Saturday, October 13, 2012

UK FSA Chair Endorses Ring-Fencing of Bank Proprietary Trading and Sponsoring of Hedge Funds

UK Financial Services Authority Chairman Adair Turner endorsed the Vickers Commission recommendation to create ring-fenced retail banks separate from investment banks and require adequate levels of debt. In his Mansion House speech to the City of London, he said that these reforms will ensure that all banks can be resolved  rapidly without taxpayer support and without harmful disruption of banking services in the real economy.

The UK Independent Commission on Banking, the Vickers Commission, recently proposed a sweeping structural change for organizations engaged in commercial banking. In essence, within a single organization the range of ordinary banking operations, such as deposit taking, lending, and payments, would be segregated in a retail bank, which would be overseen by its own independent board of directors and ring fenced to greatly reduce relations with the rest of the organization. While proprietary trading and investments in hedge funds would not be prohibited, these activities would be outside the ring-fence and thus isolated from retail banking.

The UK Government is committed to passing legislation requiring banks to implement the ring-fence in this Parliament. Recently, the Government introduced  legislation mandating a robust ring fence, separating investment banking and related activities from more traditional personal and business lending. Under the draft financial services bill, the ring-fenced banks must be genuinely independent from other parts of the group.

Section 619 of the Dodd-Frank Act codifies the Volcker Rule and prohibits banking entities from engaging in proprietary trading of any security, derivative, and certain other financial instruments for the entity’s own account and owning, sponsoring, or having certain relationships with a hedge fund or private equity fund.

Former Fed Chair Paul Volcker has mentioned that efforts to harmonize the Volcker Rule internationally have been impressive and that considerable progress has been made. The UK is a particularly important jurisdiction in this regard, said the former Fed official, especially mentioning the proposals of the Vickers Commission to ring-fence proprietary trading and relationships with hedge funds.