April 2014

An overview of the Volcker Rule

SIFMA summarises the ban on proprietary trading and restricted investment in hedge funds and private equity introduced by the Dodd-Frank Act. 

The Volcker Rule included in the Dodd-Frank Act prohibits banks from proprietary trading and restricts investment in hedge funds and private equity by commercial banks and their affiliates. Further, the Act directed the Federal Reserve to impose enhanced prudential requirements on systemically identified non-bank institutions engaged in such activities. Congress did exempt certain permitted activities of banks, their affiliates, and non-bank institutions identified as systemically important, such as market making, hedging, securitization, and underwriting. The rule also capped bank ownership in hedge funds and private equity funds at three percent. Institutions were given a seven year timeframe to become compliant with the final regulations.

After an initial proposal in the Autumn of 2011, final Volcker Rule regulations were released and adopted by the agencies on 10 December 2013. The rules generally prohibit banking entities from:

  • Engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments for their own account.

  • Owning, sponsoring, or having certain relationships with hedge funds or private equity funds, referred to as 'covered funds'.

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