A Chinese wall is a system (that may consist of rules, physical separation, software, etc.) designed to prevent confidential information leaking from one department of a financial institution to another.
Chinese walls are necessary because financial institutions such as large investment banks have departments that serve clients with conflicting interests, and even clients whose interests conflict with those of other departments of the same bank.
For example, the corporate finance department of an investment bank may know of takeover bids that are being considered, but for the bank's trading or fund management operations to act on this information would constitute insider trading. This makes it necessary that such information is restricted to the departments actually involved, so that other departments can function normally.
The effectiveness of Chinese walls has often been questioned, particularly where where the incentives to cooperate are clearly very strong.