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Volcker Rule Will Undergo `Material Changes,' Quarles Says

Describing the rule as overly confusing and difficult to follow, Fed Vice Chairman Randal Quarles said the Fed is devoting special attention to simplifying its definition of market making.

(Bloomberg)—Federal Reserve Vice Chairman Randal Quarles says U.S. financial regulators are working quickly to make “material changes” to the Volcker Rule, one of Wall Street’s most hated post-crisis restrictions.

“The Volcker Rule is an example of a complex regulation that is not working well,” Quarles said Monday at an Institute of International Bankers conference in Washington, bringing into greater focus the overhaul effort involving the Fed and four other agencies.

The measure named for former Fed Chairman Paul Volcker was included in the Dodd-Frank Act as a way to reduce risk-taking by banning banks from trading with their own money. It has been a top target of Trump administration plans to dial back financial regulations as a way to spur economic growth.

The Treasury Department called for Volcker Rule changes when it released a series of reports last year on ways to revise financial industry rules. The five agencies responsible for the rule have been meeting since then to formulate a plan -- including at the agency-head level, Quarles said.

Market Making

Describing the rule as overly confusing and difficult to follow, Quarles said the Fed is devoting special attention to simplifying its definition of market making -- a permitted activity in which banks help their clients buy and sell assets. The Fed is considering giving banks more leeway to stockpile securities that they think their customers might want to trade, he said.

The rule’s existing definition of market making “rests on a number of complex requirements that are difficult or impossible to verify in real time,” Quarles said. “As a result, banks spend far too much time and energy contemplating whether particular transactions or positions are consistent with the Volcker Rule.”

Quarles said the agencies will “proceed with dispatch” in revising the regulation, which took the agencies three years to write after Dodd-Act was enacted in 2010. Despite the agencies’ past difficulties in unifying on policy decisions, he said, “the odds are very good” for the group that includes the Securities and Exchange Commission, Commodity Futures Trading Commission, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp.

“There are five rule writers for Volcker, which of course is one of the challenges,” said Craig Phillips, a counselor to the Treasury secretary who also spoke at the conference on Monday.

Still, he said there has been “positive momentum” with the Fed and OCC initially taking the lead on the revisions. He predicted that some agencies could announce “shortly” that they were considering rulemaking actions.

Addressing a room filled with officials of overseas banks Monday, Quarles also said that the Fed is weighing “additional tailoring and flexibility of our regulations” for foreign banks operating in the U.S.

That could include easing Volcker’s restrictions for how those firms can invest in foreign funds, he said.

--With assistance from Robert Schmidt.To contact the reporter on this story: Jesse Hamilton in Washington at [email protected] To contact the editors responsible for this story: Jesse Westbrook at [email protected] Gregory Mott

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