Another key goal of the Volcker rule is to eliminate conflicts of interest at financial institutions by separating proprietary and customer trading and by making top executives responsible for seeing that the bank follows the regulation.
For instance, during the housing boom, some investment banks selected loans to package into securities, sold the securities to their customers as low-risk investments and then bet against their customers by making trades that would pay off if those securities lost value.
"That's so egregious, it's kind of mind-blowing," Min says. "The Volcker rule has some strong language about conflict of interest and this strong directive about not engaging in proprietary trading."
The concern is whether the exemptions allowed by the Dodd-Frank law end up being so broad that they lessen the impact of the rule. "It has to be written in a way that's sufficiently narrow," Donner says. "We thought the proposed rule was too weak, but of course there was pressure to make it even worse."
For instance, the proposed rule would let banks trade if they are meeting short-term needs of clients, subject to monitoring programs aimed at spotting banned proprietary trading. There are also exemptions for commodities and certain fixed-income products with a goal to maintain the vital liquidity of U.S. Treasuries and debt issued by Fannie Mae and Freddie Mac.