What the Volcker Rule really means for Wall Street trading

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At the heart of the Volcker Rule is the distinction between proprietary trading and trades aimed at market-making or hedging risk.

The success of the rules, the final draft of which were just released on Tuesday morning, will depend on how effectively regulators fenced off banned prop trading from permitted market making and hedging.

Five federal agencies approved the rule Tuesday—some 1,419 days after President Barack Obama announced that the rule would be included in the Dodd-Frank financial reforms.

The basic structure of the rule, outlined in 71 pages of regulation and more than 900 pages of commentary from regulators, reflects the simplicity of the idea and the complexity of its implementation.

The simple part: Banks are banned from engaging in prop trading. The complex part: That ban is subject to several exemptions intended to allow banks to facilitate customer trading and hedge their own risks.

Let's focus on two that are central to the business of Wall Street: market making and hedging. There are also very complex exemptions for "covered funds" (such as hedge funds, private equity funds and other investment funds) run by banks, but those will be covered separately.