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.