It’s Friday quiz time! Ready? Here goes:
- Take a couple of clued-up Brooklynites in their 30s.
- Add section §619 of Dodd-Frank, aka the “Volcker Rule”.
- Now throw in a lawyer.
What do you get?
[Hint: It's America.] Read more
It’s Friday quiz time! Ready? Here goes:
What do you get?
[Hint: It's America.] Read more
GOLDMAN SACHS HAS A SECRET PROPRIETARY-TRADING UNIT THAT IS RISKING THE BANK’S OWN CAPITAL BY MAKING INVESTMENTS AND CEO LLOYD BLANKFEIN SAID GOLDMAN WASN’T PROP-TRADING ANYMORE AND THAT IS WRONG AND HE LIED AND HE SHOULD BE HOG-TIED WITH HIS OWN BLACKBERRY CHARGER.
Hedge funds are not happy.
Don’t everyone run to their defence at once now. Read more
For those new to the story, Bloomberg and WSJ reported on Friday that a handful of hedge funds and dealers claimed that a trader in JP Morgan’s Chief Investment Office has been selling so much protection on the Markit CDX.NA.IG.9 credit index that it was “distorting” the market — making the index too cheap.
While FT Alphaville thinks that a lot of this is getting way overblown, the story is performing a few useful useful functions. Namely, it’s: Read more
JPMorgan’s head of global proprietary trading will lead what is likely to be one of the biggest hedge fund launches of 2012, as a team of the bank’s prop traders depart ahead of the Volcker Rule, the FT reports. Mike Stewart is set to launch Whard Stewart in the second quarter, leaving the bank despite having been chosen to head a new Alternatives Unit within the bank’s asset management business. Deepak Gulati, global head of equity proprietary trading at JPMorgan, is also set to join the asset management unit but has considered leaving to set up his own new fund, people familiar with his thinking said. Read more
For this, our final post covering FT Alphaville’s meeting with Yves Smith of Naked Capitalism, we asked her about the regulations that have arisen from the ashes of the financial crisis. Not wanting to leave the series on a depressing note, we (gently) prodded Ms Smith to also share with us something to be optimistic about.
AV: What do you think some of the biggest pitfalls/missteps have been since the crisis in terms of regulation? Read more
US banks are pushing for their activities around exchange-traded funds to be exempt under the so-called Volcker rule, the FT says, highlighting the importance of the funds as a tool for the big financial institutions that create and sell them. According to some interpretations, ETFs are not included in the special Volcker carve-out that allows banks to “make markets” on behalf of their clients. “Market makers in exchange-traded funds enter into a number of transactions, such as creating and redeeming ETF shares,” the Securities Industry and Financial Markets Association, which represents big banks and investors, said in its submission to US regulators on the Volcker rule. Meanwhile the CME Group has warned that the proposed Volcker rule could impede the primary dealer system used by the US Treasury to sell government debt, reports the FT separately. In a comment letter filed this week, Craig Donohue, chief executive of CME, the US’s largest futures market, wrote that the Volcker rule’s exemption for US Treasury debt did not go far enough by failing to extend to the use of Treasury derivatives such as futures and options contracts. And the WSJ reports Goldman Sachs submitted two letters pushing to rein in the proposed regulation that aims to restrict bank risk-taking. Goldman asked that regulators take years rather than months to introduce the rule, arguing that it overstepped their bounds and went beyond Congress’s intentions in passing Dodd-Frank. Read more
UPDATE: FT.com has just pubbed a Volcker op-ed, this one directly responding to European critics of his rule. A few lines:
There is a certain irony in what I read. In Europe, there are plans to introduce a financial transaction tax, justified in part by officials because it puts “sand in the wheels” of overly liquid, speculation-prone securities markets. For reasons analogous to those behind the Volcker Rule, the UK is planning to “ring fence” trading and investment banking from retail banking, creating airtight subsidiaries of larger organisations. The commercial banks responsible for what are deemed essential services to the economy will be insulated from all trading and only then will they be protected by the official safety net of access to the central bank, deposit insurance and possible assistance in emergencies. Read more
Paul Volcker is set to launch a strong defence of banning proprietary trading in a comment letter on the rule which bears his name, says the WSJ. The Volcker rule would stop investors bidding up asset prices in the hopes of always finding a buyer, the former Fed chairman will argue. Volcker’s letter on the rule, which comes into effect in July under the Dodd-Frank Act, will be met by several responses penned by industry opponents. BlackRock will argue that the Volcker rule will hurt corporate bond liquidity. Volcker’s letter will however dismiss foreign governments’ claims that the rule will make it harder for US banks to trade their sovereign debt. Read more
Goldman Sachs’ chief financial offer has told an industry conference that a ban on proprietary trading could in fact improve the bank’s profits, departing from usual banker reactions to the Volcker rule, reports the FT. US banks could squeeze more cash from clients for executing their trades under the rule and pocket the difference between bid and ask prices for assets, David Viniar said at the Credit Suisse conference. “Ultimately, it could lead to lower dealer inventory levels and could be [return-on-equity] enhancing as we adapt to a less capital intensive business model,” he added. A PDF of Viniar’s presentation can be found here. Read more
Paul Volcker has defended proposed trading rules for US banks that are being criticised by foreign governments as likely to disrupt the operation of their national bond markets. Japanese, UK and Canadian regulators, together with European bankers, have recently warned that the Volcker rule could reduce flows in global markets and damage liquidity. “There will be plenty of proprietary trading in securities without the half dozen or so American banks participating in it,” said Mr Volcker, speaking with John Bogle, the father of index investing, at the John Bogle Forum held in New York on Tuesday. FT Alphaville says it is impossible to know what the impact on market liquidity will be. Read more
There’s no shortage of concerns about the impact that new regulations will have. Basel 2.5 hitting the bond market, the prohibition of ratings under Dodd-Frank hurting the beleaguered mortgage market, and the restrictions on prop trading by the Volcker Rule — which may lead to a giant sucking sound where the liquidity of several markets used to be.
The European Commission will complain to Treasury Secretary Timothy Geithner that proposed US regulations could discourage banks from trading European sovereign bonds, the WSJ says. Michel Barnier, the European commissioner for the internal market, told the newspaper he will speak to Mr Geithner next month, adding: “We can’t accept extraterritorial consequences or Europe will be tempted to do the same thing”. Mr Barnier said the UK chancellor George Osborne raised concerns at a meeting on Monday. Japan and Canada have also complained to the US about the rule. Read more
The European Commission will complain to Treasury Secretary Timothy Geithner that proposed US regulations could discourage banks from trading European sovereign bonds, the WSJ says. Michel Barnier, the European commissioner for the internal market, told the newspaper he would speak to Mr Geithner next month, adding: “We can’t accept extraterritorial consequences or Europe will be tempted to do the same thing”. Mr Barnier said the UK chancellor George Osborne raised concerns at a meeting on Monday. Read more
The European Commission plans to object to the Volcker rule when Michel Barnier, the European commissioner for the internal market, meets US Treasury Secretary Timothy Geithner next month. There are concerns that the rule, which seeks to prohibit proprietary trading by banks, will impact liquidity for certain European assets as US banks scale back their involvement in the market, reports the WSJ. Sovereign bonds are among the assets which will be impacted when the rule comes into force in a couple of years. Japan and Canada have also complained to the US. Read more
Foreign governments and asset managers are mounting a last-ditch push against the US Volcker rule, worried that the proposed ban on proprietary trading could exacerbate a liquidity crunch, the FT says. Japanese and Canadian regulators have warned the US government that the rule, which is due to be finalised within weeks and put into force in July, could harm world markets by preventing or deterring US banks such as Goldman Sachs from trading. The Volcker rule is designed to prohibit most “prop trading” by banks, where institutions take positions for their own accounts, but Wall Street has argued that the restrictions will also hamper “market making”, where a bank stands between a buyer and seller of securities. Jun Mizuguchi, assistant commissioner for international affairs at Japan’s Financial Services Agency, said: “We are afraid that US financial institutions may refrain from trading” Japanese government bonds. In a letter to US regulators, the Canadian Office of the Superintendent of Financial Institutions said the rule could “undermine the liquidity of government debt markets outside of the US”. Read more
The comment period for the proposed Volcker rule, that bans banks from proprietary trading, is set to close on January 13th. However, Reuters reports that a 30-day extension is expected, citing a person with knowledge of the decision. On Thursday, Texas Republican Randy Neugebauer released a letter from 121 lawmakers that states concerns from various industry stakeholders that the rule in its current form will ultimately lead to higher borrowing costs for American businesses. The letter also suggests that a second proposal is released for comment before the publication of the final rule. Read more
Deutsche Bank has launched the sale of its global asset management business following a strategic review, putting a price tag of about €2bn on it. Initial bids are due in the spring. As many as 50 parties have registered an interest, including Wells Fargo, the US bank, Royal Bank of Canada and Ameriprise Financial, the US business that has about $600bn under management and administration, the FT says, citing people familiar with the matter. Ameriprise has made no secret of its ambitions to expand. Columbia, its US business, has assets under management of $325bn while Threadneedle, its UK-headquartered business, manages $96bn in funds. Europe’s banks are under pressure from regulators to strengthen their balance sheets and their asset managers are coming up against new rules and restraints in the US and Europe. Read more
State Street, the large US custodian bank, has cited new regulations including the “Volcker rule” for its decision to quit the UK and German government bond markets just three months after becoming an official dealer, says the FT. The Volcker rule bans US banks from proprietary trading – buying and selling for their own account. It contains an exemption for US Treasury securities but not foreign sovereign debt. Although market-making – buying and selling on behalf of clients – is permitted under the rule, bankers say worries that that activity will be deemed “prop” will hamper liquidity. State Street’s withdrawal is one of the first concrete signs that banks are preparing to walk away from European market-making businesses because of the new regulatory environment.
In its present form, the Volcker rule has the potential to change compensation structures. Not only that, but the Volcker rule cares about what your intentions were when you executed a trade. Starting to worry? FT Alphaville takes a look at these aspects of the proposed rules then goes over some recommendations about what to focus on when writing those all important comment letters to regulators about how they are trying to kill your business.
To kick off, here’s the specific section on compensation (emphasis ours): Read more
On Monday, FT Alphaville alerted you to one potential hole in the leaked draft of the Volcker rule. That related to what one may be able to get away with in the name of managing a portfolio of positions, presumably via a central execution desk. Here, we bring you more detail on another potential hole to drive your prop trades through, courtesy of Economics of Contempt.
Last week, Bloomberg provided more details of what’s to be expected from the upcoming Volcker rule.
The headline focused on the fact that all bank divisions would be subject to restrictions that would limit their ability to take advantage of short-term price movements in securities and derivatives markets for proprietary gain (or loss, as the case may be). Read more
Banks based outside the US could be dragged into the American “Volcker Rule”, which bans proprietary trading, according to the latest draft of the rule and lawyers that were ploughing through leaked copies on Thursday, the FT reports. The rule bans US banks from trading for their own account and imposes strict limits on their ownership of hedge funds in an attempt to hive off the riskier parts of finance from the utility functions of banking. Non-US banks are supposed to be exempt but the latest draft forces the likes of Barclays, Deutsche Bank and Credit Suisse to have to pass a four-step test: a transaction must be “conducted by a banking entity that is not organised under the laws of the United States”; no party can be a US resident; no staff “directly involved” can be “physically located” in the US; and the transaction must be “executed wholly outside” the country. The rule – which was passed into law by last year’s Dodd-Frank regulatory overhaul and sent to the Fed and other regulators for detailed rulemaking – is due to be officially unveiled next week after months of behind-the-scenes wrangling between government agencies. Bankers, lobbyists and lawyers are scrambling to interpret the the leaked proposal, the WSJ says, which appeared late on Wednesday on the American Banker website.
Repo transactions and “near-term” commodities and currencies trades are set to be exempted from the Dodd-Frank Act’s ban on proprietary trading, according to a rules draft seen by the FT. Officials said that the exemptions were needed to allow banks to engage in trading, such as repo, which could be critical to financial stability. The 174-page rules document represents the distillation of the “Volcker Rule” portions of Dodd-Frank into regulations. The draft rules would forbid short-term trades that would be significantly likely to lead to “substantial financial loss” but remain silent on whether there should be a “central data repository” to collect and analyse bank trades. Read more
The Volcker rule, which bans US banks from trading for their own account, is set to include exemptions that some officials fear will weaken its impact, the FT says, citing people familiar with the situation. According to a 174-page draft of the rules seen by the Financial Times, and confirmed by people familiar with discussions between regulatory agencies, so-called “repo” transactions and securities lending, and near-term trading in currency and commodities – but not futures – will be permitted. The draft rules exempt from the prop trading ban “positions arising under certain repurchase and reverse repurchase agreements or securities lending transactions [and] bona fide liquidity management”. They also allow “positions in loans, spot foreign exchange or commodities”.
A final version of the Volcker rule for US banks is unlikely to be in place for an October deadline, the WSJ says. The Dodd-Frank Act required the rule, which would limit banks’ proprietary trading, to have been “adopted” by October 18 but a delay of months is likely, following the publication of a proposed rule as soon as this week. A hotly-contested debate over the rule’s terms accounts for the delay, with lawmakers indicating they would prefer to see sharply-drafted regulations rather than for the rule to be rushed out. The Volcker provisions of Dodd-Frank come into force in July 2012. Read more
A list of financial entities most panicked about upcoming Dodd-Frank rules.
Get the little flags at the ready: on Tuesday JP Morgan Cazenove published the final installment of its trio of reports on regulatory arbitrage.
For those who have not yet stumbled across New York Magazine’s beguiling interview with Bernie Madoff, we do recommend a closer look.
Not only is it a compelling read in its own right — Steve Fishman, for example, recounts in great colour the conditions in which Madoff now finds himself in prison — it provides a unique window into the mind of Madoff throughout all those Ponzi years. Read more