The Volcker Rule: Toothless Then, Even More Toothless Now

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From Peter Tchir of TF Market Advisors

Volcker Rule - Not Worth Reacting To

The Final Draft of the Volcker Rule was published for comment at the end of September.  Even skipping our traditional rant about government bureaucracy, it is a document over 200 pages long, in which the word “exemption” occurs on no less than 100 pages (it is used 426 times in total).  At a quick glance, each section starts with a fairly draconian statement.  Then each subsection waters down the bold initial statement with exemption after exemption.  As we began the daunting task of trying to make sense of these rules and what they might mean in practice, it became clear there was little point in rushing to do the work.

Why is working through this doc largely pointless?  Because it is unlikely to ever be implemented in anything that resembles the current form.  The rules are meant to be in a final form by July 21, 2012.  Assuming that deadline is met, the banks then have 2 years to conform with the provisions and can petition the board for up to 3 additional 1-year extensions.  Which brings us to July 21, 2014 at the earliest, and possibly July, 2017.  Whether or not there is a new government in place before the 2014 deadline, there will certainly be another administration and president in place by 2017.  Whatever the banks ultimately have to live with, it is highly unlikely that it will resemble this.  If the Basel Accords are any indication, the battle to water down the rules will continue up until the last minute.

In the meantime, many of the Volcker Rules would be unnecessary if more products were put on exchanges.  So many of the “flow trading” concerns that are being raised by this document would go away if the regulators pushed for more transparency, more clearing, and more exchange traded products.  Progress on that front would go a long way to decreasing risks.  Of all the banking nightmares, not once have I heard of an equity “sales-trader” putting the firm at risk.