A leaked copy of the Volcker Rule, which was part of the Dodd-Frank Act, has prompted Moody’s to predict that large banks will be placed in a credit negative position.
The Volcker Rule was designed to prohibit banks from risking their own capital by participating in the proprietary trading of securities, derivatives or high-risk financial instruments associated with private equity and hedge funds, according to HousingWire.com.
Once Moody’s Investors Service obtained a copy of the leaked rule, analyst Peter Nerby predicted negative consequences for bond-holders such as Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley.
Nerby said that he sees the complex restrictions on market-making and hedging as credit negative for bank bondholders, HouseingWire.com reports.
"The rule disadvantages the important core market-making franchises of the big U.S. banks and creates opportunities for unregulated competitors, such as high-frequency trading firms, and the non-U.S. operations of foreign banks," Nerby said, according to HousingWire.com.
Moody’s disagrees with the rule’s guidelines and has said that while the rule outlines a few principles, it does not go far enough to implement effective guidelines.
According to the guidelines included in the leaked rule, financial firms with gross trading assets and liabilities higher than $5 billion must provide between 17 to 22 separate data metrics monthly to the government, HousingWire.com reports.