FRM Part II · FRM Exam Part II · Solvency, Liquidity and Other Regulation After the Global Financial Crisis
A risk manager at a large U.S. bank is reviewing the main purpose of the Volcker Rule, introduced under the Dodd-Frank Act. Which description best captures what the rule restricts?
The Volcker Rule restricts banking entities from engaging in proprietary trading for their own account and from owning or sponsoring hedge funds and private equity funds. It still permits exempted activities such as market-making, underwriting and risk-mitigating hedging, so it is not a blanket ban on trading.
- AProprietary trading by banking entities and their ownership of, or sponsorship of, hedge funds and private equity fundsCorrect
- BAny lending by banks to hedge funds and private equity funds
- CAll market-making and underwriting activity by deposit-taking institutions
- DThe issuance of subordinated debt by bank holding companies
Explanation
The Volcker Rule generally prohibits banking entities from short-term proprietary trading for their own account and restricts investing in or sponsoring covered funds. It contains exemptions for market-making, underwriting and risk-mitigating hedging, so it does not ban those activities outright. It also does not concern subordinated debt issuance.
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