Volcker Rule: What It Means, How It Works (2024)

FAQs

What are the objectives of Volcker Rule? ›

The rule prevents banks from using their own accounts to engage in proprietary trading of short-term securities, derivatives, futures, and options. This rule is based on the fact that such high-risk investments do not benefit the bank's depositors.

The Volcker Rule helps keep banks from making speculative investments that expose their customers to risk. Congress enacted similar reforms in the wake of the Great Depression to help protect consumer deposits.

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.

They include the following seven circ*mstances: (1) acting as an agent, broker, or custodian, (2) permitted organizing and offering, (3) permitted underwriting and market making, (4) investing in a fund organized by a banking entity, (5) risk-mitigating hedging activities, (6) activities and investments outside of the ...

The Volcker Rule contains exemptions from the prohibition on proprietary trading for underwriting and market making-related activities to the extent that such activities are designed not to exceed the reasonably expected near-term demands of clients, customers or counterparties (“RENTD”).

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.

The monetary policies of the Federal Reserve board, led by Volcker, were widely credited with curbing the rate of inflation and expectations that inflation would continue. US inflation, which peaked at 14.8 percent in March 1980, fell below 3 percent by 1983.

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 limits two main types of activities by large institutional banks. Banks are prohibited from engaging in proprietary trading activities and from owning interest in covered funds, generally defined as hedge funds and private equity funds.

The final rule is broadly similar to the proposed rule from January. The Volcker rule generally prohibits banking entities from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund.

What is a covered fund under the Volcker Rule? ›

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.

The Volcker rule restricts US insured depository institutions from engaging in proprietary trading of securities, derivatives and commodity futures, or options on any of these instruments. Banks have to prove that all positions are needed to meet reasonably expected near-term demand (RENTD) from clients.

As noted above, the Volcker Rule added two additional exemptions for transactions by a foreign bank with unaffiliated market intermediaries (such as unaffiliated registered broker-dealers), thus preserving the prohibition on entering into a proprietary trading transaction with an affiliated U.S. banking entity.

The Federal Reserve Board's market risk capital rule refers to regulations designed to ensure banks maintain a stable balance sheet. The MRR rule applies to U.S. banks where trading activity accounts for more than 10% of total assets or banks with assets over $1 billion.

Hedge funds pool money from investors and invest in securities or other types of investments with the goal of getting positive returns.

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.

Hedge funds were developed, in part, to help investors manage investment risk. Their market-neutral, or balanced, approach to investing helps seek out positive returns by investing in varied instruments over long- and short-term periods.

The fund's objective. When a stock mutual fund defines its investment objective, it is identifying a specific type of stock—though not individual stocks—that will be the core of its portfolio. Sometimes the objective is quite broad.

The most far reaching Wall Street reform in history, Dodd-Frank will prevent the excessive risk-taking that led to the financial crisis. The law also provides common-sense protections for American families, creating new consumer watchdog to prevent mortgage companies and pay-day lenders from exploiting consumers.