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| U.S. set to adopt Volcker rule to curb bank trading gambles |
| Washington, 11.12.2013 |
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| Wall Street banks will need to prove to regulators that certain trades are done on behalf of clients and are not veiled speculative bets as part of the final Volcker rule that U.S. officials plan to adopt on Tuesday, a senior regulator said.
Banks must show that risk hedging “activity demonstrably reduces or otherwise significantly mitigates the specific, identifiable risk(s) being hedged,” said Bart Chilton, a member of the Commodity Futures Trading Commission.
The Volcker rule, named after former Federal Reserve Chairman Paul Volcker – who championed the reform – prohibits banks from betting on financial markets with their own money, a practice known as proprietary trading.
The measure is seen as a crucial part of the effort to reform Wall Street and prevent another costly taxpayer bailout.
But regulators have struggled for years to agree on a rule that, while prohibiting such risky activity, would still allow banks to take on risk on behalf of clients as market-makers, to hedge risk, or when underwriting securities.
Large investment banks have such sprawling legal structures engaging in different financial activities that the rule needs to be adopted by a patchwork of U.S. agencies: three bank watchdogs and two market regulators.
The five regulatory agencies that need to adopt the rule are expecting to largely proceed as planned on Tuesday despite the threat of snowstorms on the U.S. East Coast, which caused federal government offices to shut down.
The CFTC cancelled a public vote on the rule, but said it would adopt it behind closed doors.
In an emailed statement, Chilton also said the Volcker rule would be delayed by a year until July 2015, a widely expected move after regulators repeatedly missed deadlines for the rule, which has now mushroomed into almost 900 pages.
Risk hedges would also need to be recalibrated continuously, Chilton said, a provision designed to prevent a repeat of such trading debacles as JPMorgan’s $6 billion trading loss in 2012, dubbed the “London Whale” because of the huge positions the bank took in credit markets.
Chilton also said that market-making – or facilitating client trades – would still be allowed, but only for the banks’ customers and not for any speculative reason.
He also said that the rule would clamp down on big bonuses paid to traders for taking undue risk. The rule would say that payouts should not be designed to reward prohibited trading, and that regulators would test this in practice.
Further, the rule will bar banks from owning more than 3 percent of hedge funds or private equity funds.
HOTLY DEBATED
Banks worry the rule will erode profits, and make it harder to engage in businesses that are exempt under the law such as hedging against market risks, facilitating client trading – or market-making – and security underwriting.
“The challenge is to prevent the impermissible activities, while promoting the underwriting, the market making, everything that everyone regards as important to financial markets,” said Robert Maxant, a partner at Deloitte & Touche.
The rule is one of the most hotly debated parts of the 2010 Dodd-Frank Wall Street reform act, aimed at preventing the taxpayer bailouts of large investment banks that happened during the 2007-2009 credit collapse.
The rule could cost banks billions in revenues, and lawyers will be poring over the details of the text to find any weaknesses that would enable them to sue regulators and get the courts to strike down the rule.
In market making, for instance, they have inventories of shares or other securities in order to quickly satisfy client orders, but banks fear new limits on how long they can hold these may make it harder to stock up.
Banks are also worried regulators will clip their wings when it comes to entering risky positions to mitigate financial risk arising in their business, so-called risk hedging.
This can still be done when there is a direct connection to the underlying risk, but banks are used to doing this in multiple and often loosely defined ways – so-called portfolio hedging – and fear this will no longer be allowed.
While the narrowing of the Volcker rule trading exemptions is expected to bite, banks have already wound down their proprietary trading since the crisis.
Morgan Stanley in January 2011 said it would spin off its proprietary trading unit Process Driven Trading, which had 60 employees around the world.
Goldman Sachs Group Inc said it had shut down two proprietary trading desks, one known as GSPS and another that did global macro trading, by February 2011.
And Citigroup said it had shuttered a money-losing proprietary group that had traded stocks.
(Additional reporting by David Henry in New York; Editing by Karey Van Hall, Tim Dobbyn and Krista Hughes)
Reuters
By Douwe Miedema
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