US financial regulators on Tuesday issued proposed rules governing banks’ trading activities, opening the door to a last-ditch lobbying effort by Wall Street companies hoping to soften the blow of new restrictions on short-term trading and other risky bets for their own account.
The so-called “Volcker rule,” aimed at substantially limiting proprietary trading and investments in hedge funds and private equity shops by banks that benefit from federal deposit insurance, will be open for public comment until mid-January. It is expected to be effective by mid-July.
For about 90 days, banks such as Goldman Sachs, Morgan Stanley and JPMorgan Chase will be likely to engage in a furious attempt to relax the proposed rules before they become final, hoping to broaden the definitions of terms such as “market making”, “hedging” and others that will affect billions of dollars in annual revenues.
“Our most significant concern is potential narrowness of the definition of the permitted activity of market making,” said Rob Toomey, an executive at the Securities Industry Financial Markets Association.
Fixed-income desks may experience a 25 per cent decline in revenue and a 33 per cent cut in pre-tax margin, estimated Brad Hintz of Sanford C. Bernstein in a note to clients this week. Mr Hintz reckoned that the reductions in revenue will largely be due to the expected ban on amassing positions simply to benefit from expected price appreciation.
Already, banks have shed traders and restructured their operations in anticipation of the long-awaited rules, which were called for as part of last year’s Dodd-Frank overhaul of financial regulation.
“The banks’ hysterical complaints about the Volcker rule are really more often about their bonuses getting smaller than anything else,” said Dennis Kelleher, head of Better Markets, a public interest group.
While the final rule will probably closely resemble Tuesday’s proposal – released by the Federal Reserve, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and the Securities and Exchange Commission – regulators included nearly 400 questions in the 298-page text, suggesting disagreement among the agencies, noted law firm Davis Polk & Wardwell.
Industry’s answers to those questions could make the restrictions more or less onerous depending on how the regulators settle them. Compared with a leaked September 30 draft, government officials have come up with even more queries, which on Tuesday saw lawyers, lobbyists and bankers frantically poring over the pages in an attempt to ascertain regulators’ future direction.
“It’s clear from the proposal that many important details remain unresolved,” said Frank Keating, head of the American Bankers Association. “More questions are asked than answered … [and] the exceedingly high number of unanswered questions betrays the frustration regulators are having as they come to grips with the complexity of the concepts behind the Volcker rule when applied to reality.”
One of the more contentious proposals involves whether bank chief executives should be required to personally attest to the effectiveness of their internal compliance regimes. In a sign that regulators are unsure how to proceed, they posed it as a question, as opposed to a requirement.