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Five things every trader needs to know about the new Volcker Rule

Unraveling the complexities of the Volcker Rule.

Are you a trader in an investment bank? Do you aspire to becoming a trader in an investment bank? As we suggested last week, being a trader in a bank isn't as exciting or highly paid as it used to be, but it's not that bad as a profession either. The newly released Volcker Rule does, however, have the potential to make traders' lives a little different. If you work as a trader in banking, this is what you need to know.

1. Traders will be able to buy securities in anticipation of customer demand 

Banks won't have to become mere agency traders buying and selling securities as requested by customers. They will have the leeway to buy and hold securities based upon their own judgement. This is crucial and will prevent trading from becoming a mere matching process which can be easily automated.

Specifically, the new Volcker Rule says banks will be allowed to buy (and hold) securities based upon expected demand from customers. This expectation can be based on historic demand, say analysts at CreditSights. It can also be based upon '"demonstrable analysis" of likely customer demand.

2. Hedging has the potential to become an even more complex process than before 

There were fears that the Volcker Rule would restrict banks' ability to hedge trades - or that it would compel them to hedge against trades on a simple position-by-position basis.

Instead, CreditSights points out that the new Volcker Rule allows banks to hedge trades on an aggregate position basis. This means that trades can be hedged across the entirety of a portfolio. However, banks will need to prove that any security purchases made for the purpose of hedging are designed to mitigate risks. This is new, and it could be complicated.

3. Banks are going to need some incredibly astute compliance managers 

As per points 1) and 2) above, compliance managers will now need to assess traders' analyses claiming that inventories need to be purchased in anticipation of customer demand. They will also need to prove that banks' aggregate hedging (AKA trading) activities are indeed focused on risk mitigation across a whole portfolio.

To meet the rule, CreditSights analysts forecast that banks will need to make some "some substantial investments in trading systems, documentation, personnel and gathering and reporting of various data points."

Most importantly, however, banks will need some bright compliance managers who can interpret the data collected and make a case showing that positions are held for hedging or market making purposes - even when they appear not to be.

4. Banks are now free to hire

The Volcker Rule has been in the pipeline since 2010. That's a long time and a lot of uncertainty. Now it's here. And it's not nearly as bad as it could have been - there were (possibly unfounded) fears that banks would have been compelled to become agency traders simply matching buyers and sellers. Instead, they can still buy and hold inventory, they can still hedge, they still need very intelligent traders and they also need very intelligent compliance managers.

5. The Volcker Rule may not actually be implemented until July 2017

The Volcker Rule will become effective on April 1st 2014. However, banks don't actually need to be in compliance with the rule until July 2015. Regulators have the discretion to push the conformance deadline back to July 2017. Hiring related to the rule may not happen instantly.

AUTHORSarah Butcher Global Editor

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The essential daily roundup of news and analysis read by everyone from senior bankers and traders to new recruits.