Just what is proprietary trading?
Proprietary trading is where a firm uses its own funds, as opposed to its depositors’ funds, to trade for various financial assets. These assets may include currencies, commodities, or equities.
Specifically, under 17 CFR sec. 255.3, proprietary trading means, “engaging as principal for the trading account of the banking entity in any purchase or sale of one or more financial instruments. As it pertains to foreign exchange, proprietary trade does not include foreign exchange forwards, foreign exchange swaps, or cross-currency swaps made by a banking entity for the purpose of liquidity management pursuant to a documented liquidity plan.
Bank proprietary trading was brought forward into public light during the 2007-2009 Great Financial Crisis where a number of commentators and elected officials held bank proprietary trading activity as one of the causes of the financial sector meltdown.
As a result, Congress incorporated the Volcker Rule into section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (12 U.S.C. 1851). The Act prohibits, with certain exceptions, a banking entity from engaging in proprietary trading.
In response to the prohibition, banks have either limited proprietary trading to activity allowed under Dodd-Frank; spun off independent proprietary trading firms; or have gotten out of the business altogether.
Last March, the U.S. Securities and Exchange Commission issued proposed rules intended to clarify the definition of “dealer” and “government securities dealer.” Proprietary dealer firms that “assume certain dealer-like roles and/or engage in certain levels of buying and selling government securities” would be required “to register with the SEC, become a member of a self-regulatory organization, and comply with federal securities laws and regulatory obligations.”
The proposed rules would exclude an investment company registered under the Investment Company Act of 1940.
FX rates as of 4:19 pm 21 July 2022
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