Public Statements & Remarks

Statement of Chairman Heath P. Tarbert in Support of Revisions to the Volcker Rule

September 16, 2019

I have voted to approve revisions to the Volcker Rule, among the most well-intentioned but poorly designed regulations in the history of American finance.  My involvement with the Volcker Rule started nearly a decade ago when I served as special counsel to the Senate Banking Committee before the passage of the Dodd-Frank Act.  In fact, I was the staff member responsible for arranging for former Federal Reserve Chairman Paul Volcker to testify before the committee on the original version of the rule that now bears his name.  Having had the opportunity to interact with Chairman Volcker at various points throughout my career, I have always had immense respect for him.  He had a clear-cut vision: banks should be barred from speculating in the markets (a practice known as proprietary trading) and from running hedge funds and private-equity firms.  “If you are doing this stuff,” he would say, “you should not be a commercial bank.”

Five federal agencies—the Federal Reserve, the FDIC, the OCC, the SEC, and the CFTC (together, the “Agencies”)—issued final regulations in December 2013 to implement the statutory language of the Volcker Rule in Title VI of the Dodd-Frank Act.  The basic premise of this law is to restrict financial institutions with deposits insured by the Federal Government from engaging in proprietary trading, but permit trading for market making, hedging, and other traditional financial services activities.

We now have five years of experience with the initial version of the regulations implementing the Volcker Rule, and over that time, a number of legitimate concerns have arisen.  In my view, the initial regulations adopted by the Agencies have metastasized from Mr. Volcker’s original, simple vision to the degree where his distinction between proprietary and non-proprietary trading is hardly recognizable.  I agree with Mr. Volcker that the rule has become overly complex and hard to understand;[i] at this point it is also nearly unadministrable.  Among other things, the regulations create confusion over what is acceptable activity for banking entities.[ii]  Indeed, the Agencies have had to issue 21 sets of frequently asked questions (“FAQs”) in the first three years since the regulations were adopted.[iii]  This is not a model of clear rulemaking.  Furthermore, the Volcker Rule imposes highly intensive compliance burdens that unfairly benefit large Wall Street banks over smaller regional ones.  No one ever intended these results.

In addition, the Volcker Rule has an extraterritorial reach that is breathtaking in its expansiveness, something I witnessed personally several years ago in Australia.  There I met with a senior executive at a local, Australian financial institution.  He handed me his business card, and it listed his title as “Head of Volcker Rule Compliance.”  In Australia!  We have created a mess not just for the United States, but for the whole world.

I do not doubt the good intentions of the original drafters of both the Volcker Rule and its implementing regulations.  I continue to affirm that deposit insurance underwritten by the FDIC and discount window access provided by the Federal Reserve—both ultimately backstopped by U.S. taxpayers—should not subsidize non-banking activities.[iv]  I will not raise the related question whether non-banks affiliated with insured depository institutions should be allowed to engage in proprietary trading.  I recognize that this is a decision for Congress, not me.[v]

As Chairman of the CFTC, my job is to ensure that the derivatives markets are liquid, resilient, and vibrant so they can serve the price discovery and risk management functions critical to our real economy.  I have seen reports that liquidity in bond markets may have been adversely affected by the Volcker Rule.[vi]  I am concerned that the Volcker Rule may also affect liquidity in the derivatives markets.  This could negatively impact the ability of agricultural, energy, manufacturing, and other companies in the real economy to engage in risk mitigation activities.

I am happy to say that the amended regulations we have now adopted help to simplify the Volcker Rule and include a number of important amendments that lessen the burden on smaller regional banks and benefit end users of derivatives.  The amendments seek to tailor the Volcker Rule to increase efficiency, right-size firms’ compliance obligations, and allow banking entities—especially smaller ones—to provide services to clients more efficiently.

The amended regulations adopt a risk-based approach that relies on a set of clearly articulated standards for prohibited and permitted activities and investments.  In particular, the new regulations revise elements of the prohibition on proprietary trading to provide banking entities—including CFTC-registered swap dealers and futures commission merchants (“FCMs”)—with greater flexibility in their trading activities and simplified compliance procedures.

The final regulations also expand existing, and include additional, exclusions from the definition of proprietary trading.  For example, the amended regulations add an exclusion for matched derivatives transactions to facilitate customer-driven swaps, especially by customers of small regional banks, which should benefit end users who rely on derivatives to hedge their commercial risks.  The amended final regulations also expand the list of permissible products for the liquidity management exclusion to include FX forwards/swaps and cross-currency swaps.  Banking entities commonly purchase and sell these instruments for the purpose of managing their liquidity and funding needs.  This can ultimately benefit commercial firms who use banks for loans and other products to hedge their foreign exchange risks arising from import and export transactions.

In addition, the final regulations tailor the compliance and metrics reporting requirements of the Volcker Rule to focus on entities with relatively large trading operations.  As a result, financial institutions on Wall Street will retain their reporting procedures, while smaller and more traditional commercial banks without major trading operations will get some relief.  What is more, the new regulations simplify requirements by clarifying prohibited and permissible activities, so that all institutions—including those headquartered abroad but who lend and deploy capital in the United States—have a better understanding of how to comply with our laws.

I believe laws should be as clear and concise as possible.  The point of having laws is for people to follow them, but before they can follow them they first have to understand them.  As Judge Learned Hand put it 90 years ago, “The language of the law must not be foreign to the ears of those who are to obey it.”[vii]  For too long the Volcker Rule has been just that—very peculiar and virtually unintelligible to market participants and regulators alike.

In short, the amended regulations will provide banking entities and their affiliates (including a number of swap dealers, FCMs, and commodity pools subject to CFTC oversight) with greater clarity and certainty about what activities are permitted under the Volcker Rule.  The revised regulations will also generally reduce the compliance burden for these entities, which will benefit those end users of derivatives who are critical to our real economy.  These changes, which will make the Volcker Rule simpler without reducing its fundamental benefits, are something we should all support.


[i] See, e.g., “Why Paul Volcker Soured on His Own Rule,” Time (Oct. 25, 2011), available at:; “Paul Volcker Says Volcker Rule Too Complicated,” Reuters (Nov. 9, 2011), available at   This is not to suggest that Mr. Volcker agrees with the proposed changes now before the interagency process.  See Volcker the Man Blasts Volcker the Rule in Letter to Fed Chair,” Bloomberg (Sept. 10, 2019), available at (describing a private letter purportedly criticizing the proposed amendments to the current regulations).  Paul A. Volcker Issues a Statement on Proposed Changes to the Volcker Rule

[ii] I have written a number of legal articles over the years to help market participants make sense of the Volcker Rule and how it might apply to them.  See, e.g., The Vagaries of the Volcker Rule, Int’l Fin. L. Rev. (Sept. 2010); The Volcker Rule and the Future of Private Equity (co-author), Rev. of Banking & Fin. Serv. (May 2011); and CLOs and the Volcker Rule (co-author), Rev. of Banking & Fin. Serv. (Aug. 2015). 

[iii] See FAQ on Conformance Period (June 10, 2014); FAQ on Foreign Public Fund Seeding Vehicles (June 10, 2014); FAQ on Loan Securitization Servicing Assets (June 10, 2014); FAQ on Namesharing Prohibition (June 10, 2014); FAQ on Metrics Reporting Date (June 10, 2014); FAQ on Trading Desk (June 10, 2014); FAQ on Mortgage-Backed Securities of Government-Sponsored Enterprises (November 12, 2014); FAQ on Metrics Reporting During the Conformance Period (Nov. 13, 2014); FAQ on Annual CEO Attestation (Sept. 10, 2014); FAQ on Metrics Reporting and Confidentiality (Dec. 23, 2014); FAQ on Treasury STRIPS (Jan. 29, 2015); FAQ on 30-Day Metrics Reporting During the Conformance Period (Jan. 29, 2015); FAQ on SOTUS Covered Fund Exemption: Marketing Restriction (Feb. 27, 2015); FAQ on Foreign Public Funds Sponsored by Banking Entities (June 12, 2015); FAQ on Joint Venture Exclusion for Covered Funds (June 12, 2015); FAQ on Seeding Period Treatment of Registered Investment Companies and Foreign Public Funds (June 16, 2015); FAQ on  CEO Certification for Prime Brokerage Transactions (Sept. 25, 2015); FAQ on Compliance for Market Making and the Identification of Covered Funds (Sept. 25, 2015); FAQ on Termination of Market-making Activity (Nov.  20, 2015); FAQ on Applicability of the Restrictions in Section 13(f) of the BHC Act (Nov. 20, 2015); FAQ on Capital Treatment of Banking Entity Investments in TruPS CDOs (Mar. 4, 2016).

[iv] See Hearing Before the Committee on Banking, Housing, and Urban Affairs, United States Senate, 150th Congress, Session 1 (May 17, 2017) at 22 (“I [Heath Tarbert] believe that Federal deposit insurance should not subsidize nonbanking activities. . . . [This] should not be controversial.”).

[v] It is worth noting that the Dodd-Frank Act of 2010 contained a provision addressing the specific issue of insured banks engaging in trading activities perceived to go beyond traditional banking services.  The “push-out” rule of Section 716, also known as the Lincoln Amendment, would have confined an insured depository institution’s trading of swaps to those used for hedging or otherwise related to the well-known list of eligible (and appropriately conservative) investments permissible for national banks.  Exotic and non-traditional products such as credit default swaps, equity swaps, and most physical commodity swaps would have been effectively “pushed out” out of insured banks and into non-bank affiliates not directly backstopped by U.S. taxpayers.  Whatever the merits of the Lincoln Amendment, no one can deny that it was a clear rule aimed at an equally clear and widely-shared policy objective.  But it was not to last.  In December 2014, a bipartisan Congress passed—and President Obama signed into law—a budget bill containing a provision that largely gutted the original push-out rule of the Dodd-Frank Act.  See Consolidated and Further Continuing Appropriations Act, 2015, Pub. L. No. 113-235, 128 Stat. 2130 at § 630 (2014).

[vi] See, e.g., M. Allahrakha & J. Cetina, et al., “The Effects of the Volcker Rule on Corporate Bond Trading:  Evidence from the Underwriting Exemption,” OFR Working Paper (Aug. 6, 2019); J. Bao, & M. O’Hara, et al., The Volcker Rule and Market-Making in Times of Stress, J. of Fin. Econ. (2018); H. Bessembinder & S. Jacobsen, et al., Capital Commitment and Illiquidity in Corporate Bonds, J. of Fin. (Aug. 2018).

[vii] Hand, L. Is There a Common Will? in The Spirit of Liberty: Papers and Addresses of Learned Hand 56 (I. Dilliard, 3d ed. 1960) (quoting from address before the American Law Institute in 1929).