Financial Message Board

Volcker Plan to restrict proprietary trading

The Volcker plan will generally prohibit banks and bank holding companies from engaging in proprietary trading activities and from sponsoring and investing in private equity and hedge funds. The Senate bill contains a version of this rule but the House bill does not.

This rule as specified in the Senate document requires regulators to implement regulations for banks, their affiliates and bank holding companies, to prohibit proprietary trading, investment in and sponsorship of hedge funds and private equity funds, and to limit relationships with hedge funds and private equity funds. Nonbank financial institutions supervised by the Federal Reserve will also have restrictions on their proprietary trading and hedge fund and private equity investments.

Regulations will be developed after a study by the Financial Stability Oversight Council and based on their recommendations.

Commentary

This rule will involve splitting up large financial institutions if they wish to trade using their own cash. Institutions will also be prohibited from investing in hedge funds. This is commonly described as removing the Casino part of financial institutions. An obvious question is though, what about client funds, but this is dealt with in other parts of the new legislation.

Surely this will mean that organizations such as Barclays, Citibank and RBS will have to go through tremendous structural change, unless they limit trading on behalf of clients only. It is less likely that firms such as Goldman Sachs will be as affected as they would be determined to be a Non Bank, thereby subject to fewer changes. However, considering a good chunk of their profits are from Proprietary sources, it is uncertain how much they will be changed.