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US cracks down on risky market trades

Tuesday, December 10 16:33:15

U.S. regulators toughened key sections of the Volcker rule's crackdown on Wall Street's risky trades today as they finalised one of the harshest reforms after the credit meltdown.

The rule - named after former Federal Reserve Chairman Paul Volcker, who championed the reform - generally bans banks from proprietary trading, or speculative trading for their own profits.

The final rule includes strictly defined carve-outs for trades executed to serve clients' interests or to protect against market risks, and forces banks to show regulators that they are not trying to pass off speculative bets as legitimate trades.

Regulators are eager to prevent a repeat of trading debacles such as JPMorgan's $6 billion trading loss in 2012, dubbed the "London Whale" because of the huge positions the bank took in credit markets.

Still, it is unclear exactly how regulators will police banks' trading activity and officials acknowledged the sprawling, 882-page rule was a complex document.

"Many of us - myself included - had hoped for a final rule substantially more streamlined than the 2011 proposal. I think we need to acknowledge that it has been only modestly simplified," Federal Reserve Governor Dan Tarullo said.

The Fed was just one of five regulatory agencies tasked with reaching agreement on one of the most hotly debated parts of the 2010 Dodd-Frank Wall Street reform act, aimed at preventing a repeat of the taxpayer bailouts during the 2007-2009 financial crisis. Similar rules in Europe are far weaker.

The idea was to prohibit banks backed by the Fed's safety net from proprietary trading and bar them from owning more than 3 percent of hedge funds, or private equity funds.

The rule is expected to hit the largest investment banks hardest, including JPMorgan and Goldman Sachs, but Wall Street banks in recent years have already wound down much of their proprietary trading activities.

"What we have on paper now is a fairly aggressive regulatory posture from the banking agencies, but it remains to be seen how aggressively it will be implemented and enforced," said Kevin Petrasic, a regulatory lawyer at Paul Hastings in Washington.

Better Markets, an often vocal pressure group critical of large banks, reacted positively to the final rule, calling it a "major defeat for Wall Street". (Reuters)