The Volcker Rule was neither written by former Federal Reserve Bank chairman Paul Volcker nor is it a rule.
Two years of back and forth between Wall Street lobbyists and elected officials produced an 800+ page Volcker Rule. The Volcker Rule seeks to prevent banks from taking speculative positions with their own capital that could potentially lead to a Lehman-esque collapse a la 2008. The Rule does not take full effect until July of 2015 and allows big banks to continue market making as usual- an estimated $44 billion per year sector. Even with the passage of the Volcker Rule the definition of speculation remains a large gray area: What is and what is not an acceptable market making activity.
In this regard the Rule is more principle than law and is open to interpretation by those responsible for implementing it – Big banks. Regulators still have to determine how and to what extent they will enforce the new rule as any sudden change may cause unexpected volatility. Unfortunately we will have to live with the suspense for 18 more months; and even then a clear understanding of how the Rule will impact the banking sector and equity markets will be difficult.
One theory is that the Rule will significantly impact the commodity markets due to speculative trading practices that may have distorted prices as banks looked to take advantage of their market making power. If a commodity price was artificially high due to profit taking by banks that price is likely to fall if the Volcker Rule is enforced in a stringent manner that forces banks away from speculative trading.
The lead regulatory agency charged with enforcing the Rule is in a gray area of enforcement itself. If Commodities Futures Trading Commission is more stringent in the application of the Rule it will likely diminish trading on the exchanges it regulates. With lower trading volumes comes lower revenue for the commission and lower levels of liquidity for financial markets.
It is hard to say what the effects of the Volcker Rule will end up being but one thing is for certain. Heritage Wealth Architects will pay close attention and adjust plans accordingly to help create more enjoyable moments that span generations.