Fed outlines Volcker rule timeline

Banks will get up to five years' grace to divest fund investments

US regulators are still months away from final rulemaking on the implementation of the Volcker rule - the restrictions on prop trading and fund investments by banks devised by former Federal Reserve chairman Paul Volcker and included in Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. But the Fed today issued final rules on the time banks will be given to comply with the new rule.

The rule itself will come into force on July 21 next year - or 12 months after final rules are issued by the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Fed - whichever is later. But banks will be given a grace period after this point to fall into line. 

In general, banks will have two years to divest any investments in funds or products that violate the rule. But the Fed will be able to grant up to three one-year extensions to individual banks at its discretion, as long as the bank applies 180 days in advance. Banks with existing investments or contractual ties to 'illiquid' funds - funds that mainly invest in illiquid assets that are not exchange-traded or electronically quoted, and which have initial tenors over a year - will be granted five years to extricate themselves.

Unanswered questions remain around the extent of the limits on prop trading - the dividing line between permitted hedging or market-making activities and prohibited proprietary investment is still unclear. Today's rule release offers little insight into these questions, though it does guarantee that banks worried about their future trading and hedging plans will have at least three and possibly as many as six years from the final rule release this summer in which to adapt.