By Ryan Tracy And Peter Rudegeair
Starting Wednesday, Wall Street banks have to comply with
perhaps the most significant new restriction on their activities
since after the Great Depression.
It was greeted with a shrug.
The "Volcker rule," the regulation banning taxpayer-insured
banks from making bets with their own money, arrived with little
fanfare, showing how much Wall Street has changed since Congress
ordered regulators to write the rule as part of the Dodd-Frank
financial law five years ago.
The big banks that fought for years to change the rule have for
the most part already fallen in line. Firms such as Citigroup Inc.,
Bank of America Corp., Morgan Stanley and Goldman Sachs Group Inc.
have shed their proprietary-trading desks, pulled money from
certain investment funds and ceased other activities that would run
afoul of the rule's restrictions.
J.P. Morgan Chase & Co.'s chief financial officer, Marianne
Lake, said last week the bank has made sufficient changes that she
doesn't expect the rule "to have a direct impact on near-term
trading."
Much remains uncertain about how the rule will work. Regulators
have checked on banks' preparations but won't start conducting the
first audits for compliance until later this summer, officials
said.
"No one has experienced what life [under the rule] is going to
be like, because they haven't had to comply and they haven't been
examined yet," said Robert Maxant, a partner at consultancy
Deloitte & Touche LLP.
Yet many of the activities prohibited by the Volcker rule, named
for its originator, former Federal Reserve Chairman Paul Volcker,
already have moved away from banks. In some cases, traders have
left banks altogether. A total of 1,428 new hedge funds were
launched from 2011 to 2014, according to Preqin, a firm that tracks
the industry. As many as 214 of those were created by employees who
left banks, the company estimates.
Hedge fund PDT Partners is a trading unit led by the
mathematical specialist Peter Muller that split off from Morgan
Stanley in 2012. PDT has $3 billion in capital to invest and 150
employees, double its original staff size, a person familiar with
the firm said.
Meanwhile, the five largest U.S. investment banks cut staff on
bond sales and trading desks by 18% from 2011 to 2014, according to
Coalition Ltd., a research firm.
Other bankers are learning to live with the restrictions, albeit
with some consternation. At a Washington event earlier this month,
Roger Blissett, head of U.S. strategy at Royal Bank of Canada's
capital-markets division, was asked what he would change about the
Dodd-Frank law. "That's low-hanging fruit," he said. "The Volcker
rule."
One senior Wall Street trader estimated he spends around twice
as much time on compliance-related matters as he did before
Dodd-Frank. The law "has been a bull market for lawyers and
compliance," he said.
Regulators tried to ease the transition, giving banks more than
18 months to conform trading operations and even longer, until
2018, to sell certain investment funds. The rule "is big and new
and will cause changes in behavior," said Karen Solomon, deputy
chief counsel at the Office of the Comptroller of the Currency, one
of five U.S. agencies enforcing the rule. "The likelihood that you
can turn on a dime, particularly for the large institution, is
pretty small. So [regulators] don't want to set up expectations
that are unreasonable."
The government has its own hurdles. Regulators have been
training examiners to become experts in the rule's minutiae, such
as how banks calculate limits they place on trading desks. Banks
also are reporting detailed data on trading activity to regulators
daily, meaning agencies had to train or hire analysts who can
digest the data and evaluate, in Ms. Solomon's words, "whether the
bank has done what it said it would do."
One question is whether banks are setting proper limits to
ensure their trading operations are meeting customers' demands,
rather than using the guise of market making and hedging, which are
permitted under the rule, to add to banks' own bottom line.
Lawyers and consultants advising banks said they are unsure
about certain details, such as how regulators will treat certain
types of investment funds banks set up for foreign clients.
"There's still a lot of unanswered questions that won't be
answered until we have some precedent and established practices,"
said Joseph Vitale, a partner at Schulte Roth & Zabel LLP.
Regulators have been meeting weekly, sometimes more often, since
the rule was finished in December 2013 to respond to banks'
questions about implementing it. The agencies have published 16
answers. Regulatory officials said they have covered the major
issues and are now focused on ensuring the agencies enforce the
rule consistently.
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