Volcker Rule (2024)

FAQs

What does the Volcker Rule do? ›

The Volcker Rule generally restricts banking entities from engaging in proprietary trading and from owning, sponsoring, or having certain relationships with a hedge fund or private equity fund.

The Volcker rule generally prohibits banking entities from engaging in proprietary trading or investing in or sponsoring hedge funds or private equity funds.

The Volcker Rule aims to protect bank customers by preventing banks from making certain types of speculative investments that contributed to the 2007–2008 financial crisis. In addition, banks will not have to set aside as much cash for derivatives trades among different units of the same firm.

Loosely put, the Rule defines a covered fund as anything considered an investment company in the Investment Company Act, including private equity and hedge funds, as well as commodity pools with certain exclusions, and funds sponsored by a US banking entity where the affiliate holds ownership interests.

To subdue double-digit inflation, Chairman Volcker announced, in October 1979, a dramatic break in the way that monetary policy would operate. In practice, the new approach to monetary policy involved high interest rates (tight money) to slow the economy and fight inflation.

Volcker slammed the brakes on the economy by raising interest rates to 20% — tough medicine to prove he was serious about getting inflation under control. "At some point this dam is going to break and the psychology is going to change," Volcker told the MacNeil/Lehrer NewsHour. It worked.

Also, “prop trading” in the directional sense barely exists at large banks anymore. They can still take their own positions for risk-management purposes, but not to earn a profit (with a few exceptions).

The Volcker Rule consists of two major parts: rule preventing banking institutions from partaking in proprietary trading from their own funds and limiting banking institutions from investing in hedge funds or private equity funds.

The final rule prohibits banks from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments, for their own account. The final rule also imposes limits on banks' investments in, and other relationships with, hedge funds or private equity funds.

During his tenure as chairman, Volcker was widely credited with having ended the high levels of inflation seen in the United States throughout the 1970s and early 1980s, with measures known as the Volcker shock. He previously served as the president of the Federal Reserve Bank of New York from 1975 to 1979.

Does the Volcker Rule apply globally? ›

The Volcker Rule does apply to every foreign entity that directly or indirectly maintains a bank branch or agency in the United States, or controls a commercial lending company.

The Volcker Rule defines the term “trading desk” to mean “the smallest discrete unit of organization” that banking entities use to trade for their own account.

On June 25, 2020, the Volcker Regulators relaxed part of the rules involving banks investing in venture capital and for derivative trading.

Section 23A establishes collateral requirements for certain. transactions between a bank and an affiliate. Under the statute, each loan or. extension of credit by a bank to an affiliate, each guarantee, acceptance, or. letter of credit issued by a bank on behalf of an affiliate or the credit.

The Volcker Rule permits certain foreign banking entities to engage in proprietary trading activities that occur solely outside of the United States. The 2013 Final Rule included several conditions to use of the TOTUS exemption.

Volcker served as president of the Federal Reserve Bank of New York from 1975 to 1979, and in 1979 U.S. Pres. Jimmy Carter appointed him to head the Federal Reserve System at a time when inflation in the United States had reached a high of almost 13 percent.

The Volcker rule prohibits banks from engaging in proprietary trading activities. Proprietary trading is defined by the rule as a bank serving as a principal of a trading account in buying or selling a financial instrument.