Volcker rule: what you need to know

The revamped Volcker Rule, a centerpiece of the Dodd-Frank Act meant to rein in the sort of risky trading that contributed to the 2008 financial crisis, passed Tuesday morning.  Here's how the Volcker rule will affect investing.

Todd Karol/Reuters/File
Former Federal Reserve chairman Paul Volckertakes part in the Spruce Meadows Changing Fortunes Round Table on business in Calgary, Alberta in 2011. The final version of the 'Volcker rule' at the center of an effort to rein in risky investing, was passed by federal regulators Tuesday, Dec.10, 2013.

In an 892-page explanation of the so-called Volcker Rule, U.S. government regulators propose cracking down on a variety of bank hedging activities, including positions meant to offset a bank's overall risk.

They also proposed more detailed trading reports as well as CEO certification that large banks have complied with the rule's parameters.

The revamped Volcker Rule, a centerpiece of the Dodd-Frank Act meant to rein in the sort of risky trading that contributed to the 2008 financial crisis, has been the subject of dispute among government agencies, which are expected to vote on its passage on Tuesday morning in Washington despite wintry conditions that shut down the federal government. 

The rule, which was toughened in recent weeks at the urging of certain regulatory officials, is expected to pass.

But whether the current iteration of Volcker will actually discourage risky bank trading activities—or, indeed, survive the legal challenges the industry is expected to mount—will take years to become clear.

Broadly speaking, the reissued rule bans banks from engaging in proprietary trading, which it defines as acting in the markets as a principal player on its own behalf. But there are numerous exceptions to the rule.

Securities bought on behalf of a corporate client undertaking an initial public offering, for instance, would be safeguarded, as would any so-called market-making activities related to client needs in general.

The proprietary trading of most government bonds, ranging from Treasurys to muni bonds, is deemed acceptable; the trading of a finite group of foreign sovereign securities is, too. And under a concept known as "liquidity management," banks are permitted to hold any positions that help ensure their near-term liquidity, or cash, needs.

The rule has been the subject of intense interest on Wall Street.

The five federal agencies who wrote it – the Federal Reserve, the Federal Deposit Insurance Corp, the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Office of the Comptroller of the Currency – received more than 18,000 comments after the initial draft was presented to the public two years ago.

In anticipation of the final rule, most banks divested themselves of any dedicated proprietary-trading desks, selling entire subsidiaries to other companies, replacing internal capital with client funds, or simply letting traders go.

If passed Tuesday, the Volcker Rule will be phased in over a two-year period, with the majority of it becoming effective by the middle of 2015.

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Volcker rule: what you need to know
Read this article in
https://www.csmonitor.com/Business/Latest-News-Wires/2013/1211/Volcker-rule-what-you-need-to-know
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe