How the Volcker Rule Affects Investment Banking

The Volcker Rule refers to section 619 of the Dodd-Frank Act. This financial law was legislated by American Lawmakers to put under control the nation’s economic distress. The rule bans many forms of propriety trading by banks and provides limits for investment options in both private equity and hedge funds. The banking industry is concerned about how the rule affects trade in USA and the world.

JP Morgan’s bank analysts, led by Kian Abouhossein, recently noted that, US Investment banks are now in subjection to undue competition against their foreign rivals. He cited European as the real beneficiaries to the act. He expressed his concern that, the Volcker rule would negatively affect the purely property trading activities besides marketing related activities in the banking industry. The new development has resulted to stakeholders wanting to dig- out more information on the effects of this legal piece. It is expected that earning per share invested in the market will be affected by limits on pure propriety trading. An example at hand is the Goldman Sachs and Morgan Stanley, where management puts estimates of expected income reduction on each share at 14 percent- by the end of the year.

For a fact it is not possible to state that, the said rule will not have far reaching consequences on both local and international investing banks. When the section of the Dodd Frank legislation, stipulates in part, that propriety trading done outside the United States is exempted from prohibitions-resulting from the rule, it means a lot. The interpretation of this rule involves several factors. Many of them provide landmines for non American banks. To begin with, the rule requires that no party involved in trade be a “resident” of the United States; be safe from legal obligations of the statute. The term resident is further defined in eight subsections of the document. Foreign organized subsidiaries of the American companies seem to be perfectly included. You can provide an example of any two foreign companies that engage in trade. If it happens that one bank involved in business is a subsidiary of a US firm, the rule must be applied. This easily results to “non resident “firms of the United States avoiding to engage in trade with key business partners based in the States. The result cannot be friendly.

Consider another requirement of this law. That to be safe from the state’s law jurisdiction, all trade must be “executed wholly” out side USA. No definition has been accorded to the phrase. Most likely, all businesses carried out” away from the US”, must not involve any US organ or institution; not even financial or security organizations. What does this mean? This rule says that no trade any where in the world would be done, that involve even shares listed in the New York Stock Exchange -so as to be on the safe side of the tough legal requirements. Therefore it is in the best interest of all stakeholders, to have a re-examination of the controversial sections of the legal pact.