The Volcker Rule Passes, Now What?

The 1000 page Volcker rule has finally been passed by regulators, and US banks now have until July 2015 to comply with the new standards.

As mandated by the Dodd-Frank act in 2010, the Volcker rule will attempt to prevent future 2009-style bailouts caused in part by the perception that trading at these banks was responsible for the collapse in the credit markets. While the new rule bars banks from trading for their own profits, they will still be allowed to participate in underwriting and market making activities to meet the needs of their clients. This means that the banks can take positions so as to hedge or have inventory with which to facilitate trades as needed by customers, but they cannot make speculative trades.  Many of the bulge firms expected to be the target of the new rules have already pared down their trading operations in the last two years.

Enforcing the new trading rules may prove harder than first thought given the complexity of the guidelines and the amount of data that must be reviewed to determine if an infraction has occurred. Also, the data needed for such reviews will likely have to come from the subject of an investigation. In the end, trading activity will likely be further reduced, and the cost to run these businesses will be higher. Whether the original goals will be met remains to be seen.