daniel k tarullo : volcker rule testimony by mr daniel k tarullo, member of the board of governors of the federal reserve system, before the committee on financial services, u. s. house of representatives, washington dc, 5 february 2014. * * * chairman hensarling, ranking member waters, and other members of the committee, thank you for the opportunity to testify on the interagency final rule implementing the requirements of section 619 of the dodd - frank wall street reform and consumer protection act ( dodd - frank act ), commonly known as the volcker rule. section 619 of the dodd - frank act generally prohibits any banking entity from engaging in proprietary trading. it also generally prohibits a banking entity from investing in, or having certain relationships with, a hedge fund or private equity fund ( a covered fund ). my remarks today will focus on the recent actions taken by the federal reserve board and other agencies responsible for issuing implementing rules under section 619. as i have previously noted in congressional testimony, the goal of the federal reserve with respect to this and all other provisions of the dodd - frank act is to implement the statute in a manner that is faithful to the language of the statute and that maximizes financial stability and other social benefits at the least cost to credit availability and economic growth. as you know, on december 10, 2013, the federal reserve, the office of the comptroller of the currency, the federal deposit insurance corporation, the securities and exchange commission, and the commodity futures trading commission ( collectively, the agencies ) approved a common final rule that was developed jointly to implement section 619 of the doddfrank act. 1 this final rule applies the statutory provisions to insured depository institutions ; companies that control an insured depository institution ; and foreign banks with a branch, agency, or subsidiary bank in the united states, as well as to affiliates of these entities, such as broker - dealers and commodity pool operators. the final rule is not a regulation that would have been written by any one agency, much less by any one principal at any of those agencies. but i think the text is an improvement, both normatively and technically, on the proposed rule issued in october 2011. the basic approach of the final rule is generally consistent with that adopted in the proposed rule, but the many comments we received from a variety of perspectives, including from members of congress, helped us make useful changes and clarifications throughout the final rule. also

, of course, the “ london whale ” episode allowed staff to test the procedural and substantive requirements of the proposed rule against a real - world example of what should not happen in a banking organization. the final rule has been modestly simplified from the 2011 proposal, but the agencies found that a good bit of the complexity in the proposal was hard to avoid in the final rule. much of the remaining complexity lies in the part of the rule dealing with covered funds. the part of the rule dealing with proprietary trading has been streamlined somewhat, particularly by reducing the number of metrics that will be used in the reporting and analysis of trading data. of course, as i have noted in previous testimony, a fundamental challenge of the volcker rule is to distinguish between proprietary trading, on the one hand, and either market - making or hedging, on the other hand. the difficulty in making this distinction inheres in the statutory provision that makes trades either permissible or impermissible depending on the intent of the trader and the context and circumstances within which the trades are made. while the final rule issued by the agencies articulates standards for making those distinctions, those standards will be given meaning as they are applied by banking entities and supervisors in the field. thus, implementation will be particularly important in continuing to shape the volcker rule. the see the agencies ’ joint press release, www. federalreserve. gov / newsevents / press / bcreg / 20131210a. htm. bis central bankers ’ speeches extended conformance period, during which relevant data will be collected from large banking organizations, will allow for the development of additional guidance. more generally, one would expect that a good many of the uncertainties will be reduced over time, as both banking entities and regulators gain experience with this new regulatory framework. the final rule requires banking entities with significant trading operations to report to the appropriate regulatory agency a variety of metrics. these data will be an important tool to help firms and regulators monitor and identify prohibited proprietary trading and high - risk trading strategies. in order to minimize burden and give full effect to the conformance period provisions of section 619, the reporting requirements are applied in a graduated manner, with only the firms with the largest trading books required to report metrics. these metrics will be used to trigger further scrutiny by banking entities and examiners in their evaluation of whether a banking entity is engaged in permitted or prohibited trading activities. as part of implementation, we