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FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure

Which of the following best describes the purpose of the Volcker Rule introduced under the Dodd-Frank Act?

The Volcker Rule restricts banking entities from proprietary trading and limits their ownership of or sponsorship of hedge funds and private equity funds, in order to protect insured deposit-taking institutions from speculative risk. It does not set liquidity ratios, derivatives venue rules or pay caps.

  1. ATo restrict banking entities from proprietary trading and limit their ownership of hedge funds and private equity fundsCorrect
  2. BTo require all derivatives to be traded only on exchanges
  3. CTo set the minimum liquidity coverage ratio for banks
  4. DTo cap executive compensation at systemically important institutions

Explanation

The Volcker Rule limits proprietary trading by banking entities and restricts their investments in and sponsorship of hedge funds and private equity funds, aiming to reduce risk to insured deposit-taking institutions. Derivatives clearing, liquidity ratios and pay caps are addressed elsewhere.

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