02/16/2012 04:05 pm ET | Updated Apr 17, 2012

Fed Official: Calling Volcker Rule 'Complicated' Would Be An 'Understatement'

* Fed bank supervisor says rule presents big challenge

* Telling market making from prop. trading may be hardest

* 17,000 comments on Volcker rule, a Dodd-Frank record

By Alexandra Alper

WASHINGTON, Feb 16 (Reuters) - A top regulatory official at the Federal Reserve acknowledged on Thursday that regulators' efforts to ban banks' risky speculative bets without damaging market-making presented a big challenge.

Speaking at a luncheon hosted by the conservative Federalist Society, Mark Van Der Weide, a director at the Fed's division of banking supervision called it an "understatement to say that the Volcker rule is a complicated statute that presents complicated implementation challenges."

The Volcker rule, named for former Federal Reserve Chairman Paul Volcker and mandated by the 2010 Dodd-Frank financial oversight law, aims to prevent financial institutions that receive government backstops, like deposit insurance, from making risky trades with their own money.

Heralded by supporters as a means to rein in the risk-taking that nearly toppled the financial system during the 2007-2009 financial crisis, the Volcker rule has been criticized for taking liquidity out of financial markets.

Some big banks and their corporate clients have called on regulators to either further delay the rule to make changes, or to start over in developing the details.

Van Der Weide, who said he did not speak for the central bank, acknowledged that trying to distinguish proprietary trading from market making poses "one of the most difficult tasks - probably the most difficult task for regulators and banking entities."

In both activities, banking entities act as principal in the trade, hold the trading position, usually for a relatively short period of time, and enjoy profits and losses based on price changes while holding the position, he said.

That is why regulators must look to the intent of the trade, and the trader, which Van Der Weide said can be hard to discern, especially at a complex global firm engaged in hundreds of thousands of trade transactions per day.

Van Der Weide said regulators had received 17,000 comments from the banking industry and others eager to weigh in on the Volcker rule, a Dodd-Frank record.

The rule's first draft was proposed by regulators in October and it is supposed be finalized before the rule goes into effect this July, as mandated by law.

It would have the biggest impact on large banks such as Goldman Sachs and Morgan Stanley. (Reporting By Alexandra Alper; Editing by Tim Dobbyn)