Lawmakers move to toughen ‘Volcker rule’

Lawmakers move to toughen ‘Volcker rule’
By Tom Braithwaite in New York
Copyright The Financial Times Limited 2010
Published: June 2 2010 23:10 | Last updated: June 3 2010 01:35
http://www.ft.com/cms/s/0/f2df5792-6e8a-11df-ad16-00144feabdc0.html


William Dudley, president of the New York Fed, whose post Congress wants to confirm in future

Congressional negotiators are moving to toughen financial reform legislation, raising the chances that banks will face a strict ban on proprietary trading and a new conflict of interest rule, people involved in the deliberations say.

Lawmakers return from recess next week to merge bills passed by the House of Representatives and Senate, and a proposal – opposed by banks – to toughen a ban on proprietary trading and stop them from betting against products they sell to customers has re-emerged during preparatory work.

The provision, sponsored by Jeff Merkley and Carl Levin, two Democratic senators, would toughen the “Volcker rule”, which bans banks from trading for their own account or owning hedge funds and private equity firms, but gives regulators time to study the rule and modify it. “That is a very wishy-washy way to approach the issue,” Mr Merkley said.

Mr Levin said even though the Treasury would “probably...want as much power as they can get to...modify [the bill]”, he thought Congress should write a strong final version.

“Merkley-Levin in general is very much alive,” Mr Levin said. “The proprietary trading provisions from a legislative perspective are very much in the mix.”

Others involved agreed with that assessment and said the proposal could be used to replace a provision by Senator Blanche Lincoln that would force banks to spin off swaps desks.

That is opposed by the Federal Reserve, the Federal Deposit Insurance Corporation and the industry, which argue it would prevent legitimate hedging activity, but it has emerged as a totem of liberal Democratic members of Congress.

In a blow to the Fed, people familiar with the preparatory talks say that the central bank is failing to persuade members of Congress to eradicate a provision in the Senate bill that gives the president the power to nominate candidates to head the New York Fed, which takes the lead in overseeing Wall Street.

Central bank officials argue the change would amount to blatant politicisation but even Fed supporters have said they are unwilling to go out on a limb to try to kill the provision.

In addition to proprietary trading, the Merkley-Levin amendment adds a new conflict of interest rule to stop banks taking a contrary position in the market to a client, with an exception for market making and hedging.