What Is the Volcker Rule?

The Volcker Rule is a federal law that restricts banks’ transactions with hedge funds and private equity firms, commonly known as covered funds, and forbids them from undertaking certain investing activities with their own accounts. The Volcker Rule has been widely criticized for reducing liquidity by reducing banks’ market-making operations.
The Volcker Rule attempts to safeguard bank clients by prohibiting banks from making certain speculative bets that contributed to the financial crisis of 2008. It basically forbids banks from trading securities, derivatives, and commodities futures on their own accounts for short periods of time, as well as options on any of these products.