U.S. regulators toughened key sections of the Volcker rule's crackdown on Wall Street's risky trades on Tuesday as they finalized one of the harshest reforms after the credit meltdown.
The rule - named after former Federal Reserve Chairman Paul Volcker, who championed the reform - generally bans banks from proprietary trading, or speculative trading for their own profits.
The final rule includes strictly defined carve-outs for trades executed to serve clients' interests or to protect against market risks, and forces banks to show regulators that they are not trying to pass off speculative bets as legitimate trades.
Regulators are eager to prevent a repeat of trading debacles such as JPMorgan's $6 billion trading loss in 2012, dubbed the "London Whale" because of the huge positions the bank took in credit markets.
Still, it is unclear exactly how regulators will police banks' trading activity and officials acknowledged the sprawling, 882-page rule was a complex document.
"Many of us - myself included - had hoped for a final rule substantially more streamlined than the 2011 proposal. I think we need to acknowledge that it has been only modestly simplified," Federal Reserve Governor Dan Tarullo said.
The Fed was just one of five regulatory agencies tasked with reaching agreement on one of the most hotly debated parts of the 2010 Dodd-Frank Wall Street reform act, aimed at preventing a repeat of the taxpayer bailouts during the 2007-2009 financial crisis. Similar rules in Europe are far weaker.
The idea was to prohibit banks backed by the Fed's safety net from proprietary trading and bar them from owning more than 3 percent of hedge funds, or private equity funds.
The rule is expected to hit the largest investment banks hardest, including JPMorgan and Goldman Sachs, but Wall Street banks in recent years have already wound down much of their proprietary trading activities.
"What we have on paper now is a fairly aggressive regulatory posture from the banking agencies, but it remains to be seen how aggressively it will be implemented and enforced," said Kevin Petrasic, a regulatory lawyer at Paul Hastings in Washington.
Better Markets, an often vocal pressure group critical of large banks, reacted positively to the final rule, calling it a "major defeat for Wall Street".
Regulators have struggled for years to agree on a text that, while prohibiting risky activities, would still allow banks to take on risk on behalf of clients as market-makers, to hedge risk, or when underwriting securities.
In the final wording, banks could still engage in market making and take on positions to help clients trade, but their inventories should not exceed "the reasonably expected near-term demands of customers", the regulators said.
The regulators also seek to put an end to portfolio hedging, a practice in which banks entered all kinds of trades that were supposed to hedge risk elsewhere in the business but that could be used as veiled speculation.
"The rule would prohibit 'macro-hedging' that has caused large speculative losses at institutions in the past," Martin Gruenberg, the head of the Federal Deposit Insurance Corp (FDIC), said in a statement.
Other changes from the originally proposed rule include a wider exemption for the trading of government bonds, which will now be permitted for foreign sovereign fixed income instruments and not just for U.S. bonds, after complaints from Europe.
Regulators extended the deadline by which banks have to fully comply with the new regulations by one year to July 2015, a widely expected move after they repeatedly missed deadlines for the rule.
The chief executives of the biggest banks would have to attest their banks have appropriate programs in place to achieve compliance with the rule, but would not themselves have to confirm their banks are in compliance.
Large investment banks have such sprawling legal structures engaging in different financial activities that the rule needs to be adopted by a patchwork of U.S. agencies: three bank watchdogs and two market regulators.
The agencies that need to adopt the rule, including the Securities and Exchange Commission and the bank regulators, largely proceeded as planned on Tuesday despite the threat of snowstorms on the U.S. East Coast, which caused federal government offices to shut down.
The boards of the FDIC and the Fed voted unanimously on Tuesday to adopt the final rule.
The Commodity Futures Trading Commission, the fifth agency that needs to approve it, canceled a public vote on the rule, but said it would adopt the rule behind closed doors.