U.S. Banks and Financial Institutions Brace for Tough Changes

The Financial Stability Oversight Council in the United States will propose rules on how it will determine non-bank firms that are important enough to the financial system for additional oversight by the Federal Reserve. Institutions such as insurance companies, mutual funds and other key players in the financial markets who are identified under the new program will be designated as systematically important financial institutions (SIFIs) and be subject to new capital and liquidity rules. The institutions will also be required to draft detailed plans on how they can be unwound in worst case scenario.

Banking regulators are scheduled to vote on a proposal banning proprietary trading done by banks, also known as the Volcker rule. The Volcker rule has been in focus after Swiss Bank UBS announced that it was a victim of fraud by one of its own trader, who lost $2.3 billion in losses related to trading. UBS chief executive Oswald Gruebel resigned over the failure of the bank to implement risk control measures. The Volcker prevents banks from speculating in securities, derivatives and other financial instruments for profit. Banks will be allowed to act as market makers and hedge against risks.

These rules were created as part of the 2010 Dodd-Frank financial oversight law. The law was put in place after the collapse of American International Group, Inc which was not subject to banking regulators at that time. Bank holding companies with more than $50 billion in assets are already subject to additional scrutiny.

U.S. stock markets are consolidating as investors wait for a vote in Slovakia on increasing the size and abilities of the European bailout fund. The Dow is trading around 11,437, the Nasdaq around 2,585, and the S&P 500 around 1,198 at the time of writing this report. Traders on OpenBook are primarily long on the Dow (DJ30). The longs have their limits around 11,600 and stops around 10,500.

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