The new law is expected to have wide-reaching implications for non-US financial institutions as well as the US banks it is meant to rein in, once it takes effect in July 2015.
The Volcker Rule is named after Paul Volcker, a former head of the US Federal Reserve and current adviser to US President Obama. It was originally proposed in 2010, as part of the much larger Dodd-Frank Act, in an effort to better regulate US banks' trading activity on Wall Street in the wake of the 2008 financial crisis.
While the regulations were initially proposed in 2010, as part of the much larger Dodd-Frank Act, in an effort to better regulate US banks' trading activity on Wall Street in the wake of the 2008 financial crisis, critics say the effects of Volcker would be global – with early drafts of the legislation defining a “covered fund” as anything other than a fund regulated under the 1940 US Investment Company Act.
This could, experts have said, mean that non-US mutual funds and Japanese investment trusts were treated the same as hedge funds.
Precisely how the rule will in fact affect non-US banks and other organisations remains to be seen, but there is a general sense that it could be yet another regulatory burden to be dealt with.
Andre Spicer, a professor of organisational behaviour at Cass Business School, noted that although the partial separation of client services from proprietary trading, in banking, called for by the Volcker Rule was a "vital step" in the direction of addressing some of the structural tensions that contributed to "some of the worst behaviour leading up the financial crisis", the exemptions would "inevitably create unforeseen loopholes which some banks will exploit".
"The exemption of market-making parts of banks from proprietary trading makes sense on paper," he added. "But in practice, the central position of banks as market makers gives them significantly more information about the market than other players. It is uncertain whether they will restrain themselves from using this information to make gains from proprietary trading."
What's more, he added, the requirement to report annually on compliance "should keep issues of culture, responsibility and ethics on the agenda of senior executives", but in fact, it could actually create "ceremonial reporting, where senior executives use all the right words to impress the regulators, but don't grasp the difficult internal issues in their organisation"s.
As reported, another feature of the Dodd-Frank Act is a 2012 act that aims at boosting the standards of advice on offer from America’s financial advisory industry, following in the footsteps of the UK, Australia and Singapore.
Both this act and the Volcker Rule follow in the wake of another major post-financial crisis package of regulations, the Foreign Account Tax Compliance Act, key parts of which come into force next year. It has had a major effect on banking and wealth management outside the US, because it obliges non-US financial institutions around the world to report to the US tax authorities on the accounts of any American taxpayers they happen to have on their books.
