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Forex Trading And Volcker Rule: Legal Considerations In Las Vegas – The Volcker Rule is a federal regulation that generally prohibits banks from engaging in certain investment activities with their own accounts and limits their dealings with hedge funds and private equity funds, also called hedged funds.
The Volcker Rule aims to protect bank customers by preventing banks from making certain types of speculative investments that contributed to the financial crisis of 2007-2008. Essentially, it prohibits banks from using their own accounts for short-term proprietary trading in securities, derivatives and commodity futures, as well as options on any of these instruments.
Forex Trading And Volcker Rule: Legal Considerations In Las Vegas
In August 2019, the US Office of the Comptroller of the Currency (OCC) voted to amend the Volcker Rule in an attempt to clarify what was not allowed to be traded in securities by banks. On June 25, 2020, officials at the Federal Deposit Insurance Corp. (FDIC) said the agency will loosen the restrictions of the Volcker Rule, allowing banks to more easily make large investments in venture capital and similar funds.
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The Volcker Rule is intended to protect bank customers by preventing banks from making certain types of speculative investments that contributed to the financial crisis of 2007-2008.
In addition, banks will not have to set aside as much cash to trade derivatives between different units of the same company. That requirement was established in the original rule to ensure that banks were not wiped out if speculative derivatives bets went wrong. Loosening those requirements could free up millions of dollars in capital for the industry.
The Volcker Rule is named after the economist and former chairman of the Federal Reserve (Fed) Paul Volcker, who died on December 8, 2019 at the age of 92. The Volcker Rule refers to Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. of 2010, which establishes rules for the application of article 13 of the Banking Companies Law of 1956.
The Volcker Rule also prohibits banks or insured depository institutions from acquiring or holding interests in hedge funds or private equity funds, with certain exemptions. In other words, the rule is intended to discourage banks from taking too much risk by preventing them from using their own funds to make such investments to increase profits. The Volcker Rule is based on the premise that these speculative trading activities do not benefit the banks’ customers.
Volcker Rule Covered Fund Amendments
The rule went into effect on April 1, 2014, requiring banks to be in full compliance by July 21, 2015, although the Fed has since established procedures for banks to request an extended time to transition to full compliance. certain activities and investments. On May 30, 2018, members of the Fed’s board of directors, led by Chairman Jerome “Jay” Powell, voted unanimously to advance a proposal to loosen restrictions around the Volcker Rule and reduce costs for banks that must fulfill it The goal, according to Powell, was to “…replace overly complex and inefficient requirements with a more simplified set of requirements.”
The rule, as it exists, allows banks to continue market making, underwriting, hedging, trading in government securities, participating in insurance company activities, offering hedge funds and private equity funds, and acting as agents, brokers or custodians. Banks can continue to offer these services to their customers to generate profits. However, banks may not engage in these activities if doing so would create a material conflict of interest, expose the institution to high-risk assets or business strategies, or create instability within the bank or the U.S. financial system in general.
Depending on their size, banks must meet different levels of reporting requirements to disclose details of their covered business activities to the government. Larger institutions must implement a program to ensure compliance with the new rules, and their programs are subject to independent testing and analysis. Smaller institutions are subject to less compliance and reporting requirements.
The rule’s origins date back to 2009, when Volcker proposed a regulation in response to the ongoing financial crisis (and after the nation’s largest banks racked up huge losses from their proprietary trading arms) that aimed to prohibit banks from speculating in the markets . Volcker ultimately hoped to restore the division between commercial banking and investment banking, a division that existed before but was legally dissolved by the partial repeal of the Glass-Steagall Actin 1999.
Proprietary Trading Archives
Although not part of then-President Barack Obama’s original proposal for the financial overhaul, the Volcker Rule was endorsed by Obama and added to Congress’ proposal in January 2010.
In December 2013, five federal agencies: the Fed’s Board of Governors; the FDIC; the OCC; the Commodity Futures Trading Commission (CFTC); and the Securities and Exchange Commission (SEC)—approved the final regulation that makes up the Volcker Rule.
A bank may be excluded from the Volcker Rule if it has no more than $10 billion in total consolidated assets and no total trading assets and liabilities of 5% or more of total consolidated assets.
The Volcker Rule has been widely criticized from various angles. The US Chamber of Commerce stated in 2017 that a cost-benefit analysis has never been done and that the costs associated with the Volcker Rule outweigh its benefits. That same year, the International Monetary Fund’s (IMF) chief risk officer said that regulations to prevent speculative bets are difficult to enforce and that the Volcker Rule could inadvertently decrease liquidity in the bond market.
Comment Letter On Proposed Changes To The Volcker Rule
The Fed’s Finance and Economics Discussion Series (FEDS) made a similar argument, saying the Volcker rule will reduce liquidity due to reduced market-making activities by banks. Also, in October 2017, a Reuters report revealed that the European Union (EU) had scrapped a draft law that many characterized as Europe’s answer to the Volcker Rule, citing no foreseeable deal in sight. Meanwhile, several reports cited a milder-than-expected impact on big banks’ revenues in the years following the rule’s enactment, although ongoing developments in the rule’s implementation could affect future operations.
In February 2017, then-President Donald Trump signed an executive order directing then-Treasury Secretary Steven Mnuchin to review existing regulations of the financial system. Since the executive order, Treasury officials have released several reports proposing changes to Dodd-Frank, including a recommended proposal to allow banks greater exemptions under the Volcker Rule.
In one of the reports, released in June 2017, the Treasury said it recommends significant changes to the Volcker Rule while adding that it does not support its repeal and “supports in principle” the rule’s limitations on proprietary trading. The report specifically recommends exempting banks with less than $10 billion in assets from the Volcker Rule. The Treasury also cited the regulatory compliance burdens created by the rule and suggested simplifying and refining the definitions of trading in property and covered funds as well as easing regulation to allow banks to hedge their risks more easily.
Since the June 2017 assessment, Bloomberg reported in January 2018 that the OCC has led efforts to revise the Volcker Rule in line with some of Treasury’s recommendations. The timeframe for the proposed revisions to take effect is unclear, though it would certainly take months or years. In June 2020, banking regulators loosened one of the provisions of the Volcker Rule to allow lenders to invest in venture capital funds and other assets.
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Following the election of President Joseph Biden in 2020, the new administration has signaled support for reversing Trump-era decreases in financial system regulations.
The origins of the Volcker Rule date back to 2009, when economist and former Federal Reserve (Fed) Chairman Paul Volcker proposed a regulation in response to the ongoing financial crisis (and after the nation’s largest banks racked up huge losses on their arms commercial owners). The goal was to protect bank customers by preventing banks from making certain types of speculative investments that contributed to the crisis.
Essentially, it prohibits banks from using their own accounts (customer funds) for short-term proprietary trading in securities, derivatives and commodity futures, as well as options on any of these instruments. Volcker ultimately hoped to restore the division between commercial banking and investment banking, a division that existed before but was legally dissolved by a partial repeal of the Glass-Steagall Act in 1999.
The Volcker Rule has been widely criticized from various angles. The US Chamber of Commerce stated in 2017 that a cost-benefit analysis has never been done and that the costs associated with the Volcker Rule outweigh its benefits. The Fed’s Finance and Economics Discussion Series (FEDS) has argued that the Volcker rule will reduce liquidity due to a reduction in banks’ market-making activities. In addition, analysts at the International Monetary Fund (IMF) have argued that regulations to prevent speculative betting are difficult to enforce.
Volcker Rule: Special Focus
Prompted by the failure of nearly 5,000 banks during the Great Depression, the Glass-Steagall Act was passed by the US Congress as part of the Banking Act of 1933. Sponsored by Senator Carter Glass, former Secretary of the Treasury, and Rep. Henry Steagall, chairman of the House Banking and Currency Committee, prohibited commercial banks from engaging in the investment banking business and vice versa.
The reason was the conflict of interest that arose when banks invested in securities with their own assets, which of course were actually the assets of their account holders. Simply put, proponents of the bill argued that banks had a fiduciary duty to protect these assets and not engage in overly speculative activities.
The Volcker Rule aims to restrict high-risk speculative trading activity
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