Federal agencies have, after three years, issued final rules to implement the Volcker Rule, which is named after former Federal Reserve chairman Paul Volcker and aims to limit risk by prevent banking entities from betting on financial markets for their own account.

Federal agencies have, after three years, issued final rules to implement the
Volcker Rule, which is named after former Federal Reserve chairman Paul Volcker
and aims to limit excessive risk by preventing certain banking entities from betting on financial markets for
their own account.

The Federal Reserve; the Commodity Futures Trading
Commission; the Securities and Exchange Commission; the Federal Deposit Insurance
Corporation; and the Office of the Comptroller of the Currency jointly
developed the rule and passed it this week. 

As well as prohibiting banking entities from engaging in
various short-term proprietary trades for their own gain, the final rules also impose
limits on their investments in, and other relationships with, hedge funds or
private equity funds.

“Like the Dodd-Frank Act, the final rules provide exemptions
for certain activities, including market making, underwriting, hedging, trading
in government obligations, insurance company activities, and organizing and
offering hedge funds or private equity funds. The final rules also clarify that
certain activities are not prohibited, including acting as agent, broker, or
custodian,” the Federal Reserve Board said in a statement.

Compliance under the final rules will depend on the
size of the banking entity and the scope of activities conducted. Those entities with significant trading
operations will have to provide a detailed compliance program, which their chief executives will be required to prove is “reasonably
designed” to achieve compliance with the final rule.

Independent testing and analysis of
an institution's compliance program will also be required, although the final
rules reduce the burden on smaller, less-complex institutions; a banking entity that does not engage in covered trading
activities will not need to establish a compliance program.

The Volcker Rule pertains to section 619 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act and comes into force in July 2015. 

“This provision of the Dodd-Frank Act has the important objective of
limiting excessive risk taking by depository institutions and their
affiliates,” said Federal Reserve chairman Ben Bernake.