Volcker Rule Compliance
For capital-intensive businesses, the variables in portfolio decisions can seem overwhelming. Streamlining can help.
October 2011 | by John Olivier, Chief Investment Officer
The Volcker Rule aims to prevent bank holding companies from engaging in trading and investment activities that involve material conflicts of interest that cause exposure to high-risk assets or trading strategies, or that generally threaten the safety, soundness, or financial stability of the bank entity or the larger US economy. The Volcker Rule was developed in the aftermath of the credit crisis to prevent banks from taking excessive risk while managing government-insured customer deposits. At that time, banks were being accused of taking on risk and conducting unfair business practices outside the purview of both their own internal management and the regulators, which could not properly manage the banks’ complex instruments.
In addition to bringing all trading and investment activities into compliance under a set of Volcker compliance program requirements—which include documentation and record keeping, independent third-party verification, management review, and CEO attestation—the proprietary-trading section of the Volcker Rule requires banks to produce sets of metrics as a demonstration that their trading activities conform. Many large banks are finding that the generation and integration of those metrics across their various trading activities is no trivial exercise.
Companies must weather negative business cycles and a continually changing global regulatory and legal landscape. This requires more than a standard risk management program. Resilient companies preserve value by anticipating unfavorable scenarios and by building strength and flexibility into their core operations, supply chains, and financials.
As organizations grow in size and across geographies, they inevitably become more complex. Some add new markets, operations, and strategies as they adapt to a changing global economy or in response to market disruption; others become unnecessarily overcomplicated as a result of a loss of focus and alignment. One key to creating value is the ability to distinguish between good and bad complexity and to use analytics effectively to access—and act on—the right information at the right time. Global businesses face vastly different—and continually changing – conditions across the globe. Management must understand the local economy, political and regulatory climate, cost environment, talent pool, and consumer demographics of each market in which it operates while at the same time integrating at the strategic level. This requires mastering a holistic approach to growth firmly rooted in exceptional execution.