Last week, the SEC joined regulators in a desire to revise the Volcker rule, what commercial banks have long dreamed of.
On Tuesday, 5 June, US Securities and Exchange Commission ranked fifth of five agencies, Following FED, By the Commission for the Regulation of the Activities of Commercial Banks, By the Federal Deposit Insurance Corporation and the Commission on Futures Trading, which agreed to a possible amendment to Volcker's rule from 2013 of the year, prohibiting commercial banks to carry out purchase and sale operations on deposits from the population and organizations to derive their own profit.
The rule became part of the Dodd-Frank Act 2010 years and was introduced due to the rhetoric of the former Fed Chairman Paul Volcker that, that increased speculative activity of commercial banks in high-risk financial instruments was a key catalyst for the financial crisis 2008 of the year.
In response to the SEC's possible consent to the revision, major news agencies, such as the New York Times and CNBC, called the changes "extensive", while U.S. Senator Elizabeth Warren reacted even more sharply. Addressing many of Goldman Sachs' former investment bankers, who were or are part of the Trump administration, including current Treasury Secretary Stephen Mnuchin, Warren called it "patronage" from "ex-pals" who are willing to break the rule., which protects taxpayers from a new crisis.
Large banks, but, not celebrating victory yet. Even if these changes actually make it easier for banks to apply this rule, eventually those, who is upstairs, will continue to be responsible for financial risks, that financial institutions may have. The most significant proposed changes do not eliminate the core regulatory component, preventing large banks from making profit from transactions, carried out with clients' money.
While small and medium banks (institutions with less than 10 billion in trading assets and liabilities) will be exempt from the Volcker rule, larger banks, who carry out the bulk of trading operations, will not.
Volcker's Rule 2.0
Changes to the rule are intended to make it easier for banks and regulators to comply with the law. Federal Reserve Chairman Jerome Powell said at a meeting of the Board of Governors 31 May next.
“The proposal will address some of the uncertainties and complexities, due to which it is currently difficult for companies to understand, how best to fulfill requirements, and it is difficult for regulators to track, that the rules are being followed. Our goal is to change overly complex and ineffective requirements to a more streamlined set of requirements. ".
A new version, which many call the "Volcker Rule 2.0", will be open for public comment for 60 days before, as five banking regulators, probably, will hold a second round of voting later this year. The amendment includes several major changes.
The first is to modify the categories., which defines, how tightly regulated the bank is. Any institution with assets and liabilities of $10 billion and more will be subject to maximum compliance requirements, whereas for banks with trading assets less than $10 billion, but higher $1 billion requirements will be relaxed. For institutions with less than 1 billion dollars in trade, then they will be exempt from the Volcker rule.
While, as critics say, that the exemption of any banks from trading rules is a huge negative factor, Fed officials note, that forty banks will still be fully regulated. These forty institutions include Bank of America (NYSE:BAC), Citigroup (NYSE:C), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS) и Wells Fargo (NYSE:WFC) - in total they provide 98% trading activity.
The second change eliminates the ban on transactions for less than 60 days, that even the Fed's regulators find too burdensome. This gives traders more freedom., when it comes to placing risky bets on behalf of the client. Other exceptions include hedging and underwriting conditions for IPOs.
The new rules instead allow banks to set their own risk and trading strategies with set parameters.. As long as banks stay at risk, banking experts suggest, that firms operate within the law.
Other Key Points Remain, including the responsibility of bank managers for any risky trade. This will include providing evidence that, that they have implemented appropriate controls, to prevent trading with clients' funds with the personal benefit of the bank.
Simplification without revising key provisions
The added clarity will make the rule "easier and cheaper to follow", - said the senior vice president of Moody’s Peter Nerby.
"Clarification of the Volcker Rule, which will facilitate compliance, in combination with other post-crisis regulations, which still require banks to hold more capital and liquidity to deal with risks (including Basel III requirements, Dodd-Frank stress tests and aggregate capital analysis from the Fed), is a positive development ".
Even Paul Walker, who suggested this rule, not against changes. “The important point is that, that simplification does not undermine the fundamental principle, - taxpayer-backed banking groups of any size do not engage in private trade contrary to the interests of the public and customers ", - he noted in a prepared statement.
While some have condemned the revision of the Volcker rule as a return to pre-crisis banking periods, remains to be seen, will the sector really become a "battlefield without rules", how it was before the crisis 2008 of the year. For many, new changes mean the opposite.: work will become easier, and regulators will have more time to make sure, that banks will not provoke a new financial crisis.
Volcker's rule is law, which prohibits investment banks from engaging in high-risk trading, which could hurt customer deposits, because banks play aggressively against them. The bill met with resistance from its inception to its last revision.. Volcker's rule is named after Paul Volcker, former Fed chairman, who proposed to completely prohibit banks from engaging in prop trading (Trading for profit).
There was still no complete ban. Banks can invest their money in hedge funds and private equity funds (but the share in the fund is limited 3%). The entry into force of such a law is due to the fact, that when banks are insured by the state against risk, they can take a high risk, trading speculative instruments, including against their clients. The law should separate market-making and speculation. Difficulties with the definitions of market making and speculation, therefore, the last edition of the law is delayed. Maybe, different market-making rules will be introduced for different financial instruments. Team, which is working on the law is led by Assistant Secretary of the Treasury Mary Miller and includes lawyers from the FED, SEC, FDIC, FTCC, OCC.
Below is the details from the futures commission document, concerning prohibitions and restrictions of prop-trading.
Article 619 the Dodd-Frank Act, inter alia, prohibits 2 type of banking.
- It prohibits government-insured institutions, banks and their subsidiaries to engage in short-term prop-trading in securities, derivatives or any other financial instrument with some exceptions.
- It forbids to own, be a shareholder or have a relationship with hedge funds, private equity funds with some exceptions.
Become 619 also prohibits banking or transactions, That:
- Conflict with the interests of customers
- Lead to high risks
- Pose a threat to the security of banking
- Threatens US financial stability
Before the introduction of the article 619 in force, the commission forms proposals to clarify the scope of the prohibited and exceptions. Futures Commission Offers Are Similar To FED Offers, OCC, FDIC, SEC.
Commission invites banks to implement an internal compliance program, the purpose of which is to control how closely they follow the Volcker Rule.
The bill obliges companies with a large number of trading operations in the financial markets to submit reports to the supervisory authority, to explain which of the operations comply with the new law, and which ones are not.
The law also excludes certain types of trading from the list of prohibited ones.:
- U.S. government bonds
- Enterprise Bonds, government-sponsored
- Bonds of municipal and regional governments
The following types of operations are permitted:
- Market Making
- Underwriting
- Hedging
Despite the general ban on investing in hedge funds and private equity funds, as well as the ownership of such funds, the law contains several exceptions:
- It is allowed to organize hedge funds and private equity funds, satisfying certain conditions
- Allowed to invest in hedge funds and private equity funds, but investments should not exceed a certain amount
- Allowed to make investments, which hedge risks
- Allowed to invest in some funds outside the USA
Volcker's Rule (English. The Volcker Rule) "It's a special part Dodd-Frank Act (English. The Dodd — Frank Act), proposed by an American economist Paul Volcker (English. Paul Volcker) and adopted by the US financial regulators. The law restricts the participation of US banks in transactions of purchase and sale of securities with their own funds, originally intended to cover obligations to its clients. The rule applies to banks, which attract deposits from the population and organizations. The change is primarily aimed at limiting the risky activities of systemically important banks, such as Goldman Sachs, Morgan Stanley And JPMorgan Chase.
Purpose of the law
The Volcker Rule was introduced to minimize the possibility of a repeat of the 2007-2008 financial collapse. According to many experts, one of the main reasons for it was the trading activities of the largest US banks, who have invested free capital reserves in mortgage-backed securities. The fall in the value of these assets led to the bankruptcy of many financial institutions., including Lehman Brothers, Bear Stearns и Merrill Lynch. New law applies to US financial institutions, whose solvency is guaranteed by the government or who have access to loans from the Federal Reserve System. Since the US government guarantees the safety of deposits, then the collapse of banks, holding deposits, leads to the need to use taxpayers' funds to restore the solvency of a bankrupt financial institution.
Paul Volcker proposed a very simple rule: banks can engage in risky financial transactions only and exclusively on the orders of their clients. Then the clients themselves take the risk.. And if the bank risks depositors' money in its own interests, for your own profit, then the situation arises, when the benefits turn out to be private, and if losses, happen a crisis, fall on the taxpayer, for the entire financial system.
— M. Bernstam, Research Fellow, Stanford University Hoover Center in the USA
The new law prescribes, that the only possible goal of banks' activity on the exchange can now only be the execution of exchange orders of its clients or mediation in the role of a guarantor of the liquidity of transactions (English. market-making). In this way, Banks are prohibited from using their own funds to trade securities and derivative financial instruments, such as futures and options, if this trade is carried out for your own profit. The rule also requires the bank to differentiate between trading operations., carried out on behalf of the client from those, which are committed on the bank's own resources.
The ban also covers the possibility of having more than 3 % share in hedge funds, as well as encouraging the purchase and sale of securities using bank funds through bonuses to employees. The limitation of banks' participation in hedge funds is due to the fact, that investing in hedge funds is considered a high-risk transaction, which can lead to serious losses.
Banks' reaction
Many systemically important US banks did not wait for the law to come into force in April 2014 years and curtailed their activities, related to securities trading. Bank of America, for which such trade was 14 % from all income, Calculated, that the closure of such operations led to a loss of 500 million dollars per quarter.
Goldman Sachs' trading income was 44 % for the third quarter 2013 of the year. According to the calculations of economists at FBR Capital Markets, Goldman Sachs Bank May Lose Due to Volcker Rule 25 % Annual Income. This dependence on buying and selling securities at its own expense forced Goldman Sachs to look for a way to avoid restrictions.. In particular, according to media reports, the bank is considering strategies for modifying the mechanisms for attracting and investing funds.
According to Standard & Poor’s, the eight leading financial institutions in the United States all together will receive less $10 billion in pre-tax profits per year after the full entry into force of the Volcker rule.
Two weeks after the adoption of this law, financial institutions affiliated with the American Bankers Association (American Bankers Association, ABA) filed a claim with the Court of Appeal to challenge the rule in court. Their statement notes, that if the provisions of the "Volcker rule" come into force, many banks will have to get rid of certain investments or write them off completely, fixing losses[8].
