Regulators set to approve sweeping Volcker rule on banks US regulators on Tuesday are set to approve the controversial Volcker rule, which will dramatically curb the way Wall Street does business and hold bank chief executives more accountable. The Volcker rule, named after Paul Volcker, former Federal Reserve chairman, is one of the hallmarks of the sweeping Dodd-Frank reform legislation aimed at preventing another financial crisis. The rule, which is 71 pages long, bans banks from making risky bets using their own accounts in what is known as proprietary trading. Banks will have to set up compensation so they do not reward or encourage traders to engage in proprietary trading. US government offices were shut on Tuesday because of bad weather, leading the Commodity Futures Trading Commission to cancel its open meeting on the rule. But the CFTC will still submit a written vote while the Federal Deposit Insurance Corporation, the Federal Reserve, the Securities and Exchange Commission and the Office of the Comptroller of the Currency were also slated to consider the rule. It took almost four years for the agencies to finish the rule after the Dodd-Frank legislation was passed in 2010. "I know it's been a long time coming but this has been one of the most complex rulemakings I can remember being involved in," said Thomas Curry, comptroller. I believe the final regulations strike the right balance. A critical issue will be how the various regulators interpret and enforce the rule. The text of the measure totals about 1,000 pages because of a preamble that addresses more than 18,000 letters submitting comment, which could be used by the agencies as guidance. The rule goes into effect on April 1, 2014, although the compliance date will be delayed for a year to July 21, 2015. But starting in June 2014, large banks are required to begin reporting certain information to show they are working to comply with the rule. One of the aspects of the rule that was strengthened by regulators in the past few weeks was how it defines hedging. That provision gained new urgency after JPMorgan lost more than $6bn through derivatives trading last year. Jamie Dimon, JPMorgan chief executive, described the so-called London Whale loss as a portfolio hedge. While the Volcker rule does not explicitly ban portfolio hedging, it includes strict descriptions of permitted activity that requires banks to prove their move is aimed at mitigating "specific, identifiable risks." "The final rule has been strengthened from the proposal in several aspects to prevent banking entities from conducting proprietary trading under the guise of hedging," according to a Fed staff note to its governors. The rule also requires that banks conduct an analysis, including assessing correlation, to show the hedge is in connection with "identified positions, contracts or other holdings of the banking entity." The rule also requires banks to document their hedging activities to prove it mitigates risks. "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 organisation," said Daniel Tarullo, Fed governor. The exemption for foreign banks engaged in activity outside the US has been revised after banks complained those moves could still be captured under Volcker even if their trade falls outside the US. There is an exemption for activities conducted "solely outside of the US," which is now based on risk as opposed to transactions. For example, the rule allows foreign banks to trade with foreign operations of a US bank and conduct proprietary trades on US exchanges and clearing facilities. But some foreign banks could still complain that the definition is too narrow. A foreign bank that trades with or through a US entity falls under Volcker, with a US entity defined as "any entity that is, or controlled by, or is acting on behalf of, or at the direction of, any other entity that is located in the US or organised under the laws of the US or of any state." To hold chief executives accountable, they must attest in writing that their banks are setting up processes to maintain, enforce and review compliance programs, but they do not have to certify that the bank is not engaged in proprietary trading. It also requires that chief executives and the board of directors review the effectiveness of their compliance programs. Another provision that was strengthened involves banks being prohibited from investing in or sponsoring what are called "covered funds," which include hedge funds and private equity funds. Banks have worried this will force them to divest of certain investments, which will probably come at a cost. Banks have to limit their total investment in covered funds to 3 per cent of their tier one capital. There are exceptions, such as in cases where a bank is "acting solely" as an agent or broker, the activity is conducted on behalf of a customer or the bank does not retain "beneficial ownership of such ownership interest." Banks could also receive an additional two years to sell their investment if they prove it won't affect their safety and soundness. Banks will be able to engage in market-making activities in which they buy and sell bonds and other financial instruments as long as they prove they are aimed at meeting the "reasonably expected near term demands of clients, customers or counterparties." The banks also have to prove that bonds, securities and other assets held in inventory are meant to meet customer needs. That provision will require banks to show "demonstratable analysis of historical customer demand, current inventory of financial instruments" and other factors. That will put additional reporting requirements on banks but the rules seem to provide enough flexibility to them, which had been a worry for both financial firms and the corporations they serve. Another tricky aspect of the Volcker rule was how compliance would be measured, with banks complaining that it is difficult to assess the intent of a trader in real time as to whether he is hedging or making a risky bet. The rule requires banks to develop compliance programs that include written procedure, internal controls and independant testing. A bank with at least $50bn in trading assets and liabilities will have to report to its regulatory agencies every month. The rule exempts US Treasuries, and has some limited exceptions for foreign sovereign debt as well, a provision that was pushed by other central banks.