WASHINGTON — Federal regulators on Tuesday signed off on tougher restrictions on banks engaged in complex financial trading, finally moving on one of the most complicated portions of the 2010 revamp of financial regulation.
The regulators individually approved language implementing the so-called Volcker Rule, named after former Federal Reserve Chairman Paul Volcker, who as an aide to President Obama proposed restricting the kinds of investments banks could get involved with if they are taking money from depositors or investors.
The regulators adopting the final language were the Federal Reserve, Federal Deposit Insurance Corp, the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Commodity Futures Trading Commission.
“It achieves the important balance,” CFTC Chairman Gary Gensler said in a statement Tuesday.
The Volcker Rule sought to limit risky investments in the lightly regulated derivatives markets, involving complex financial instruments that even the CEOs of major investment banks acknowledged during the 2008 financial crisis they didn’t fully understand.
The long-delayed, 900-page rule will prevent banks from owning a stake larger than 3 percent in hedge funds and private-equity funds, investment vehicles for the ultra-wealthy. Big banks also will have to provide much more information to regulators about their complex investments to ensure they are hedging against specific risks and not actually engaging in trading for profits.
They’ll also face restrictions for activities in which there are a limited number of players, often called market-making.
The biggest shock to giant banks is that they are now prohibited from engaging in so-called portfolio hedging, using one kind of investment to mitigate the risks in a broad portfolio of other investments.