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Alternative Market Briefing

Other Voices: The Volcker Rule's ban on proprietary trading - a practical approach to implementation

Thursday, July 15, 2010

This article was authored by U.S.-based research and consulting house Woodbine Associates.

The final form of the Dodd Frank Wall Street Reform and Consumer Protection Act is essentially complete and awaiting Senate confirmation; now, attention will turn toward how regulators will implement provisions of the new law and the impact of these changes on the financial markets.

The "Volcker Rule," a central element of the new legislation, has received a great deal of attention for numerous reasons, ranging from outright practicality to issues regarding the potential for global regulatory arbitrage. No doubt, implementation of the final rule will be hotly debated as the markets will look to federal banking regulators, the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) to sort out specifics centered around differentiating market making and customer related hedging from outright proprietary trading and positioning within regulated financial firms.

The Volcker Rule in its (near) final form has two main components affecting banks and regulated financial entities: it curtails investment in and ownership of hedge funds and private equity investment and it eliminates proprietary trading by covered financial institutions.

The restrictions on private equity and hedge fund investment are relatively uncomplicated. Banks will be restricted from investing more than 3......................

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