WASHINGTON—Big banks would have more freedom to conduct short-term trading without running afoul of the Volcker rule under proposed changes set to win unanimous approval Wednesday at the Federal Reserve.
The proposal, known as Volcker 2.0, would loosen compliance requirements for all banks, though it would grant more relief to firms with small trading desks. The Fed is set to vote on it Wednesday, and four other U.S. agencies are expected to follow suit over the next week.
“This proposal represents our best first effort at simplifying and tailoring the Volcker rule,” Fed Vice Chairman for Supervision Randal Quarles said in prepared remarks for the Fed’s board meeting.
The Fed said regulators are making the changes because the existing Volcker rule is too costly and unclear. The rule, named for former Federal Reserve Chairman Paul Volcker, was adopted after the financial crisis and bars banks from hedge-fund-like speculative activities. Banks are allowed to trade in concert with customers’ demand.
In practice, judging traders’ intent has been difficult for regulators and for bankers. Many observers say financial markets aren’t functioning as well because big banks are nervous that certain positions may violate the Volcker rule. At the same time, many big banks have cut back on trading businesses in search of more stable revenue sources.
Wednesday’s proposal would eliminate a presumption that positions held for fewer than 60 days violate the rule unless bankers prove otherwise—a change that could give traders more freedom. Instead, regulators would look to how trading positions are defined under accounting rules. They also would check to see that trading desks are operating within stated risk limits, without swings in gains or losses that exceed $25 million over a 90-day period.
The proposal also reworks the definition of permitted hedging and market-making activities with an eye toward clarifying them, and seeks to reduce the impact of the rule on foreign-owned banks’ overseas activities.
Regulators are also proposing to create three new categories of banks. Those with more than $10 billion in trading assets and liabilities would face the highest expectations under the Volcker rule. Firms with between $1 billion and $10 billion in trading assets and liabilities would have “moderate” compliance, the Fed said. These two categories comprise about 40 firms and 98% of total U.S. bank trading activity, the Fed said.
Firms under the $1 billion level would be presumed compliant with the rule and would no longer be required to have their chief executive attest to Volcker rule compliance.
Write to Ryan Tracy at ryan.tracy@wsj.com