Cheat sheet: How regulators plan to revamp the Volcker Rule

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WASHINGTON — A proposal to revamp the Volcker Rule due to be released by regulators this week will aim to ease the industry's compliance burden while keeping the general framework of the proprietary trading ban in place, according to sources familiar with the matter.

In what these sources call Volcker Rule 2.0, financial regulators will propose clarifications around what activity is allowed under the ban's liquidity management exception, as well as revisions to how certain trading activity is determined to be in compliance with the rule.

The proposal will also seek to address concerns that the rule created a separate compliance regime running parallel to other requirements, these sources said.

The sources said the proposal will address concerns about the so-called 60-day "rebuttable presumption," which some in the industry would like to see removed. The rule currently views any investment held for less than 60 days as prohibited, but banks can attempt to argue that a trade was exempted. The proposal will also address other industry complaints about compliance and recordkeeping requirements, the sources said.

“The rebuttable presumption change is the most important,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics. “The current regulatory approach is ‘guilty unless you can prove yourself innocent’ in terms of what is or is not proprietary trading.”

But “the ‘innocent until proven guilty’ approach . . . is a preferable regulatory approach,” Petrou added.

The changes to the Dodd-Frank Act trading ban — which was originally the idea of former Federal Reserve Board Chairman Paul Volcker — will be proposed Wednesday at an open meeting of the Fed board, and at a meeting the next day of the Federal Deposit Insurance Corp.'s board of directors.

The regulatory move comes on the heels of President Trump last week signing a regulatory relief legislative package that among other things provided banks with less than $10 billion of assets an exemption from the Volcker Rule.

Yet observers say the plan is likely to preserve the most important elements of the ban enacted through Dodd-Frank that regulators implemented in 2013.

"Our view is that the agencies will put forward a modest proposal that is relatively similar to what we would have seen if a Democrat won the White House," Jaret Seiberg, an analyst at Cowen Washington Research Group, said in a research note Tuesday morning. "This is not a radical change and the results for the biggest banks may be less than the headlines would suggest. Our expectation is that the proposal will make modest changes designed to address some of the biggest objections from banks."

Because the Volcker Rule is so complex and lengthy, it’s also possible the regulators will circle back with additional proposed changes following the first proposal, said Oliver Ireland, senior counsel at Morrison Foerster and former official at the Federal Reserve.

The regulators “are going to try and roll it back” but “we might see a multi-stage process here where they try to hit some low hanging fruit first,” Ireland said.

Isaac Boltansky, director of policy research at Compass Point Research & Trading, said in an analyst note that regulators could also look to clarify the permissible market-making activities under the rule, specifically related to illiquid securities.

But Boltansky noted that "altering the Volcker Rule will be an iterative and lengthy process" since "there are five agencies with rule-writing authority over the Volcker Rule, which underscores the inherent difficulty in coordinating and advancing a unified set of changes."

Meanwhile, House lawmakers have attempted to move legislation that would consolidate authority for implementing the Volcker Rule with the Fed, but Boltansky said the effect of such legislation on the timetable for a regulatory revamp would be limited.

"The legislative effort to vest sole Volcker rulemaking authority in the Federal Reserve warrants watching in the weeks ahead, but our sense is that the associated revamp timeline would only modestly condense if the streamlining provision is enacted," Boltansky wrote.

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