The SA Reserve Bank is adopting a wait-and-see approach.
The Volcker Rule came into force in the US in April 2014. The Volcker Rule is a federal regulation under the Dodd-Frank Act that, subject to exceptions, prohibits US commercial banks from engaging in short-term proprietary trading of many financial instruments for their own account. The prohibition includes trading in derivatives, commodity futures, options and securities. It strictly limits investment made by commercial banks and their affiliates in covered funds, hedge funds and private equity funds. Trading in other instruments (such as government securities) and market-making, underwriting, hedging and a number of other activities are permitted provided they do not create a material conflict of interest or high risks. The Volcker Rule aims to ring-fence many of the commercial banks’ trading practices and to minimise conflicts of interest between the banks and their clients.
Application of the Rule
The Volcker Rule is broad and complex, and will apply to many banking entities. It will constrain the worldwide activities of most internationally active non-US banks and their affiliates. The rule will apply to any company (and its affiliates) that is treated as a bank holding company under US banking legislation, whether inside or outside of the US. Non-US banks will, however, be allowed to continue non-US proprietary trading where the transaction takes place solely outside the United States.
The rule imposes extensive mandatory compliance, governance and reporting procedures in order to monitor the prohibition of proprietary trading.
Five US federal financial regulatory agencies approved the Volcker Rule in order to implement section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The compliance deadline is 21 July 2015.
The UK’s response to Volker:
The Financial Services (Banking Reform) Act was passed by the UK parliament from February 2014. It requires the ring-fencing of some retail banking activities into separate entities within a group. The ring-fenced retail banks are then prohibited from carrying on specified activities, including dealing in investments as a principal. There are exceptions to the prohibition, such as the hedging by a ring-fenced retail operation of its exposure to changes in interest rates, exchange rates or commodity prices, liquidity risk and default risk.
It is anticipated that the UK act will come into effect before the next general election in the United Kingdom, not later than May 2015.
What will happen in South Africa?
There is no similar legislation or draft legislation that will introduce prohibitions on South African banks dealing in investments as principal.
The SA Reserve Bank is adopting a wait-and-see approach and will presumably keep a close watch on the manner in which the UK and the US enforce their legislation and the response from the financial sectors to the regulations and prohibitions and then decide on a course of action to follow.
SA banks must start considering how the Volcker Rule will apply extra-territorially to their operations, both in South Africa and abroad, and what exemptions (if any) can be relied upon to avoid the Volcker net.
Here is the response of a number of international jurisdictions compiled by Norton Rose Fulbright.
July 2014 marks four years since Dodd-Frank came into operation. Neither Dodd-Frank nor the Volcker Rule have been acclaimed in the US. Economists and commentators have pointed to evidence that Dodd-Frank and the Volcker Rule are not working.