Named after former Federal Reserve Chairman Paul Volcker, the Volcker Rule is Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule contains two primary components:
- a prohibition on proprietary trading, with allowances for activities such as market-making, underwriting and the hedging and trading of government securities
- a prohibition on investing in or sponsoring hedge funds and private equity funds.
The Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the U.S. Securities and Exchange Commission (collectively known as the Agencies) issued the proposed Volcker Rule regulations in a 298-page document in October of 2011. At the same time, the Agencies solicited comments from banks, investors and other interested parties about how the proposed rule might impact market-making liquidity, foreign institutions and private equity and hedge fund investments. What followed was a tidal wave of responses - more than 17,000 in all - from a wide range of banking entities, industry associations, investors and consumer advocacy groups.
In this report, KPMG provides a synopsis of some of the key issues and themes that have emerged following a detailed examination of the formal responses from a wide range of investment banks, industry associations and other influential players. We provide this report in hope it helps our member firms' clients better understand scope of this regulation, its potential impact on their business and what measure may need to be contemplated in order to comply.
For the most part, the industry’s responses to the proposed rule have been unenthusiastic, ranging from skepticism to outright frustration and apprehension. The controversy revolves around one central question: “How can regulators enforce a ban on proprietary trading without inadvertently impacting legitimate types of trading done by banks to help keep markets flowing smoothly for investors?”