Final Volcker Rules on Proprietary Trading


Five US agencies have released the final version of section 619 of the Dodd-Frank Act that governs proprietary trading, otherwise known as the “Volcker Rule”.

The five agencies being: Board of Governors of the Federal Reserve System, Commodity Futures Trading Commission, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and the Securities and Exchange Commission.

The rules would generally prohibit banks 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.’

The rules provide exemptions for certain activities which include; market making, underwriting, hedging, trading in certain government bonds, and organising and offering a hedge fund or private equity fund.

The rules however, limit these exemptions if they involve a material conflict of interest; a material exposure to high risk assets or trading strategies; or a threat to the safety and soundness of the banking entity or to U.S. financial stability.

Market making exemptions include:

Under this exemption, a trading desk is required to routinely stand ready to purchase and sell one or more types of financial instruments. The trading desk’s inventory in these types of financial instruments would have to be designed not to exceed, on an ongoing basis, the reasonably expected near term demands of customers based on such things as historical demand and consideration of market factors.

A market making desk may hedge the risks of its market making activity under this exemption, provided it is acting in accordance with certain risk management procedures required under the final rules.

The final rules become effective on of all days April 1st 2014, and who said the US doesn’t do April fool’s day!

Links here for Summary of Rules and full common rules

One Response

  1. […] only last week, the final version of the rules governing proprietary trading, the so-called ‘Volcker Rules‘. All of which has been a huge burden for banks and vendors as they prepare the connectivity […]

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