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Feds Enact Tough Volcker Rule Curbing Risky Trades

Stocks in this article: JPM

WASHINGTON, D.C. (The Deal) -- After more than two years under consideration, five federal regulators on Tuesday approved the landmark Volcker Rule, the measure that seeks to prohibit big banks from making short-term speculative proprietary derivatives and stock investments.

The rule is also fashioned to force those financial institutions to cash out most of their hedge fund and private equity investments in the coming years.

The Volcker Rule was required by the Dodd-Frank Act, enacted in the wake of the 2008 financial crisis.

The final measure, which weighs in at over 950 pages, was approved at open meetings held Tuesday by two federal agencies -- the Federal Reserve and the Federal Deposit Insurance Corp. -- and closed meetings held by the nation's securities regulators, theSecurities and Exchange Commission, the Commodity Futures Trading Commission and Office of the Comptroller of the Currency. Despite the measure's approval all around, oneFDICcommissioner, Thomas Hoenig, said he would have preferred to see large banks broken up instead.

The rule -- named after former Fed chairman Paul Volcker whose idea inspired the regulation -- seeks to limit big banks' propensity for risk taking in the wake of the 2008 economic crisis and is, on balance, more stringent than the roughly 300-page proposal regulators introduced in October 2011. Yet it provides some relief for certain trades and wasn't as tough as some lawmakers and regulators would have liked.

President Barack Obama said in a statement that the U.S. financial system will be safer because "we fought to include this protection in the law."

Volcker, for his part, issued a statement saying the rule is a "significant part of the larger on-going effort to rebuild a strong banking system fully capable of and attentive to meeting the critical financial needs of businesses and individuals." He added that bank supervisors will need to be "equipped and alert" in detecting and dealing with problems as they arise.

The former Fed chairman touched on a key potential weakness in the regulation. Because a great deal of the burden is placed on bank and securities regulators to identify and limit prohibited trades, some are concerned about whether the five agencies responsible for overseeing the regulations will be able to enforce the restrictions.

"Implementation here, more than with most rules, is probably going to be key. Our supervisors are going to have to navigate pretty carefully," said Federal Reserve Governor Daniel Tarullo.

The Fed, one of the agencies involved, extended the deadline for complying with the rule to July 21, 2015, from July 21, 2014.

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