Wall Street is poised to get a big reprieve from the Volcker Rule, as U.S. agencies prepare to scrap a restrictive presumption that most short-term trades violate the post-crisis regulation, three people with knowledge of the matter said.

In a much-anticipated overhaul, the Federal Reserve and other regulators are planning to drop an assumption written into the original rule that positions held by banks for less than 60 days are speculative — and therefore banned, the people said. Instead, banks would have leeway to conclude that their trades comply with the rule, putting the onus on regulators to challenge such judgments, the people said.

Former Fed Chair Paul Volcker
Former Fed Chair Paul Volcker Bloomberg News

The change is one of many that regulators appointed by President Donald Trump are expected to propose in the coming weeks when they unveil their revamp, known internally as "Volcker 2.0," said the people, who requested anonymity because it hasn't been made public. The release will mark a key milestone in the Trump administration's push to roll back regulations that it blames for stifling financial markets and economic growth.

The rule, named for former Fed Chairman Paul Volcker, has been in Wall Street's crosshairs for years. It was included in the 2010 Dodd-Frank Act as a way to limit excessive risk-taking by restricting speculative trading by banks, and curtailing lenders' investments in hedge funds and private-equity firms. But the industry argues that it has dried up market liquidity, is overly complex and is difficult to comply with.

The Fed has led the rewrite, though there is broad agreement on how to proceed among all five agencies responsible for the rule. The other watchdogs involved in the process are the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Commodity Futures Trading Commission.

Additional changes the regulators intend to propose include making it easier for banks to stockpile assets that their customers may want to buy in the near term and dialing back compliance burdens for smaller lenders, the people said. The agencies expect to release the proposal by the end of the month — a timeline confirmed publicly by Joseph Otting, the former banker who leads the OCC. Spokesmen for the five agencies declined to comment.

The unveiling of the regulators' plan will be the first step in a lengthy process. There will then be votes at the agencies on whether to seek public comment on the proposal, followed by what could be months of rewriting before a final round of votes on making the changes official.

Many of the Volcker revisions under consideration adhere to a blueprint issued last year by Trump's Treasury Department, which advised doing away with many of the rule's more subjective demands. Asking banks to figure out the purpose of each purchase or sale of an asset "effectively requires an inquiry into the trader's intent at the time of the transaction, which introduces considerable complexity and subjectivity," Treasury argued. Its report said the rule's complexity had caused banks to be overly conservative in their trading activity, a contention also made by industry lobbyists.

The main component of Volcker was banning what's known as proprietary trading, the practice of banks trading for themselves rather than for clients. The rule assumes all the short-term positions are forbidden unless the banks seek one of a narrow list of exemptions, including market making for customers and certain hedging of risks. Presuming all short-term trades are prohibited transactions "has undercut banks' ability to serve customers, out of concern that such services would be deemed proprietary trading," the American Bankers Association said in a Sept. 21 comment letter to the OCC.

Randal Quarles, the Fed's vice chairman for supervision, in March called Volcker "an example of a complex regulation that is not working well" and said regulators were working fast to make "material changes." That was a welcome sentiment for banks such as Goldman Sachs Group which shuttered its proprietary-trading desks after Dodd-Frank and has since lobbied against the constraint.

As for going easier on smaller banks, it's an objective that's also making headway in Congress. The Senate passed a bill earlier this year that would exempt all lenders with assets of less than $10 billion from Volcker. The legislation is expected to clear the House as soon as next week.

While enemies of the rule have called for its repeal, erasing Volcker would require a new law from Congress. The revision from regulators represents the limits of what the agencies can do as long as the rule remains on the books.

Criticism of Volcker hasn't been limited to Republican regulators nominated by Trump. Former Fed Gov. Daniel Tarullo, who frequently battled with Wall Street over post-crisis rules, said before he stepped down last year that it was "too complicated" and may hurt banks' ability to make markets. And FDIC Chairman Martin Gruenberg, who was appointed by former President Barack Obama, has called Volcker a good place to start simplifying rules.

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