Volcker Rule compliance and expected impact

The compliance date of July 21 for the Volcker Rule is almost upon us. The broad aim of the regulation is to curtail the speculative trading of banks and there are several important aspects of the rule related to including controls on proprietary trading, emphasis on liquidity planning, limits on investment in covered funds and so on. Among the various areas related to the rule, the last aspect relating to the limits on investment in covered funds is possibly the greatest challenge, since it relates to banks’ investments in tens of thousands of securities and funds. This can be a significant operational hurdle in terms of identification of covered funds and divestment from these. On the whole, the big banks are fairly well prepared to deal with the deadline but the regulation is expected to be difficult to comply with for mid and small sized banks as these have fewer resources to deal with such requirements. Some vendors have introduced automated tools to help banks meet Volcker Rule requirements for covered funds, but not all banks would be able to use such platforms or automate their processes sufficiently on their own. Overall, the regulatory measure is expected to reduce the overall liquidity in the markets. Once implemented, we can expect to have a more controlled approach to trading from market participants. The markets might well be safer after all these changes, but to some extent these will come at the expense of trading volumes and profitability.