Many new rules are going into effect to rein in Wall Street banks. But no rule has sparked as much confusion and outrage on Wall Street as the Volcker rule.
Named for former Federal Reserve Chairman Paul Volcker, the rule was part of last year's Dodd-Frank Act. The law proposed many rules to overhaul the financial markets. The Volcker rule specifically limited banks from betting or trading with their own money. Under the rule, banks can only trade in stocks, bonds and derivatives for their clients. The rule was aimed at barring the firms from the kinds of risky trades that exacerbated the financial crisis in 2008.
Banks have said the rule was not clear and that it would not be possible to distinguish between transactions done internally to benefit a firm or for clients. Regulators drafted a proposal, released Oct. 11, and have invited comments from the public until Jan. 13. Some executives expressed amazement at the size of the proposal, while PricewaterhouseCoopers said in a report that the rule would be "worthy study for Talmudic scholars."
A final version is scheduled to take effect on July 21.
Morgan Stanley, which Wednesday reported earnings of $2.2 billion in the third quarter, will be affected directly by the rule.
In a conference call with investors Wednesday, Morgan Stanley CEO James Gorman discussed the rule in response to a question on the Volcker rule by Roger Freeman, an analyst at Barclays Capital. Here are edited excerpts of the exchange:
QUESTION: On the Volcker rule, did anything stand out as surprising relative to what you expected to see from the discussions that you have had with regulators in the preceding months?
RESPONSE: What stood out to me, was the simple proposition of ensuring depository institutions don't take on aggressive trading was converted into 290 pages with additional 394 comment questions with asking for commentary, some of which have multiple parts for them. I'm not criticizing the regulators. This is a complex thing, and fortunately they have opened up five or six months for the industry to weigh in by providing a list of all of the questions that felt needed addressed.
... We've got six months to work on it and work on it we will....This is a very complex set of changes and they want to be very careful to make sure they get real input from all the market participants to make sure we don't somehow mess this up.