The Volcker Rule: Its Implication And Aftereffects

Even though we are eight years down the line, the after effects of the Financial Crisis of 2008 can still be witnessed. The idea of Volcker Rule was conceptualized in order to restrict large US banks from making risky speculative bets with funds from their own accounts through proprietary trading.

The Volcker Rule, which is Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, was scheduled for implementation in July 21, 2010, but was repeatedly delayed. On December 10, 2013, the Volcker Rule was approved by representatives of the five agencies who now implement it. These include the Securities and Exchange Commission (SEC), the Federal Reserve, the Commodities Futures Trading Commission (CFTC), the Federal Deposit and Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency, a division of the Treasury Department.[1]

On December 10, 2014, the Rule was implemented and began to take effect from April 1, 2014.

We briefly explain the Volcker Rule, the challenges it brings to banks and how they can be addressed:

What Is The Volcker Rule?

The Volcker Rule is named after Paul A. Volcker, chairman of the Federal Reserve during the 1980s and an elder statesman of the financial world. He acted as an advisor for President Obama in 2008 and was instrumental in the passing and creation of the Rule. It aims to prevent large banks from engaging in speculative trading activity with the idea that important banks support the economy by lending to consumers and businesses.

The Rule seeks to prevent banking entities from taking unwarranted risks, especially with regard to federally insured deposits. To this end, it curtails banking entities from engaging in two specific practices:

  1. Proprietary Trading: The first category of activities the Rule prohibits is proprietary trading. This generally means that a banking entity cannot serve as the principal of its own trading accounts through which it purchases or sells financial instruments.
  2. Hedge and Private Equity Fund Activities: The second category prohibits banking entities from serving as principals in transactions in which they directly or indirectly obtain or keep ownership interests in certain types of “covered funds.” These include private equity, venture capital, and hedge funds as defined by the Investment Company Act of 1940, as well as certain commodity pools under the Commodity Exchange Act and certain foreign funds that resemble U.S. covered funds.

Volcker Rule also prohibits banks from sponsoring covered funds. This means that banks cannot serve as general partners, managing members or trustees of covered funds. Banks also may not serve as operators of commodity pools with respect to covered funds, nor may they select or control the majority of a covered fund’s directors, trustees or management. Finally, banks cannot share names or variations of names with covered funds for commercial purposes. At their core, the second set of restrictions related to covered funds prohibits banks from indirectly accomplishing activities from which they are directly prohibited by the first category’s private trading restrictions. [2]


  • July 2010: Volcker Rule provisions scheduled to be implemented as part of Dodd-Frank Act.[3]
  • April 2014: The Final Rule becomes effective April 1, 2014, with banks asked to comply until July 21, 2015.
  • June 2014: Starting on June 30, 2014, entities with $50 billion or more in consolidated trading assets and liabilities brought under the purview of Volcker Rule must report quantitative measurements.
  • April 2016: Banking entities with between $25 and 50 billion in consolidated trading assets and liabilities subject to the Rule’s requirements on April 30, 2016. Banking entities with between $10 and $25 billion in assets subject to Volcker Rule on December 31, 2016.[4]

On December 18, 2014, the Federal Reserve extended the Volcker Rule’s conformance period for “legacy covered funds” (a defined term) until July 21, 2016, and indicated it would likely extend the period further to July 21, 2017[5]. The extension to 2016 is the second of three possible one-year extensions the Federal Reserve may issue under the Dodd-Frank Act

Impact of Volcker Rule On Financial Institutions

On July 21, 2015 various large banks were required to comply with the Volcker Rule. They had had a year since April 2014 to get their compliance mechanisms in check and be prepared for the implementation of the Rule. This cost seven of the largest banks $400 million[6]. The complexity and expense of the compliance has added to the regulatory stress on many community and smaller banks, the impact similar to that seen of the Dodd-Frank Act (Regulatory Impact on Small and Midsize Banks).

Also, a number of banks that had a major stake in hedge funds and private equity businesses during the pre-crisis era have been closing or selling units. Many of the banks to be governed under the rule, including Bank of America, Citigroup, and Goldman Sachs, have killed off a number of practices that may fall under its restrictions, including their proprietary trading.[7]

Challenges Banks Face Due To The Volcker Rule

For banks, the Volcker Rule represents probably the most challenging rule of any regulation from the perspective of data collection, aggregation and reporting. Part of the challenge is just figuring out how the Volcker Rule interacts with other elements of Dodd-Frank and Basel III.[8]

Data Challenges

Key Basel Committee and Senior Supervisory Group reports in December and January highlighted how banks struggle with establishing strong data aggregation governance, architecture and processes.

The Volcker Rule will require banks to have their data in check for better monitoring of risks and generate accurate reports using cleaned data. This will require banks to develop a very strong compliance program and evaluate the personnel available to do so.

As part of the compliance program, banks have to create compliance manuals specific to the Volcker Rule where they should provide details of the type of trading that they conduct, identification of customers, risks and risk management processes, hedging policies, and how they resolve problems when the Volcker Rule is breached.

Banks will also need to pay special attention to the information that they will need to comply with market-making and underwriting exemptions granted by the Volcker Rule. Just preparing the compliance manual should force banks to think of what type of IT architecture they have in place to capture, store and maintain relevant data.

Timely And Accurate Reporting

One of the requirements of the Volcker Rule is for a bank’s CEO to attest annually in writing to regulators that the bank has in place processes to establish, maintain, enforce, review, test and modify its compliance program.

This is far from easy as not only are the banks under stress, even regulatory agencies now have added responsibilities. They need to supervise and examine that banks are properly implementing the Volcker Rule, which means banks are required to generate reports on a greater frequency than before.

High Compliance Costs

High Compliance Costs is another aspect that has banks under pressure. The Volcker Rule could lop as much as $10 billion total in yearly pretax profit from the eight largest U.S. banks through lower revenue and higher compliance costs, according to estimates from Standard & Poor’s. [9]

Hexanika: Addressing Regulatory and Data Woes

Hexanika is a RegTech big data software company which has developed a software platform SmartJoin™ and a software product SmartReg™ for financial institutions to address data sourcing and reporting challenges for regulatory compliance.

The challenges of the Volcker Rule will be for banks to attest that they have the mechanism in place required to make data and documentation available in a timely and concise manner. Hexanika helps banks establish a compliance platform that streamlines the process of data integration, analytics and reporting. Our software platform can develop and clean data to be sourced for reporting and automation, simplifying the processes of data governance and generating timely and accurate reports to be submitted to regulators.

Read more about our unique solution at:

Contributor: Vedvrat Shikarpur

Image: Sue Waters via Flickr

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[1] About: USA Economy: Volcker Rule

[2] Fortune: The Volcker Rule takes effect today after years of delays

[3] Reuters: U.S. reveals Volcker rule’s murky ban on Wall St bets

[4] LexisNexis: The Volcker Rule’s Impact on Financial Institutions and Companies

[5] FRB: Order Approving Extension of Conformance Period Under Section 13 of the Bank Holding Company Act

[6] The Economist: Much ado about trading

[7] The Wall Street Journal: Volcker Bank-Risk Rule Set to Start With Little Fanfare

[8] American Banker: The Volcker Rule: Mission Impossible

[9] The Wall Street Journal: Volcker Rule Challenges Wall Street

Originally published at on February 19, 2016.