Volcker Rule

The “Volcker Rule”  prohibits an insured depository institution and its affiliates from:

• engaging in “proprietary trading”;

• acquiring or retaining any equity, partnership, or other ownership interest in a hedge fund or private equity fund; and

• sponsoring a hedge fund or a private equity fund.

Nonbank financial companies designated by the Council for supervision by the Board of Governors would not be subject to this prohibition. The Act provides, however, that they could be subject to additional capital requirements for, and additional quantitative limits with respect to, the foregoing activities.

The Volcker Rule would apply to proprietary trading and fund activities by U.S. banking organizations regardless of where the trading or activities are conducted. However, for non-U.S. banking organizations, the Volcker Rule would apply only to proprietary trading and fund activities in the U.S., or such activities outside the U.S., if they involve the offering of securities to any U.S. resident.

While the Volcker Rule has been moderated since its inception, these limitations would have a significant impact on the ability of U.S. banking organizations to provide investment management products and services that are competitive with nonbanking firms generally and with non-U.S. banking organizations in overseas markets. It would also effectively prohibit short-term trading strategies by any U.S. banking organization, regardless of the location of its trading business, if those strategies involve instruments other than those specifically permitted for trading

‘Spectacular’ Losses = USA Banks

The rule, named after former Federal Reserve Chairman Paul Volcker, was included in the 2010 Dodd-Frank Act in an effort to restrict risky trading at banks that operate with federal guarantees. Five U.S. regulators released the 298-page proposal seeking comment on how it would affect market-making, liquidity, foreign institutions and private equity and hedge fund investments.

Volcker, 84, defended the rule in his own letter yesterday, challenging banks’ arguments that the rule would hurt markets.

“The recent years of financial crisis have seen spectacular trading losses in large commercial and investment banks here and abroad,” Volcker said. “Consequently, the stability of important banks was jeopardized, contributing to a financial crisis of historic dimension.”

The Volcker Rule will push risk outside the US Federal envelope and make it the risk takers problem and not the taxpayers problem....