Fed: Volcker Rule Extension for Banks

The US Central Bank Granted A Time Extension For Big Banks To Comply With The Volcker Rule.

Besides the two-day meeting among the Federal Reserve members that put the US dollar on steady, the central bank has also explained how US banks can apply to take five more years to abide by with the Volcker Rule, which is part of the Dodd–Frank Wall Street Reform and Consumer Protection Act.

This is a reform which stemmed from the 2007-09 financial crises that has received some of the most punitive criticism coming from Wall Street. In particular, the Volcker Rule is projected to hold banks from speculating with their clients’ money, curb the amount of illiquid investments establishments can hold; in other words, it is a federal regulation that forbids banks from conducting certain investment activities with their own accounts, and confines their ownership of and relationship with hedge funds and private equity funds. It was initially proposed by American economist and former Fed Chairman Paul Volcker.

During the pre-crisis period, big banks had proprietary trading desks that made bets on market direction, in-house hedge funds, investments in external hedge funds and co-investments alongside customers in internal private-equity funds. The underlying assets could range from investments in private enterprises to real estate and long-dated products.

Needed Extension

Big Wall Street banks have expressed they require more time to walk out of fund investments that are hard to sell but no longer permitted by the 2010 Dodd-Frank Wall Street reform law. To answer that, the Fed stated it was the final grace period it could allow following three one-year extensions.

Additionally, the Fed said a bank would qualify for extra time as long as it proved significant progress in pesting illiquid funds, had an adequate compliance program and the Fed was not alarmed it was trying to elude the law.

Firms will also need to verify that the funds meet the definition of illiquid and draft a plan for pesting, or making the investments submit to the rule. In regulatory filings, banks have said they may face trouble in clearing those investments by set deadlines.

Fed Meeting, Rate Hike Hopes

Elsewhere, the highly anticipated FOMC meeting is set to conclude tomorrow. Markets are still jittery over the meeting that may trigger investors to cash in the US dollar’s recent rally.

“We think the meeting may be a catalyst for people to take some profit on long dollar positions,” said Barclays (LON:BARC) analyst Hamish Pepper. “The dollar tends not to perform particularly well in December. If you put that together with a well-priced Fed meeting plus already long positioning, it is the right set-up for a pullback.”

Markets have also fully priced in that the US central bank will raise interest rates in its FOMC meeting, thus pushing the dollar to a 7% gain since September. There are also worries over whether the Fed will want to send a strong sign that more tightening is to follow.

Analysts from BNP Paribas (PA:BNPP) wrote in a note that: “Rates markets are discounting close to five 25 basis point Fed rate hikes by the end of 2018. With the Fed likely to be cautious in its forward-looking language on Wednesday, those positioned long dollars heading into the meeting may be concluding that risk-reward is not attractive for staying in positions into the event risk.”

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