This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Leaked Volcker Draft Leaves Questions (Update 1)

Volcker story update with additional commentary

NEW YORK ( TheStreet) -- A leaked draft of federal regulators' proposed set of regulations to implement the Volcker Rule sheds light on the coming fight between lawmakers and the industry before the rules are finalized at year-end.

As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act -- signed into law by President Obama last July -- the Volcker Rule prohibits bank holding companies from engaging in most forms of proprietary trading while severely limiting banks' investments in private equity funds and hedge funds. The rule was proposed by the president and supported by former Federal Reserve Chairman Paul Volcker.

Paul Volcker

Investment banks Goldman Sachs (symbol) and Morgan Stanley (symbol) are facing a major upheaval to their business models, as the firms have relied on private trading as a profit center over recent years.

Other large holding companies, including Bank of America (symbol), JPMorgan Chase (symbol), Wells Fargo (symbol) and Citigroup (symbol) will also be affected as they eliminate most proprietary trading, while facing mounting pressures on revenues in other areas, including narrowing interest rate spreads in the wake of the Federal Reserve's "Operation Twist", reduced fees on credit cards and checking account overdrafts, and a significant reduction in the interchange fees the banks charge merchants to process debit card purchase transactions.

In January, before the Federal Reserve issued its draft proposal to implement the Volcker Rule, JPMorgan Chase's Europe Equity Research group, estimated that the average decline in earnings per share for "a normal year" for Goldman and Morgan Stanley from the rule's "limits on 'pure' proprietary trading alone," would be 14%, with possible revenue declines of 15% for Citigroup and 14% for Bank of America, depending on how the regulator's final rule would restrict banks' market making activities.

At that time, the potential limiting of market-making activity based around the regulatory interpretation of "expected near team demands of clients, customers, or counterparties" was at the center of debates among regulators and the banking industry.

A key question -- according to JPMorgan analyst Kian Aboulhossein -- was how regulators would interpret the terms "near term" when used in the context of "trading accounts" and "market making permitted activities." The analyst said that if the new rules wouldn't allow banks to hold securities inventories for long periods, "trading activities were likely to be impacted materially."

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
BK $40.29 1.36%
BAC $15.52 1.37%
C $51.64 1.25%
GS $191.02 1.57%
JPM $60.96 2.37%

Markets

DOW 17,976.31 +263.65 1.49%
S&P 500 2,086.24 +25.22 1.22%
NASDAQ 4,947.4410 +56.2220 1.15%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs