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The Financial Stability Oversight Council puts out a study and recommendations on the Volcker Rule that will serve as a guide to drafting the rules for implementing it. The overall tone of the report is that regulators must be vigilant for ways in which banks may try to evade the rule. Mr Volcker said after reading the report that it is clear and straightforward in its effort to let banks know that you cannot hide proprietary trading in other activities.

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Regulators from the S.E.C., the FDIC, the Federal Reserve and the CFTC, defend the plan to implement the Volcker Rule in Jan 2012 hearings before the House Committee on Financial Services of the U.S. Congress.

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Comments by the banking sector and the central bank of Canada on the Volcker Rule.

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Eisinger says the Volcker Rule is voluminous and complex with 530 pages, because banks and lobbyists with complicit regulators wanted it that way. This is also what Volcker told Charlie Rose in an interview, that banks can't complain that it is complex and at the same time work to add complex language to the rule.

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Gongloff points out that the word exemption occurs on 100 of the 200 pages of the final draft of the Volcker Rule published for comments in September 2011, for a total of 426 times. The banks have 2 years after its introduction in July 2012 to comply with its provisions and are allowed to petition the board for 3 one year extensions taking the process to July 2014 or July 2017. And this whole exercizes resembles some form of kabuki theater as the title of this piece suggests, and makes going through its detail meaningless. Especially since the probability of a new administration in 2014 or in 2017 are high. At that time new rules would be written.

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Dilution of the Volcker Rule by defining "hedging" as covering bank risk on a "portfolio basis," "including aggregate risk of one or more trading desks." The new wording is in a 174 page draft proposal for the rule released by regulatory agencies. The Federal Reserve, the FDIC, the CFTC, the SEC, and the Treasury Department are putting together the final wording. This opens the door for banks to engage in proprietary trading on their own account. Experts say this makes it possible for financial firms to make all kinds of bets on the market, by defining the risk of its portfolio broadly, such as a U.S. recession. Additional changes are the deleting of the requirement that chief executives pledge their firms are not engaging in proprietary trading. Another change that is being debated is whether to require banks to report all trading to a single repository so that regulators can see if there is systemic risk. The result of this would be a watering down of the original Volcker Rule provision in the Dodd-Frank legislation, that banned proprietary trading after the 2008 financial collapse on Wall Street....

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A review of the Volcker Rule for bank regulation in its final form by the WSJ in Dec. 2013 shows it leaves out language permitting portfolio hedging. Banks will not be allowed to use portfolio hedging creating new risks. Regulators wrote in the rule that hedges are not to "give rise .. to any significant new or additional risk that is not itself hedged contemporaneously." The Volcker Rule in its final form was influenced by regulators awareness of the J.P. Morgan Chase bank's huge losses from portfolio hedging in the Whale case. Senators Merkley and Levin in the U.S. Congress wrote to regulators saying a loophole in the Volcker Rule allowing portfolio hedging would lead to a repeat of the "London Whale."

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In private conversations, Paul Volcker has advised administration officials, that in implementing the Volcker Rule, regulators should follow the practice in money laundering laws. There the government bans a certain behaviour, and then the burden is on the banks to screen for red flags and to ensure compliance. His advice is to ban banks from trading with their own funds if they benefit from any kind of government guarantee. Banks would be required to police their own actions, and the Fed examiners ensuring they are in compliance. The recently passed regulatory reform bill left a lot to the regulators, who have to fill in the blanks. Volcker's concern is that narrow rules would invite gamesmanship from the banks to evade the intent of the law. At one Congressional hearing Volcker suggested a Potter Stewart type of approach- Stewart as Supreme Court Justice said about pornography: "I know it when I see it." For Volcker bankers know what proprietary trading is and is not, and he does not want to let bankers tell anybody anything different. Thw new Financial oversight Stability Council is charged with the task of coming up with a course of action by January 2011, and then writing the rules by October 2011. The fear among a group of 18 senators is that bankers will weaken the Volcker rule protections. A letter pointing this out was sent by the group to the Oversight Council last week....

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That former Fed chairman Volcker considered CEO attestation a critical part of the Volcker Rule is reflected in his advice about its implementation- to keep broad and let the responsibility for seeing that the proper activity takes place on bank management. CEO attestation is now part of the final form of the Volcker Rule requiring CEO's to sign off that the financial firm is in compliance. It may lead to a sequence of attestations or sub-certifications from business heads to upper management in actual practice, says Joseph Grundfest at Stanford University. The Financial Stability Oversight Council, created under the Dodd-Frank legislation, proposed this requirement saying that the rule require" public attestation by the CEO that compliance standards are continually being met." The WSJ points out that 5 of the FSOC's members are also top officials at government agencies writing the Volcker Rule. Jacob Lew, Treasury Secretary, leads the council. Lew says about the individual accountability of the top executive- "it puts in place strong compliance requirements that require those in charge of financial institutions to make sure that the 'tone at the top' sends the right signals to the whole firm."...

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The $2 billion losses at Chase highlights the need for completing the Volcker Rule with language that prevents banks engaging in risky trading activities. Former FDIC chairman Sheila Bair says precise language is needed to clarify the defiinition of hedging after the losses by a single trader's complex hedging bet in London. Individual traders have too much authority in existing trading arrangements to make complicated bets in finanial markets. Large losses were incurred by Swiss bank UBS when an individual trader in London made risky bets in 2011, raising all sorts of questions about the bank's risk management systems.