The Volcker Rule and Fraud


Bruce Dorris, J.D., CFE, CPA
ACFE VP and Program Director

There has been tremendous press (most recently in Reuters and Bloomberg) in the last few months on the latest release by U.S. financial regulators concerning the Volcker rule. The rule, part of the Dodd Frank Act reforms, is designed to limit certain trading activities, in particular derivatives, of banks. The theory is that if riskier trades are prohibited, the financial system will be safer.

While the effects of the Volcker rule remain to be seen, one thing is certain – there are many more regulations (71 pages with 882 pages of support as of now) that financial institutions now must comply with. 

My fear is that as these regulations are promulgated, rogue bankers looking to continue trading and booking these prohibited derivatives will find ways to bend the rules or exploit loopholes in them.

Additionally, not only do banks have another set of rules to comply with, but regulators will now carry a new workload as these rules are rolled out. Education and training for those examiners implementing and enforcing the rules will be critical. If regulators and examiners don’t know what they are looking for, then the spirit of the rule will never be met. We must equip the agencies and overseers with adequate resources to isolate complex derivatives and ferret out those banks continuing these prohibited trades.

For example, since the swap market is now under the purview of the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), these groups must make certain their staff can isolate trades and instruments that are in violation of these rules. If the staff is unfamiliar with these derivatives and not adequately trained what to look for and analyze, Volcker becomes all bark and no bite. Unethical traders will take advantage of any weakness in the system.

Again, training to know what to look for is imperative. For a diver, if the water is murky, visibility is nil. The sea of new regulations will make things murky enough; providing future training and education for those responsible will make things clearer.