By Markets Media

Define Proprietary

09.30.2011 By Markets Media

As regulators still scratch their heads over how to properly interpret the Volcker rule, draft legislation suggests that banks and other financial institutions will be able to engage in the practice.

Earlier this month, a 174-page draft of the rules indicated that regulators have good intentions but seem unable to clearly define what’s constituted as proprietary trading. For instance, it says banks can still engage in market making and positions in loans, FX and commodities. That’s proprietary trading, no matter how much lipstick you add to it.

Holding times are up for debate as well. Who can exactly determine how long a position must be held during a volatile market? If a bank is making a market in a particular name, what’s the holding time on that? What if it’s a hedge for a customer order? All these questions and plenty more need be addressed in better fashion.

Since the introduction of the Volcker Rule, which is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, most banks have begun spinning off proprietary trading desks into separate entities and have rid themselves of hedge fund investments.

Still, despite the detractors, some traders are supportive of the regulation, deeming it fit for banks who may need to scale back their operations.

“Glass-Steagall worked for some 60 years, was repealed (in essence) in 1999 by Gramm-Leach-Bliley and within 8 years we needed a trillion-dollar-plus bailout of our financial services industry, even with two major market participants being allowed to collapse (Bear and Lehman). Color me supportive of the Volcker Rule,” said one trader in Chicago.

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