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.