Wall Street Sweats Out Volcker Rule Impact On Revenue
Wall Street banks, which already shut proprietary trading units that helped fuel record profits, are girding to learn next week how much revenue the Volcker rule may cut from the $44 billion they say comes from market-making.
With U.S. regulators scheduled to vote Dec. 10, the largest firms are getting little detail about the final terms of the Volcker rule's ban on proprietary trades, and still have basic questions about what kind of market-making will be allowed, said three senior U.S. bankers. They're also wondering whether they'll have to change practices or curtail business in some less-liquid markets, the bankers said.
The answers could threaten their revenue and affect transaction costs for clients of firms such as JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc. The Volcker rule is close to being adopted more than three years after it became a centerpiece of the 2010 Dodd-Frank Act, designed to prevent a repeat of the global credit crisis.
"Everything in the Volcker rule that defines what is permitted market-making, and what is not, is by far the most important part of the rule," said David Hilder, an analyst at Drexel Hamilton LLC in New York. Regulators probably have been silent on the specifics to preserve agreements they've made, he said. "Outside input in the late stages of a negotiation tends to blow apart consensus."
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, named for former Federal Reserve Chairman Paul Volcker, seeks to stop banks with federally insured deposits from making such trades that could threaten their stability.
Regulators including the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and Commodity Futures Trading Commission are scheduled to meet next week on the rule's final version. The Securities and Exchange Commission probably will act at about the same time.
The $44 billion at stake represents principal trading revenue at the five largest Wall Street firms in the 12 months ended Sept. 30, led by New York-based JPMorgan, the biggest U.S. lender, with $11.4 billion. An additional $14 billion of the banks' investment revenue could be reduced by the rule's limits on stakes in hedge funds and private-equity deals. Collectively, the sum represents 18 percent of the companies' revenue.
Goldman Sachs and Morgan Stanley may be the most affected by any additional restrictions since they generate about 30 percent of their revenue from principal trading. JPMorgan generated about 12 percent of its total revenue from principal transactions in the 12 months ended Sept. 30. The figure was less than 10 percent for Bank of America, based in Charlotte, North Carolina, and New York-based Citigroup Inc.
The executives at three banks, who asked not to be identified because the talks are private, characterized the lack of communication from regulators so close to the end of the rulemaking process as unusual. The U.S. Chamber of Commerce's capital markets unit asked regulators last month to re-propose the rule to allow more comments and discussion.
Treasury Secretary Jacob J. Lew warned chief executive officers of top U.S. banks in a private meeting in October that the final Volcker rule would be tougher than Wall Street expects. Lew, who's coordinating efforts of the five regulators, told the bank group that to get the rule right, he prefers to err on the side of making it tougher, said one of the people familiar with the discussion.