Wall Street relaxes due to exclusion of market-making in newly-signed Volcker Rule

December 11
4:56 AM 2013

In a report by Bloomberg, Wall Street banks began to breathe easily as regulators spared market-making operations after crafting the Volcker Rule. The speculative trading ban had threatened major banks in the US like Goldman Sachs Group Inc as the proprietary trading ban was widely known to affect the over $40 billion in annual revenues generated by its market-making desks.

Shares of Goldman climbed to a record level since the last three months after five US government agencies including the US Federal Reserve approved the rule yesterday. The final wording of the Volcker Rule broadened exemptions for market-making desks of US banks.

On the other hand, the rule making was said to have marked three years of uncertainty for US banks regarding the scope of the rule. The regulation and preamble documents spanning over 900 pages had left watchdogs to interpret the wording and decide whether financial institutions and firms will be permitted to conduct market-making and hedging activities as opposed to conducting proprietary trading.

San Francisco-based Wells Fargo & Co former chairman and chief executive officer Richard Kovacevich said, "It appears to be reasonable and one that the industry can live with. The devil is always in the details. The question is how do the regulators implement the rule?"

The Volcker rule, said Bloomberg, will be implemented after July 2015. This means banks will have an extra year ahead to comply with the new rule, said the news agency. Wall Street banks representative H. Rodgin Cohen, who is also senior chairman of law firm Sullivan & Cromwell LLP, said, "There's this debate between rules and principles, and the reason people like rules is that they're clear. There is no way you could have clear rules here. This isn't like saying ‘Your capital should be 7 percent, you can calculate 7 percent.' You can't calculate market-making. You can't calculate proprietary trading."

Bloomberg defines market-making or principal trading as using the capital of a firm to buy and sell securities with clients and obtaining profits from price movement and spread. On the other hand, proprietary banking is the act of placing speculative bets using banks' own capital. The Volcker rule will stop banks from using federally insured deposits to be used in such trading, which will expose their stability to trading risks.

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