FinReg Provisions to Watch

The best explanatory writing about the final financial regulatory reform bill will happen this weekend, rather than today. Why? Last night, the members of Congress convened did much of their negotiating behind closed doors, and made dozens of minute changes to complicated provisions up until 5:39 a.m., and reporters don’t have full final text yet. This will take a while to sort out. But we do know the major outline of the changes to the most controversial provisions under debate yesterday — the Volcker Rule, which bans banks from speculative trading with their own money, and the reform of derivatives trading.

Here are some major changes:

• Initially, it seemed that conference committee might bar banks from investing in hedge funds or private equity firms. Now, they can invest only 3 percent of their “Tier 1 capital” in those speculative investment vehicles. That is part of the Volcker Rule.
• The bill will stop banks from hedging against trades performed on behalf of clients — in reaction to the Goldman Sachs Abacus scandal.
• Banks will need to spin off derivatives trading desks for most types of swaps, including agricultural, equity, credit-default and most commodity swaps. But banks will not need to spin off trading desks for the less-risky kinds, including foreign-exchange swaps and interest-rate swaps, that make up most of the $500 trillion market.