How does the Volcker Rule define "permitted activities"?

The Volcker Rule, implemented as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, defines "permitted activities" as specific financial activities that banks are allowed to engage in while still complying with the rule's prohibitions on proprietary trading and certain investment activities. Permitted activities under the Volcker Rule primarily include activities related to traditional banking services and customer-oriented financial intermediation. Here are some key elements of permitted activities:

1. Underwriting and Market-Making: Banks are permitted to engage in underwriting and market-making activities, provided they meet certain criteria and do not engage in proprietary trading. These activities involve facilitating the issuance of securities and providing liquidity to the financial markets.

2. Risk-Mitigating Hedging: Banks are allowed to engage in risk-mitigating hedging activities, but these hedges must be designed to reduce or offset specific risks, and they must be related to positions held by the bank.

3. Trading on Behalf of Customers: Banks can engage in trading on behalf of customers, including executing customer orders and managing customer accounts, as long as they are acting solely as an intermediary and not for proprietary trading purposes.

4. Securities Lending and Borrowing: Banks can participate in securities lending and borrowing activities, which involve lending securities to customers or other market participants in exchange for collateral. This activity is considered a permitted activity as long as it meets certain conditions.

5. Repo and Reverse Repo Transactions: Banks can engage in repurchase agreement (repo) and reverse repo transactions, which are common in the money markets and involve the sale and repurchase of securities. These transactions are permitted as long as they meet specific requirements.

6. Trading in U.S. Government and Agency Securities: Trading in U.S. government and agency securities is generally considered a permitted activity and is subject to specific provisions under the Volcker Rule.

7. Organizing and Offering Hedge Funds and Private Equity Funds: Banks are permitted to organize and offer hedge funds and private equity funds, subject to restrictions and limitations. However, the bank's involvement in these funds is subject to certain limitations to prevent conflicts of interest and excessive risk-taking.

8. Foreign Banking Entities: Foreign banking entities are allowed to engage in certain permitted activities outside the United States, subject to compliance with the rule's requirements.

It's important to note that while the Volcker Rule permits these activities, there are specific conditions and limitations attached to each of them to ensure that they are conducted in a manner that does not result in prohibited proprietary trading or create undue risks for the bank and the broader financial system. Additionally, banks are required to have comprehensive compliance programs and risk management systems in place to monitor and control their permitted activities in accordance with the rule's provisions. Regulatory agencies, such as the Federal Reserve and the Office of the Comptroller of the Currency, provide guidance and oversight to ensure compliance.