UPDATE 4-US reveals Volcker rule’s murky ban on Wall St bets
* Industry, consumer groups complain about complexity* Proposal acknowledges fine line on proprietary tradingBy Dave Clarke and Alexandra AlperWASHINGTON, Oct 11 (Reuters) - U.S. regulators unveiled a
ban on Wall Street banks’ trading for their own profit, but the
long-awaited Volcker rule proposal was so complex that banks
blasted it as unworkable and consumer groups dismissed it as
too weak.The rule, required by last year’s Dodd-Frank financial
oversight law, is aimed at avoiding a repeat of the 2007-2009
financial crisis by curbing excessive risk-taking.It has been difficult for the government to craft a rule
that reins in Wall Street while protecting the trades that big
banks execute on behalf of clients.Regulators are giving the public until Jan. 13, 2012, to
comment. That is more time than expected, and could result in
more pressure to change elements of the rule.”The proposal is written so that everybody has to lobby on
it — it is not straight forward,” MF Global policy analyst
Jaret Seiberg said.The proposal includes more than 350 questions that
regulators want interested parties to weigh in on, particularly
on how the government should write exemptions that allow banks
to still make markets for their customers and hedge risk in
their portfolios.”Only in today’s regulatory climate could such a simple
idea become so complex, generating a rule whose preamble alone
is 215 pages, with 381 footnotes to boot,” American Bankers
Association Chief Executive Frank Keating said in a statement.”How can banks comply with a rule that complicated, and how
can regulators effectively administer it in a way that doesn’t
make it harder for banks to serve their customers and further
weaken the broader economy?” he asked.On the other side of the issue, the consumer coalition
Americans for Financial Reform said regulators warped a simple
ban into a weak crackdown that is weighted toward preserving
banks’ flexibility.”Unfortunately, the proposal issued today falls well short
of what the Volcker Rule could and should achieve,” AFR said.The Federal Reserve and other bank regulators acknowledged
in the proposal that it will be challenging for the government
to identify “proprietary trading” that will be banned under the
rule due, by law, to go into effect on July 21, 2012.The proposal said drawing the line between prohibited and
permitted trading “often involves subtle distinctions that are
difficult both to describe comprehensively within regulation
and to evaluate in practice.”The rule is expected to have the most impact on large banks
such as Goldman Sachs , Morgan Stanley and
JPMorgan Chase , and could trim billions of dollars in
annual revenues.In a separate meeting of U.S. regulators on Tuesday, the
Financial Stability Oversight Council proposed using a $50
billion asset test as it reviews which non-bank financial firms
are large enough to warrant additional oversight.LONG RULE, COMPLEX ISSUESThe Volcker rule, named for former Fed Chairman Paul
Volcker who championed the measure, aims to prevent banks from
making risky trades by prohibiting short-term trading for their
own profit in securities, derivatives and other financial
products.It will also prohibit banks from investing in, or
sponsoring, hedge funds or private equity funds.The idea behind the rule is to prevent banks that enjoy
some sort of government safety net, such as deposit insurance
on customer accounts or access to Fed money, from using that
backstop to make money for themselves.Industry groups have argued for broad exemptions for trades
done to make markets for customers, and for trades used to
hedge against certain risks in the banks’ portfolios.The proposal includes both types of exemptions, but it is
difficult to determine how they will work in practice.”There are enough vague descriptions that you can be bearish
or bullish” about the impact on banks, said bank analyst David
Konrad of Keefe, Bruyette & Woods.At a minimum, the proposed rule would increase costs and
discourage firms from making markets in securities, said Dwight
Smith, a partner at Morrison & Foerster LLP, a law firm which
works with investment banks.”It calls for some very precise management of that business
and some very detailed record-keeping,” said Smith. “It becomes
very cumbersome.”EARNINGS IMPACTThe impact of the proposed rule will likely be discussed
with investors as banks host quarterly earnings calls starting
Thursday with JPMorgan.Some analysts have said the proposed rule could severely
hit fixed-income trading for Wall Street brokers, resulting in
25 percent less in revenues.Regulators on Tuesday acknowledged that controversy has
surrounded the Volcker rule from the outset.”The proposed rule has been noted as long, the issues are
complex, so I think we made the right decision in allowing the
full 90 days for comment,” said John Walsh, acting director of
the Office of the Comptroller of the Currency, which oversees
the nation’s largest banks.Walsh spoke at a meeting of the Federal Deposit Insurance
Corp board which agreed on Tuesday to put the proposal out for
comment. The Securities and Exchange Commission is due to
discuss the Volcker rule proposal at a meeting on Wednesday.
The Commodity Futures Trading Commission has yet to announce
how it will proceed.The proposal released by bank regulators on Tuesday is
largely similar to a draft of the rule leaked last week that
received a mixed reaction from industry groups.The Securities Industry and Financial Markets Association,
for instance, raised concerns about whether the exemption for
market-making trades is too narrow.Randy Snook, a SIFMA executive vice president, said on
Tuesday that financial firms need to be able to provide capital
and liquidity to markets. “There is a real legitimate concern
here that everything gets cast as prop trading. This isn’t just
about speculative activity, in our mind,” Snook said.Charles Whitehead, a professor at Cornell Law School and a
former investment bank lawyer, said the draft offers a
potentially unworkable maze of tests to distinguish proprietary
trading from market-making transactions.”We may create a real spider web of regulations that will be
costly for the firms and almost impossible for the regulators
to monitor,” Whitehead said.
