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Reports: Leaked Volcker Memo Stirs Markets, Industries

A recently ""leaked memo"":http://cdn.americanbanker.com/media/pdfs/093011VolckerRulePreamble_FINAL_DRAFT.pdf outlining the proposed Volcker Rule sent market watchers and industry insiders into a tizzy, according to multiple news outlets.

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The tentative rule itself ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô required by the Dodd-Frank Act and named after former Fed chief Paul Volcker ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô remains in development at federal regulatory agencies like the ""Federal Reserve"":http://www.federalreserve.gov/, ""FDIC"":http://www.fdic.gov/, and ""Office of the Comptroller of the Currency"":http://www.occ.treas.gov/.

""_The American Banker_"":http://www.americanbanker.com/ obtained and published a copy of the memo last week. In early form, the yet-to-be proposed rule seeks to address short- and long-term proprietary trading rules, with the precise way regulators plan on defining it remaining a major hurdle.

The leaked memo tentatively jumps that hurdle by defining proprietary trading as the ""purchase or sale of one or more covered financial positions as principal"" for accounts created for these purposes.

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It also rules out agents, brokers, and custodians acting on behalf of an unaffiliated third party, ""because acting in these types of capacities does not involve trading as principal, which is one of the requisite aspects of the statutory definition.""

Also in the memo: the definition of a trading account as one that takes covered financial positions for certain security-based swaps, exemptions for banks that deploy risk-mitigating actions on behalf of consumers and government entities, and more.

Writing for ""_The Wall Street Journal_"":http://online.wsj.com/article/SB10001424052970204294504576615382298044922.html, reporters Scott Patterson and Victoria McGrane said that industry insiders from across the market ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô bankers, lobbyists, and lawmakers ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô pulled together to address the situation and better understand the details during mornings last week.

In one instance, according to the _Journal_, a seven-member team of attorneys with ""Davis Polk & Wardwell"":http://www.davispolk.com/ ""worked through the night"" to provide clients with briefings about the memo. Staffers with congressional offices busied themselves with the memo to better understand the finite details.

More formal outcry came from around the markets.

""_Forbes_"":http://www.forbes.com/sites/halahtouryalai/2011/10/07/volcker-rule-will-hit-goldman-sachs-morgan-stanley-hardest/ quoted ""Nomura"":http://www.nomura.com/ analyst Glenn Schorr as saying in a recent note, ""Given the challenges of distinguishing what it is improper trading and what is not, we believe that it is impractical for regulators to propose and implement overly prescriptive rules.

""We believe that regulators understand that, if the rules are too restrictive, then liquidity would be hampered, placing U.S. banks at a competitive disadvantage [versus] global peers,"" _Forbes_ quoted her as adding.

About Author: Ryan Schuette

Ryan Schuette is a journalist, cartoonist, and social entrepreneur with several years of experience in real-estate news, international reporting, and business management. He currently lives in the Washington, D.C., area, where he freelances for DS News and MReport.
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