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Why Wall Street traders aren't rejoicing over changes to Volcker rule

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Former Fed chairman Paul Volcker had pushed for the curbs on trading soon after the 2008 financial crisis.

New York

WALL Street has long derided the Volcker Rule, complaining it's so complex that traders would need to be psychoanalysed to comply.

Now, banks are poised for a break, as authorities overhaul the fine print. Still it's not exactly what traders wanted - a return to the golden era before 2008, when they could make big, bonus-boosting bets with their companies' money.

After the Federal Reserve and other agencies proposed changes Wednesday to the Volcker Rule, analysts and former regulators rolled out their predictions on the impact.

It will probably make compliance cheaper and easier for many firms, especially the smallest. But the revised regime won't significantly ease a ban on risky trading or expand the activities allowed - at least for now. Regulators hinted that more changes may yet come.

"It's a recognition of how complicated and burdensome complying with the rule has been," said Mike Alix, a former Fed official who's now a partner at PricewaterhouseCoopers. The idea is to overhaul but not undermine the measure, he said. It's "more of an attempt at clarification rather than relaxation".

The biggest win for Wall Street was eliminating part of the rule long ridiculed by bank leaders including JPMorgan Chase chief executive Jamie Dimon. In 2012, he singled out what's known as the intent test - a requirement that trades be done to help clients, not to bet the bank's money on market moves.

Every tradr would need to be flanked by a lawyer and a psychologist to comply, Mr Dimon quipped. The new proposal would instead start by focusing on whether the bank has labelled the security a trading asset on its balance sheet.

Firms have long had to make such determinations for their books kept under US Generally Accepted Accounting Principles. Yet that replacement would likely expand the rule's reach to more securities.

So to limit the impact, the new test would only apply to trading desks that accumulate more than US$25 million in losses and profits in a three-month period.

Big banks will still find themselves crossing that threshold. Goldman Sachs, for example, made US$200 million in one day in February when volatility in markets spiked, CNBC reported last week.

The main benefit is that it's based on accounting standards banks are already using anyway, said Jai Massari, a partner at law firm Davis Polk & Wardwell LLP.

The proposal also seeks to address another complaint by banks: The Volcker Rule originally prescribed complex calculations for demonstrating that client demand is the driving force for a firm's inventory.

Banks argued that the maths relied too much on historical data and didn't allow for changes in market conditions. Under the draft unveiled on Wednesday, they must still adopt a methodology that can be presented to regulators, but it will probably give firms more flexibility to set desks' risk limits.

Still, that probably won't enable traders to make bold bets, because sudden tweaks to limits will draw scrutiny.

Letting a bank design its own methodology isn't necessarily that big of a break, said Michael Bailey, a principal at Deloitte's advisory arm. "You could come up with new ways of setting limits, but still need to have a policy."

Smaller firms are emerging, once again, as the biggest winners.

Last week, they got relief from Congress in a Bill easing rules for oversight including stress tests. Now, the Volcker proposal would let them off the hook on most of its complicated tests and reporting requirements.

Paul Volcker, the former Fed chairman who pushed for the restrictions on trading soon after the financial crisis, welcomed the efforts to simplify compliance without undermining core principles. BLOOMBERG

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