Wall Street banks avoided their worst fears of the Volcker rule after regulators crafted the ban on speculative trading to leave market-making operations intact.
Goldman Sachs Group Inc., which among big U.S. banks gets the largest portion of its revenue from trading, climbed to the highest level in almost three months after five agencies approved the rule yesterday. Changes in the final wording broadened exemptions for banks’ market-making desks, which generate more than $40 billion a year in revenue.
The rulemaking ends three years of uncertainty at banks over which activities would be permitted by the measure named for former Federal Reserve Chairman Paul Volcker. The more-than 900 pages of regulations and preamble leave watchdogs room to interpret wording and decide whether firms are engaging in permitted hedging and market-making as opposed to proprietary trading.
“It appears to be reasonable and one that the industry can live with,” Richard Kovacevich, the former chairman and chief executive officer of San Francisco-based Wells Fargo & Co., said in a phone interview. “The devil is always in the details. The question is how do the regulators implement the rule?”
Banks also got an extra year to conform, with the deadline pushed to July 2015. Regulators recognized the “incredible complexity” inherent in the rule and businesses it covers, said H. Rodgin Cohen, senior chairman of law firm Sullivan & Cromwell LLP, which represents Wall Street banks.
“There’s this debate between rules and principles, and the reason people like rules is that they’re clear,” Cohen said. “There is no way you could have clear rules here. This isn’t like saying ‘Your capital should be 7 percent, you can calculate 7 percent.’ You can’t calculate market-making. You can’t calculate proprietary trading.”
Market-making, or principal trading, is the business of using a firm’s capital to buy and sell securities with customers, while profiting on the spread and movement in prices. Proprietary trading involves banks placing speculative bets with their own capital. The Volcker rule seeks to stop banks with federally insured deposits from making such trades that could threaten their stability.
Concerns that the rule would turn the biggest fixed-income dealers into agency traders weren’t realized, according to analysts at Evercore Partners Inc. Banks can hold inventory to meet expected customer demand, and proprietary trading in government bonds is allowed.