The Volcker Rule bans proprietary trading, but repo trading and securities lending look safe. There is often a lot of prop trading in repo – maturity transformation by playing the yield curve is a classic. But repo is not seen as speculating in anticipated price movements, hence it is not a trading activity banned by the Volcker Rule. BUT, many repo desks use their expertise in short term interest rates to speculate in cash, futures and derivatives markets. This activity often is highly profitable given the market knowledge repo traders have on funding. Some repo desks can run speculative short term rates positions that exceed those in cash trading or derivatives.
The Volcker Rule does exempt (from the ban) trading in governments, agencies, munis, and other certain government sponsored entities (see Rule § __.6(a)), but this may not be broad enough and could crimp the more speculative activity on repo desks.
The draft of the Volcker Rule, dated September 30, 2011 states “…The proposed definition also clarifies that no account will be a trading account to the extent that it is used to acquire or take certain positions under repurchase or reverse repurchase arrangements or securities lending transactions, positions for bona fide liquidity management purposes, or certain positions held by derivatives clearing organizations or clearing agencies…This clarifying exclusion is proposed because positions held under a repurchase or reverse repurchase agreement operate in economic substance as a secured loan, and are not based on expected or anticipated movements in asset prices…”. Securities lending also is exempted for similar reasons (See Rule__.3(b)(2)(iii)(A) and Rule __.3(b)(2)(iii)(B).
A copy of the leaked rule can be found at http://online.wsj.com/public/resources/documents/093011volcker_draft.pdf