Volcker Rule Released For Comments

October 12 00:00 2011

New York, October 12 (RainbowNewsLine.com) – The Federal Reserve, The Federal Deposit Insurance Commission (FDIC) as well as the Office of the Comptroller Of Currency have finally released the controversial Volcker rule for public comments. The organizations backing these rules will listen to public feedback till the 15th of January before the rule finally comes into existence. This rule has been created after Paul Volcker, former chairman of the Federal Reserve commented that banks were gambling with public money that was Federally insured.

As per this rule, the banks will not be allowed to take any short term positions that are speculative in nature. A short term position is defined as one having less than sixty days to maturity. There will also be restrictions on the amount of leverage that banks can take while indulging in proprietary trading. The rule will exempt market making activity by the banks. However, it will regulate the compensation of the traders who indulge in market making activity as well as make senior management accountable for any shortfalls in compliance.

The Volcker rule, however leaves room for hedging. The banks are allowed to take short term positions if they are hedging risk across one or multiple portfolio. The correlation in risks need not be perfect, it must be reasonable.