What is the Volcker Rule in private equity?
The Volcker Rule is a federal regulation that generally prohibits banks from conducting certain investment activities with their own accounts and limits their dealings with hedge funds and private equity funds, also called covered funds.
What are the permitted activities of the Volcker Rule?
Permitted activities: As provided by the Dodd-Frank Act, the final rules permit a banking entity, subject to appropriate conditions, to invest in or sponsor a covered fund in connection with: organizing and offering the covered fund; underwriting or market making-related activities; certain types of risk- Page 3 3 ...
What happened to the Volcker Rule?
The Volcker rule was further amended to allow banks to invest 3% of Tier 1 capital into hedge funds and private equity funds, an amount that would exceed $6 billion a year for Bank of America alone.
What is the original Volcker Rule?
The Volcker Rule was part of the Dodd-Frank Act enacted into law by the Obama administration in 2010 as a response to the Global Financial Crisis. It prohibits banks from engaging in proprietary trading, or from using their depositors' funds to invest in risky investment instruments.
What is the objective of the Volcker Rule?
The Volcker Rule's purpose is to prevent banks from making certain types of speculative investments that contributed to the 2008 financial crisis.
What is the rule of 20 in private equity?
The 20% performance fee is charged if the fund achieves a level of performance that exceeds a certain base threshold known as the hurdle rate. The hurdle rate could either be a preset percentage, or may be based on a benchmark such as the return on an equity or bond index.
What is the exemption for the Volcker Rule?
The Volcker Rule contains exemptions from the prohibition on proprietary trading for underwriting and market making-related activities to the extent that such activities are designed not to exceed the reasonably expected near-term demands of clients, customers or counterparties (“RENTD”).
What is considered a covered fund under Volcker?
“Covered funds” are investment pools that either (i) rely on exclusions from the definition of “investment company” provided by § 3(c)(1) or § 3(c)(7) of the Investment Company Act of 1940 (ICA), (ii) are commodity pools offered privately in reliance on the exemptions in 17 C.F.R.
What is market making under the proposed Volcker Rule?
The Agencies' proposed implementation of the Volcker Rule would reduce the quality and capacity of market making services that banks provide to U.S. investors. Investors and issuers of securities would find it more costly to borrow, raise capital, invest, hedge risks, and obtain liquidity for their existing positions.
Why was Volcker fired?
Paul Volcker, the previous Fed Chairman known for keeping inflation under control, was fired because the Reagan administration didn't believe he was an adequate de-regulator.
Did Volcker cause a recession?
Monetary tightening and the recessions of the early '80s
Beginning in October 1979, Volcker's Fed tightened monetary policy by raising interest rates. This decision had the effect of depressing demand and slowing down the U.S. economy, as credit became more expensive for households and businesses.
What banks does Volcker Rule apply to?
The Volcker Rule applies to “banking entities” – defined by statute to include FDIC-insured depository institutions, bank holding companies, savings and loan holding companies, other entities that control an FDIC-insured depository institution, and foreign banks conducting banking activities in the U.S. (referred to ...
What is Dodd Frank in simple terms?
The most far reaching Wall Street reform in history, Dodd-Frank will prevent the excessive risk-taking that led to the financial crisis. The law also provides common-sense protections for American families, creating new consumer watchdog to prevent mortgage companies and pay-day lenders from exploiting consumers.
How did Volcker fight inflation?
Ultimately, it took a crackdown by cigar-chomping Fed chairman Paul Volcker to break the cycle of rising prices and wages. Volcker slammed the brakes on the economy by raising interest rates to 20% — tough medicine to prove he was serious about getting inflation under control.
What is the rule of 72 in private equity?
The Rule of 72 estimates the number of years required to double the value of an investment at a fixed compound growth rate. To use the Rule of 72, we divide 72 by the number of years that an investment is held for. Note that the Rule of 72 only works if the investment doubles in value over the course of the period.
What is the rule of 70 private equity?
Basically, the rule says real estate investors should pay no more than 70% of a property's after-repair value (ARV) minus the cost of the repairs necessary to renovate the home. An example of this would be a home's ARV is $200,000 and it needs $40,000 in repairs.
What is the rule of 70 in equity?
The rule of 70 is used to determine the number of years it takes for a variable to double by dividing the number 70 by the variable's growth rate. The rule of 70 is generally used to determine how long it would take for an investment to double given the annual rate of return.
Are insurance companies subject to the Volcker Rule?
That holding company and each of its subsidiaries worldwide, including your client insurance company, is a banking entity within the meaning of the Volcker Rule and therefore is subject to the Volcker Rule prohibitions and restrictions described in this practice note.
What is the Super 23A rule?
Super 23A: Permissible Low-risk Transactions with Related Funds. The Volcker Rule generally prohibits all covered transactions between a banking entity and a covered fund that it advises or sponsors (a “related fund”).
What is the difference between proprietary trading and market making?
We identify two types of traders: 1) speculators, sometimes referred to as proprietary traders, who earn money trying to anticipate the direction of future price movements; and 2) customer-based traders, usually called market makers, who earn money on the bid-ask spread without speculating on future prices.
Can banks be market makers?
Market makers are typically large banks or financial institutions. They help to ensure there's enough liquidity in the markets, meaning there's enough volume of trading so trades can be done seamlessly. Without market makers, there would likely be little liquidity.
What ended the great inflation?
Once Paul Volcker became chairman of the Federal Reserve, the destabilizing role of activist policies on inflation expectations was recognized and less activist policies adopted, ending the inflation episode. The Great Inflation was an international phenomenon.
What did Paul Volcker do to end stagflation?
Stagflation in the 1970s combined high inflation with uneven economic growth. High budget deficits, lower interest rates, the oil embargo, and the collapse of managed currency rates contributed to stagflation. Under Federal Reserve Board Chair, Paul Volcker, the prime lending rate was above 21% to reduce inflation.
What stopped inflation in the 80s?
Determined to wring inflation out of the economy, Federal Reserve chairman Paul Volcker slowed the rate of growth of the money supply and raised interest rates. The federal funds rate, which was about 11% in 1979, rose to 20% by June 1981.
Who broke the back of inflation?
The reduction in inflation that occurred in the early 1980s, when the Federal Reserve was headed by Paul Volcker, is arguably the most widely discussed and visible macroeconomic event of the last 50 years of U.S. history.
