Wall Street’s Biggest Enemy is Ready to Pounce

The final draft of the Volcker Rule is expected to be completed by September and possibly as early as this summer, to the great displeasure of Wall Street. The Volcker Rule — named after the former chairman of the Federal Reserve — aims to rein in risky trading and will ban banks from placing bets with their own money, a practice known as proprietary trading.

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The chief executives of six large banks voiced concerns over the Volcker Rule at a meeting with the Federal Reserve Governor Daniel Tarullo on Wednesday. The meeting was held at the Federal Reserve Bank of New York and was arranged by Tarullo and JPMorgan Chase (NYSE:JPM) CEO Jamie Dimon, who has publicly criticized the Volcker Rule on several occasions. Among the banking executives were representatives from Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Wells Fargo (NYSE:WFC), and Bank of America (NYSE:BAC).

The financial industry was quick to criticize the Volcker Rule when regulators first proposed a version of it last year. Opponents of the rule urged regulators to rewrite the draft from scratch, which was seen as a ploy to delay the process until after the 2012 election, which could end Democratic control of the Senate and the White House.  However, no such plot has successfully halted the rule-writing process, and proponents have no plan to introduce a new version of the rule.

Essentially, the rule stipulates that banks should not make risky wagers while enjoying government deposit insurance and other types of backing. Currently, regulators are moving forward with provisions and exemptions that allow banks to hold a certain amount of securities for customers.

From Wall Street’s perspective, the Volcker Rule threatens the health of the financial industry and the broader economy. Banks are showing concern regarding the imprecise nature of proprietary trading, which can be blurred with the role of market-making. Market-making takes position in stocks and bonds in order to sell them to clients. These same fears are also shared by foreign governments and both big and small corporations alike.

During the meeting with Tarullo on Wednesday, bank executives made clear the danger that markets face if market-making were to be constrained. The executives warned that if regulators adopted a broad interpretation of the Volcker Rule, it could hurt market liquidity. Tarullo refused to respond to the views expressed by the bank representatives.

Regulators have yet to reach a final agreement on a definition of market-making. Although it has been reported that talks were advancing, the agencies have not agreed upon a uniform definition of market-making to all varieties of securities.

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