JPMorgan's $2B Loss Re-Focuses Attention on the Volcker Rule

When JPMorgan Chase confirmed a $2 billion trading loss, the resulting flood of commentary quickly focused on the so-called Volcker Rule, intended to place prohibitions on risky bets at banks.

Catherine Dunn, Corporate Counsel, May 15, 2012
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When JPMorgan Chase confirmed a $2 billion trading loss late last week, the resulting flood of commentary quickly tapped into one of the most controversial components of Dodd-Frank financial reform: the so-called Volcker Rule, intended to place prohibitions on proprietary trading and other risky bets at banks.

Indeed, no sooner did JPMorgan CEO Jamie Dimon issue a mega mea culpa than did he lament that the “egregious mistake” would give ammunition to regulators (and he’s already been an outspoken opponent of the rule named after former Federal Reserve Chairman Paul Volcker). Meanwhile, a host of others (see here, here, and here for a sampling) have said the bank’s blunder highlights, precisely, the need to have a Volcker Rule to restrict such high-stakes trading.

Yet there is no final Volcker Rule yet. And how this latest finance-sector fracas will impact the ultimate content of the rule—and, indeed, when the final rule will come out—is as good as anyone’s guess.

“The world keeps changing,” says Oliver Ireland, a partner at Morrison Foerster in Washington, D.C. and former associate general counsel of the Board of Governors of the Federal Reserve System. “Last week at this time, [the Volcker Rule] was probably on one schedule. This week, it’s probably on a slightly different schedule.”

Under Dodd-Frank, the statute that encompasses the Volcker Rule is set to take effect on July 21, 2012. But the prohibitions outlined in the Wall Street reform law’s Section 619 are only part of the equation.

“Without having a definitive rule, there’s still a lot of doubt in terms of what activities are going to be permitted and what activities aren’t,” says William Stern, a partner in the business-law department at Goodwin Procter in New York.

In February, Federal Reserve Chairman Ben Bernanke said the rule would likely not be ready by the statutory deadline. Then last month, the Fed and other agencies issued a joint statement to clarify that financial institutions would have some leeway on Volcker Rule compliance, confirming that those institutions would have until July 2014 to come into conformance with the rule.

But until there is an actual, finalized rule, that means the conformance period, for now, will be compressed, says Ireland.

A major part of the challenge is that the Volcker Rule is an interagency rule. It comes under the province of five different regulatory agencies: the Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission.

“I’ve written interagency rules. It’s awful,” says Ireland, who worked on the Gramm-Leach-Bliley privacy rules under the Financial Services Modernization Act of 1999. He recalls some 40 people sitting in a room, poring over a draft, trying to work out disagreements among agencies on substantive issues, as well as on the language.

“You’ve got to resolve all of those differences, get to a common agreement, and get it out. You have to make a lot of deals,” Ireland says.

And while the staffs of the regulatory agencies are sifting through hundreds of public comments they received on the proposed rule, they’re also absorbing the latest round of furor, Ireland says.

“They’re listening to everything,” he says. “They are absolutely listening to the dialogue that’s going on right now.”

Until they decide what’s in and what’s out, the bottom line for JPMorgan Chase and other players in the U.S. financial sector, according to Ireland, is: “You don’t know what you’re going to have to do, and you don’t know when you’re going to have to do it. It’s as simple as that.”

See also: “Occupy the SEC Goes Big on the Volcker Rule,” CorpCounsel, February 2012.