– Related to Question 13 — why are they looking to define buy and sell? Is this to avoid or include trading in Inverse ETFs?
– Question 14. Whole foundation is very shaky. Defining what isn’t an exempted trade is strange. Defining the trading account based on what is in it is a bit strange.
They’re defining the trading account in the statue, but we could say that it doesn’t make sense. My function in the bank shouldn’t matter on what time trajectory my trade is on–short term or long term.
– Question 15
Volcker’s initial concept was that anything that is in a “trading account” under the Market Risk Capital rules. They are modifying that, and may be in conflict.
It was noted that the Market Risk Capital rules are subject to Basel III
When they define the Trading Account,
Repos are considered trading for the Market Risk Capital rules, so WHY are they included separately.
Should short term be defined to 180 days, because it will encompass more trades.
C mentioned… why would long term trades be ok?
All the problems happen when you ramp up risk for many years. If you’re entering a short term trade, it’s fairly easy to get out of.
Should short-term arbitrage be ok?
We’re bound by the statue–statue says a trading account is for selling in the near term.
C mentioned that standard CDS maturity is 5 years.
We need to make a list of all the types of transactions (all asset classes), in order to answer this question
Variation margin: if you have a derives trade w/ someone, every day, the value of the UL will move around. Every day as the value of the UL moves around, you have to post cash.
If something isn’t being remarked on a regular basis, so this is a strange metric to use to see if it’s risky. If you have the ability to determine variation margin.
are they trying to capture non-exchange traded products for variation margin?
it’s just an indicator they’re using, but it’s not a great indicator.
for CDSes, every trade has variation margin forever.
why are swaps dealers considered different? Is this b/c CFTC regulates them separately.
rebuttable assumption is unclear.
the exemptions are rebuttable. WHY?
increase the rebuttable period.
M says no, anything bought and sold w/in 180 days is a short term trade.
180 as a hard rule.
If they don’t accept that, at least extend rebuttable period to 180 days.
C thinks short term shouldn’t be in there at all.
Should the agencies ask banks to document intent of trades?
C had to do it for Lehman and took ages, not realistic that people will actually do it
what are the repercussions for not doing this? The only penalty seems to be that you have to close the position.
One of our main points should be: THERE ARE NO PENALTIES
The hedging policy is to be determined by the banks on their one
NOVATION — is when party changes on an OTC contract]
Arbitrage should never be an allowed trading strategy.
How would we define arbitrage?
Our hands are tied with the short term language, but we can add long-term in where we can.
We should include accounts for long-term positions b/c they can be used for short-term trading.
Why do loans get special treatment?
CDOs are considered securities, so they are a covered financial position.
What impact is putting an SVP going to have on securitization?
G2 says that securitizations are ok. Q29 says what affect is the rule going to have on securitization if an SVP is considered a banking entity?
Answer: NO it should not be exempted. We get that there’s an exemption for securitization, but that’s a different story.
But if you’re going to do all your trading through an SIV, that shouldn’t be allowed.
Lots of debate over how SVPs work.
Repo exemption exists b/c they’re the same as sec lending [edit: they’re NOT]… that seems to be why they’re calling it out.
Sec lending is a core part of I-banking. And if repos are just like sec lending, they should be allowed.
Should not have a separate repo exemption, it should just fall under the Liquidity Management position.
Or we could cancel everything out, and just let it be defined by Covered Financial Positions.
There needs to be a mention of repos, bc if they’re not mentioned, it could be argued that it falls under the definition of a loan. So they need to be called out, to define them as different than a loan.
There also needs to be consistency w/ Market Risk Capital, where repo is included as a trading asset [so it would fall under prop trading if we were only looking at the Market Risk Capital rules]/
Examples: AIG got all their money through repo-ing their life insurance bonds. MF Global got their money by repo-ing out securities.
Q: What types of banking entities would be likely to engage in liquidity mgmt. activities?
We want repos to be separate from liquidity mgmt.
Bona fide liquidity mgmt. by the bank are NOT the trading account.
We need to clarify what bona fide liquidity is.
Let’s define it as Treasuries.
They will try to say “I’m a bond trader, and I have to put these bonds to use.” No you don’t. So sell them if you don’t want them anymore.
Should there be a clarifying exclusion for illiquid assets?
A lot of this doesn’t make sense for illiquid assets.
So NO there should not be an exclusion for illiquid assets.
A lot of langage needs to be added if there is to be a meaningful effect on preventing trading in illiquid assets.
There was an overall comment that there need to be simple rules or traders won’t pay attention to them. Your beta should be ___.
[banks in euro zone fighting Volcker rule, it’s in the Financial Times today, Tuesday]
There was a discussion on strategy, and whether or not we should be putting this into layman’s terms in the comment letter itself. We could have two copies, one that’s a layman version and one that’s for the Regulators themselves. Or we could have an appendix to the letter that’s a layman version. We could send the layman’s copy to congresspeople.
Alt Banking took a holistic view… Can’t do market-making if there’s a conflict of interest. Someone said, if I have my money in a bank (in a savings account), and you’re market-making, I’m not getting any piece of the bid-ask spread.