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Morgan Stanley Wins on 'Volcker Day' (Update 1)

Stocks in this article: GS MS BAC C JPM WFC

Updated from 2:15 p.m. ET with market close information.

NEW YORK ( TheStreet) --  Morgan Stanley (MS - Get Report) was the winner on Tuesday among the largest U.S. banks, with shares rising 1.4% to close at $30.80.

The broad indices were all ended with declines, and the KBW Bank Index (I:BKX) was down slightly 0.3% to 67.41, after federal regulators finally released the text of new regulations to implement the Vocker Rule's ban on proprietary trading by the largest U.S. banks.

The Volcker Rule -- named after former Federal Reserve chairman Paul Volcker -- is part of the landmark Dodd-Frank bank reform legislation signed into law by President Obama in July 2010.  The rule is meant to keep systemically important financial institutions (SIFI) in the U.S from "gambling" with insured deposits.

The Federal Reserve, U.S. Treasury, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and the Securities and Exchange Commission took more than two years to finalize their regulations to enforce Volcker, after the regulations were introduced in October 2011.  Significant points of contention included the definitions of "proprietary" and the exceptions to the rules, to allow banks to hold sufficient inventories of securities to act as market makers for their customers and to engage in hedge trades to protect from losses on those securities. 

Prior to the leak of the final text of the regulations late Monday, analysts had speculated that the largest U.S. banks, including JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Goldman Sachs (GS - Get Report) and Morgan Stanley, all of which have significant investment banking and brokerage businesses, might find the Volcker compliance burden to be so steep they might consider breaking themselves up.  If the banks were to spin-off their investment banking and brokerage units, those units would escape Volcker, since they would no longer be gathering FDIC-insured deposits.

Considering that the stocks of the "big six" U.S. banks also trade at significant valuation discounts to regional banks, these potential big bank breakups could benefit investors by unlocking value, as well as placating Washington.

KBW analyst Frederick Cannon in a client note on Monday wrote that the Volcker Rule could lead to significant gains in market share for non-bank financial firms

The final regulations to implement Volcker will require bank CEOs to sign-off on compliance with the rules. 

The final set of rules "more clearly defines the types of trading activities that are exempt from the ban on proprietary trading," according to FDIC chairman Martin Gruenberg.  "Perhaps the most challenging and complex of these exemptions has been the exemption for market making activities. Under the final rule, the market making exemption has been updated to reduce operational complexity and uncertainty for banking entities and, at the same time, to increase management accountability for ensuring that the requirements of the exemption are met at all times," Gruenberg added in a statement.

Under the final rules, banks will still be allowed to enter hedge trades to protect themselves from losses on securities held in inventory, however, the banks will no longer be allowed to enter "market hedge" trades, similar to the series of trades that led to the "London Whale" losses of over $6.2 billion that JPMorgan Chase suffered during 2012.

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