Yekooche: Volcker Bank-Risk Rule Set to Start With Little Fanfare (Starting Wednesday)
July 21, 2015, 06:32:00 PM EDT
Starting Wednesday, Wall Street banks have to comply with perhaps the most significant new restriction on their activities since after the Great Depression.
It was greeted with a shrug.
The "Volcker rule," the regulation banning taxpayer-insured banks from making bets with their own money, arrived with little fanfare, showing how much Wall Street has changed since Congress ordered regulators to write the rule as part of the Dodd-Frank financial law five years ago.
The big banks that fought for years to change the rule have for the most part already fallen in line.
Firms such as Citigroup Inc., Bank of America Corp., Morgan Stanley and Goldman Sachs Group Inc. have shed their proprietary-trading desks, pulled money from certain investment funds and ceased other activities that would run afoul of the rule's restrictions.
J.P. Morgan Chase & Co.'s chief financial officer, Marianne Lake, said last week the bank has made sufficient changes that she doesn't expect the rule "to have a direct impact on near-term trading."
Much remains uncertain about how the rule will work. Regulators have checked on banks' preparations but won't start conducting the first audits for compliance until later this summer, officials said.
"No one has experienced what life [under the rule] is going to be like, because they haven't had to comply and they haven't been examined yet," said Robert Maxant, a partner at consultancy Deloitte & Touche LLP.
Yet many of the activities prohibited by the Volcker rule, named for its originator, former Federal Reserve Chairman Paul Volcker, already have moved away from banks. In some cases, traders have left banks altogether.
A total of 1,428 new hedge funds were launched from 2011 to 2014, according to Preqin, a firm that tracks the industry. As many as 214 of those were created by employees who left banks, the company estimates.
Hedge fund PDT Partners is a trading unit led by the mathematical specialist Peter Muller that split off from Morgan Stanley in 2012. PDT has $3 billion in capital to invest and 150 employees, double its original staff size, a person familiar with the firm said.
Meanwhile, the five largest U.S. investment banks cut staff on bond sales and trading desks by 18% from 2011 to 2014, according to Coalition Ltd., a research firm.
Other bankers are learning to live with the restrictions, albeit with some consternation. At a Washington event earlier this month, Roger Blissett, head of U.S. strategy at Royal Bank of Canada's capital-markets division, was asked what he would change about the Dodd-Frank law. "That's low-hanging fruit," he said. "The Volcker rule."
One senior Wall Street trader estimated he spends around twice as much time on compliance-related matters as he did before Dodd-Frank. The law "has been a bull market for lawyers and compliance," he said.
Regulators tried to ease the transition, giving banks more than 18 months to conform trading operations and even longer, until 2018, to sell certain investment funds. The rule "is big and new and will cause changes in behavior," said Karen Solomon, deputy chief counsel at the Office of the Comptroller of the Currency, one of five U.S. agencies enforcing the rule.
"The likelihood that you can turn on a dime, particularly for the large institution, is pretty small. So [regulators] don't want to set up expectations that are unreasonable."
The government has its own hurdles. Regulators have been training examiners to become experts in the rule's minutiae, such as how banks calculate limits they place on trading desks.
Banks also are reporting detailed data on trading activity to regulators daily, meaning agencies had to train or hire analysts who can digest the data and evaluate, in Ms. Solomon's words, "whether the bank has done what it said it would do."
One question is whether banks are setting proper limits to ensure their trading operations are meeting customers' demands, rather than using the guise of market making and hedging, which are permitted under the rule, to add to banks' own bottom line.
Lawyers and consultants advising banks said they are unsure about certain details, such as how regulators will treat certain types of investment funds banks set up for foreign clients.
"There's still a lot of unanswered questions that won't be answered until we have some precedent and established practices," said Joseph Vitale, a partner at Schulte Roth & Zabel LLP.
Regulators have been meeting weekly, sometimes more often, since the rule was finished in December 2013 to respond to banks' questions about implementing it.
The agencies have published 16 answers. Regulatory officials said they have covered the major issues and are now focused on ensuring the agencies enforce the rule consistently.