Is the Volcker Rule on the Brink of Further Weakening?

Under guidelines set earlier this year by the Financial Stability Oversight Council, any position taken by a bank that isn't hedged completely can be considered proprietary trading, a practice that was banned by the Volcker Rule.

Experts say that under FSOC's original guidelines, regulators would need to develop a mechanism that would track a trader's book to make sure their positions were always completely hedged.

But in recent months, regulators and banks have been haggling over how to define hedging under the new law. Now it appears that banks might have won their fight for a lenient interpretation of hedging, which would enable them to continue making risky, yet potentially profitable bets with their own capital according to a Wall Street Journal report.

The newspaper says the latest rule proposal opens the door for banks to make all sorts of bets in the marketplace.

From the WSJ:

The new language, contained in a 174-page draft proposal for the rule released to regulators in August and reviewed by The Wall Street Journal, says hedging can cover bank risk on a "portfolio basis," including "the aggregate risk of one or more trading desks." In effect, that 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.

Naturally this interpretation has folks throughout the industry pleased.

From WSJ:

"We think the portfolio approach is the way to go," said Rob Toomey, managing director at the Securities Industry and Financial Markets Association. "It's the way people think about their hedging activity."