The changes proposed by the Volcker Rule stem from the fact that many banks engage in highly risky trades in securities, derivatives and other financial instruments for their own profit -- often backed by the benefits of deposit insurance and Federal funding. This is perceived as an unnecessary and avoidable burden on taxpayers, who have little to gain (at least directly) from banks' bulked-up trading revenue figures, but much to lose as their own money is potentially at risk when market conditions deteriorate.

Former Federal Reserve Chairman Paul Volcker, after whom the rule is named, extended his full support to it in his comment on the SEC website earlier this week.

Banks, on the other hand, claim that banning all proprietary trading would be counter-productive. Firstly, a complete ban would make it more difficult for them to perform their market-making role efficiently, and would result in attempts by companies to raise capital more expensive. Secondly, banks argue that as the ban also includes hedging operations, it would actually increase their risks, as they will not be able to hedge their exposure.

Comments from representatives at Morgan Stanley against the rule can be found here, while those from Goldman's chief of staff are provided here.

It must be noted that most of the banks have already shut down or spun off parts of their proprietary trading operations, or are in the process of doing so, in response to the Volcker Rule (see Citi Continues Shedding Prop Trading Units as Volcker Rule Looms). But they continue to do everything in their power to keep the rule at bay. Even if it is to be enforced, they intend to limit the extent of the bans proposed.

The Volcker Rule is slated for implementation in July this year. While it is unlikely that it will be passed into law in its entirety as it stands now, the sheer volume of comments received for and against it begs for more consideration of the impact of each proposed change on the general public as well as the country's banking system.

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