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Volcker Bans Prop Trading, Permits Utter Confusion

NEW YORK ( TheStreet) -- Federal regulators on Tuesday released proposed rules to implement the "Volcker Rule," but failed to define the short-term "proprietary trading" from which banks would be banned; a main objective of the regulation.

A draft of the proposed rule was leaked last week.

As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act -- signed into law by President Obama last July -- the Volcker Rule prohibits bank holding companies from engaging in most forms of proprietary trading while severely limiting banks' investments in private equity funds and hedge funds. The rule was proposed by the president and supported by former Federal Reserve Chairman Paul Volcker and the "exemptions" to the short-term trading ban will be the scene of a major battle between the large banks, the regulators, and members of Congress.

Paul Volcker

Investment banks Goldman Sachs (symbol) and Morgan Stanley (symbol) and the "big four" bank holding companies, including Bank of America (symbol), JPMorgan Chase (symbol), Wells Fargo (symbol) and Citigroup (symbol) are facing major changes as the work to understand the rules, eliminate most proprietary trading, and put complicated compliance systems in place.

The proposed rules have been jointly proposed by the U.S. Treasury Department, the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.

One major change from the leaked draft was that the regulators extended the public comment period to Jan. 13 from Dec. 16. Kevin L. Petrasic -- a partner in the Paul Hastings Global Banking practice in the firm's Washington, D.C. office - said that a "full 90-day comment period is an important indication that the agencies are taking this quite seriously and giving the industry and the public an opportunity to digest the proposal."

While the draft proposal outlines plenty of "exemptions" from the Volcker Rule's ban on short-term proprietary trading by banks, the regulators steered clear from providing a clear definition of what "short term" actually means.

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