Conformance period for Volcker Rule clarified

Entities covered by the Volcker Rule will have two years to fully conform to it, unless the Federal Reserve Board extends the conformance period, it said. 

The Volcker Rule – Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act – prevents banks from trading, in-house, federally-guaranteed deposits, and from sponsoring and investing in alternative investment funds.

The conformance period gives entities covered by Volcker until 21 July 2014 – two years after the Dodd-Frank implementation date – to fully conform.

The news comes as a relief to banks that feared they may have to comply with strict regulations as early as this summer. 

The Volcker rule was developed by former Federal Reserve chairman Paul Volcker and originally called for US banks to choose between running private equity operations and taking deposits. 

It limits banks’ investment in private equity to no more than three percent of their Tier-1 capital, with an additional restriction from acquiring no more than a three percent ownership stake in any fund.

Those who support the rule say it will prevent banks from engaging in risky trades. However, banks have said it is hard to distinguish between trades done for clients and those done for the bank's profit. They say it makes the ban on proprietary trading unnecessary and difficult to implement.

As a result of the Volcker Rule many banks have already started selling off their private equity arms. Barclays Private Equity spun off to become Equistone Partners last year, while HSBC also sold its private equity business to its management team, which renamed the business Graycliff Partners.