Nom de Plumber | Volcker Rule Implementation: Mission Impossible?

rcwhalen's picture

Below follows the latest from Nom de Plumber on the act of full display public idiocy known as the Volcker Rule.  The American Bankers Association and Community Bankers have apparently backed down regulators when it comes to small bank holdings of preferred CDOs. But what is really needed is a loud "Foxtrot Oscar" to regulators on the entire enterprise. The Volcker Rule is artibrary and capricious.  As Nom de Plumber argues, you cannot enforce a legal standard that cannot be accurately measured.  One man's hedge is another man's principal exposure.  The Volcker Rule is public evidence of the irrational madness that passes for serious thought in US public policy circles.  -- Chris

Volcker Rule implementation:  Mission Impossible?

A hedge at a bank will be deemed allowable risk mitigation, and not forbidden proprietary trading-----but only if no material new risk arises, unless the hedge simultaneously protects against that too.   Yet, in reality, every hedge does NOT eliminate risk, but merely exchanges one risk type for ideally more-palatable risk types.   For instance, a bank could hedge the market risk of its Treasury bond portfolio, by shorting Treasury futures.   The bank thereby assumes these substantive new risks, instead:

basis risk (cash versus futures tracking error)

liquidity risk (margin calls, without offsetting asset cashflows)

counterparty and operational risks ( )

regulatory risk (topic here, ironically).


So, how can any hedge truly be Volcker Rule-compliant? 

To prove having only client market-making and no proprietary exposures, a bank must attribute its daily trading P&L to particular risk factors (yield curves, prepayments, defaults, credit spreads, equity indices, dividend streams, option-implied volatility, IRR, asset cashflows, currency rates, etc.) and buy-sell activity.  It must then report all un-attributable P&L to regulators, for flagging non-client, proprietary risk positions.   Yet, in reality, almost every asset (except non-callable, fixed-rate, high-quality sovereign debt) trades strictly by market price……not by observable or consensus settings of underlying risk factors.   Because infinite permutations of risk factor movements can cause a specific asset price movement, no definitive anchor points will arise to bootstrap that mandated P&L attribution. 

So, how can a bank or regulator attribute daily P&L, to flag proprietary trading versus client market-making?

Bottom line:  The Volcker Rule will be remarkably hard, at best, to implement.

Moreover, a bank complying with Dodd-Frank originator risk retention could simultaneously be charged as a disguised version of non-compliant proprietary trading.

Thank you. 

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J J Pettigrew's picture

Wall Street is blocking the appointment of certain key commission seats (CFTC)....thus

delaying the implementaion of the Volcker Rule.  +1 on the Glass Steagal ..... removed by

Clinton per a Goldman Sachs Treasury Sec push, and then the system to its knees per Goldman

Sachs...and now the moon shot market enriching all those players ten fold.


Kina's picture

The new normal will be 25% unemployment, drones patroling the streets, armoured police cars, soup kitchens and hoardes living in the sewers eating rats. Cue Arnold Swartsenetc...Stallone....

ebworthen's picture

How about we end the gambling and start making principal based loans and letting banks fail?

new game's picture

glass-steagall and phys asset backed curency WILL NOT happen.

the PTB will not let it happen, unless things get seriously out of control.

template of contol being universaly implimated around the world-debt money.

growth/expansion and acceptance of use-debt slaves!


new normal

understanding is a bitch.

logicalman's picture

Understanding is a bitch.

Not understanding is likely to be worse, in the near future.

RaceToTheBottom's picture

And through all these transfers of risk from one form to the other, all backed and subsidized by the FED, the WS banksters take their cut.

They promote the crash, including the next one but they take their profits as if that was some rule not affected by the crime.

Bring back the original Glass-Steagall. Networks of community banks would be much safer than the cesspools of corruption and risk we now have.

disabledvet's picture

buy gold. if you have enough of it you are compliant. if you fuck up and need a bailout the Government gets your gold. If you are lucky the Government....or some Government (Europe, Great Britain) will bring back full convertibility. Then you can get rid of counter party risk that way too. It's really not complicated.

logicalman's picture

You beat me to it!

If we are all lucky, the world will go to a system of some form of real (non-printable/non-mouse-clickable) money.

Until then, the Banksters will find ways to rip us all off.

disabledvet's picture

If we're lucky Illinois will go belly up and the "Final Shakeout" of the Clinton Lunacy will be seen for how it always was...a bunch of paper promises predicated on the idea that "inflation can always be traded because all you need to do is unleash the printing press thus making deflation an impossibility and debt roll over a guarantee everytime." oooooops. So much for that theory...

logicalman's picture

If we are lucky, Fukushima won't kill us all.

philipat's picture

Agreed. Just reinstate Glass-Stiegel, which worked just fine until corruption caused it to be repealed.

BTW, the Plumbers name was Joe?