6:50 pm - Sunday July 23, 2017

DFA and Volcker rule (Proprietary Trading)

Federal Regulators in the United States are moving ahead with a rule that would ban banks from trading for their own profit.

This rule – popularly known as Volcker Rule – is covered under Section 619 of Dodd Frank Act and contains two broad prohibitions for banking entities – No proprietary trading and No ownership interest in or sponsorship of a private equity or hedge fund.

The requirements of the statutory Dodd Frank Act covering proprietary trading are:

(1) Prohibited transactions are transactions that would result in material conflicts of interest, exposure to high-risk assets or activities, the safety or soundness of the banking entity, or pose a threat to U.S. financial stability

(2) Certain financial relationships or arrangements with covered funds are prohibited

(3) Nonbank financial firms may also be subject to activities restrictions/capital charges.

There is a requirement that agencies must issue rules covering internal controls and recordkeeping to insure compliance with statute prescriptions.

Proprietary trading is clarified as engaging as principal for a trading account in purchase or sale of covered financial positions.

However all agency activities and transactions for unaffiliated third parties are excluded from this definition.

Covered financial positions include long, short, synthetic or other positions on securities, options on securities, derivatives, options on derivatives and commodity futures.

And the exclusions are loans, commodities and foreign exchange or currencies. A trading account is one that acquires or takes up a covered financial position for short term resale, price movement benefits, arbitrage and hedging of all these (sale term resale, price movement benefits, and arbitrage).

In short, a market risk capital rule covered position; (excluding positions in foreign exchange derivatives and commodity derivatives / futures) if the banking institution reckons such risk based capital ratios.

For regulated securities and commodities firm, the covered financial position could be for any purpose

Many thanks Dodd Frank Act for the valuable inputs

You may also want to read these

No comments yet.

Leave a Reply