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Volcker Rule - Seven Things You Need to Know

February 20, 2013

NEW YORK- What is the Volcker rule, and how can it affect businesses? This article will cover the most important things to know about how it can affect financial institutions.


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1) What It Is

The Volcker rule, named for previous Federal Reserve Chairman Paul Volcker, is a set of restrictions placed on the trades and actions of financial institutions, primarily those dealing with both consumer lending and items such as hedge funds, private equity, and investment banking. In short, the goal of the Volcker rule is to minimize or reduce potential conflicts of interest among the different activities of financial institutions and clients of that particular institution.

2) What It Isn't

Despite the name, the Volcker rule is not actually a single regulation or statement that the financial industry must follow. Instead, it is mainly a subsection of a larger bill passed through the United States Congress. While sometimes compared to 1933's Glass-Steagall Act, the Volcker Rule is sufficiently distinct enough to be treated as a separate idea instead of a continuation. It is not a universal ban on all types of trading, either, as exceptions (including Treasury bonds, municipal bonds, and some others) are exempted from the overall requirements.

In addition to the issues with the name, the Volcker rule is neither complete nor implemented, and as such is subject to change at any time.

3) A Brief History

The rule was introduced in 2008, following the recession that year as it was felt that certain financial institutions had accumulated too much risk and were following too many high-risk business practices without allowing regulators sufficient opportunity to look behind the scenes. It was implemented via the Dodd-Frank bill, though as-written it is more complicated than originally intended by Former Chairman Paul Volcker.

4) Delays

Though initially intended to take effect in the middle of 2012, the Volcker rule has been delayed due to difficulties with determining the exact language the regulations will use. This has had a significant effect on the overall financial industry.

5) Actions during Delays

Financial institutions have responded to the delays in the Volcker rule in different ways. Some have focused on modifying in-house practices to try and minimize the future changes when the laws are finalized, while others have made use of the delays to continue trading or even create new funds. In an article for the February 4, 2013 issue of Fortune magazine, Dan Primack noted the way that Goldman Sachs in particular has managed to profit from the overall delays and problems currently being experienced by the Volcker rule, in part by effectively ignoring it.

6) Actual Impact

Lack of finalized language makes it difficult or impossible to determine the actual impact that the implementation of the Volcker rule will have, assuming that the proposal is not entirely scrapped by future legislation or for other reasons. Bartlett Naylor, writing for the Huffington Post, has suggested that very few financial institutions would actually be affected by the Volcker rule, since many of them (such as credit unions) are already prohibited from using derivatives and other items that the rule covers. However, it is important to remember that the number of institutions engaged in the trading prohibited by the Volcker rule is not as important as the amount of trading actually being done.

7) Uncertainty over Implementation

Since finalized language has not been approved for the Volcker rule, it is currently unknown when the rule will go into effect. This uncertainty also means that there may be unexpected provisions within the rule that will have a significant impact on the practices of the institutions that will be affected once the rule goes into effect.

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