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FRM Part II · FRM Exam Part II · Solvency, Liquidity and Other Regulation After the Global Financial Crisis

A US bank holding company is reviewing its trading activities under the Volcker Rule, which was introduced by the Dodd-Frank Act. Which activity is generally permitted under the rule?

Market making to meet reasonable near-term client demand is permitted under the Volcker Rule. The rule bans short-term proprietary trading for the bank's own profit and restricts ownership of hedge and private equity funds, but it exempts market making, underwriting and certain hedging activities.

  1. AProprietary trading in equities for the bank's own account to generate short-term profit
  2. BMarket making in securities to meet the near-term demands of clients, customers and counterpartiesCorrect
  3. COwning a majority stake in a hedge fund sponsored by the bank
  4. DShort-term trading in commodity futures purely to profit from price movements

Explanation

The Volcker Rule restricts proprietary trading and limits bank investments in hedge funds and private equity funds. It contains exemptions for market making, underwriting and risk-mitigating hedging tied to client demand. The other options describe proprietary trading or fund ownership that the rule restricts.

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