How does the Volcker Rule define "proprietary trading desks"?

The Volcker Rule, which is a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, defines "proprietary trading desks" in the context of its restrictions on proprietary trading by banking entities. The rule's definition of proprietary trading desks is designed to identify those units or areas within a banking entity that engage in activities covered by the rule's prohibitions. Here's how the Volcker Rule defines proprietary trading desks:

1. Trading Desks or Units: The Volcker Rule refers to "proprietary trading desks" or "proprietary trading units" within a banking entity. These are specific divisions or groups within the entity that are involved in trading activities.

2. Trading for Profit: Proprietary trading desks are primarily engaged in trading financial instruments (such as stocks, bonds, derivatives, and commodities) for the purpose of generating profit for the banking entity itself. In other words, they buy and sell these instruments on the bank's own account, rather than on behalf of customers.

3. Risk and Position-Taking: Proprietary trading desks typically take market positions and engage in risk-taking activities. They may hold inventories of financial instruments and are exposed to market fluctuations, with the intention of profiting from price movements.

4. Exclusions: The Volcker Rule excludes certain activities and trading desks from the definition of proprietary trading desks. For example, trading desks that are engaged in market-making, underwriting, or risk-mitigating hedging activities are not considered proprietary trading desks when those activities meet specific criteria and conditions outlined in the rule.

The key distinction in the Volcker Rule's definition is between proprietary trading desks that trade for the bank's own profit and trading desks engaged in activities that serve customers, promote market liquidity, or hedge risks related to the bank's activities. Proprietary trading is generally prohibited, while certain other trading activities are allowed if they meet regulatory requirements.

The definition of proprietary trading desks under the Volcker Rule is critical for determining which trading activities are subject to the rule's prohibitions and restrictions. Banking entities must carefully assess and categorize their trading desks to ensure compliance with the rule's provisions. Regulatory agencies, such as the Federal Reserve, the Office of the Comptroller of the Currency (OCC), the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC), oversee and enforce compliance with the rule and its definitions.