Federal Reserve Board Chairman Ben Bernanke told Congress on Wednesday that U.S. regulators are unlikely to make the July 21 deadline to finalize the Volcker Rule.

The central banker did not offer any specific timeline for seeing a final rule, which will bar banks from proprietary trading and limit their investments in private-equity and hedge funds.

"I don't know the exact date, but we're obviously working on it as fast as we can," Bernanke told the House Financial Services Committee.

Dodd-Frank required regulators to finish the rule, named after former Fed Chairman Paul Volcker, by its two-year anniversary, but a proposal issued last year has drawn significant criticism.

"I don't think it'll be ready for July," Bernanke said. "Just a few weeks ago, we closed the comment period. We have a lot of very difficult issues to go through."

The Fed has received close to 17,500 comments on the rule, which is opposed by many banks and even some foreign governments.

Much of the criticism centers around exceptions for the rule. Under the statute, banks are permitted to engage in certain kinds of trades, such as those for market making activities.
But regulators have struggled with defining those exceptions.

"The most difficult distinction for us is between proprietary trading and market-making. Because in market-making, firms often have to buy assets which they hold for a short period and then they sell to a customer," Bernanke said. "So the question is did they buy that asset for a proprietary purpose or for a market making purpose?"

Bernanke's comments followed similar remarks by Fed Gov. Daniel Tarullo last month.
"I found that the biggest drafting challenge in implementing the Volcker Rule is to distinguish between prohibited proprietary trading, on the one hand, and underwriting, market making and hedging on the other," Tarullo said at a Jan. 18 hearing.

Bernanke said the Fed will need to develop metrics and other criteria in order to differentiate between those two types of activities.

The chairman did not say whether there would be a re-proposal of the rule — as many in the industry have sought.

Industry representatives have presented a litany of complaints about the Volcker proposal, including that it could harm liquidity and complicate market making for banks, causing them to abandon the equity business entirely.

Others argue that U.S. commercial banks will face now a competitive disadvantage with foreign banks because of the rule.

Even Troy Paredes, a Securities and Exchange Commissioner, this week called on regulators to abandon their current proposal and start over.

The strength of the anti-Volcker comments has even prompted Volcker himself to come out in its defense.

"The continuing explicit and implicit support by the Federal government of commercial banking organizations can be justified only to the extent those institutions provide essential financial services," Volcker wrote in the letter. "Proprietary trading of financial instruments … does not justify the taxpayer subsidy implicit in routine access to Federal Reserve credit, deposit insurance or emergency support."

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