RBC Exits Half Its Prop-Trading Strategies as Volcker Rule Looms

Royal Bank of Canada exited about half its proprietary-trading strategies as the lender seeks to comply with looming U.S. regulations.

The bank’s RBC Capital Markets unit recorded about C$46 million ($40.5 million) of costs and lower revenue in the fourth quarter tied to abandoning those strategies to conform with the Volcker Rule, the Toronto-based company said today. Royal Bank has been working to reorganize its global arbitrage and trading unit for a year after the U.S. regulators released a final version of the provision, which restricts banks’ ability to trade with their own money.

“We’re well advanced in restructuring our proprietary-trading activities in the U.S. to comply with the Volcker Rule,” Chief Financial Officer Janice Fukakusa said today in a conference call with investors. “We’ve exited about half the trading strategies, we’ve transitioned market-making strategies into our agency-trading business and we are restructuring our remaining strategies to comply.”

The bank has sold some of its credit positions and transferred others into cash equities and securities-funding businesses, Doug McGregor, head of RBC Capital Markets, said on the call. Royal Bank considered spinning off its U.S. proprietary-trading business into a hedge fund before deciding against the plan in October.

The provision of the 2010 Dodd-Frank Act, named after former Federal Reserve Chairman Paul A. Volcker, limits banks’ ownership stakes in hedge funds and private-equity funds.

“It’s not that much of a concern whether or not they have this specific prop-trading business persisting the way it has in the past,” said Tom Lewandowski, an analyst with Edward Jones & Co. in St. Louis. “It’s going to be cents in the overall picture of earnings.”

Royal Bank gets about 1.5 percent of total revenue from proprietary trading, which is “not a significant thing for us,” Fukakusa said at a March 26 investor conference. Royal Bank had C$34.1 billion of revenue in the fiscal year ended Oct. 31, according to financial statements.

Before it's here, it's on the Bloomberg Terminal.