TheChek News Flow

Wall Street trading jobs are about to go on a journey

You’ll probably know that after markets closed last night, Steve Mnuchin’s treasury department issued a detailed report outlining the regulatory changes proposed by the Trump administration. Most interestingly, Mnuchin asked the Treasury to review the infamous Volcker Rule which restricts banks’ ability to take “proprietary risk” with their own money and (generally) restricts them simply to making markets for clients. Last night’s report was the Treasury’s response.

The report is simply a proposal with no guarantee of making it into legislation. If it does (make it), however, it’s likely to have a big impact on Wall Street trading jobs. Based on KBW banking analysts’ reading of the report, here’s how we see the likely implications.

The Treasury is proposing that banks with $10B or less in assets should be exempt from the Volcker Rule. This would rule out most large investment banks (unless of course, they were to set up dedicated trading operations which are separately capitalized…).

The report also says, however, that big banks would be allowed to opt out of the Volcker Rule if their trading operations were tiny. – Specifically, if they have, ‘1.) less than $1B in trading assets and trading liabilities, and 2.) trading assets and liabilities represent 10% or less of total assets,’ says KBW.

Even if you’re working for a bank that is still covered by the Volcker Rule, the Treasury’s proposals suggest it would be greatly weakened.

KBW says Mnuchin wants to give banks, “additional flexibility to adjust market-marking inventory.” The Treasury also wants to allow banks to opt out of the existing (and complicated) ‘reasonably expected near term demand of customers’ (“RENTD”) framework, so long as they’re hedging significant risks and have provided detailed descriptions of what each trader is up to (so-called “trader mandates”).

Given that banks like Goldman Sachs are already able to circumvent the Volcker Rule in illiquid markets where they can argue their need to buy and hold inventory for long periods, the proposed changes are likely to open the door to much more widespread proprietary trading in all but the most liquid product areas.

Curiously, the Treasury’s report suggests banks might also be able to escape the Volcker restrictions if they just hire some more control staff. “Consideration should be given to highly capitalized banks that adhere to trader mandates and ongoing supervision and examination to reduce risks to be permitted to opt out of the Volcker rule,” says KBW. Expect compliance and risk recruitment to increase again.

Lastly, the Volcker Rule restricts banks’ ability to invest in hedge funds and private equity funds. Ultimately, banks are only allowed to own 3% of each fund, with the exception of an initial year when they can own 100% of the seed capital.

The Treasury wants to keep much of this in place. However, it wants to define hedge funds and PE funds more closely, and it’s proposing that the initial one year period be extended to three.

UK retail sales worse than expected

The UK’s takeover watchdog has ruled that shareholders of Petropavlovsk who are seeking to overhaul its board are not acting in concert to control the company.

The Takeover Panel, which regulates deals in the UK, said that three of the four directors proposed by the shareholders Renova, M&G and hedge fund Sothic Capital were independent.

“As a result, the Executive has concluded that the resolutions proposed by Renova, M&G and Sothic are not board control-seeking … and accordingly, that these shareholders, and the proposed new directors, should not therefore be considered to be acting in concert and that there is therefore no requirement for a mandatory offer to be made under the code,” the panel said.

Still, it said that one of the directors proposed by Russia’s Renova, Vladislav Egorov, was not independent, given that he is an employee of Renova.

The shareholders proposals will be subject to a vote at the company’s annual general meeting on June 22. DE Shaw, another shareholder, is also backing the proposals by M&G and Sothic.

Together the shareholders have almost 40 per cent of the shares in Petropavlovsk. They are all calling for shareholders to vote against the re-election of the current chairman and co-founder, Peter Hambro, at the upcoming meeting.

Mr Hambro, a scion of the Hambro banking dynasty, co-founded the company in 1994. On Thursday, he said:

The gold miner’s shares have fallen by over 90 per cent over the past five years and the company was forced to restructure and raise equity in 2015 following a collapse in the gold price.

M&G, Sothic and DE Shaw say the company has under performed its peers since its restructuring in 2015 and needs new directors to deal with the company’s debt and improve the company’s corporate governance. Both DE Shaw and M&G contributed $35m during the company’s restructuring.

Renova has declined to comment on its proposed directors.

The EU’s new roaming rules

Big changes for travellers in Europe

The battle to end roaming fees has always been about European political goals and market unification as well as consumer protection. It began in 2006. Viviane Reding, then the European commissioner responsible for telecoms and media regulation, announced the project by saying that “it is only when using your mobile phone abroad that you realise there are still borders in Europe”. The complication of using a phone abroad stems from the fact that the shape and properties of a mobile network depend on the physical and social geography of the country it serves. Networks in Britain are designed to handle the heavy traffic of the relatively dense population, for instance. This means that some charge more than others for access. Networks make up the difference by charging a fee to allow customers from foreign networks to gain access to them, as well as for the administrative load of registering the new guest. The size of this fee depends upon the relationship between the networks, and how much flow there is between them.

The new “Roam Like at Home” rule mean consumers no longer need to worry about any of this. Every EU citizen’s home plan will work anywhere in Europe, at no extra cost. Calls, data and texts are all free. This constitutes a significant change. Data, on average, used to be dear, costing €6 per MB in 2007. Calls were €0.49 a minute, and an SMS cost €0.28 to send. The networks must still pay the costs that arise from their customers connecting to foreign networks, but those fees are no longer passed on as roaming charges.

Some mobile network operators will do well out of the new deal. Networks in Mediterranean countries, for example, will be paid for the data gobbled up by Instagramming tourists. Consumption will soar, now that the tourists don’t pay those costs themselves. But since fewer residents of the Mediterranean venture north for holidays than northern Europeans head south, sunnier countries may do well out of Roam Like at Home. Large transnational operators like Vodafone and Telefónica will be insulated from this, as they can balance traffic flows through their different operations in each country. The new law may not be all good for all consumers; it is possible that non-roamers will end up subsidising the more expensive needs of roamers, as the networks respond to the lost roaming revenue.