The Volcker Rule refers to § 619 (12 U.S.C. § 1851) of the Dodd–Frank Wall Street Reform and Consumer Protection Act, originally proposed by former United States Federal Reserve Chairman Paul Volcker to restrict United States banks from making certain kinds of speculative investments that do not benefit their customers.
Volcker argued that such speculative activity played a key role in the financial crisis of 2007–2010. The rule is often referred to as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank’s own accounts, although a number of exceptions to this ban were included in the Dodd-Frank law. The Volcker Rule has been compared to, and contrasted with, the Glass–Steagall Act of 1933. Its core differences from the Glass–Steagall Act have been cited by scholars as being at the center of the rule’s identified weaknesses.
On December 10, 2013, the necessary agencies approved regulations implementing the rule, which were scheduled to go into effect April 1, 2014.
Under discussion is the possibility of restrictions on the way market-making activities are compensated; traders would be paid on the basis of the spread of the transactions rather than any profit that the trader made for the client.
Effect of the Volcker Rule
The Volcker Rule has resulted in a brain drain of traders from large banks to hedge funds. Many former traders have also formed their own hedge funds. Critics argue that the rule has become meaningless since traders have moved from banks to hedge funds.