Understanding Systemic Risk in Global Financial Markets

CHAPTER 10The Volcker Rule

INTRODUCTION

Section 619 of the Dodd-Frank Act, known as the Volcker Rule, sets prohibitions, requirements, and limitations in relation to the trading and private fund activities of banking entities and systemically risky nonbank financial companies. The Volcker Rule is wide-ranging and complex, with activities that are permitted despite the prohibitions and many elements that are subject to rulemaking and interpretation. In this chapter we explore the Volcker Rule in-depth.

After you read this chapter you will be able to:

• Explain the Volcker Rule.
• Understand the Volcker Rule's motivation and objectives.
• Describe the Volcker Rule's prohibition of proprietary trading by banking entities.
• Describe the Volcker Rule's prohibition of ownership or sponsorship of hedge funds and private equity funds by banking entities.
• Explain the impact of the Volcker Rule on systemically risky nonbank financial companies.
• Describe activities that are permitted despite the Volcker Rule.
• Understand how the Volcker Rule was implemented.
• Explain criticism of the Volcker Rule.

INTRODUCTION TO THE VOLCKER RULE

The “Volcker Rule” is the commonly used title of Section 619 of the Dodd-Frank Act. Section 619 is referred to as the “Volcker Rule” in recognition of Paul Volcker, a former chair of the U.S. Federal Reserve and the driving force behind Section 619. Specifically, Paul Volcker had chaired a Group of Thirty Steering Committee that formed recommendations in response ...