Wall Street Sweats Out Volcker Rule Impact

The final rule, due out next week, may affect up to 18 percent of revenue at the five largest Wall Street firms.

Wall Street banks, which already shut proprietary trading units that helped fuel record profits, are girding to learn next week how much revenue the Volcker rule may cut from the $44 billion they say comes from market-making.

With U.S. regulators scheduled to vote Dec. 10, the largest firms are getting little detail about the final terms of the Volcker rule’s ban on proprietary trades, and they still have basic questions about what kind of market-making will be allowed, said three senior U.S. bankers. They’re also wondering whether they’ll have to change practices or curtail business in some less-liquid markets, the bankers said.

The Obama administration has self-imposed a deadline to complete the rule by the end of the year. Banks have until July 21 to implement it, even though regulators are behind the schedule outlined by Dodd-Frank. Regulators have assured industry representatives that that deadline probably will be extended, according to three people involved in the talks.

Volcker said in a Senate hearing last year that the rule that bears his name should prevent risky trades that could cripple a bank, and that it should change the culture of large firms that accepted conflicts of interest and rewarded “unnecessarily dangerous behavior.”

Brad Hintz, an analyst at Sanford C. Bernstein & Co., said after the initial proposal was released in 2011 that banks’ fixed-income desks could see revenue fall as much as 25 percent, or about $14 billion based on last year’s revenue at the five firms.

Banks have said that trading customers will suffer from wider spreads and lower liquidity if the rule is too harsh. That raises the possibility that revenue may not fall as lower activity is offset by better margins, said one of the three executives.

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