The Banking and Strategy Initiative

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Meet the Volcker Rule – Volcker read the other regulators’ | Banking Insight

As of now this is where Paul Volcker has encouraged efforts by the four regulators to implement the limitations of banks to essential services in exchange for access to the trading window with the Fed and of course explicit bailouts on failure (no longer allowed to benefit Capitol Hill senators and policy makers though incl the current and future crop of regulators)

I understand that such measures as trading volume, and its relation to size of the trading “book”, the volatility of earnings from trading, the extent to which those earnings are generated by pricing spreads rather than changes in price, the origination of trades (i.e. from customer initiative) and the close alignment of “hedging” transactions with the composition of the trading positions will be essential tools for supervisors and management to monitor the trading activities of firms.

To the degree those metrics can be made consistent with the banks’ internal reporting and control systems, both management control and simplicity will be greatly facilitated.

I realize that between those two requirements – management commitment and ex-post measurement of performance – lies the thorny issue of guidance with respect to defining the character of “market making” for customers. Clearly, we know what it does not mean. Holding substantial securities in a trading book for an extended period obviously assumes the character of a proprietary position, particularly if not specifically hedged. Various arbitrage strategies, esoteric derivatives, and structured products will need particular attention, and to the extent that firms continue to engage in complex activities at the demand of customers, regulators may need complex tools to monitor them. There may well be occasions when a customer oriented purchase and subsequent sale extending over days cannot be more quickly executed or hedged. But substantial holdings of that character should be relatively rare, and limited to less liquid markets. Flagrant, intentional violation of the general restrictions should be evident from review of well designed metrics and “ad hoc” examinations (and should, of course, also be identified by a bank’s internal controls).

And of course, my writers’ block, if I can be afforded one, comes to the same, when you know it is so impossible, why try! Easier said than done, Paul!

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