Volcker Rule
A Dodd-Frank provision prohibiting banks from proprietary trading and limiting their investments in hedge funds and private equity.
What is Volcker Rule?
The Volcker Rule (Section 619 of Dodd-Frank) prohibits federally insured banks — institutions backed by taxpayer deposit insurance — from engaging in proprietary trading (trading financial instruments for the bank's own profit rather than on behalf of clients) and from owning or sponsoring hedge funds and private equity funds beyond de minimis levels. Named after former Fed Chairman Paul Volcker, the rule's rationale is that deposit insurance and access to Fed lending are intended to protect depositors, not to subsidize speculative trading. Implementation has been controversial due to the difficulty of distinguishing proprietary trading from legitimate market-making, and the rule has been revised multiple times to reduce compliance burdens.
Example
JPMorgan's 2012 'London Whale' trading loss of over $6 billion — where a trader named Bruno Iksil took massive positions in credit derivatives — became a case study for the Volcker Rule debate: the bank claimed the trades were hedges (permitted), while critics argued they were proprietary bets (prohibited). The episode led to management changes and helped accelerate Volcker Rule implementation.
Source: Federal Reserve — Volcker Rule