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Fed Unveils "Self-Regulated" Volcker Rule

Tyler Durden's picture




 

And so it is done (as we detailed here)... and due to be put in place as of April1st 2014 (rather ironically). The 100-plus-pages of rules and regulations prohibit two activities of banking entities: (i) engaging in proprietary trading; and (ii) owning, sponsoring, or having certain relationships with a hedge fund or private equity fund. But the kicker...

requires banking entities to establish an internal compliance program designed to help ensure and monitor compliance with the prohibitions and restrictions of the statute and the final rule.

Great! Because self-regulation worked so well in the past for the financial services industry.

Via Reuters,

  • FEDERAL RESERVE EXTENDS VOLCKER RULE COMPLIANCE PERIOD TO JULY 2015 FROM JULY 2014 - FINAL VOLCKER RULE DOCUMENT
  • RULE WOULD ALLOW HEDGING ACTIVITY THAT MITIGATES "SPECIFIC, IDENTIFIABLE RISKS OF INDIVIDUAL OR AGGREGATED POSITIONS" HELD BY THE BANK - REGULATORS
  • BANKS COULD ENGAGE IN PROPRIETARY TRADING OF US GOVERNMENT DEBT AND, IN MORE LIMITED CIRCUMSTANCES, FOREIGN OBLIGATIONS UNDER VOLCKER RULE
  • VOLCKER RULE ALSO BANS BANKS FROM OWNING AND SPONSORING "COVERED" HEDGE FUNDS AND PRIVATE EQUITY FUNDS - REGULATORS
  • REGULATORS SAY FINAL RULE DEFINES "COVERED FUNDS" MORE NARROWLY THAN PROPOSAL WITH REGARD TO FOREIGN FUNDS AND COMMODITY POOLS
  • U.S. REGULATORS SAY MOST COMMUNITY BANKS HAVE LITTLE OR NO INVOLVEMENT IN PROHIBITED ACTIVITIES, WOULD NOT HAVE TO COMPLY WITH RULES

 

Who will be most affected?

 

Some excellent color from Bloomberg,

Merriam-Webster’s Dictionary defines “speculation” in 31 words. The key ones are “risk of a large loss.” When Paul Volcker, the former U.S. Federal Reserve chairman, proposed banning speculation by federally insured banks to reduce risk to the world economy, he did it in one paragraph. Four years later, the nation’s regulators are poised to vote on Volcker’s proposal. The rule now runs close to 100 pages, with hundreds more in supporting material — and no one is quite sure how it would be enforced. It’s a lesson in how complicated simplifying Wall Street can be.

 

The Situation

 

The idea became law in the Dodd-Frank reforms of 2010, but turning it into regulations has been slowed by a lobbying onslaught. Already many banks have shut down or spun off the desks they used for trading that was clearly solely for their own account, what’s known as proprietary trading. Banks do other kinds of trading that can also make them money, or loses it: Some of the trades are to help clients, and others are to reduce the risks of their own lending or trading. Figuring out which trades fall into which category isn’t always easy, and deciding how much risk is too much for which kind of transaction may be even harder. On these issues, how regulators decide to enforce the rules may be as important as the rules themselves, particularly as responsibility will be split between five agencies set to announce the final rule on Tuesday. They have very different agendas: Some are primarily concerned with keeping markets working smoothly, while others worry mostly about keeping banks from blowing themselves up.

 

The Background

 

After the Great Depression, Congress created federal deposit insurance to prevent runs at commercial banks. In return, the banks had to concentrate on making loans and leave the fancy stuff to investment banks. That dividing line blurred in the ’90s and was erased entirely in 1999 when the Glass-Steagall Act was repealed at the behest of banks like Citigroup that promptly grew big trading operations. The financial crisis of 2008 had its seeds in bad mortgages, but what brought banks to the brink, Volcker noted when he proposed his idea, wasn’t bad loans but the exotic trades they had made around them. The six largest U.S. banks made $15.6 billion in trading profits during 13 of the 18 quarters that spanned mid-2006 to 2010. They racked up bigger losses during the five remaining quarters when their bets turned sour. Even after the meltdown and unpopular taxpayer bailouts, taking a step back toward Glass-Steagall met Wall Street resistance. That’s why when President Barack Obama adopted the idea he wrapped it in Volcker’s name, in the hope that the towering stature of the man who tamed 1970s inflation would lend it greater weight.

 

The Argument

 

Banks continue to insist that it’s impossible to distinguish between prop trades and what banks call market making — the steady stream of buying, selling and holding they do so their customers can always buy what they want to buy and sell what they want to sell. Jamie Dimon, the chief executive officer of JPMorgan Chase, said that every trader would need a psychologist and a lawyer by his side to make sure he wasn’t breaking the rule. Some regulators have grown wary of trades banks say they’re making to offset specific risks since JPMorgan Chase’s $6 billion London Whale losses, which Senate investigators saw as closer to gambling than to hedging the bank’s other bets. Volcker has said the rule could accommodate both kinds of trades and still stay fairly simple. “It’s like pornography,” Volcker said of prop trades. “You know it when you see it.”  Instead of blanket bans, however, regulators sought to define each situation and carve out a string of exemptions, which is how the rule grew and grew. A small but growing number of bipartisan voices in Washington say they may push for a more radical simplification — bringing back Glass-Steagall.

 

Volcker Main

 

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Tue, 12/10/2013 - 10:44 | 4232304 TeamDepends
TeamDepends's picture

The Onion strikes again!

Tue, 12/10/2013 - 10:47 | 4232318 Stackers
Stackers's picture

MOST COMMUNITY BANKS HAVE LITTLE OR NO INVOLVEMENT IN PROHIBITED ACTIVITIES

 

This would be 2 of 3 that are left ?

Tue, 12/10/2013 - 11:00 | 4232383 Dre4dwolf
Dre4dwolf's picture

Note "Most" that means almost all of them are invovled in prohibited activities. lol in govt speak.

Tue, 12/10/2013 - 11:04 | 4232408 Fish Gone Bad
Fish Gone Bad's picture

Self regulation works really well.  That is why the United States has the fattest people in the world, they self regulate the food they eat.

Nuff said.

Tue, 12/10/2013 - 11:21 | 4232465 pods
pods's picture

Like putting a child in charge of their Halloween candy.

pods

Tue, 12/10/2013 - 11:38 | 4232524 Spastica Rex
Spastica Rex's picture

If it was good enough for Ronald Reagan...

Tue, 12/10/2013 - 12:08 | 4232633 post turtle saver
post turtle saver's picture

and by Ronald Reagan you mean Bill Clinton...

Tue, 12/10/2013 - 12:10 | 4232636 Spastica Rex
Spastica Rex's picture

And George the 1st, and George the 2nd, and BO the Forever King.

Tue, 12/10/2013 - 10:51 | 4232358 Occident Mortal
Occident Mortal's picture

At least they banned prop trading, and owning hedge funds (whatever a hedge funds is?).

 

What happens to all those reserves over deposits now?

Tue, 12/10/2013 - 11:01 | 4232388 BLOTTO
BLOTTO's picture

What in-the-fuck is going on on this planet?

Tue, 12/10/2013 - 11:38 | 4232464 Son of Captain Nemo
Son of Captain Nemo's picture

Total panic and an inability to think clearly and rationally work through the problem which includes using tried and true measures that always achieve results like severe punishments for criminal misconduct by those that make unethical or illegal policies under the rule of law.

Same team which gave us the '9/11 Commission Report', TARP and TEPCO.

Tue, 12/10/2013 - 11:56 | 4232584 edotabin
edotabin's picture

Yeah, they must be somehow related to the team that gave us the JFK explanation as well. Very truthful, strightforward, conclusive and with so much indisputable evidence.

Tue, 12/10/2013 - 11:36 | 4232525 11b40
11b40's picture

Planetary Rape, Pillage, & Plunder.

 

Meanwhile, http://www.youtube.com/watch?v=iYTzlP7aZNk, nuclear winter cometh.

 

Party on.

Tue, 12/10/2013 - 11:51 | 4232575 booboo
booboo's picture

There are more government regulators then ever and never has there been so little enforcement, draw your own conclusion but why would any bank hire compliance officers when they know they can break the rules with impunity. Self regulation only works when there is justice to back it up. Fear is a powerful motivator.

Tue, 12/10/2013 - 11:21 | 4232468 USA USA
USA USA's picture

This will work as well as "The Ten Commandments" does for these blood sucking liars!

Tue, 12/10/2013 - 10:46 | 4232310 VD
VD's picture

it really is a joke. never forget who owns The Fed and the joke is always on you cause April Fools is every single trading day. POMO the CLOWN.

Tue, 12/10/2013 - 11:12 | 4232439 aleph0
aleph0's picture

The Arrogance & Audacity ... choosing 1st. April tells you everything .... 

... another way of saying .... Screw "You" , signed , the Bankster Cartel.

Tue, 12/10/2013 - 10:48 | 4232324 Max Damage
Max Damage's picture

Self regulation = No regulation

As a result BTFD

Tue, 12/10/2013 - 11:39 | 4232534 11b40
11b40's picture

What dip?

You mean, buy the FATH.

Tue, 12/10/2013 - 11:22 | 4232330 falak pema
falak pema's picture

Talking about markets and self regulation Buffet takes us down memory lane making a statement to make every self respecting Austrian cringe in his underwear in deep freeze tinglings, like the one the USA north east is currently witnessing. 

Warren Buffett On George W. Bush - Business Insider

George Bush said, “If money doesn’t loosen up, this sucker will go down” – I believe this was the greatest economic statement of all time. This is why he backed up Paulson and Bernanke. 

So head Oligarch says : he saved our skins.

But did he save it from a deeper recession? 

America forgives big banks for financial crisis - MarketWatch

More banksta hopium? 

Looks like the long arm of the Banksta lobby is about to control Volcker's rule as it gets Buffet to speak its tune, and the banks try to earn back their respectability in the public eye... until the next crash! 

Tue, 12/10/2013 - 11:27 | 4232486 moneybots
moneybots's picture

"George Bush said, “If money doesn’t loosen up, this sucker will go down” – I believe this was the greatest economic statement of all time. This is why he backed up Paulson and Bernanke. 

So head Oligarch says : he saved our skins.

But did he save it from a deeper recession? "

 

Define deeper recession.

 

91 million Americans are not employed.  Real unemployment is chronically high.  Food stamp recipients have numbered 47 million for a chronically long period of time.

So what have we been saved from?  Very little it appears.


Tue, 12/10/2013 - 12:05 | 4232540 11b40
11b40's picture

Moneytbots, your problem is that you are talking about the wrong "we".

Tue, 12/10/2013 - 10:49 | 4232331 Bangin7GramRocks
Bangin7GramRocks's picture

Don't worry. Efficient markets will take care of everything. Wall Street will probably still complain that it costs a few dollars to fake comply to this toothless rule.

Tue, 12/10/2013 - 10:51 | 4232340 Dre4dwolf
Dre4dwolf's picture

You can make all the rules you want, they have enough money to pay the fine since the fine is about as much as a parking ticket.

Tue, 12/10/2013 - 10:57 | 4232347 JenkinsLane
JenkinsLane's picture

I assume banks are building extremely large desk drawers as we speak to stuff their prop trading departments in,

aka "we're going to need a bigger boat".

 

That's my 'fucking about' quota filled for the day.

Tue, 12/10/2013 - 10:52 | 4232349 Rainman
Rainman's picture

LOL ... adventures in can kicking... this shitshow will be way blown up by July 2015.

Tue, 12/10/2013 - 10:52 | 4232352 Xibalba
Xibalba's picture

Self regulation might work in concept if you allow those fuckers to fall on their bloated sword, i.e. go bankrupt as they should've, and then send the crooks to jail.  Then maybe, self regulation would work.  

Tue, 12/10/2013 - 11:56 | 4232585 post turtle saver
post turtle saver's picture

this comment deserves more up arrows than I can possibly give it, well said... self-regulation only works if failure of that activity results in hard consequences

Tue, 12/10/2013 - 10:52 | 4232361 Catullus
Catullus's picture

BANKS COULD ENGAGE IN PROPRIETARY TRADING OF US GOVERNMENT DEBT

Good.  You can still hock [rented] government bonds to people.

Tue, 12/10/2013 - 10:57 | 4232373 Catullus
Catullus's picture

So does this effectively kill these 2x and 3x ETNs?

Tue, 12/10/2013 - 10:59 | 4232387 Al Huxley
Al Huxley's picture

I think those are designed to sodomize naive retail traders, and I didn't see anything in the rule that prohibits banks from sodomizing their customer base, so I'm guessing the 2x and 3x funds will be fine.

Tue, 12/10/2013 - 11:23 | 4232477 JenkinsLane
JenkinsLane's picture

Michael Gambon - "I used to be a homosexual but I had to give it up."

Journalist - "Why?"

Michael Gambon - "It made my eyes water."

 

ETN's are products the banks, etc., take a fee from for managing. They are not prop trading.

 

Since late 2011 XIV has been the easiest of easy money, buy and hold. Still, over now.

Tue, 12/10/2013 - 11:41 | 4232545 Al Huxley
Al Huxley's picture

They make it easy for a community that would normally be restricted to the long side of the market to make foolish short-side bets, thereby providing fodder for short squeezes that wouldn't normally be available.

Tue, 12/10/2013 - 10:56 | 4232374 Seize Mars
Seize Mars's picture

Uhhhh....
"This isn't prop, it's flow!"
Whatever. Douchebags.

Tue, 12/10/2013 - 11:08 | 4232391 Dr. Engali
Dr. Engali's picture

Well at least the number of pages is coming down:

 

Federal Reserve act  31 pages.

Glass Steagall         37 pages

Interstate banking act 61 pages

Sarbane-Oxley           66 pages

Gramm - Leach -Bliley-145 pages

Frank- Dodd       2319 pages

 

I have a better idea..If they are too big to fail then break the fuckers up. 

Tue, 12/10/2013 - 11:10 | 4232435 centerline
centerline's picture

They will... right after the next crisis which wipes out at least a portion of private pension funds, savings, etc.

 

Tue, 12/10/2013 - 11:56 | 4232586 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

Maybe they need a too big to read within the timeframe the bill is to be voted on ban on bills but the bill for just such a thing would probably be a 1000+ written manuscript.

Tue, 12/10/2013 - 11:04 | 4232409 no more banksters
no more banksters's picture

"The Greek case shows that the supposed free market is just an illusion, especially in the banking industry. The biggest private banks created a complex financial environment with complex financial destructive "tools" which governments are unable to manage. Governments are forced to turn to the same banks for "advising services" while they are flooded with former bank executives placed in key positions. This explains why the biggest private banks receive bailout packages of billions at the expense of taxpayers, loading governments with more debt."

http://failedevolution.blogspot.gr/2013/11/an-example-of-how-banking-car...

Tue, 12/10/2013 - 11:07 | 4232413 no more banksters
no more banksters's picture

The illusion of the self-regulating society through the deregulated market

http://failedevolution.blogspot.gr/2012/07/the-illusion-of-self-regulati...

Tue, 12/10/2013 - 11:24 | 4232483 Mercury
Mercury's picture

Don't fool yourself.

The US RRE mortgage market circa 2007 was probably the most regulated market of anything the world has ever known.

 

Tue, 12/10/2013 - 11:29 | 4232501 toady
toady's picture

They'll innovate new ways to enable their greed.

They are the best & brightest!

Tue, 12/10/2013 - 11:12 | 4232417 Mercury
Mercury's picture

requires banking entities to establish an internal compliance program designed to help ensure and monitor compliance with the prohibitions and restrictions of the statute and the final rule.

Great! Because self-regulation worked so well in the past for the financial services industry.

 

What government-industry regulatory system doesn't require internal compliance and self-generated red tape?

Tue, 12/10/2013 - 11:06 | 4232418 toady
toady's picture

Ah, self-regulation, good. Everyone knows how to regulate their vices.

Tue, 12/10/2013 - 11:10 | 4232432 ChaosEquilibrium
ChaosEquilibrium's picture

Matthew Dowd ABC NEWS:  " Is an American 'Arab Spring Coming'?"....The American disillusionment goes MAINSTREAM!!

 

Is this the first 'pre-shock' in MSM?

Tue, 12/10/2013 - 11:59 | 4232595 11b40
11b40's picture

We had our Arab Spring with OWS.  It did not work.  Nobody cared, as the people in the movement were branded as "the other".

We watch all the news channels, along with C-Span.  It's called self defense.

I have been a little surprised with some of the things I have been hearing discussed, and with the angry tone toward the Banksters and other Powers That Be.  It makes me wonder when the NBC Network clamp-down is coming for that station.

Meanwhile, FOX seems increasingly schizophrenic, not knowing how far to get in the Tea Party weeds, or how to deal with the Pope, Immigration, and some other issues that "concervatives" are divided over.

There may be some true unrest starting to bubble up from the natives.....but don't hold your breath.

Tue, 12/10/2013 - 11:17 | 4232447 moneybots
moneybots's picture

"requires banking entities to establish an internal compliance program designed to help ensure and monitor compliance with the prohibitions and restrictions of the statute and the final rule."

 

What the Fox say.

 


Tue, 12/10/2013 - 11:52 | 4232579 Quinvarius
Quinvarius's picture

Wah pow pow pow, Wah pa-pow pa-pow.

 

Tue, 12/10/2013 - 11:22 | 4232476 vote_libertaria...
vote_libertarian_party's picture

Gvt: "Ok banks, we won't check your homework but we expect you to..."

 

 

Banks win again.

Tue, 12/10/2013 - 11:24 | 4232478 White Owl
White Owl's picture

Self-regulating = a bobcat guarding the hen house

Tue, 12/10/2013 - 12:20 | 4232664 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

Self regulating only works when your mortality is in the crosshairs when said regulation fails. The more you fear loss of it the better the self regulation works. Anything less is a fucking joke.

Tue, 12/10/2013 - 11:26 | 4232484 Racer
Racer's picture
Ex-RBS manager facing jail term over £3m mortgage fraud

http://www.mortgagestrategy.co.uk/news-and-features/latest-news/ex-rbs-m...

 

Amazing!!!!!!!!!

 

 

Tue, 12/10/2013 - 11:26 | 4232490 firstdivision
firstdivision's picture

Pretty sure the "self-regulation" was what was stated for LIBOR/Commodities/OTC Derivatives and we see how well that turned out.

Tue, 12/10/2013 - 11:35 | 4232522 alien-IQ
alien-IQ's picture

I think that the credibility of the threat of this rule actually ever going into effect can best be measured by looking at GS stock this morning. Despite the fact that this rule would eliminate the branch of GS that generate about 40% of their revenue, the stock has popped to a new 52 week high on this news.

Does it look like the market is worried?

Tue, 12/10/2013 - 11:50 | 4232554 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

Person A: Corporations own the government! (Excited, hysterical tone)

Person B: They need to be regulated.

Person A: By whom?

Person B: The government! (Excited, hysterical tone)

So we get the Volcker Rule which allows said corporations to self regulate with no consequences for violating rule. Yep the inmates run the asylum.

Roll the fucking guillotines out, nothing changes otherwise if you keep playing a rigged game. Either stop playing or start purging and restoring the system back to proper balance. If you ain't willing to do either then stop whining.

 

 

Tue, 12/10/2013 - 11:52 | 4232572 post turtle saver
post turtle saver's picture

Until Glass-Steagall is reimposed anything they come up with will be a Flintstones band-aid on a sucking chest wound. Glass-Steagall brings the rule of law back to the banking & finance industries, which is why they don't want it. Prepare for turbo lobbying activity backed by gigabucks to keep Glass-Steagall from reappearing in its original form.

Tue, 12/10/2013 - 12:03 | 4232613 11b40
11b40's picture

Yep.....Painting a bright line between basic banking and investment banking is the only thing that will be effective.

Banking should be about like any other public utility, as should the pay scale.  It is not that complicated.

Investment banking, on the other hand, is like the Wild West.  If you want to play shoot-em up, you need to be willing to be killed.  Remove all socialistic ties to the investment banker losses.

Tue, 12/10/2013 - 12:03 | 4232618 HamRove
HamRove's picture

I think they really start talking taper when PMs start to go up as an excuse in case it gets out of control. Silver is up 3% this morning.

Tue, 12/10/2013 - 12:12 | 4232640 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

Realistically did anything think silver was going to stay at under $20 for an extended period of time. I would be willing to bet it was mainly smashed down strictly so some in the club shorts could close their positions for a profit.

Tue, 12/10/2013 - 12:06 | 4232623 post turtle saver
post turtle saver's picture

am I the only one amused by the fact that politicians got us into this mess (repeal of Glass-Steagall) and now politicians are going to "fix it"? what's the definition of insanity again?

Tue, 12/10/2013 - 12:06 | 4232630 curbyourrisk
curbyourrisk's picture

"U.S. REGULATORS SAY MOST COMMUNITY BANKS HAVE LITTLE OR NO INVOLVEMENT IN PROHIBITED ACTIVITIES, WOULD NOT HAVE TO COMPLY WITH RULES"

 

Does this mean the TBTF banks will now buy local, community banks and move thier PROP trading desks over there???

Tue, 12/10/2013 - 16:17 | 4233508 yogibear
yogibear's picture

Disregard it because it doesn't matter. It's written for the small guy.

Tue, 12/10/2013 - 12:19 | 4232659 no more banksters
no more banksters's picture

This is what the banksters mean by "self-regulation":

http://failedevolution.blogspot.gr/2013/12/when-monti-bowed-to-banksters...

naturally, since they own governments

Tue, 12/10/2013 - 13:47 | 4232675 fuu
fuu's picture

Hopefully no one was shocked.

Tue, 12/10/2013 - 13:04 | 4232851 Itch
Itch's picture

If the devil is in the detail, the devil just got a little bit smarter. How long can you keep a bunch of vultures away from a rotting corpse? 5 years!!

 

Tue, 12/10/2013 - 16:06 | 4233465 Dre4dwolf
Dre4dwolf's picture

From what I read, its more of the same, they might as well not have written anything.

Tue, 12/10/2013 - 16:18 | 4233502 yogibear
yogibear's picture

The banksters are laughing all the way to the Catman Islands. 

Self-regulating is like kid that sees a bowl of trick or treat candy outside the door and just decides to take all of it.

LOL, there are no rulles or regulations.

Tue, 12/10/2013 - 17:22 | 4233779 Born2Bwired
Born2Bwired's picture

Paul Volcker needs to publically ask that his name be removed from this bill, it is such a sham. I believe he could write his intent on the back of a cocktail napkin and it would actually work. This is just more obfuscation so TPTB can do whatever they want. What bullshit.

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