The Volcker Rule, if implemented in present form according to Bernstein project, will cut revenue for Wall Street brokers by 25%. The leaked version, if true, has far reaching implications for financial giants (NYSE:XLF) such as Goldman Sachs (NYSE:GS), JPMorgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS), Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC).
Banning short-term propriety trading has negative implications for credit investors. Regulations under the rule will also remake compensation guidelines so that pay doesn’t encourage big risk-taking. Valuing safety, profitability and soundness, are the goals of restrictions of compensations according to Derivatives lawyer, Sherri Venokur. However, Moody’s says that the Volcker Rule is expected to target big U.S. financial institutions, which all have “substantial market making operations.”
“Bernstein says the proposal’s potential limitations on market-making activities are a surprise as it appears to ban flow trading in “nonexempt portions” of the bond trading business. Bernstein says inventory levels–and presumably risk taking–on a market making desk must be based on the demands of clients and not on “expectation of future price appreciation,” according to The Wall Street Journal.