In response to industry complaints, regulators on Thursday provided precise guidance on when financial institutions will have to comply with the Volcker Rule.
Banks will be expected to fully comply with the provision, named after former Fed Chairman Paul Volcker, by July 21, 2014, or two years after the rule technically takes effect.
The American Securitization Forum (ASF) earlier requested Congress to enact legislation to amend the implementation of the Volcker statute to at least twelve months after the joint regulators issue their final rules.
However, without such legislation, the ASF said that regulators should issue an interim final rule or other regulatory guidance saying that they will not enforce the Volcker Rule until at least twelve months after they adopt final rules. Please see ASR coverage on this issue.
Aside from the securitzation industry, this was a long-awaited reprieve for firms that feared having to adhere to the rule this year at the stroke of midnight on July 22.
"This should reassure the market that banks will continue to engage in market-making even after Volcker Rule kicks in July 21 of this year," said Jaret Seiberg, a senior policy analyst for Guggenheim's Washington Research Group. "That's an overall positive for the economy and for the banks. You can continue to run your business in August just like you do in April."
The rule, which bars banks from proprietary trading activities and hedge fund and private equity funds activities, has been a source of concern for a number of stakeholders given the complexity of the proposal released by the agencies last year. The regulators have yet to finalize the plan, but banks had begun wondering when they are expected to comply with the statute.
According to regulators, firms have two years to prepare, but are encouraged to take steps toward that effort in the meantime.
"During the conformance period, banking entities should engage in good-faith planning efforts, appropriate for their activities and investments, to enable them to conform their activities and investments to the requirements of section 619 and final implementation rules by no later than the end of the conformance period," according to the statement.
But bankers were still wary Thursday on how they would take steps to conform to a rule that had yet to be completed.
"The purpose of the two-year period is to bring our operations into conformance. If we don't know what the rule is, we can't start that," said Wayne Abernathy, the head of financial institutions policy and regulatory affairs at the American Bankers Association.
Federal Reserve Board Chairman Ben Bernanke has suggested that regulators would slip past the July deadline and a spokeswoman for the central bank declined to provide further comment on the issue.
Others agreed suggesting more clarity would be necessary in order for institutions to become compliant.
"All that we know is that at the end of this two-year period in July 2014 everything has to be in full compliance with the Volcker Rule. The problem with that of course we still don't know what full conformance with the Volcker Rule means," said one industry source.
Some observers said regulators had to keep the status quo until the rule, which will ultimately dictate whether banks will be in the market-making businesses, has been completed.
"It was the only choice," said Seiberg. "The fact is it's hard to see how they could have gone in a different direction because the rule isn't finalized and there's lots of potential downside risk to the economy if banks en masse pull out of market making. So until you know what the final rule is going to be, you want to preserve the status quo."
The Federal Reserve Board provided initial guidance in February, but received numerous inquiries for clarification, especially related to how soon the rule would apply.
Under the Dodd-Frank law, the statute takes effect on July 21, 2012, a fact that has troubled the industry, especially given the increased likelihood that regulators will not complete a final rule by that time.
"The Board received a number of requests for clarification of the manner in which this conformance period would apply and how the prohibitions will be enforced," according to a joint statement with the four other regulators responsible for drafting the rule. "The Board is issuing this statement to address this question."