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Volcker Rule Deadline and Libor

Michael J. Moore & Dakin Campbell, Bloomberg, Wall Street Sweats Out Volcker Rule Impact on Revenue, here.

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 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.

Matt Levine, Bloomberg, EU Is Shocked That Banks Colluded on Libor, here.

So the banks got together and decided: Let’s create a composite of our borrowing costs and all sell swaps against that composite. We’re all talking to each other anyway as we go about borrowing from each other, so let’s all just write down how much we’re paying to borrow, send our costs to a trade association, take a trimmed average, call it the London interbank offered rate, and write all our swaps against Libor. We can even set up a different trade association to make sure that we all have the same documents for our swaps, so that all our swaps work the same and use the same rate that we all more or less agree on.

So they did that, and it was great. I mean, it was, for them. You can complain because Libor has fallen into some disrepute of late, and they can complain because “fallen into disrepute” really means “has racked up some enormous fines for Libor banks,” but I don’t want to hear it from any of you. U.S. banks — U.S. banks alone — made $2.8 billion just last quarter from trading interest rate derivatives. That decision to have a standardized thing that they all agreed on as the basis for those derivatives worked out just plain great for them.

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