October 9th, 2011
Econintersect: The Wall Street Journal has reported that the 205 page draft of the latest proposed version of the Volcker Rule, which will limit the proprietary trading of banks, has been leaked from a government commission which has been drafting it. (Paul Volcker photo by AP.) This rule is one of the most contested by banks of all the regulations that have been authorized by the Dodd-Frank Act for overhaul of the financial system. The FDIC is scheduled to release the proposed draft regulation for public comment on Tuesday (October 11). The leak gives banks a head start on their efforts to attack any meaningful regulation of their risky trading activities. Follow up:
Follow up:From the Wall Street Journal:
The rule is named for former Fed Chairman Paul Volcker, who argued that trading by banks for their own profit, an activity known as proprietary trading, encouraged financial institutions to take excessive risks.
A spokesman for Mr. Volcker declined to comment on the draft and said he will only comment when the official version has been released.
For years, banks racked up profit from proprietary-trading desks that acted in many ways like hedge funds. They made big bets on everything from stocks to commodities, often using borrowed money that amplified gains but also increased risk.
According to a July report by the U.S. Government Accountability Office, proprietary trading accounted for $15.6 billion in revenue at the six largest bank holding companies for the 13 quarters from June 2006 to December 2010, amounting to a fraction of combined revenue.
During five quarters spanning the financial crisis, however, proprietary trading accounted for $15.8 billion in losses, wiping out the gains of the previous 4½ years.
Summaries have been posted by AdvisorOne and by Wall Street and Technology. From Wall Street and Technology:
The Volcker Rule proposal defines proprietary trading, offer limited circumstances under which a bank could invest in a hedge or private-equity fund, and require banks to install internal controls to ensure compliance with the rule. The Federal Deposit Insurance Corp. is set to release proposal on Oct. 11.
"Officials inside the government agencies that drafted the document fumed about the leak. They worried that it could lead to pressure to change the language ahead of the FDIC's meeting next week. Alternatively, the regulators could feel pressure to refrain from changes that could make it appear that they had given in to industry pressure.
The leak left regulators fuming and opened a new front in Wall Street's battle to soften the blow of the proposed rule. The draft gave banking industry lobbyists several days to discuss it before Tuesday, when the Federal Deposit Insurance Corp. is scheduled to consider issuing a version for public comment."
Many of those who have seen the draft are reportedly concerned that it demands extremely granular policing of traders, as part of the strict compliance program described in the leaked 205-page draft.
From the WSJ:
"Among the many prescriptions for these compliance regimes: Banks with trading assets of $1 billion or more in trading assets and liabilities would have to measure their trading with a variety of quantitative formulas, and periodically report these metrics to regulators. The specific reporting requirements would vary by the scale and scope of a banks' trading activity, according to the document." [...]
Critics say that by allowing banks to hedge risks on a portfolio-wide basis, the rule could open the door to more aggressive trading tactics. A bank could claim that its portfolio is at risk from an economic turn, such as a recession, and take positions that protect it from such an event, they say."