January 16, 2014

The Promulgated Volcker Rule

On December 10, 2013, the Volcker Rule, prohibiting proprietary trading by banks, was released having received final approval from five federal regulatory agencies – the Federal Reserve, the Federal Deposit Insurance Corporation, the Securities Exchange Commission, the Commodity Futures Trading Commission, and the Office of the Comptroller of the Currency.

The promulgated rule is named after the former Federal Reserve chairman, Paul A. Volcker.  A recent New York Times article describes the Volcker Rule as a centerpiece of the Dodd-Frank financial overhaul law, which viewed proprietary trading and hedge fund investments as risky activities that banks relying on taxpayer guarantees should not engage in.

According to the article, among other things, the rule specifies that:
  1. most proprietary trading is prohibited,
  2. banks are allowed to facilitate trades (i.e., bringing together buyers and sellers of securities),
  3. hedging must be against identifiable risks associated with specific investment positions,
  4. banks must specify in advance the way in which a particular trade serves as a hedge, and
  5. chief executives must attest that the required processes are in place.
The Volcker Rule will be fully in place in 2015.  According to the article, the federal regulators have stated that they will collect and analyze data relating to trading activities and revise the rules as appropriate.