You shouldn’t expect too much from the Volcker Rule study that the Financial Stability Oversight Council (FSOC) is releasing today. It almost certainly won’t get into the weeds of the definitions, which is where all the action in the Volcker Rule fight will be. It may make recommendations on how specific/broad different definitions should be, but that still won’t tell us much.

It all depends on the specific language of the definitions. Instead, the study will likely focus on how regulators should enforce the Volcker Rule. Regulators have already floated the idea of using a three-tiered system, in which certain trades or combinations of trades would set off “tripwires” that automatically alert regulators. This could conceivably work, but again, it all depends on the specific language of the tripwires — if the tripwires are too narrowly defined, for example, they might not catch some proprietary trades.

The WSJ says that the FSOC is “leaning against suggesting precise rules for specific assets or trades, and instead might focus on the amount of risk being carried by a firm or trading desk, according to people briefed on the negotiations.” The WSJ also says that the FSOC will recommend that regulators monitor the size banks’ positions, how long positions are being held, and Sharpe Ratios.

That all sounds reasonable enough — indeed, I’ve suggested monitoring how long positions are being held myself. Regulators were always going to have to use some sort of “tripwire” system to enforce the Volcker Rule, seeing as it’s not even remotely possible (or physically possible, for that matter) for regulators to review every single trade. The FSOC study will probably just confirm that regulators are planning to use a multi-level tripwire system, and provide a better sense of the factors regulators are planning to focus on.

That still won’t tell us much about how effective the Volcker Rule will ultimately be though, because the key is how regulators design this tripwire system. Most importantly, how broad are the categories of trades that set off the tripwires? What actions do regulators take when a tripwire is set off? How often/actively do regulators perform spot checks? What is the punishment for violating the Volcker Rule?

Again, it’s impossible to answer these questions without the all-important definitions. If the definitions of “market-making-related activities,” “risk-mitigating hedging activities,” and “trading account” are too broad, then banks probably won’t have any trouble avoiding the tripwires. If the definitions are sufficiently narrow, and somehow don’t provide banks with multiple opportunities for evasion, then a multi-level tripwire system could very well work. (Given the way the statute was drafted, I fully expect that the definitions will be too broad; don’t say I didn’t warn you.)

We just don’t know how effective it will be without the definitions. And we likely still won’t know how effective the Volcker Rule will be even after the FSOC releases its study.

(Of course, that won't stop the pundits from claiming that the study proves that regulators have sold out to Wall Street, proclaiming that the Volcker Rule is now officially dead, and somehow managing to blame it all on Tim Geithner. Count on it.)