‘Volcker’ private equity bank rules due next week

Regulators will unveil details of a much-anticipated rule that bans most proprietary trading by banks and is expected to fuel the secondary market.

Details concerning a rule that severely restricts financial institutions’ private equity capabilities will be unveiled 11 October, according to an announcement on the Federal Deposit Insurance Corporation’s website.

The so-called “Volcker rule” has two elements: one preventing banks from doing their own in-house trading on federally guaranteed deposits and another on sponsoring and investing in alternative investment funds.

Former Federal Reserve chairman Paul Volcker developed the rule, which originally called for US banks to choose between running private equity and private equity real estate operations and taking deposits. Banks will have seven years to comply with the rule.

The Fed is clarifying the rule, along with the FDIC and other regulators.

Mandated by the Dodd-Frank Act, the Financial Stability Oversight Council has been taking comment from industry leaders over the Volcker rule.

The Dodd-Frank Act, which was signed into law by President Obama July 2010, requires the council to complete a study about the bill’s enactment.

Supporters of the Volcker rule say it would prevent banks from engaging in risky trades.

However, banks have called the ban on proprietary trading unnecessary and difficult to implement because it is hard to distinguish between trades done for clients and those done for the bank's profit.

Secondary investors have been anticipating the release of the rule details for several months.

Some market sources believe the rule will motivate banks to sell their private equity holdings, while other banks have already been selling large private equity portfolios ahead of the publication of the rule.