Volcker Rule

The Volcker Rule As Price-Setting

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Today in Volcker Rule coverage: now you can read the whole thing. Get on that. Many people find it confusing.

Much of the meat of the rule is a bunch of qualitative and quantitative information that banks must collect and hand over to regulators, each piece of which tends to indicate whether a trading desk is more prop-y or flow-y. So if 90% of your trades face customers, that looks like market-making; if 90% of your trades face other dealers, that looks like prop. But there are no bright lines on what is and is not allowed – you just report statistics and hope that the regulators are okay with it.

One important complex of tests involves the distinction between revenues that come from “portfolio profit and loss,” i.e. securities going up or down in value, and “fee” and “spread” income. Fees and spreads are okay. Portfolio is not okay. Or okay only in moderation. Unspecified amounts of moderation.

I continue to have an unhealthy fascination with exactly how the regulators draw those lines. Continue reading »

Volcker Rule Too Long, Say Banks, Guy Who Stayed Up All Night Summarizing It

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Apparently lawyers at Davis Polk pulled an all-nighter reading and summarizing the Volcker Rule draft that was published yesterday. And they’re not the only people annoyed by the regulators’ refusal to get to the point:

As people drilled down into the details of the draft, many were concerned that it appeared to require very granular policing of individual traders at banks as part of the stringent, multilevel compliance regime described in the document.

“They have chosen the most burdensome way of doing it,” said Tim Ryan, chief executive of the Securities Industry and Financial Markets Association, a Wall Street trade association, in an interview.

While last night’s rule-summarizing festivities undoubtedly distracted some young lawyers from the Yankees game / general yearning for death, there may be other more consequential distractions. Continue reading »

Volcker Rule To End With “P.S. Please Don’t Blow Yourself Up”

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The draft Volcker Rule proposal memo that American Banker got its hands on and published today is a pretty impressive piece of work. As a reminder, people thought that a reason 2008 was so unpleasant was that banks engaged in too much risky proprietary trading. So the testudinal gentleman to the right suggested, and Congress passed, a rule to rein in risk by banning FDIC-insured banks from proprietary trading.

But that’s hard to do, since the basic securities functions of a bank – making markets for customers, and hedging risks in its market-making book or in its regular old deposits-and-loans banking activities – require trading for its own account. So the agencies implementing the rule came up with a rule proposal that sets out, in 200 pages with lots of Q&A in case you have better ideas, to figure out how to distinguish bad “proprietary trading” from good “permitted trading.”

On a first read, er, skim, it’s really smart. It looks at a bunch of different metrics to distinguish market making from prop trading, like:
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The Fed Will Take 174 Pages To Tell You What “Prop” Trading Is

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Paul Volcker has made himself surprisingly relevant recently as an enemy of both (1) inflation/whatever Paul Krugman might be up to and (2) proprietary trading/whatever Kweku Adoboli might be up to. As for the second category, on Friday I guessed that I was not alone in being confused by the Volcker rule, which would ban “proprietary” trading by big banks while still allowing not-”proprietary” (“flow”? “customer facilitation”? “market making”?) trading. So I was pleased to learn today that the regulators designing the Volcker rule seem to be equally confused:
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  • 16 Sep 2011 at 2:59 PM
  • Banks

Let’s Just Go Ahead And Assume That Greek Letters = Evil

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The fact that one lovable rogue in London misplaced UBS’s bonus pool for the year has people talking again about the Volcker rule, which would ban proprietary trading at banks. I still don’t really understand that, and I’m not alone. Here is a thing about the Volcker rule and “Delta desks” (what?):

Yet the definition of what constitutes proprietary trading can be fuzzy. Many on Wall Street consider proprietary trading, or prop trading, to involve only trades made by dedicated traders who are using the bank’s capital and do not have access to client information. The trading done on Delta desks, they contend, is done on behalf of clients.

Those boundaries, however, can blur. A bank may buy a derivative or security from a client in order to make a market, then decide it is worth hanging onto, turning it into a proprietary bet.

The Volcker rule of the Dodd-Frank act is named after Paul A. Volcker, the former Federal Reserve chairman who proposed it. It is intended to prevent American banks from taking on too much risk. The fine print, however, has yet to be worked out, and regulators are debating just how comprehensive to make the definition of proprietary.

This is sort of correct but nicely embodies the conceptual confusion that I suspect lies behind the Volcker rule. Let’s spend four hours talking about it, shall we?
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  • 04 May 2011 at 2:02 PM

Goldman Reps So ‘Freaked’ Over Volcker Rule They’re Forgetting Invisibility Cloaks At Home

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“They’re totally freaked out about Volcker,” said a Goldman lobbyist who declined to speak on the record for fear of losing the contract. “People are working on that a lot, with agency staff, with lawmakers, you name it.”…”Before the crisis, Goldman was basically non-existent in Washington,” said a former Congressional staffer who now works as a policy analyst at a Wall Street bank. “Post-crisis, Goldman is everywhere.” [Reuters]

  • 21 Mar 2011 at 3:18 PM

Goldman Sachs Doesn’t See Anything In The Volcker Rule That Prevents The Bank From Making Principal Investments With Its Own Money

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The rest of the market thought otherwise but Goldman has another interpretation. Continue reading »