Volcker Rule

[moretodo]

Can anyone please explain to me as to why BBs are still offering derivative trading and other related positions such as Quantitative Investment Strategies and STQA etc. post Volcker rule and Dodd Frank act. Shouldn't these divisions be ideally shutting down business ?

I dont think these guys merely execute trades on behalf of clients and assist them in hedging risk. They still have to be investing the bank's capital in some way to command such high salaries and have hard skill set requirements.

 

[Ken Abbott]

Certain products are exempt. It's very important to read the fine print associated with the rule.

 

[financeguy]

In addition to certain products being exempt, there seems to still be quite a lot of wiggle room in how banks can trade in less-than-liquid derivatives markets. It would be very convenient if every trade a client wanted to do could be offset by a trade a different client wanted to do, but that's simply not possible in many markets in which this sort of natural two-way flow just doesn't exist. Banks are still taking decent amounts of risk in macro vol products, for instance, by trading under the guise of pre-positioning for client flow, i.e. saying they are trying to foresee what clients will want next week or next month and so are buying in the market in order to be in a better position to sell to those customers when the time comes. There's additional fuzzy lines given banks delta hedge options, run delta positions against vega positions, run delta and vega positions against surface positions, and so on - all of which can be real attempts to hedge illiquid risk with more liquid risk - and furthermore all of these risks are model dependent to some extent. While all of that seems quite reasonable for hedging purposes, you can see how risk can still be taken one way or the other. I'm not sure how quickly all of that is going away; we've been talking about all the same issues for the past four years or so and not much has changed. Then again I am by no means a knowledgeable resource on the Volcker rule - I can only say what I see on the ground.