I wish I could take credit for this, but I can't. A colleague came into my office today with a proposed enforcement mechanism for the Volcker rule, and when I opened my mouth to disagree with him, nothing came out. I just laughed.

The proposal: If a trader is found by regulators to have violated the Volcker rule more than once in a calendar year, his pay cannot be more than $100K for that year. No exceptions. No million dollar bonuses. If the trader has already received more than $100K in base salary for the year, then he has to pay back any amount over $100K. Believe me, once a trader has violated the Volcker rule once, he'll be falling all over himself to document why and how every trade is related to market-making.

I like it: short, sweet, and devastatingly effective. It uses deterrence to compensate for the inevitable inadequacies — that is, over-permissiveness — of the final rule.

17 comments:

The Epicurean Dealmaker said...

Hence the critical capability of regulators to find such violations. I still like your prior idea of posting regulators in sufficient numbers on the trading floors of the subject institutions. You need to be able to observe and find violations before you can punish them.

Anal_ said...

Wouldn't they first have to finally and clearly clarify explicitly what constitutes market making and what does not (and I suppose, activities that will be considered on an ad-hoc basis)?

Bootvis said...

But what if the trader trades for his own account? Or does so on paper using a legal trick?

yoyodyne said...

That's not enforcement that's merely a penalty.

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