The key is how to define prop trading so the rule can be enforced.
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Thank Paul Volcker whose so-called Volcker Rule is forcing banks to wind down prop trading operations.
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Bloomberg columnist Michael Lewis offers this : The banks have no intention of ceasing their prop trading.
Volcker allows banks to invest up to 3% of their Tier-1 capital in prop trading, hedge funds and private equity.
American efforts to draw clear boundaries between prop trading and buying securities to sell to clients are proving fiendishly difficult.
The Volcker Rule prohibits banks from owning a division (like prop trading) that makes speculative bets with the banks own capital.
Kevin Roose at the New York Times recounted recently how Citi is winding down is prop trading effective Feb. 6.
In many instances, the prop trading guys and gals who were forced to find new jobs landed ended up finding them hedge funds.
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No vast prop trading, just the simple fact that the banks have lent too much money to people who now cannot pay it back.
Some Fin Reg provisions like prop trading and hedge funds phase in over many years, but resolution authority containing these wind-down provisions starts immediately.
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Corzine initiated a new and aggressive prop trading strategy that invested heavily in European sovereign debt leading up the the EU crisis, the trustee says in his report.
Why would the prop trading issue be expendable to bankers?
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Banks including Bank of America, Goldman Sachs, Morgan Stanley and others began winding down their prop trading desks early on before the much of the rule was finalized.
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The back story is this: For years, these firms were known as proprietary trading groups, or prop shops.
The problem is that in the short- to medium-term, ill-advised trading with potential adversaries can serve not only to prop up their regimes, but afford them opportunities to do us great harm.
Prop traders, even if they are "ring fenced" from other trading desks, still have access to information the bank has on customer positions, if only by virtue of breathing the same air as their client-facing colleagues.
All banks have until 2014 to comply but Goldman and JP Morgan already shut down some of their proprietary trading desks while Bank of America laid off a third of its prop traders.
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