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2017 Rutgers Univ. L. Rev. Commentaries 1 (2017)

handle is hein.journals/rgsusty2017 and id is 1 raw text is: RUTGERS UNIVERSITY LAW REVIEW COMMENTARIES A COUNTERPRODUCTIVE CONSTRAINT: HOW THE VOLCKER RULE UNDERMINES ITS PURPOSE BY DISCOURAGING HEDGING Renee Dudek I. INTRODUCTION The Volcker Rule was designed to prevent banks from engaging in proprietary trading, which is investing for their own direct gain as opposed to earning commissions by trading on behalf of clients. The purpose is to insulate banks from the risks of proprietary trading. In theory, proprietary trading is distinct from hedging, a practice that reduces risk. However, there is no clear distinction between proprietary trading and hedging in practice. Classification largely depends on how a bank packages a transaction. Thus, it is unlikely that regulators could enforce the ban on proprietary trading while leaving hedging unscathed. By deterring hedging, regulators undermine the purpose of the Volcker Rule: to reduce banks' exposure to risk. Yet, if regulators under-enforce the ban to encourage hedging, they will essentially fail to deter any proprietary trading. Banks will be able to artfully package their trading activity into compliance, with the Volcker Rule operating like a tax to be collected by bank lawyers. II. BACKGROUND The Volcker Rule is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.1 It prohibits banks from engaging in proprietary trading.2 The five agencies charged with implementing the Volcker Rule are the Office of the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, and the Securities and Exchange Commission.3 It was introduced in 2010, went into effect on April 1, 2014, and was fully implemented on July 21, 2015.4 1. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111- 203, § 619, 124 Stat. 1620 (2010) (codified at 12 U.S.C. § 1851 (2012)); see also 12 C.F.R. §§ 44, 248, 351 (2015); 17 C.F.R. §§ 75, 255 (2015). 2. Dodd-Frank § 619; 12 U.S.C. § 1851; 17 C.F.R. § 75. 3. Dodd-Frank § 619; 12 U.S.C. § 1851(b)(2)(B)(i); 12 C.F.R. §§ 44, 248, 351, 255. 4. Vinita Tandon, The Volcker Rule: Clarifying the Anti-Evasion Provision to Facilitate Compliance, 20 N.C. BANKING INST. 385, 386 (March 2016) (internal citations omitted). MAY 23, 2017

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