Market makers boxed in by Volcker Rule
Consultation paper shows clear impacts for banks that have not been able to prove proprietary trading does not pose significant risks to large institutions. October 13, 2011 | Peter HoflichThe politicization of banking has found its bluntest instrument in the Dodd-Frank Act, crafted by politicians; but the Volcker Rule, proposed by economist and central banker Paul Volcker—and endorsed by president Barack Obama, of course—is just as blunt, aiming to remove proprietary trading from bank books. A draft proposal of the rule has just been released, with a pre-amble of 244 pages and 387 footnotes, commentary closing mid-January 2012 and implementation to begin July 21st, 2012. Complaints from non-bankers are that the rules will be watered-down by a still-powerful bank lobby (it would be interesting to establish how powerful the bank lobby really is), while the American Banking Association paints a picture of the report betraying regulator confusion about trading by the many questions it moots, as well as the estimates the report makes of the cost of compliance with the rule. Limiting banks’ ability to trade on their own books and invest in hedge funds and private equity will also limit their profits, which Glen Schorr, an analyst at Nomura Securities, estimates to be $2 billion per year. According to a July report from the General Accountability Office, proprietary trading generated $15.6bn of revenues for Wall Street's six biggest banks between June 2006 and December 2010… but also burdened them of losses of $15.8bn in the same period. But the new rules are not limited to proprietary trading desks, which most banks have already finished shutting down in anticipation of these rules (and, diplomatically, in response to the political climate of the day), but are set to impact market making activities that may share some of the attributes of proprietary trading as laid out in the new document. This includes how banks handle corporate bonds, credit default swaps, or “off the run” U.S. Treasuries, which are typically handled in ways that use ... Please login to read the complete article. If you already have an account, you can login now or subscribe/register.
Categories: Markets & Exchanges, Risk and RegulationMarkets Exchanges,Risk and Regulation, Markets & Exchanges,Risk and Regulation, Keywords:Volcker Rule, Market Risk, Paul Volcker, Barack Obama, Nomura Securities, Goldman Sachs, Morgan Stanley, Securities Volcker Rule, Market Risk, Paul Volcker, Barack Obama, Nomura Securities, Goldman Sachs, Morgan Stanley, Securities
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