Regulators Weaken Dodd-Frank Draft Regs, Allow More Risk

• By: Marian Wang, ProPublica
• Date: September 22, 2011
• Source: www.propublica.org

The regulatory agencies in charge of finalizing some of the most controversial rules mandated by the financial reform law are leaning toward making them looser and more favorable to banks and other traders, according to recent reports in the financial press.

As we noted  in June, federal regulators were still puzzling over how restrictive the ban on proprietary trading - banks trading on their own behalf - should be, given that banks are still allowed to hedge against risks. The Office of the Comptroller of the Currency has argued for banks to be given more leeway in what types of trades would be permitted as hedges under the rule, but critics charge that banks could use the opportunity to take more risks rather than hedge against them. 

A draft version of the so-called "Volcker rule " suggests that the ban has been significantly watered down. Here's the Wall Street Journal:

[The language] opens the door for banks to make all manner of bets on the market, observers said, because a bank might define the risk to its portfolio broadly, such as the risk of a U.S. recession.

If the language is confirmed in the final rule, expected by late October, it would be a victory for Wall Street firms that have lobbied to relax the ban on proprietary trading.

Meanwhile, the federal Commodity Futures Trading Commission has drafted a final rule that reportedly backs down on other key provisions intended to limit excessive speculation by large banks and commodities players. Reuters reports:

The CFTC's final rule maintains that the Dodd-Frank Wall Street overhaul law requires position limits -- caps on the total number of commodity-linked contracts that any one trader can hold -- to prevent excessive speculation in oil, grain, silver and other commodity markets.

...But in the details of the plan, the CFTC modified key areas that were a major concern for big Wall Street banks like Morgan Stanley and oil companies such as Shell.

In an earlier draft of the rule, the agency had essentially proposed that all the trading positions of a company be added up and that the total be subjected to the position limits, thereby limiting a company's overall bet on a commodity. 

But the latest version, according to Reuters, allows the limits to be applied to individual trading desks within large companies, provided they trade independently. This could allow banks and other companies to accumulate far larger totals of commodity-linked contracts.

The CFTC2019s rule is already months behind schedule, and its writing has been particularly contentious and hampered by internal disagreement on the commission. Nonetheless, MarketWatch reports that a vote is expected on the final draft in the coming weeks .