Staff Writer
Columbus CEO

c.2013 New York Times News Service

Federal regulators are poised to approve on Tuesday a tougher-than-expected version of the so-called Volcker rule, adopting a harder line in recent weeks against Wall Street risk taking, according to a copy of the rule reviewed by The New York Times.

A symbol of the Obama administration’s post-financial-crisis crackdown on Wall Street, the tougher rule would ban banks from trading for their own gain, a practice known as proprietary trading.

In doing so, the Volcker Rule takes aim at the sort of risk taking responsible for a $6 billion trading blowup at JPMorgan Chase last year. The bank claimed it was trading to hedge its broader risks, but, instead, built a position that racked up a large profit before spinning out of control.

To prevent such blowups, the rule will require banks to deploy “independent testing designed to ensure that the positions, techniques and strategies that may be used for hedging may reasonably be expected to demonstrably reduce” the risks, according to the version reviewed by The Times. When five federal agencies initially proposed the rule in October 2011, those requirements were softer. Even in the last two weeks, the regulators continued to adopt harsher language, people briefed on the matter said.

For example, to further prevent banks from masking proprietary trading as a hedge, the rule required banks to conduct an “ongoing recalibration of the hedging activity by the banking entity to ensure” that the activity is “not prohibited proprietary trading.”

Five federal agencies writing the rule — the Federal Reserve, the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal Deposit Insurance Corp. and the Comptroller of the Currency — were divided over how tough to make the final rule. While some officials at the Federal Reserve and the SEC wanted to give banks significant flexibility to carry out trading considered important for their health and the functioning of markets, the CFTC and SEC Commissioner Kara M. Stein, a Democrat, sought to extract additional restrictions.

The votes on Tuesday will come more than a year after Congress required the agencies to finalize the Volcker rule, which is a centerpiece of the Dodd-Frank Act of 2010. Until recent days, regulators appeared unlikely to meet the recommendation of Treasury Secretary Jack Lew, who has urged the agencies to complete the rule in 2013. If passed, the regulation will represent a turning point in financial reform.