“We’ve nearly reached the end of the road with the Volcker Rule, but, to quote Boyz II Men, we can’t just let it go. At least not yet.
“The final version of the Volcker Rule is due out next Tuesday, Dec. 10. This is the part of Dodd-Frank, remember, that’s designed to prevent banking entities from engaging in “proprietary trading” — transactions in which a bank uses its own capital to assume the principal risk in order to benefit from short-term price movements. Or, in plain English, it removes the parts of banks that gamble and act like hedge funds, because those parts can blow up quickly.
“The Volcker Rule isn’t, however, supposed to interfere with ‘market-making,’ or those activities in which a bank either matches buyers with sellers or acts as an intermediary by using financial instruments. The rule also isn’t supposed to mess with a bank’s ability to hedge against risk. The tricky part for regulators is figuring out how to tell the difference between ‘proprietary trading’ and these latter, legal activities.”
Implementation: Even if the Volcker Rule is strong, it still needs to be enforced. Ideally, the rule would also foster cultural and institutional change at these largest firms. So how can we measure this?
“The Volcker Rule ideally will point to actual concrete things we can look at in six months to see if the rule is having an effect,” former market-maker Caitlin Kline told me. In an early draft of the rule, the metrics were fairly poor and hard to measure. Figuring this out will be part of the final process.
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