This week, the Federal Reserve took a final step to implement a part of the Dodd-Frank financial regulation reform meant to restrict high-risk trading by banks.
The Federal Reserve approved the Volcker Rule, which will become a reality on April 1.
The rule prohibits banks from proprietary trading in securities, derivatives or other certain financial instruments. It also prohibits banks from investing in, sponsoring or having certain relationships with a hedge fund or private equity fund. The Dodd-Frank law allows them to have only 3% of their capital tied up in such funds.
The central bank gave the banks two years to fall into compliance with the Volcker Rule. However, the Reserve’s Board of Governors has the right to extend the time in some situations, if necessary.
The Volcker Rule, authorized under last summer’s Dodd-Frank legislation, “is aimed at reducing the chance that banks will make risky investments with their own capital and put their federally insured deposits at risk.”
