important because of the key role that market makers play in facilitating liquid markets in securities, derivatives, and other assets. at the ends of the spectrum, the distinction between pure proprietary trading and market making is straightforward. at one end, for instance, trading activities that are organized within a discrete business unit, and that are conducted solely for the purpose of executing trading strategies that are expected to produce short - term profits without any connection to customer facilitation or intermediation, are not difficult to identify. these “ internal hedge fund ” operations existed at many bank affiliates for quite some time before the volcker rule was enacted. firms that either are or were engaged in these non - client - oriented, purely proprietary trading businesses can readily identify and wind down these activities. indeed, some have already done so for a number of reasons, including anticipatory compliance with the volcker rule. at the other end of the spectrum, a textbook example would be a pure agency - based market maker that acts as an intermediary, instantaneously matching a large pool of buyers and sellers of an underlying asset without ever having to take a position in the asset itself. profits are earned either solely by charging buyers a higher price than is paid to sellers of the asset, or in some cases by charging a commission. buyers and sellers willingly pay this “ spread ” fee or commission because the market maker is able to more quickly and efficiently match buyers with sellers than if they were left to find each other on their own. i refer to this as a textbook example because instances of such riskless market making in our trading markets are rare. in actual markets, buyers and sellers arrive at different times, in staggered numbers and often have demands for similar but not identical assets. market makers hold inventory and manage exposures to the assets in which they make markets to ensure that they can continuously serve the needs of their customers. accordingly, in the broad middle that exists between these two clear examples, the distinction between prohibited proprietary trading and permissible market making can be difficult to draw, because these activities share several important characteristics. in both activities, the banking entity generally acts as principal in trading the underlying position, holds that position for only a relatively short period of time, and enjoys profits ( and suffers losses ) from any price variation in the position over the period the position is held. thus, the purchase or sale of a specific block of securities is not obviously permissible or forbidden bis central bankers ’ speeches based solely on the features

apply, in general, to insured depository institutions ; companies that control an insured depository institution ; and foreign banks with a branch, agency, or subsidiary bank in the united states, as well as to an affiliate of one of these entities. under the statute, proprietary trading is defined as taking a position as principal in any security, derivative, option, or contract for sale of a commodity for future delivery for the purpose of selling that position in the near term or otherwise with the intent to resell to profit from short - term price movements. the statute applies only to positions taken by a banking entity as principal for the purpose of making short - term profits ; it does not apply to positions taken for long - term or investment purposes. moreover, the statute contains a number of exemptions, including for underwriting, market making - related activities, and risk - mitigating hedging activities. the implementing rule proposed by the agencies incorporates all of these statutory definitions and exemptions. the statute also authorizes the relevant regulatory bis central bankers ’ speeches agencies to permit additional activities if they would promote and protect safety and soundness of the banking entity and the financial stability of the united states. the second major prohibition in the statute forbids any banking entity from acquiring or retaining an ownership interest in, or having certain relationships with, a covered fund. again, the statute contains a number of exceptions, including for organizing and offering a covered fund, making limited investments in a covered fund, sponsoring and investing in loan securitizations, and risk - mitigating hedging activities. the statutory definition of a fund covered under the volcker rule is quite broad. the statute also quite broadly prohibits any banking entity that serves as the investment manager, adviser, or sponsor to a covered fund, or that organizes and offers a covered fund, from engaging in certain transactions with the fund, including lending to, or purchasing assets from, the fund. the statute also prohibits otherwise permissible trading and investment activities when there is a material conflict of interest with customers, clients, or counterparties, or when the activity results in an exposure to high - risk assets or trading strategies. these are significant provisions and the agencies have specifically solicited comment on disclosure requirements and other approaches to implementing these parts of the statute. differentiating proprietary trading from market making one of the more difficult tasks in implementing the statutory prohibitions is distinguishing between prohibited proprietary trading activities and permissible market - making activities. this distinction is