Financial Reform - Impact on Market-Makers

FX Trader, so you're saying that Market Makers will be impacted by Volcker because the nature in which they use the Banks capital?

I thought they would be immune, but am equally as confused as anyone about how Washington is defining "prop."

Also, I'm confused as to how places like CS and DB New York will be able to avoid the reform even though they are international banks...I mean I think they should be allowed to given the fact that we would literally be pushing these banks out of America as all their business can be conducted electronically.

Other than the employees, there's no reason CS or DB have to exist in America....I would assume their clients would still use them even if their desks were over seas.

Edit: FXTrader was only discussing the Lincoln amendment in that post. But as for CS and DB avoiding the legislation, there are two things.

1)Their deposit are not FDIC insured, as a result the federal government and by extension the taxpayer will never be asked to fund their lending or trading activities 2) At least for CS, in the US, they already are a subsidiary of their parent company (they are known as : Credit Suisse Securities USA LLC), so even if they were to fall under the blanket of regulation, they've technically already complied by being a spin-off.

Of course I'm being facetious here, because 2) only applies if 1) was an issue

I didnt address the proprietary trading ban in that post. I'll address it here. But the consensus is, it will be a watered-down Volcker rule (especially since Levin and Merkley are trying to strengthen it and Volcker opposed their change).

Here's an example of why they are so confused as to how to address it (even for market makers).

If I'm a market maker in single stock options and Hedge Fund A comes to me and wants to sell 100 calls on XYZ, I make a market and buy the options. Now technically speaking, if i dont hedge this trade, it is a proprietary bet because I'm sitting pretty if the stock experiences a rally and I'm hurting if it collapses. So, my regulator can try to make sure that i delta hedge it (go out and sell some stock to hedge the exposure). Fine!

...but... wait... what if I was making a proprietary bet on volatility? Oops! If volatility explodes, I make huge money, if vol collapses, I'm hurting. So my regulator says I have to hedge delta AND vega. Fine!

Mmmm... but... what if i'm making a proprietary bet on gamma? If this underlying experiences substantial drift, I'll make big money, if it remains stagnant, I'm hurting. My regulator says I have to hedge delta, vega AND gamma.

(can you see where this is going?)

I can keep going, (Perhaps even when hedged as described above, i could using options as a bet on dividends, interest rates, even TIME (for which gamma is a proxy)).

That's ONE example of a market maker in single stock options. You can imagine how complex it gets otherwise.

As for your question about DB and CS, the legislation aims to prevent tax payers from funding trading bets and derivatives "gambling". In a nutshell, DB, CS, UBS and other international securities firms do not have FDIC insured deposits here in the US (that is the key!)

Got it, I assumed there would be mass hysteria and confusion in DC over what exactly a "Proprietary" position really was at bank since technically, as you laid out above, market makers have to take proprietary positions in order to do their jobs.

Here's another question for the FX or Credderivs:

How does this effect the smaller market makers that aren't banks, like Optiver, Weeden, etc? Bad or Good?

A surface assumption would be, depending on the degree of Volcker & Lincoln, this would be good for them...possibly exposing them to more clients and the larger spreads FX mentioned above that'll occur during the "spin off" period.

Ultimately I think anything that passes will not have to do with fdic but more likely who gets access to the discount window, those large european banks all have access I beleive so it would not make sense to be able to borrow at 0% and put on prop trades to hurt us firms.

No one knows what the rules will truly look like, daily we hear the CFTC change their minds.

How exactly does a funding/bond desk prepare a position for a PE firm's upcoming LBO? does the desk hedge it all right away, is balance sheet affected? does PE funding rates go up?

How does a utlity hedge low power prices? Who you think can manage risk better, some utility or top traders? But for the traders to manage risk they need to speculate daily, so are all those deals gone?

Just a heads up, it passed tonight, about an hour or so ago.

Now it has to be merged with the house bill which is much less watered down than the senate bill.

brothers and sisters, let me say this

until america has one regulator (like the uk) or two (like the netherlands) (and also a fed to do monetary policy and systemic risk regulation), america's reform is not done yet.

c'mon, america is the odd one out. everyone else is consolidating their financial regulatory system. dodd's bill has some consolidation aspects, but that's still not enough

america's system is a mess, a clusterfuck if you will. it leaves gaps in some areas, creates dupications in others, allows companies to pit authorities against one another, creates administrative and cost nightmares for fin institutions who have to answer to 51+ insurance regulators, encourages regulatory capture, confusers consumers and, most of all, is damn expensive

america keeps patching shit up when something goes wrong with a new body here, a new committee there. that's how it's been for over a century

and let's not forget the sec and cftc have had pissing contests for decades. it's ridiculous. that certainly wouldn't happen in the uk or australia.

this all should be obvious. but alas, there are lobbyists. dodd's proposal for a single bank regulator didn't get traction. there is, unsurprisingly, no trace of it in his bill. hell, this one certainly wasn't unanimous. what's stupid was that the the aba and icba was complaining about how community/smaller banks/building societies would be overlooked. what crap. it's not about what you want, but what's best for the country.

thus, i don't think we'll see it any time soon. so, america's regulation won't be finished any time soon. paulson's blueprint, while imperfect, is more or less on track. that will be classic literature by the time america's done it's job right, by the looks of it. and dodd will hopefully not be ashes in an urn by that time

and america needs it. it might be a hassle, but it will save america billions in the long run, at a time when america needs all the fucking money it can get in the next 10+ years.

in the wsj, jamie dimon came out praising the idea of a single banking regulator in an op ed. that's good enough for me.

anyone have an opinion on how hard it's gonna be to get a derivatives trading job this fall now?

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Senate Democrats Pass Bill Allowing Govt to Collect Addresses, ATM Records of Bank Customers

http://cnsnews.com/news/article/66439

Creepy!