Investing.com - U.S. federal regulators are set to approve the so-called Volcker rule to curb risky trading activity by banks later Tuesday, as part of a far-reaching overhaul of financial regulation in the wake of the 2008 financial crisis.
The Volcker rule, named after Paul Volcker, a former Federal Reserve Chairman and an advisor to President Barack Obama, will bar banks from trading for their own profit, a practice known as proprietary trading. The rule also set limits on banks’ ability to invest in certain trading vehicles, such as private equity and hedge funds.
Five federal agencies, including the Federal Reserve, the Commodity Futures Trading Commission and the Securities and Exchange Commission are expected to vote to approve the rule later Tuesday.
If the rule is rubber stamped it will be implemented as part of the 2010 Dodd-Frank Wall Street Reform Act, which is aimed at ending tax-funded bailouts of large investment banks.
U.S. Treasury Secretary Jacob Lew said last week that the Volcker rule will help the Obama administration to strengthen financial oversight.
“It prohibits risky proprietary trading while protecting economically essential activities like market-making,” Lew said. “Regulators have worked hard to find the right balance that protects our economy and taxpayers while also leaving room for well-functioning financial markets.”
Supporters of the rule believe it will prevent risky trading practices by banks, which led to J.P. Morgan Chase's USD6.2 billion loss in the London Whale derivatives trade last year.
However, banks have argued that the rule will push down profits and make it more difficult to hedge against market risks.
Many Wall Street banks, including Morgan Stanley, Goldman Sachs and Citigroup have already shut down their proprietary trading operations ahead of the ruling.
The Volcker rule, named after Paul Volcker, a former Federal Reserve Chairman and an advisor to President Barack Obama, will bar banks from trading for their own profit, a practice known as proprietary trading. The rule also set limits on banks’ ability to invest in certain trading vehicles, such as private equity and hedge funds.
Five federal agencies, including the Federal Reserve, the Commodity Futures Trading Commission and the Securities and Exchange Commission are expected to vote to approve the rule later Tuesday.
If the rule is rubber stamped it will be implemented as part of the 2010 Dodd-Frank Wall Street Reform Act, which is aimed at ending tax-funded bailouts of large investment banks.
U.S. Treasury Secretary Jacob Lew said last week that the Volcker rule will help the Obama administration to strengthen financial oversight.
“It prohibits risky proprietary trading while protecting economically essential activities like market-making,” Lew said. “Regulators have worked hard to find the right balance that protects our economy and taxpayers while also leaving room for well-functioning financial markets.”
Supporters of the rule believe it will prevent risky trading practices by banks, which led to J.P. Morgan Chase's USD6.2 billion loss in the London Whale derivatives trade last year.
However, banks have argued that the rule will push down profits and make it more difficult to hedge against market risks.
Many Wall Street banks, including Morgan Stanley, Goldman Sachs and Citigroup have already shut down their proprietary trading operations ahead of the ruling.