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Tags: volcker | rule | banks | regulation

Volcker Rule Will Be Delayed Until 2015, CFTC's Chilton Predicts

Tuesday, 10 December 2013 07:51 AM EST

The United States will not implement the so-called Volcker rule before 2015, a top regulator said on Tuesday, a widely expected move after regulators struggled for years to agree on the ban on proprietary trading.

Bart Chilton, a member of the Commodity Futures Trading Commission, said he expected the agency to adopt the rule behind closed doors on Tuesday despite a government shutdown in Washington because of the threat of a snowstorm.

The Commodity Futures Trading Commission, one of five regulators due to adopt the rule, which would ban banks from gambling with their own money.

It was also unclear whether two other agencies — the U.S. Federal Reserve and the Federal Deposit Insurance Corp. — would hold their scheduled votes on Tuesday.

Chilton also said the final rule, details of which will be released later on Tuesday, would still allow proprietary hedging by banks, but would require a close correlation between a hedge and the underlying risk.

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 rule, which has now mushroomed into 800 pages, will also bar them from owning more than 3 percent of hedge funds or private equity funds.

The final version of the crackdown is expected to be tougher than when it was proposed two years ago, after JPMorgan Chase & Co.'s $6 billion loss in 2012 — nicknamed the London Whale after the bank's huge positions — highlighted the perils of speculative trading.

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 the largest investment 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.

Banks will particularly focus on how strict the requirements are for them to prove that any risky positions they take on are on behalf of clients.

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.

JPMorgan initially explained its London Whale trades as portfolio hedges and regulators have since made it clear the final rule will render such trades impossible.

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.

© 2023 Thomson/Reuters. All rights reserved.

The United States will not implement the so-called Volcker rule before 2015, a top regulator said on Tuesday, a widely expected move after regulators struggled for years to agree on the ban on proprietary trading.
Tuesday, 10 December 2013 07:51 AM
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