UPDATE 3-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 on the rule. That is more time than expected, and could
result in more pressure to change elements of the rule.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.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 shave off billions of dollars
in annual revenues.”CUMBERSOME” RULEThe Volcker rule, named after former Federal Reserve
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.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.”The impact of the proposed rule will likely be discussed
with investors as banks host quarterly earnings calls starting
Thursday with JPMorgan.Barclays Capital analyst Jason Goldberg said in an Oct. 7
research report that executives would be well-served to show
investors how they will cope with the Volcker rule
restrictions, with bank stocks already beaten down this year.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.A note released on Monday by Bernstein Research said, based
on the draft, that the rule “will have a very negative impact
on the business models of fixed-income trading for Wall Street
brokers.” Bernstein estimates the impact could be 25 percent
less in revenues.To stop foreign-owned banks reaping a windfall or skirting
the rule, prohibited trades cannot be conducted if a party to
the transaction is a U.S. resident or a bank employee involved
in the transaction is physically located in the United States.Under the Dodd-Frank law, the Volcker rule goes into effect
on July 21, 2012.
