An Enforcement Mechanism for the Volcker Rule

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.