that help ensure markets remain liquid. Right now, companies have to measure the "reasonably expected near-term customer demand" for such activities at each trading desk. The proposal, though, would instead require companies to set up internal limits for those activities — and regulators would generally assume that companies are meeting near-term demand if they are coming within those limits.
"That's a much more black-and-white line and therefore easier to comply with and easier to enforce," said Nerby.
The metrics requirements are more of a mixed bag, Deloitte's Trehan said. One "welcome change" for banks in this category, he said, would give them 10 more days to report a set of required metrics to regulators. In their proposal, regulators said the current shorter timeline leads to reporting that is "often incomplete or contains errors."
But while regulators are proposing to eliminate some reporting metrics for these large banks, they would also require them to provide more information about their tradings desks' background and any changes in trading strategy.

Institutions with 'moderate' trading activity
The Fed indicated the middle category of institutions includes 22 companies, which altogether make up about 3% of banks' U.S. trading activity.
Regulators would require a less comprehensive compliance program for those companies. They would no longer have to document some metrics and report metrics to regulators.
Still, some of those companies may face a new requirement.
Right now, CEOs at companies with more than $50 billion in total assets, as well as those with trading assets or liabilities above $10 billion, need to personally attest that their compliance programs are appropriate. The regulators' proposal would broaden that pool by instead requiring that same attestation from CEOs of companies with more than $1 billion in trading assets and liabilities.
Fed Governor Lael Brainard, an Obama appointee, listed that as one of the reasons she supported the change.
"The requirement of CEO attestation is critical for this to work, in my view," she said at the Fed Board of Governors' May 30 meeting.
Institutions with 'limited' trading activity
Congress narrowed the institutions in the lowest category significantly by exempting banks with less than $10 billion in total assets from the Volcker rule. The Dodd-Frank rewrite that President Donald Trump signed into law May 24 had exempted more than 5,000 banks from complying with the rule, according to an S&P Global Market Intelligence analysis.
Randal Quarles, the Fed's vice chairman for supervision, said May 30 that though the new law "quite appropriately" exempts companies with less than $10 billion in assets from the Volcker rule, regulators should also recognize that firms with more limited trading activity present smaller proprietary trading risks.
But Rostin Behnam, a Commodity Futures Trading Commission member, said before voting against the proposal that those companies do not appear to be "any less likely" to violate the Volcker rule.
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