WASHINGTON – Regulators appeared visibly relieved Tuesday as they signed off on a final Volcker Rule after three years of interagency wrangling, but the hardest part will be figuring out how to implement and enforce the new regulation.

The five agencies involved had to carefully detail the ban on proprietary trading without curbing legitimate market-making activities, an effort even its author, former Federal Reserve Board Chairman Paul Volcker, once conceded was difficult. “It’s like pornography; I know it when I see it,” Volcker said of defining proprietary trading, referencing a line by the late Supreme Court Justice Potter Stewart.

Yet now that the definitions and exceptions are theoretically spelled out, regulators acknowledged that it will be up to them to figure out a way to make them work in practice.

 “The ultimate effectiveness of the rule will depend importantly on supervisors, who will need to find the appropriate balance while providing feedback to the board on how the rule works in practice,” Federal Reserve Board Chairman Ben Bernanke said at a public board meeting.

That issue was raised repeatedly by nearly every top official at public meetings held by the Federal Deposit Insurance Corp. and the Fed as they met to discuss and vote on a final Volcker Rule, as well as public statements issued by other heads of agencies who were unable to convene a board meeting due to the inclement weather in Washington.

Over the course of 71 pages, the respective agencies exhaustively laid out rigorous guardrails of what could and could not be permissible by large financial institutions like JPMorgan Chase and Goldman Sachs in the years ahead. But agency officials were also direct in their concern about the upcoming challenge in ensuring that major banks would be held accountable in complying with the rule.

“Issuing a final rule is only the beginning of the process,” Comptroller Tom Curry said at the FDIC’s board meeting. “Equally important is how we will enforce it, and I want to be clear that the OCC will be especially vigilant in developing a robust examination and enforcement program that ensures our largest institutions will remain compliant with the Volcker Rule.  During 2014, we will develop the necessary examination procedures and training to ensure that our bank examiners have the tools they need to do the job.”

Fed Gov. Sarah Bloom Raskin, who has been nominated to serve as deputy Treasury secretary, also stressed the urgency in regulators issuing formal guidance to examiners, who will be relied upon heavily in deciphering whether banks are engaging in high-risk trading activity or following some of the multiple exceptions to the Volcker Rule.

“The proposed final rule does not make clear what assets or types of assets constitute such high-risk assets and what types of trading strategies constitute such high-risk trading strategies,” Raskin said. “Instead, examiners will be asked to make these determinations, so I look forward to the formulation of guidance that assists examiners from all the agencies in those efforts and communicates those views to the affected financial institutions so they understand what could be problematic.”

Lawmakers were also cautious as regulators released the final rule. Sens. Carl Levin, D-Mich., and Jeff Merkley, D-Ore., who fought to add the Volcker Rule to the Dodd-Frank Act, said they would keep a close eye on regulators’ next steps.

“No regulation is ever perfect, and we will carefully monitor implementation and hold regulators and firms accountable,” the senators said in a joint statement.  

Some regulators acknowledged that the rule could hardly prevent all problems related to trading. Still, it should force both banks and their supervisors to ask tough questions when examining trading activity and hedges.

“I don’t think we should expect this is going to prevent all future trading-related screwups, and that is why robust capital against any trading exposure, be it market-making or otherwise, is really in some sense the first line in defense,” said Fed Gov. Jeremy Stein. “Nevertheless, this rule puts into place a systematic process that forces -- when we’re looking at hedges or trades or whatever --  to ask the right kinds of questions.”

At the FDIC’s meeting, Chairman Martin Gruenberg, lauded specific elements of the regulation meant to ensure banks obey it. That included new reporting requirements for banks subject to the rule, and a process for executives to validate their institutions’ accordance with it.

“The heart of the final rule remains the compliance framework,” he said. “The final rule requires boards of directors, CEOs and other senior management at large firms to approve their compliance framework and review its effectiveness on an ongoing basis.”

Unlike with the initial proposal released in 2011, the agencies agreed to insert a so-called CEO attestation in the final rule to heighten accountability at firms by forcing top executives to sign off on trades happening inside their institutions.

Regulators also toughened documentation requirements at U.S. financial institutions to reduce the risk of evading the law.

As an additional backstop measure, the agencies opted to put the burden of proof on financial institutions when it came to certain permissible trading activities to demonstrate how a hedge could reduce or mitigate a risk of a single or aggregate position.    

Banks typically use hedges to help manage risks that often come from trading with clients. But it's widely acknowledged that matching one for one is often difficult to attain, thus banks have used portfolio hedging to manage a broader swath of risks.

To ensure banks are not evading the law, they will be required to document certain transactions when there is a risk that the hedge may not be in compliance, while also continuously monitoring and recalibrating their hedges on an ongoing basis to reflect market changes.

Top officials also said they planned to monitor and review how they supervised banks with regard to compliance. They whittled down an initial list of 20 metrics to seven on compliance, but several officials said they would revisit the issue later.

The agencies also agreed to a staggered schedule for when banks would have to begin  testing against the metrics. The largest institutions, with assets of at least $50 billion, will go first, starting June 30, 2014.

“The staged implementation of the required reporting of quantitative trading data will allow the agencies and reporting firms to benefit from early experience to evaluate whether any modifications are warranted, and what they should be,” Mary Jo White, the head of the Securities and Exchange Commission, said in a statement.

White and Fed officials also said regulators may need to provide more clarity to the rule in the future.

“Implementation and feedback will be very important as we learn about how the rule works and the effects on banks, but also the effects on markets and the broader economy,” said Bernanke, whose term as chairman expires in January. “I think we should be prepared to make adjustments over time if we learn that there are unanticipated problems or unintended consequences that arise from the rule.”

Joe Adler contributed to this article.

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