Volcker Rule, formally known as section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, went into effect April 1, 2014, with banks’ full compliance required by July 21, 2015.
Volcker Rule is named after former Federal Reserve Chairman Paul Volcker. The Volcker rule disallows short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments for banks’ own accounts. These activities are not allowed when these do not benefit banks’ customers. In other words, banks cannot use their own funds to make these types of investments to increase their profits. The purpose is to discourage banks from taking too much risk
The final rules broadly prohibit banking entities from
- Engaging in short-term proprietary trading of specific financial instruments for their own account.
- Owning, sponsoring, or having certain relationships with hedge funds or private equity funds, and certain other investment vehicles “Covered Funds”.
The rule allows banks to continue market making, underwriting, hedging, trading of government securities, insurance company activities, offering hedge funds and private equity funds, and acting as agents, brokers or custodians. Banks may continue to offer these services to their customers and generate profits from providing these services. However, banks cannot engage in these activities if doing so would create a material conflict of interest, expose the institution to high-risk assets or trading strategies, or generate instability within the bank or within the overall U.S. financial system.