Proprietary Trading: Regulators Will Need More Comprehensive Information to Fully Monitor Compliance with New Restrictions When Implemented

GAO-11-529 Published: Jul 13, 2011. Publicly Released: Jul 13, 2011.
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In addition to trading on behalf of customers, banks and their affiliates have conducted proprietary trading, using their own funds to profit from short-term price changes in asset markets. To restrain risk-taking and reduce the potential for federal support for banking entities, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the act) prohibits banking entities from engaging in certain proprietary trading. It also restricts investments in hedge funds, which actively trade in securities and other financial contracts, and private equity funds, which use debt financing to invest in companies or other lessliquid assets. Regulators must implement these restrictions by October 2011. As required by Section 989 of the act, GAO reviewed (1) what is known about the risks associated with such activities and the potential effects of the restrictions and (2) how regulators oversee such activities. To conduct this work, GAO reviewed the trading and fund investment activities of the largest U.S. bank holding companies and collected selected data on their profits, losses, and risk measures. GAO also reviewed regulators' examinations and other materials related to the oversight of the largest bank holding companies.

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Recommendations for Executive Action

Agency Affected Recommendation Status
Financial Stability Oversight Council In order to improve their ability to track and effectively implement the new restrictions on proprietary trading and hedge fund and private equity fund investments, the Chairperson of FSOC should direct the Office of Financial Research, or work with the staffs of the Commodity Futures Trading Commission, Federal Deposit Insurance Corporation (FDIC), Federal Reserve, Office of the Comptroller of the Currency (OCC), and Securities and Exchange Commission (SEC), or both, to collect and review more comprehensive information on the nature and volume of activities that could potentially be covered by the act.
Closed – Implemented
On December 10, 2013, five federal financial regulators issued final rules developed jointly to implement section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Volcker rule"). These rules restrict the ability of U.S. financial institutions to conduct short-term proprietary trading for their own account and from owning or investing in hedge funds or private equity funds. Treasury staff that assist the activities of FSOC reported actively participating with these regulators in the development of the final rules and recognized the importance of gathering additional information on activities that could be affected by the final regulations. At least one of these regulators reported obtaining and analyzing data as part of preparing the final rules. The final rule also includes a detailed appendix of data that covered institutions will have to report to their regulators on their trading activities as part of ensuring compliance with the restrictions. As noted in the proposed draft of these rules, the data required to be reported includes various quantitative measurements intended to assist the regulators in better understanding the scope, type, and profile of covered entities' trading activities. The regulators provide for a phased-in schedule for the collection of data, and plan to review the merits of the data collected and revise the data collection as appropriate.

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