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Washington - US regulators on Tuesday adopted a rule to prevent banks from behaving like hedge funds, called the Volcker rule after former Federal Reserve Chairperson Paul Volcker.
The rule reins in so-called proprietary trading - in which banks make bets with their own money - and limits banks' ownership of hedge funds and private equity funds.
First proposed in November 2011, the regulators finalized the 800-page document after receiving more than 15 000 comment letters from the industry, which is worried that the tough new regime will eat into profits.
Herewith the main facts of the Volcker rule, which will come into force on July 21 2015:
Proprietary trading
Banks may no longer engage in the short-term proprietary trading of securities, derivatives, commodity futures and options for their own account.
There are exceptions for:
Underwriting. Banks may still hold securities to distribute them as part of a public or private offering, as long as these positions do not "exceed the reasonably expected near-term demands of customers".
Market making. They may also hold securities that "they routinely stand ready to purchase and sell" for clients. There are tough requirements to determine whether inventory is in line with client demands.
Hedging. Banks can still hedge risk, as long as they are able to prove that any position they enter in "demonstrably reduces or significantly mitigates" specific and identifiable positions.
They also need to monitor and calibrate these positions. This provision puts an end to broad hedges banks in the past could use to mask speculation known as "proxy hedges" or "portfolio hedges".
Government bonds
The regulators provided broader exemptions for trading in government bonds. They may also engage in the trading of foreign government bonds, though to a more limited degree than the trading of the US Treasuries, which had already been carved out in the proposed Volcker rule.
Funds
Banks may not own more than 3% of individual hedge funds and private equity funds, and may not own more than 3 percent of their highest-level equity capital of all such funds collectively. However, regulators scaled back the definition of which funds fall under the cap.
Management
Bank managers will need to attest that their banks have appropriate programs in place to achieve compliance with the rule, though they would not themselves have to confirm their banks are in compliance.
Foreign banks
Non-US. banks are still permitted to engage in proprietary trading, provided the risk is held outside the country. The transactions may only occur with US entities under certain circumstances to make the trading safer.
Compliance date
The rule becomes effective on April 1 2014, but banks won't have to conform with it until July 21 2015. Certain reporting requirements for larger banks kick in earlier.
