Other meanings of Volcker Rule
Finance & Regulation
The Volcker Rule is a U.S. financial regulation that restricts banks from engaging in proprietary trading and from owning or sponsoring hedge funds or private equity funds. Named after former Federal Reserve Chairman Paul Volcker, the rule was enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to reduce risk-taking by federally insured banks. It aims to protect depositors and the financial system by separating speculative trading from traditional banking activities.
The Volcker Rule prohibits banking entities from engaging in short-term proprietary trading of securities, derivatives, and certain other financial instruments for their own account. It also restricts them from acquiring or retaining ownership interests in, or sponsoring, hedge funds or private equity funds, subject to certain exemptions. The rule requires banks to establish internal compliance programs to monitor and limit such activities.
Exemptions permit market-making, underwriting, risk-mitigating hedging, and trading in government obligations, among others. Banks must demonstrate that these activities are designed not to exceed the near-term demands of clients, customers, or counterparties.
Five federal agencies jointly adopted the rule: the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. The final rule was approved in December 2013 and became effective in April 2014, with full conformance required by July 2015.
Implementation has been complex, with banks required to report metrics on trading activities and maintain detailed documentation. The rule has been criticized for its complexity and compliance burden, leading to calls for simplification.
In 2019, the agencies proposed amendments to tailor compliance requirements for banks with less trading activity. The final amendments, approved in 2020, streamlined the rule by clarifying the scope of prohibited trading, easing compliance for smaller banks, and revising the treatment of certain foreign funds.
These changes aimed to reduce regulatory burden while preserving the core restrictions. The rule remains a central element of post-crisis financial regulation, though its effectiveness continues to be debated.
The rule is named after Paul Volcker, who championed it as a response to the 2008 financial crisis. Notably, the rule does not apply to banks' trading in U.S. government securities, which are considered safe. Also, it permits banks to invest in certain small business investment companies and public welfare funds.
One lesser-known aspect is that the rule's definition of 'proprietary trading' excludes trading in foreign exchange and certain commodities, which has led to regulatory arbitrage concerns. Additionally, the rule has extraterritorial reach, affecting foreign banks' U.S. operations and their dealings with foreign funds.
The Volcker Rule is codified at 12 U.S.C. § 1851.
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