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Federal Reserve kicks off Volcker rule changes

Federal Reserve officials took the first step Wednesday in making changes to the Volcker rule, which prohibits federally backed financial institutions from engaging in proprietary trading or having interests in private equity or hedge funds.

The board voted to officially propose changes that would tailor rules to a bank's size and ease those for banks with less than $10 billion in assets. It would also clarify exemptions for banks' proprietary trading and related situations and rules about having interests in private equity or hedge funds. The proposal will be published in the Federal Register shortly for public comment.

Large banks have been pushing for clarification of the rules, which have been criticized as being difficult for both regulated entities and their regulators to ensure compliance.

The proposal will tailor the rule "by focusing the most comprehensive compliance regime on the firms that do the most trading. Firms that do more modest amounts of trading will face fewer requirements," Federal Reserve Chairman Jerome Powell said at the meeting.

Board member Randal Quarles, who oversees bank supervision for the Fed, said that firms still subject to the Volcker rule would be sorted into three tiers based on trading activity levels for further rule tailoring. The proposal "represents our best first effort at simplifying and tailoring the Volcker rule. This is a complex regulation, and achieving those goals while maintaining fidelity to the statute is not an easy undertaking," he said.

The Federal Reserve is one of five regulators that will be involved in changing the Volcker rule. The others, including the Securities and Exchange Commission and Commodity Futures Trading Commission, have yet to meet on this issue. It took three years for the original Volcker rule to be approved, after passage of the 2010 Dodd-Frank Act.

Aaron Anderson, senior vice president of research at Fisher Investments, said the proposed changes "maintain the spirit of the rule but ease the implementation burden." Since the revisions have been discussed for quite some time, "I doubt they move markets much. But they should give financial firms more balance sheet flexibility, which potentially benefits institutional investors by improving the availability, pricing, and liquidity of financial products and services," Mr. Anderson said.

The American Investment Council, which represents private equity firms, said in a comment letter that while their members are not directly subject to the Volcker rule, it has made it more difficult to raise funds from investors such as non-U.S. banks investing from abroad.

Dennis Kelleher, president and CEO of industry watchdog Better Markets, said in a statement that the rule has achieved its purpose of reducing banks' risk taking and protecting taxpayers. "Given the irresistible riches generated by proprietary trading, it is inevitable that weakening the Volcker rule will result in banks again pushing the envelope, gaming the system and ramping up their dangerous trading."