Two Big Rulings Could Alter Online Trading

In late 2020, the Federal Reserve picked up where the FDIC
left off and altered part of the Volker rule which was put in place during the
great financial crisis of 2008. The change in the ruling effects the way banks
must hold reserves if they want to invest their own money in the market. During
the financial crisis, banks lost billions of dollars on high leverage bets on
the US housing market. In the wake of the crisis, new laws were put in place
along with regulations that halted proprietary trading by banks. The consumer
led bailout of the banks led to tight regulation which was in place for more
than a decade and have finally seen some relief.

Tweak to a Ruling

In mid-2019 the Federal Deposit Insurance Corp (FDIC)
approve a revision
of the Volcker Rule. This change helps to clarify the way banks trade
securities using their own funds known as proprietary trading. Proprietary
trading differs from the trading that a bank does for its clients. Ahead of the
change made by the FDIC, the Officer of the Controller of the Currency also
approved the rule change.

In late October of 2019, the Federal Reserve announced that
the change in the rule would take effect on January 1, 2020. Their announcement
was a change to the Volcker rule which prohibits banking entities from engaging
in proprietary trading. Community banks will remain exempt from the Volcker
rule by statute.

The new rule was jointly developed by the Federal
Reserve Board, the Commodity Futures Trading Commission, the Federal
Deposit Insurance Corporation, the Office of the Comptroller of the Currency,
and the Securities and Exchange Commission.

How Will This Alter Proprietary Trading?

The upshot is that banks that trade actively will have more
restrictions but will be able to engage in trading of its own funds. This will
provide an additional revenue stream for banks that want to engage in this
practice. While regulators will have more to watch, their focus will be on the
leverage that banks are able to take. Authorities will want to make sure that a
regulated
online trading broker cannot bet the ranch as they did ahead of the 2008
financial crisis.

Crypto Trading Could Get a Boost in India

Banks might decide to increase their risk in
cryptocurrencies, and the expansion into Indian might support that investment.
Cryptocurrency trading could see a boost in liquidity following the Indian
Supreme Court ruling against a bank on trading placed by the Reserve
Bank of India. The Indian Supreme Court announced a ruling in favor of
crypto exchanges that banned domestic Indian financial institutions from
providing trading services related to crypto exchanges.

The initial ruling that took place during the Q2 of 2018
forced many crypto exchanges to either close or change their business
practices. The change by the Indian Supreme Court might increase liquidity and
change the view of many of the financial regulators that govern the
cryptocurrency markets.

Key Takeaway

The changes to the ruling in the United States and India
should increase liquidity as well as risk. Allowing the banks to engage in
proprietary trading will increase their leverage and could generate both more
rewards and risks as the markets become volatile. The ruling against the
Reserve Bank of India by the Supreme Court is a win for the cryptocurrency
market environment. Exchanges should reemerge and provide access to a growing
market.

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