U.S. banks would be banned from proprietary trading and other large financial firms would face quantitative limits on such activity, according to draft language on the so-called Volcker rule from the Obama administration.
The language maintains the toughest components of the proposal first floated in January, despite skepticism from lawmakers and the industry that such restrictions would do little to prevent another financial meltdown like the one that seized markets in 2008.
Banks would also be banned from investing in or sponsoring hedge funds and private equity funds, according to a draft version of the legislative language obtained by Reuters. A final version of the language is expected to be sent to lawmakers later on Wednesday.
The proposal would prevent a financial firm from acquiring another company if the resulting firm would have more than 10 percent of the liabilities of the financial system.
President Barack Obama announced in January that he would propose these limits, named after White House economic adviser Paul Volcker. Obama said additional safeguards were needed to prevent the build-up of risk in the financial system.
The announcement in January of the Volcker rule came months after the administration's proposals in mid-2009 for other financial reforms, prompting Senate Banking Committee Chairman Christopher Dodd to complain that the Volcker rule was late to the show and looked transparently political.
The legislative language on Wednesday also targets non-banks, saying those financial firms that engage in proprietary trading would face tough consolidated supervision and quantitative limits on their risky activities.
These proposals are part of a comprehensive package of reforms to create a safer, more resilient financial system, the draft legislative language said.
It is unclear if lawmakers will include the Volcker rule in their legislative package.
The Senate Banking Committee has recently spent marathon sessions trying to reach some sort of bipartisan deal of financial reform, but has been bogged down in debate over a Consumer Financial Protection Agency.
Dodd has said it would be hard to write a bill to specifically ban proprietary trading. His committee has been said to consider a narrower version of such a provision that would give federal banking regulators the authority to impose limits, but not outright ban proprietary trading.
(Reporting by Karey Wutkowski, Rachelle Younglai, Kevin Drawbaugh and Caren Bohan, editing by Gerald E. McCormick, Gary Hill)