The proposal known as the “Volcker rule” would limit banks’ proprietary trading, get them out of the hedge fund and private equity business, and limit their future growth through a new market share cap. The proposals were inspired by former Federal Reserve Chairman Paul Volcker.
PROPRIETARY TRADING BAN
Banking firms would be banned from “purchasing or selling, or otherwise acquiring and disposing of, stocks, bonds, options, commodities, derivatives, or other financial instruments for the institution’s or company’s own trading book, and not on behalf of a customer, as part of market making activities, or otherwise in connection with or in facilitation of a customer relationship.
HEDGE FUND, PRIVATE EQUITY FUND RESTRICTIONS
Banking firms would be banned from investing in or sponsoring hedge funds, private equity funds, or other similar funds that are exempt from federal registration.
The prohibition on sponsoring these private funds would include acting as a managing member or general partner of a fund, controlling the management of a fund, or sharing the firm’s name with a fund.
* PRIVATE FUND LIMITS
Banking firms would continue to be able to serve as investment adviser to private funds, but would be prohibited from lending, providing prime brokerage services, or engaging in any transactions that provide support to a private fund advised by the banking firm.
Non-bank firms would be allowed to continue to engage in proprietary trading and hedge fund and private equity activities, but would be subjected to tough consolidated supervision, more stringent capital and liquidity requirements, and be required to provide more information to the market about their risks.
Any firm that is identified for heightened supervision would be subject to additional capital and quantitative limits on these activities.
MARKET SHARE CAP
Financial firms would not be allowed to grow by acquisition above 10 percent of the liabilities of the financial system.
The financial firm would not be allowed to acquire another company if the resulting firm would have more than 10 percent of the liabilities of the financial system.