WASHINGTON (MarketWatch) — Bank regulators on Tuesday introduced the controversial Volcker rule, a measure that could cost big banks billions of dollars and force them to stick with a wide variety of trades for at least two months.

The measure — named after an idea suggested by former Federal Reserve Chairman Paul Volcker — would prohibit big insured banks’ speculative proprietary derivatives and stock investments by next summer. It also seeks to limit banks’ investments in hedge- and private-equity funds in an effort to reduce risks to the broader financial system.

The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency rolled out a unified draft proposal on Tuesday.

There weren’t many changes from a draft provided to news outlets last week. One major adjustment is that banks and other interested groups have 90 days to comment on the proposal, until Jan. 13. In the previous proposal, interested groups had until Dec. 16 to comment.

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Bank and securities regulators are required by the Dodd-Frank Act to approve a unified rule on the subject. The Securities and Exchange Commission has scheduled a meeting for Wednesday to formally propose the Volcker-inspired regulations.

The Commodity Futures Trading Commission is also required to propose the measure. According to a CFTC staffer, the Volcker rule has been circulated among agency commissioners for consideration. He added that the agency will consider the regulation, but its timing is uncertain.

The FDIC introduced the proposal at a meeting, and all three of its directors approved it. The agency also released data projecting that the cost of FDIC-insured institution failures for the five-year period from 2011 through 2015 will be $19 billion, much less than the agency’s estimated losses of $23 billion for banks that failed in 2010.

The Volcker rule “is an appropriate response to the underlying statute and recognizes the wide range and complexity of the activities being regulated,” said Thomas Curry, a an FDIC member and the White House’s nominee to head the OCC, at the meeting.

OCC chief John Walsh, a member of the FDIC board, raised concerns about last week’s leaked proposal. “There have been a number of occasions over the past months where there were discussions and leaks of parts of the proposal that were aimed at influencing its outcome,” he said.

The measure also contains more than 350 questions, indicating that regulators may be willing to make further changes before adopting regulations. Regulatory observers said that when it came to issues that bank-agency chiefs couldn’t agree on, they agreed to ask a question on the subject.

No quick flips

Based on the proposal, regulators are seeking to prohibit a bank from holding a position for less than 60 days unless it meets a series of exemptions.

If a bank buys and sells securities in less than 60 days, they must justify to regulatory examiners — with documentation and reasoning — why it is exempted. Regulators expect that banks will have set up compliance polices and procedures, approved and overseen by their senior management, to ensure they aren’t engaged in proprietary trading.

The goal is, in part, to create incentives for institutions to hold long-term investments outside of their trading desks, where the securities would be subject to significantly higher capital requirements.

One exemption provided in the proposal is for legitimate market-making trades, where banks provide liquidity to the market or an individual stock.

However, bank-lobby groups suggest that firms and regulators may have a difficult time differentiating between legitimate market-making actions and prohibited, profit-making speculative transactions, and that will limit needed liquidity to the markets.

“It seems that in trying to address the challenging problem of differentiating between market-making and proprietary trading, regulators have proposed a framework which may adversely impact market liquidity,” Securities Industry and Financial Markets Association President Tim Ryan said in a statement.

U.S. banks also would be banned from using foreign subsidiaries to conduct proprietary trading and U.S. branches of foreign banks would not be permitted to conduct proprietary trading in the States.

Paul Volcker

Once the rules are adopted, big banks would have a year to cut their holdings in the hedge funds, mutual funds and private-equity firms they create down to 3%. For existing funds, banks will have a two-year transition period to get their ownership down to 3%.

Operating subsidiaries, joint ventures, acquisition vehicles and collaborative investment funds would be subject to the divestiture requirement as well. However, a joint venture that operates as a clearinghouse intermediary between buyers and sellers of swaps would be exempted.

All that leaves banks in the difficult position of setting up costly new compliance regimes to determine where the boundary is between prohibited proprietary trading and permissible trading.

The proposal asked interested groups more than a dozen questions about how the costs of compliance would affect the institutions. The queries covered the costs associated with a record-keeping requirement, and what the costs could be for banks to enforcing their compliance programs, including written policies.

“The agency is asking over 350 questions, and I want to make sure we respond to as many of those as possible,” said American Bankers Association Vice President Timothy Keehan after the meeting. “We are encouraged by the 90-day comment period, which gives us enough time to really address the issues with our members.”

Even though senior managers are responsible for approving the compliance programs, the draft language seems to step back from a controversial CEO-certification consideration in a broad Volcker rule study released in January. This is a move that observers say had bank executives breathing a sigh of relief.

In the study, regulators suggested that agencies consider requiring the chief executive to attest to the effectiveness of the new Volcker rule-imposed compliance regime.

However, instead of proposing that CEOs must make their certification, the draft language asks whether bank CEOs should certify annually that they have adequate compliance procedures in place.