1. Frank-Dodd Act
The legislation is the US’ response to the global financial crisis of 2008. The Act was signed into law in July 2010 by President Barack Obama. Some of the major aspects of the Act include regulation of mortgages, loans and credit cards, overseeing Wall Street and systemic risks that occur within, and regulate, risky derivatives. The Volcker Rule, which is a sub section of the Act, bans banks from proprietary trading or using hedge funds to do the same. The basic idea of the rule is to stop banks from gambling with depositors’ money. Even though it was legislated in record time, the Frank-Dodd Act has been implemented very slowly. Only a third of the rules have been made while the rest are yet to be finalised. The Volcker Rule will be a major point of discussion in 2013 and even if some part of it is implemented, it has the potential to affect liquidity in global markets. Financial liquidity in global markets is often provided by large traders such as hedge funds. Banks are often the main source of funds for many hedge funds that invest the money in global markets. A large part of the liquidity in Indian equity markets is accounted for by portfolio investors. If the Volcker Rule becomes a reality, then it has the potential to affect liquidity across the globe, and that includes India.
(This story appears in the 11 January, 2013 issue of Forbes India. To visit our Archives, click here.)