You'll probably know that after markets closed last night, Steve Mnuchin's treasury department issued a detailed report outlining the regulatory changes proposed by the Trump administration. Most interestingly, Mnuchin asked the Treasury to review the infamous Volcker Rule which restricts banks' ability to take "proprietary risk" with their own money and (generally) restricts them simply to making markets for clients. Last night's report was the Treasury's response.
The report is simply a proposal with no guarantee of making it into legislation. If it does (make it), however, it's likely to have a big impact on Wall Street trading jobs. Based on KBW banking analysts' reading of the report, here's how we see the likely implications.
The Treasury is proposing that banks with $10B or less in assets should be exempt from the Volcker Rule. This would rule out most large investment banks (unless of course, they were to set up dedicated trading operations which are separately capitalized...).
The report also says, however, that big banks would be allowed to opt out of the Volcker Rule if their trading operations were tiny. - Specifically, if they have, '1.) less than $1B in trading assets and trading liabilities, and 2.) trading assets and liabilities represent 10% or less of total assets,' says KBW.
Even if you're working for a bank that is still covered by the Volcker Rule, the Treasury's proposals suggest it would be greatly weakened.
KBW says Mnuchin wants to give banks, "additional flexibility to adjust market-marking inventory." The Treasury also wants to allow banks to opt out of the existing (and complicated) 'reasonably expected near term demand of customers' (“RENTD”) framework, so long as they're hedging significant risks and have provided detailed descriptions of what each trader is up to (so-called "trader mandates").
Given that banks like Goldman Sachs are already able to circumvent the Volcker Rule in illiquid markets where they can argue their need to buy and hold inventory for long periods, the proposed changes are likely to open the door to much more widespread proprietary trading in all but the most liquid product areas.
Curiously, the Treasury's report suggests banks might also be able to escape the Volcker restrictions if they just hire some more control staff. "Consideration should be given to highly capitalized banks that adhere to trader mandates and ongoing supervision and examination to reduce risks to be permitted to opt out of the Volcker rule," says KBW. Expect compliance and risk recruitment to increase again.
Lastly, the Volcker Rule restricts banks' ability to invest in hedge funds and private equity funds. Ultimately, banks are only allowed to own 3% of each fund, with the exception of an initial year when they can own 100% of the seed capital.
The Treasury wants to keep much of this in place. However, it wants to define hedge funds and PE funds more closely, and it's proposing that the initial one year period be extended to three.