WASHINGTON Federal Reserve Board Chairman Ben Bernanke said Wednesday that regulators are nearing completion of a contentious rule that will ban proprietary trading at U.S. firms.
"We've made quite a bit of progress," Bernanke told reporters at a press conference following a two-day Federal Open Markets Committee meeting, saying the Volcker Rule is likely to be released by early next year.
The provision, named after former Fed Chairman Paul Volcker, is designed to stop banks from engaging in proprietary trading. It has been criticized by stakeholders in the U.S. and abroad for being overly complicated and highly prescriptive.
The five agencies that must jointly write the Volcker Rule had hoped to issue a final version by the end of the year, but after receiving nearly 18,000 comment letters, the agencies' efforts have stalled. A multibillion-dollar trading loss by JPMorgan Chase & Co. also heightened concerns by lawmakers whether such a rule would have prevented the episode from occurring in the first place.
Bernanke acknowledged the effort by the staff at the Fed, the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Securities and Exchange Commission, and the Commodity Futures Trading Commission has made in writing such a "difficult, complex rule."
The challenge facing regulators has been enormous, especially given the number of agencies that must agree to every aspect of the rule and have often been too far apart on the issues.
Bernanke signaled that a significant amount of progress has been made in closing the gap on differences on particular aspects of the rule.
"I think there is quite a bit of agreement, I wouldn't say final agreement, but quite a bit of agreement on key points among the regulators at this juncture," said Bernanke.
The biggest issue has been how regulators choose to craft exemptions from the proprietary trading ban. Under Dodd-Frank, regulators must allow certain "hedging" and "market-making" activities - but it has proven difficult to define those terms and the exact scope of the exceptions.
A source familiar with the matter said Wednesday that all five agencies are committed to a joint final rule, despite suggestions that perhaps regulators might take a piecemeal fashion to implementing the measure. Regulators have momentum in edging closer to a final rule, the source said.
But that has done little to bolster the confidence of Congress. With no final rule in sight, lawmakers are calling for a two-year delay in implementing the rule. Last month, outgoing and incoming Republican chairmen of the House Financial Services Committee, Reps. Spencer Bachus of Alabama and Jeb Hensarling of Texas, sent a letter to the heads of the agencies to postpone implementation of the rule.
"Given the time that it will take for you to agree on one version of the Volcker Rule as well as the tremendous uncertainty that market participants face in trying to anticipate what the final rule will look like, we respectfully suggest that the Federal Reserve Board delay the Volcker Rule's effective date until two years after the date on which the final rule is promulgated," they wrote in their letter.
Bernanke said until regulators get new directions from Congress, they plan to proceed with finalizing the rule.
"If Congress gives us different instruction we'll follow that, but so far we haven't received any different instructions. So it's our intent to try to get this done early in 2013," said Bernanke.
Regulators in April provided precise guidance on when financial institutions would have to comply with the Volcker rule. Banks are expected to fully comply with the provision by July 21, 2014, or two years after the rule technically takes effect.