The Volcker Rule mandates that banking entities cease proprietary trading, subject to certain exceptions for “permitted activities” including market making and risk-mitigating hedging.
The current proposed implementation of the rule includes recommendations for a framework of 17 quantitative metrics to be calculated and analyzed daily, and reported to regulators monthly.
The 17 quantitative metrics are grouped into 5 metrics groups (as listed to the left)
Each metrics group variously seeks to establish that a bank’s risk taking appetite, revenue profile, trading inventory and origination are all consistent with that of a market maker providing liquidity and hedging any residual risks incurred in the provision of this service.
Risk Management: the 4 metrics in this group try to establish that the bank’s trading units retain risk that is not in excess of the size and type required to provide intermediation/market making services to customers.
Sources of Revenue: the 5 metrics in this group try to establish that the bank’s trading units’ revenues are earned primarily from customer revenues (fees, commissions and bid-offer spreads) and not from price movements of retained principal positions.