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Obama faces pivotal point in overhaul of Wall Street rules

NEW YORK — The Obama administration, stumbling through the health care overhaul, has reached a critical stage in its other signature effort: reining in Wall Street.

The push to reshape financial oversight hinges on negotiations in coming weeks over the Volcker rule, a regulation that strikes at the heart of Wall Street risk taking. The rule, which bans banks from trading for their own gain, has become synonymous with the Dodd-Frank overhaul law that Congress adopted after the financial crisis.

Treasury Secretary Jacob J. Lew has urged federal agencies to finish writing the Volcker rule by year’s end — more than a year after they had been expected to do so — and President Obama recently stressed the deadline’s importance.


While regulators are optimistic they would complete the rule soon, even after facing a lobbying onslaught from Wall Street, they have little time to overcome the wrangling that has stymied them for years. The tension — five agencies are writing the rule — centers on just how stringent to make it.

Some are pushing to close potential loopholes, saying the rule will prevent future trading blowups at big banks, a concern that gained traction when JPMorgan Chase lost $6 billion in London. Yet some officials, at agencies including the Federal Reserve and Securities and Exchange Commission, have worried the rule might inhibit banks from activities considered important for their health and the functioning of markets.

The Volcker rule has emerged as a litmus test of the strength of Dodd-Frank, especially after regulators weakened other rules under that 2010 law.

Kara M. Stein, a Democratic SEC commissioner who favors a strict Volcker rule, recently submitted a four-page list of requested changes to a current draft of the rule, said the officials briefed on the negotiations. Stein could hold the swing vote on the five-member commission, with the two Republicans unlikely to support it.


Gary Gensler, head of the Commodity Futures Trading Commission, also wants to make it harder for banks to disguise speculative wagers as permissible trading done for customers, said the officials briefed on the discussions. Other regulators privately groused that Gensler’s agency — which spent most of the last few years completing dozens of other new rules under Dodd-Frank — was too slow to raise concerns about the Volcker rule.

In recent weeks, officials say, regulators have added language stricter than the initial version of the rule.

From the outset, the Volcker rule was the product of compromise. The Obama administration declined to favor legislation forcing banks to spin off their turbulent Wall Street operations from their deposit-taking businesses. But it did not want regulated banks, which enjoy deposit insurance and other forms of government support, trading for their own profit. That business, known as proprietary trading, had long been a lucrative, albeit risky, business for Wall Street banks.

Paul A. Volcker, a former Federal Reserve chairman who served as an adviser to Obama, urged that Dodd-Frank outlaw proprietary trading. Over Wall Street’s objections, the administration inserted into Dodd-Frank what became known as the Volcker Rule.

Banks can still buy stocks and bonds for their clients — a practice called market making — and place trades that are meant to hedge their risks.

For regulators, the headache comes with finding ways to distinguish proprietary trading from the more legitimate practices. If they wrote the exemptions for market making and hedging too loosely, the banks might find loopholes. If they made them too strict, banks might not be able to engage in activities Congress had said were permissible.


Gensler, officials briefed on the negotiations said, wants to tighten the market making definition. In the real world of Wall Street, traders at a bank might keep buying shares of Apple until they have a substantial position in the company.

On the surface, that might look like market making, since clients have in the past wanted to buy Apple shares. But the bank may have actually amassed the position because it thinks the shares will rise in the future, effectively making it a speculative proprietary position. To prevent that sort of maneuver, Gensler’s agency is pushing to limit the ability of banks to stockpile such large positions.

Gensler also argued recently that the rule offered too broad an exemption for hedging, officials said, warning that it would fail to prevent a repeat of the JPMorgan trading loss episode. As regulators compromised and strengthened the language last week, officials said, Gensler withdrew his objection.