On December 10, 2013, five federal agencies — the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission — issued final rules developed jointly to implement Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules are known collectively as the "Volcker Rule" after Paul Volcker, the former U.S. Federal Reserve chairman.

The Volcker Rule is an attempt to end speculative trading by banks in light of the 2008 financial crisis, with the goal of reducing the risks that banks take. According to documents released by the Federal Reserve Board, the rule prohibits "any transaction or activity" that exposes banks to high-risk assets or strategies "that would substantially increase the likelihood that the banking entity would incur a substantial financial loss or would pose a threat to the financial stability of the United States." The Volcker Rule focuses on several key areas, some more strictly than others. Short-term proprietary trading is completely banned and hedging is heavily regulated under the rules. Although hedging is still allowed, in order to pursue a hedge, a bank must provide detailed and updated information for review by on-site bank supervisors. On a continued basis, banks must demonstrate that their trades hedge specific risks in order to pursue the hedge under the rules. According to the rule language, banks must analyze and independently test that a hedge "demonstrably reduces or otherwise significantly mitigates one or more specific, identifiable risks." Further, banks must provide "ongoing recalibration of the hedging activity by the banking entity."

In contrast, while the Volcker Rule bans banks from trading to profit their own accounts, it allows them with relative ease to continue making markets for clients. The final rule relaxed the criteria banks must meet in order to engage in market making-related activities, as compared to the 2011 proposed rules. According to the rule, on an ongoing basis the trades must not exceed the "reasonably expected near-term demands of clients." The rule dictates that banks base demand on historical data and other market factors, and also requires that compensation arrangements are not designed to reward prohibited trading.

The Volcker Rule also makes clear that both the boards of directors for banks and their top managers "are responsible for setting and communicating an appropriate culture of compliance." In order to do this, the rule in part requires that CEOs "annually attest in writing" that the company has "procedures to establish, maintain, enforce, review, test and modify" the compliance program. However, the rule does not require that CEOs personally guarantee compliance.

One area of concern is the manner in which the rule will be enforced. Rather than provide clear rules that the banks must satisfy, the rule often uses terms like "reasonable" and "substantial," and also does not provide guidance for important provisions such as the extent to which a hedge must reduce "specific, identifiable" risks. Further, the five agencies that issued the rules will all be involved in the supervision and enforcement of the rule. So it will be difficult to determine the full impact of the Volcker Rule until it is seen how the agencies will enforce the rule.

The final rules become effective on April 1, 2014, but the Federal Reserve Board has extended the conformance period to July 21, 2015. However, certain entities will have to begin reporting quantitative measurements before then, whereas others will not until after that date. Banking entities with $50 billion or more in consolidated trading assets and liabilities must report quantitative measurements beginning June 30, 2014. Banking entities with $25 billion, but less than $50 billion in consolidated trading assets and liabilities, must meet this requirement on April 30, 2016. Finally, those with at least $10 billion but less than $25 billion in consolidated trading assets and liabilities will become subject to the requirement on December 31, 2016. The agencies will review the data collected prior to September 30, 2015, and revise the collection requirement as appropriate.

SEC final rule: http://www.sec.gov/rules/final/2013/bhca-1.pdf