In late 2020, the Federal Reserve picked up where the FDIC left off and altered part of the Volker rule which was put in place during the great financial crisis of 2008. The change in the ruling effects the way banks must hold reserves if they want to invest their own money in the market. During the financial crisis, banks lost billions of dollars on high leverage bets on the US housing market. In the wake of the crisis, new laws were put in place along with regulations that halted proprietary trading by banks. The consumer led bailout of the banks led to tight regulation which was in place for more than a decade and have finally seen some relief.
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Tweak to a Ruling
In mid-2019 the Federal Deposit Insurance Corp (FDIC) approve a revision of the Volcker Rule. This change helps to clarify the way banks trade securities using their own funds known as proprietary trading. Proprietary trading differs from the trading that a bank does for its clients. Ahead of the change made by the FDIC, the Officer of the Controller of the Currency also approved the rule change.
In late October of 2019, the Federal Reserve announced that the change in the rule would take effect on January 1, 2020. Their announcement was a change to the Volcker rule which prohibits banking entities from engaging in proprietary trading. Community banks will remain exempt from the Volcker rule by statute.
The new rule was jointly developed by the Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission.
How Will This Alter Proprietary Trading?
The upshot is that banks that trade actively will have more restrictions but will be able to engage in trading of its own funds. This will provide an additional revenue stream for banks that want to engage in this practice. While regulators will have more to watch, their focus will be on the leverage that banks are able to take. Authorities will want to make sure that a regulated online trading broker cannot bet the ranch as they did ahead of the 2008 financial crisis.
Crypto Trading Could Get a Boost in India
Banks might decide to increase their risk in cryptocurrencies, and the expansion into Indian might support that investment. Cryptocurrency trading could see a boost in liquidity following the Indian Supreme Court ruling against a bank on trading placed by the Reserve Bank of India. The Indian Supreme Court announced a ruling in favor of crypto exchanges that banned domestic Indian financial institutions from providing trading services related to crypto exchanges.
The initial ruling that took place during the Q2 of 2018 forced many crypto exchanges to either close or change their business practices. The change by the Indian Supreme Court might increase liquidity and change the view of many of the financial regulators that govern the cryptocurrency markets.
Key Takeaway
The changes to the ruling in the United States and India should increase liquidity as well as risk. Allowing the banks to engage in proprietary trading will increase their leverage and could generate both more rewards and risks as the markets become volatile. The ruling against the Reserve Bank of India by the Supreme Court is a win for the cryptocurrency market environment. Exchanges should reemerge and provide access to a growing market.
