Volcker Rule.

In plain English

The rule separates proprietary trading, where a bank bets its own capital, from market making and hedging done for customers, on the theory that federally backed deposits should not fund speculative bets. It also caps how much a banking entity can own of, or sponsor, hedge funds and private equity funds. Drawing the line is hard in practice, because a market maker holds inventory that looks like a position, so compliance rests on documented intent, customer demand, and risk limits. Regulators have revised the rule since it took effect to simplify testing and narrow the fund restrictions. It applies to banking entities, not to standalone trading firms.

01Why it matters

It shapes which risks sit inside institutions that hold insured deposits and have access to the central bank, which is a direct question about who is exposed if a trading desk is wrong.

02The math, step by step

Say a bank's desk buys $50 million of corporate bonds because clients are expected to buy them within days. That is inventory for market making. Buying the same $50 million because the desk expects prices to rise over the next year is the proprietary bet the rule restricts.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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