Section 619 of the 2010 Dodd-Frank Act, commonly referred to as the Volcker Rule, prohibits banks from engaging in proprietary trades, owning interest in or sponsoring a private equity or hedge fund, and making risky investments on their own behalf with federally insured deposits, Courthouse News Service reports.
The rule aims to limit the exposure of financial institutions to credit-default swaps and other risky investments that contributed to the 2007 financial services collapse.
Financial services groups maintain that the rule will damage market liquidity as well as their ability to compete in a global economy. Following JPMorgan Chase & Co.’s $2 billion-plus losses last month, however, the rule received increased support from its proponents who claimed that the measure could have prevented the bank’s losses, according to The New York Times.
The rule also prohibits any banking entity that manages, sponsors or advises a hedge or private equity fund from engaging in any transactions with the fund, thereby eliminating all financial incentive for banks to bet on the positions of the funds they advise, Courthouse News Service reports.
Firms subject to the Volcker Rule, which is set to take effect on July 21, are required to show a good faith effort to comply with the ban.