NEW YORK — Federal regulators are poised to approve a tougher-than-expected version of the so-called Volcker rule, adopting a harder line in recent weeks against Wall Street risk taking, according to a copy of the rule reviewed by The New York Times.
The rule, which comes to a vote on Tuesday, is a symbol of the Obama administration’s post-financial crisis crackdown on Wall Street. The rule bans banks from trading for their own gain, a practice known as proprietary trading.
In doing so, the Volcker Rule takes aim at the sort of risk taking responsible for a $6 billion trading blowup at JPMorgan Chase last year. The bank claimed it was trading to hedge its broader risks, but, instead, built a position that racked up large profit before spinning out of control.
To prevent such blowups, the rule will require banks to deploy “independent testing designed to ensure that the positions, techniques and strategies that may be used for hedging may reasonably be expected to demonstrably reduce” the risks, according to the version reviewed by The Times. And the risks, the rule said, must be “specific, identifiable” rather than theoretical and broad.
When five federal agencies initially proposed the rule in October 2011, those requirements were softer. Even in the last two weeks, the regulators continued to adopt harsher language, people briefed on the matter said.
For example, the rule required banks to conduct an “ongoing recalibration of the hedging activity by the banking entity to ensure” that the activity is “not prohibited proprietary trading.” The idea is to further banks from masking proprietary trading as a hedge.
The Volcker rule, a centerpiece of the Dodd-Frank Act of 2010, also imposes requirements on top executives. In part, chief executives must attest that they have established compliance programs for the rule. Such a mandate was not included in an October 2011 version of the rule.
The votes on Tuesday, which come more than a year after Congress required the agencies to finalize the Volcker rule, offer Wall Street a degree of clarity that once seemed remote. Until recent days, regulators appeared unlikely to complete the rule in 2013.
The passage of the regulation would represent a turning point in financial reform. Although it counted as only one of 400 rules under Dodd-Frank, the Volcker rule became synonymous with Dodd-Frank and a litmus test for the overall strength of the law.