A draft Volcker Rule proposal is out and will be voted on next week, on October 11.American Banker obtained a copy of the draft proposal. Download it here.
Banks have been preparing for the changes the Volcker rule proposes for a while now. The draft proposal makes it clear just how significant those changes are.
Market-making activities fall into the “exceptions” category, however the rule makes banks jump through several hoops in order to ensure that banks are only market making, including setting up an internal compliance program.
Based on other exceptions the rule includes — transactions conducted by a banking entity as investment adviser, commodity trading advisor, trustee, or in a similar fiduciary capacity for the account of a customer where the customer, and not the banking entity, has beneficial ownership of the related position — we would expect to see more of these kinds of activities happening at banks in the future, as banks can charge higher fees for the activities, and thus make up for the profit lost.
Of course the rule could change between now and the time it’s passed.
Prop trading definition, according to the proposal:
“Engaging in the purchase or sale of one or more covered financial positions as principle for the trading account of the banking entity.” Proprietary trading specifically would not include acting as an agent, broker, or custodian for an unaffiliated third party. The rule would apply to any trading account that takes a position for the purpose of selling in the near-term.