WASHINGTON (CN) – The Board of Governors of the Federal Reserve confirmed that banks and financial companies it regulates will have until July 21, 2014 to conform to Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Commonly referred to as the Volcker Rule, after former Fed Chairman Paul Volcker, Section 619 prohibits banking entities from making speculative investments on their own behalf with federally insured deposits or from engaging in proprietary trading or from owning an interest in, or sponsoring, a hedge fund or private equity fund.
The rule is intended to limit the exposure of banks, and by extension, protections afforded to banks by federal agencies, to credit-default swaps and other types of high risk investments that helped to bring on the collapse of the financial services sector in 2007.
Separately, the rule also prohibits a banking entity that advises, manages or sponsors a hedge fund or private equity fund from entering into any transaction with the fund. This eliminates financial incentives for banking entities to place outside bets on positions held by funds they advise.
While the details of the rule are still in the proposal phase with the five federal regulators tasked with writing the details, the conformance period begins on July 21 and all entities regulated by the Fed have to be able show they are making good faith efforts to move toward conformity.The recent heavy losses at JP Morgan, which some analysts believe would have been prevented if the rule had been in effect, have put pressure on regulators to work out the details and adopt final rules as quickly as possible