'Volcker Rule' is explained in detail and with examples in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
The Volcker Rule is a controversial much loved or intensely hated part of the Frank-Dodd Wall Street Reform and Consumer Protection Act. This federal regulation made it illegal for banks to pursue specific investment activities using their own money and accounts.
It also restricted their relationship to and ownership of private equity funds and hedge funds. These so called covered funds engaged in a variety of speculative leveraged and high risk investments. Such investments and their ultimate massive failures played a major part in the American and ultimately global financial collapse of the 2008 financial crisis and Great Recession.
The Volcker Rule was originally named for Paul Volcker, the one time legendary Federal Reserve Chairman. This rule eliminates short term bank trading of derivatives, securities, commodity futures, and options on such futures. They may no longer use their own accounts for such trading that does not provide any benefit to the customers of the banks. The end result is that banks may not engage their own proprietary funds in order to participate in investments that may boost their own corporate profits.
This Volcker Rule is spelled out under section 619 of the massive Dodd-Frank Wall Street Reform and Consumer Protection Act. It amended the Bank Holding Company Act of 1956, also known as the BHC Act, by adding in a brand new section 13 that has become universally known as the Volcker Rule. All institutions which accept deposits, as well as any corporate entity that is affiliated with these insured depository groups, are prohibited from pursing this secretive proprietary trading.
They also may no longer have an interest in, acquire, or sponsor any private equity or hedge funds. There are some exemptions, definitions, and restrictions in the legal statute. It provided banking groups with some time until they had to prove they had conformed to the provisions of the rule. Originally this was July of 2014, but it was later extended to July 21, 2015 in order to provide banks with sufficient time to extricate themselves from these trades and practices.
The end form of the regulations had to be approved by five different federal agencies. These included the Federal Deposit Insurance Corporation, the Federal Reserve System Board of Governors, The Commodity Futures Trading Commission, the Office of the Comptroller of the Currency, and the SEC Securities and Exchange Commission. They approved these rules in December of 2013.
The rules became effective on April 1, 2014 and required banks’ complete compliance by July 21, 2015. The Volcker Rule did not completely tie banks’ hands. They are still allowed to keep making markets, hedging, and underwriting government securities. They may also engage in the activities of insurance companies and perform the roles of custodians, brokers, and agents.
They may offer customers private equity funds or hedge funds for their own accounts and benefit. All such services which they provide to their customers they may do in an effort to turn profits. The caveat is that banks may not pursue these activities when it leads to a dangerous conflict of interest, creates instability in the individual bank or the entire United States’ financial system, or opens up the banking institution to dangerous trading strategies or involvement with risky assets.
Banks of certain sizes must report and disclose all of their covered trading activities to the appropriate government regulators. The bigger banks had to create programs that guaranteed they were abiding by the new rules. Besides this, their new compliance programs were subject to further independent analysis and tests. Institutions which were smaller were subjected to fewer reporting and compliance rules and regulations.