Long-sought Volcker Rule revisions land on a changed Wall Street

Yalman Onaran, Bloomberg News on

Published in Business News

NEW YORK -- Wall Street spent the better part of a decade battling for regulators to reshape the reviled Volcker Rule. When the changes finally landed Tuesday, the win felt more symbolic.

The Federal Deposit Insurance Corp. and other regulators rolled out tweaks that clarify which trades are prohibited and lay out limits for banks to follow in their market-making units. While those are some of the revisions that banks had pushed for, they're far from transformational changes that will spark a trading revival.

"Reports of the demise of the Volcker Rule are premature," said Jai Massari, a partner at law firm Davis Polk & Wardwell LLP. "It will be more clear whether activities will be scoped in or out of the rule, but the overall impact is not yet clear."

Bank trading divisions have been totally reshaped, spurred by the new rules as well as technological advancements and a multiyear revenue slump. Global banks' stock and bond desks are coming off their worst collective first half since before the crisis. Goldman Sachs Group Inc. -- once the king of proprietary trading -- just launched a credit card.

The Volcker Rule targeted banks' trading operations under the rationale that FDIC-insured lenders shouldn't act like hedge funds. Proprietary-trading desks racked up billions in losses during the financial crisis and contributed to the need for taxpayer bailouts that sparked furor on both sides of the political aisle.

The low-hanging fruit was a series of standalone prop-trading units that were producing almost $5 billion a year for the biggest banks. Firms fairly quickly spun out or shut down legendary money-making teams including Goldman Sachs Principal Strategies and Morgan Stanley's Process Driven Trading.

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The trickier part was crafting regulations that wouldn't allow banks to carry on prop trading within their client-facing desks. Wall Street firms have long argued that the rule went too far in that effort, limiting activities that are legitimately aimed at facilitating buying and selling illiquid bonds for customers or hedging the bank's own risk. Traders also grumbled that the guilty-until-proven-innocent approach of the rules curbed the risk appetite needed in the market, on top of the costs and headaches from compliance efforts and paperwork.

Bank critics pointed to traders who continued to rack up hundreds of millions of dollars in gains in a single year to note that Wall Street desks were far from riskless matchmakers.

'More Leeway'

"The big banks could already do risky trading by pretending to be market making -- these changes will give them more leeway to do so," said Mayra Rodriguez Valladares, managing principal at New York-based MRV Associates, which trains bank examiners and finance executives.


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