The RBC bank and logo photographed on Sept 18 2014.Fred Lum/The Globe and Mail
Royal Bank of Canada will not spin off its proprietary trading arm after top regulators, the United States Federal Reserve and the Securities and Exchange Commission, balked at the idea.
The lender was looking at turning the division into an independent hedge fund to comply with tough new U.S. laws, and then investing bank money into the fund.
However U.S. regulators had concerns about the plan, according to two people familiar with the situation.
One of the people said the early signals from the Fed were that the plan was compliant with the Volcker Rule. However, the Fed may have been concerned about setting a precedent where a foreign bank would be able keep proprietary trading on U.S. soil, which would open the central bank to criticism. The SEC had issues with a smaller facet of the transaction that could have been dealt with, the person said.
Starting next summer, banks with U.S. operations will be banned from any proprietary trading activity south of the border, meaning they will no longer be allowed to trade solely for their own profit. The regulation in question is known as the Volcker Rule, because it was championed by former U.S. Federal Reserve chairman Paul Volcker.
The rule was included in the Dodd-Frank Wall Street Reform and Consumer Protection Act, a set of regulations passed in the wake of the financial crisis. The Volcker Rule was intended to prevent banks from making investments with shareholders' money rather than clients' funds, which was seen as a threat to their own survival when such bets went bad during the crisis.
Because of the rule, RBC, like many of its rivals, had to determine what to do with its U.S. proprietary trading business, known as the Global Arbitrage and Trading unit.
Options now include trying to keep some of the traders in the U.S. but make their trading compliant with the Volcker Rule. Another option is to ask traders to move offshore.
"We are actively working to restructure our proprietary trading business to comply with the Volcker Rule ahead of the July, 2015, deadline," RBC said in a statement. "We have concluded that a spin-out of GAT in its current form will not proceed."
At the moment, RBC will not say what it plans to do with the unit, but someone familiar with the discussions said there will not be mass layoffs, adding that the Volcker Rule allows foreign-based banks to conduct proprietary trading in other countries.
Historically, RBC's proprietary trading unit generated between
1 and 3 per cent of the bank's total revenues, and in fiscal 2013, its revenue totalled $600-million. The unit currently employs roughly 125 people.
"We do not expect there to be a material impact on RBC's revenue in any of the scenarios currently contemplated," the bank said.
The option RBC has rejected involved spinning out the proprietary business to a new fund, which was expected to be called Taursa Capital Partners and run by former senior RBC executive Mark Standish and current proprietary trading head Richard Tavoso.
RBC isn't the only bank that has been forced to rethink its proprietary trading business. However, it holds a key advantage in being based outside the U.S. Rivals such as Goldman Sachs Group Inc. and Citigroup Inc. effectively shut down their prop trading arms in the past few years.
The Securities and Exchange Commission, the top U.S. securities regulator, declined to comment. A call to the Federal Reserve Board was not returned.