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
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

[video] Volcker Reaction Pours In, Even Before Rules Are Published (Update 1)

Updated from 8:22 a.m. ET with comment from Peter Tchir of TF Market Advisors.

NEW YORK (TheStreet) -- The regulators really don't want your bank to be your broker.

The Federal Reserve, U.S. Treasury and other regulators are set to "vote" Tuesday morning on the finalized set of regulations to implement the Volcker Rule, which is part of the Dodd-Frank banking reform legislation.  The regulators first proposed the rules way back in October 2010, and after more than two years struggling to define Volcker's terms and "exceptions" to the ban on short-term proprietary trading by the nation's largest banks, nobody expects any "no" votes over Volcker.

The Volcker Rule -- named after former Federal Reserve chairman Paul Volcker -- was included in the the landmark Dodd-Frank bank reform legislation signed into law by President Obama in July 2010.  The rule seeks to ban "proprietary trading" by systemically important financial institutions in the U.S.  The idea of Volcker is that banks gathering insured deposits shouldn't be "gambling" with that money.

The nations' largest banks are all in investment banking and brokerage businesses.  These banks maintain inventories of securities in order to serve as "market makers" for their customers, while also engaging in hedging activities to protect from losses on the securities held in inventory.

The Federal Reserve in April 2012 announced that banks would need to be in full compliance with the Volcker Rule by July 2014, even though the new regulations weren't close to being completed. Even before that announcement, many of the largest banks, including JPMorgan Chase (JPM), Bank of America (BAC) and Morgan Stanley (MS) began to shut down their proprietary trading operations.

Much of the debate over Volcker over the past two years has centered around the precise languages of the exceptions to the trading ban that will allow the banks to continue functioning as brokers.

How big a deal is Volcker? 

"Currently, there is more than $100 billion of trading revenue generated annually at U.S. bank holding companies, with the largest five banks [including JPMorgan, Bank of America, Morgan Stanley, Goldman Sachs (GS) and Citigroup (C)] accounting for more than 90% of that amount," KBW analyst Frederick Cannon wrote in a note to clients on Sunday.

The text of the final set of regulations to enforce the Volcker Rule was leaked to the Wall Street Journal yesterday.  According to the Journal, banks will no longer be allowed to engage in "portfolio hedging."  This means hedge trades will have to be specific, protecting against loss on one particular security, or possibly against loss on one issuer.  JPMorgan will no longer be allowed to engage in the type of market hedging activity that led to the "London Whale" trading losses in its Chief Investment Office (CIO), which exceeded $6 billion during 2012.

According to the Journal, bank CEOs will have to sign-off on compliance with Volcker.  The banks may also face a high burden in documenting their historical volume of securities trades for their clients, in order to justify the inventory levels they maintain.

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

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
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, 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
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

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

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
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!
DOW 16,951.04 +31.45 0.19%
S&P 500 1,983.60 +2.00 0.10%
NASDAQ 4,528.9690 +1.4550 0.03%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

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