In the paper, The Volcker Rule and Evolving Financial Markets, published in the inaugural issue of the Harvard Business Law Review, I question the effectiveness of the Volcker Rule in light of change in the financial markets over the last thirty years. The Volcker Rule largely prohibits proprietary trading by banking entities—in effect, reintroducing to the financial markets a substantial portion of the Glass-Steagall Act’s static divide between banks and securities firms. By removing proprietary trading, the Rule’s proponents expect utility services, such as taking deposits and making loans, to once again dominate the commercial banking business,

There is considerable uncertainty around the scope of the Volcker Rule and its impact on the financial markets, highlighted—but not resolved—by the recently published Financial Stability Oversight Council study. Chief among the concerns is defining “proprietary trading.” Trading activity can vary among markets and by asset class, and so what constitutes a “near term” or “short-term” transaction for one instrument, subject to the Volcker Rule, may be quite different for another. How, if at all, should the Volcker Rule distinguish among them? In addition, different firms employ different trading strategies, and so what would be considered proprietary at one firm may not be the same at another. A firm may also vary its approach to trading based on changes in the marketplace. A longer-term investment, for example, may be resold quickly in the face of an increasingly volatile market. How can regulators distinguish between changes in strategy and prohibited transactions? And how should regulators separate prohibited transactions from permitted activities, such as market-making?

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