The Wall Street Journal - 21.08.2019

B12| Wednesday, August 21, 2019 THE WALL STREET JOURNAL.**

BANKING & FINANCE

WASHINGTON—The former

government lawyer who man-

aged Washington’s crackdown

on cryptocurrency fraud is join-

ing Davis Polk & Wardwell LLP, a

white-shoe law firm whose cli-

ents include some of Wall

Street’s biggest banks and stock

exchanges.

Robert Cohen, 47 years old,

will become a partner at the

firm in October. He spent 15

years at the Securities and Ex-

change Commission, where he

supervised insider-trading en-

forcement and complex cases in-

volving stock-market infrastruc-

ture before taking over the SEC’s

Cyber Unit.

Mr. Cohen is one of a select

few former government officials

with expertise in cryptocurren-

cies to move into the private

sector. Others include Katie

Haun, a former federal prosecu-

tor known for her involvement

in bitcoin-related cases, who be-

came a general partner at ven-

ture-capital firm Andreessen

Horowitz.

The cyber unit, composed of

about 30 lawyers, was set up af-

ter SEC Chairman Jay Clayton

said in 2017 that many crypto-

currency assets should have to

follow investor-protection laws.

The unit has handled probes tar-

geting crypto trading and fraud-

ulent fundraising, as well as cy-

bersecurity cases. One

prominent probe targeted a

Ukraine-based hacker who broke

into the SEC’s system for storing

corporate filings and allegedly

shared the lucrative data with

Russian, Ukrainian and Ameri-

can traders.

The SEC’s stance against ini-

tial coin offerings, a way of rais-

ing money that exploded in 2017,

essentially killed off the concept

in the U.S., even though many

crypto developers argue rules

written for Wall Street are a bad

fit for their software-focused

projects.

Nonetheless, many startups

that hoped to issue cryptocur-

rencies, or similar digital assets,

have treated them like securities,

which has significantly restricted

their issuance and trading.

Mr. Cohen’s departure from

the cyber unit this month left it

without a leader and came at a

time when the agency was tak-

ing on bigger targets in its

crypto cases.

Senior SEC officials, particu-

larly from the enforcement divi-

sion, are often in high demand

by law firms that represent pub-

lic companies, investment banks

and hedge funds. At Davis Polk,

Mr. Cohen will represent compa-

nies facing government investi-

gations, although like other ex-

regulators he won’t be allowed

to talk to agency officials for a

year.

BYDAVEMICHAELS

Government

Crypto-Fraud

Cop Heads to

Law Firm

driven by the economy, not

the wealth of stockholders—

and obvious: If the market’s

falling because investors fear

a slowdown, the Fed proba-

bly fears a slowdown too,

and should act. Falling stock

prices can also crimp con-

sumer confidence and house-

hold wealth, and so slow the

economy.

At the moment, the Powell

put works when the Trump

put doesn’t. The Fed is con-

cerned that Mr. Trump’s

trade fights are a risk to the

economy, and has already cut

rates once.

WASHINGTON—Banks are
on the verge of getting some
relief from Volcker-rule limits
on speculative trading, one of
the industry’s priorities in
amending the regulations put
in place after the financial cri-
sis.
Two financial regulators on
Tuesday approved changes re-
laxing trading restrictions for
midsize banks and easing
compliance for the biggest
banks.
The Volcker rule, part of
the 2010 Dodd-Frank financial
law, bars financial firms from
making speculative trades

BYLALITACLOZEL

with their own funds through

a complicated set of restric-

tions. Exemptions allow firms

to engage in “market-making,”

or buying and selling securi-

ties for their clients, to facili-

tate market liquidity.

Banks have long complained

the rules were hard to comply

with and that they interfered

with the banks’ ability to en-

gage in allowed trading.

The Federal Deposit Insur-

ance Corp. and the Office of

the Comptroller of the Cur-

rency approved the changes to

the Volcker rule. The Federal

Reserve, Securities and Ex-

change Commission and Com-

modity Futures Trading Com-

mission also have to approve

them and are expected to en-

dorse the changes without any

significant revisions.

Among the changes, firms

with less than $1 billion in

trading assets and liabilities—

including midsize firms that

engage in hedging for agricul-

tural loans or other trades

made on behalf of clients—will

be given the benefit of the

doubt by regulators that they

comply with the Volcker rule’s

trading restrictions. Previ-

ously, those companies faced

the burden of showing regula-

tors that they were in compli-

ance with the rules.

The biggest banks, includ-

ing JPMorgan Chase &Co.,

Citigroup Inc. and Bank of

America Corp., will get lim-

ited relief by no longer having

to prove to regulators that

trades held for less than 60

days weren’t made for the

firms’ own short-term profit

or otherwise prohibited.

The biggest banks will still

have to comply with other Vol-

cker requirements, which en-

compass other short-term

trading restrictions and a re-

quirement that chief execu-

tives sign off on compliance

programs.

FDIC Chairman Jelena

McWilliams said the changes

“will provide more clarity, cer-

tainty, and objectivity around

the Volcker rule, while tailor-

ing the requirements to focus

on those banks that conduct

the overwhelming majority of

trades.” The Volcker-rule lim-

its were imposed on banks in

part to reduce the chance they

might need to be bailed out by

taxpayers after making risky

bets in the markets.

FDIC board member Martin

Gruenberg, an Obama appoin-

tee, voted against the changes,

saying they would weaken re-

strictions on banks engaging

in speculative trading.

“The Volcker rule will no

longer impose a meaningful

constraint on speculative pro-

prietary trading by banks and

bank holding companies bene-

fiting from the public safety

net,” Mr. Gruenberg said. He

added he has calculated the

changes would reduce the

scope of financial instruments

covered by the Volcker rule by

25% for bank holding compa-

nies, down from $2.4 trillion.

Banks have long said the

short-term trading provision

was too subjective and un-

clear. Regulators last year set

out to replace it with a clearer,

accounting-based standard,

but banks said that plan was

worse and would have ex-

panded the types of trades

covered under the rule.

“The changes finalized to-

day help address the long-

standing, bipartisan concern

from Congress and the regula-

tors that the Volcker rule, as

originally implemented, was

too complicated, ultimately

making it more difficult to

serve the needs of savers and

investors,” Kevin Fromer, chief

executive of the Financial Ser-

vices Forum, which represents

the heads of the largest U.S.

banks, said in a statement.

The changes also will ease

some restrictions for banks in-

vesting in hedge funds and

private-equity funds if they

are made for the purposes of

underwriting securities or

trading on behalf of a client.

Regulators plan to make addi-

tional changes to address sim-

ilar fund restrictions.

The changes, if they receive

the expected remaining ap-

provals, will be effective on

Jan. 1, 2020, and banks will

have an additional year to

comply.

Banks to Get Relief in Volcker Rule Changes

Regulators finalize

changes to crisis-era

law that restricts

firms’ own trades

Robert Cohen left the SEC.

T.J. KIRKPATRICK FOR THE WALL STREET JOURNAL

Traders

Bet on Low

Volatility

as a warning signal, some in-

vestors turned to protection in

the derivatives market, driving

up the levels of near-term VIX

futures. Recently, some inves-

tors loaded up on stocks

again, and volatility has re-

treated.

Potentially assuaging some

of the fears surrounding the

inverted yield curve, the S&P

500 has historically risen after

the yield curve has inverted.

The S&P 500 has logged posi-

tive returns six months after

the yield curve has inverted

about 88% of the time, accord-

ing to data from Credit Suisse

Group AG.

Matt Thompson, a manag-

ing partner at Thompson Capi-

tal Management, said that he

is positioned for volatility to

fall and for stocks to rise, at

least in the near term. He said

he has bet against volatility

through VIX futures and

bought S&P 500 futures that

would profit from a stock

Continued from page B1

rally.
Investors have also grown
accustomed to a rapid decline
in volatility after brief jumps.
Betting on volatility to recede
once the VIX rises above 20
has historically been profit-
able, Mr. Thompson said.
Mr. Thompson said that re-
cent trade news alongside the
prospect of interest-rate cuts
has made him more optimistic
that stocks could rise in the
short term, as they did Mon-
day. President Trump recently
said the U.S. would delay some
tariffs on goods from China
from Sept. 1 to later this year.
“It seems like the trade
stuff’s coming off the boil a
little bit,” Mr. Thompson said.
Federal Reserve Chairman
Jerome Powell is scheduled to
give a speech later this week
in Jackson Hole, Wyo., and
some investors are expecting
he will lift expectations of an-
other interest-rate cut, accord-
ing to Mr. Thompson. That
would further fuel a rally for
stocks, making bets against
volatility profitable, he said.
Still, some analysts warn
that U.S. stocks could continue
to record big swings. U.S. and
China trade tensions aren’t re-
solved, and Mr. Powell could
disappoint investors in Jack-
son Hole, sparking big moves
Sources: FactSet (S&P 500, VIX); CFTC (futures bets ratio) in the equity market.

U.S. stocks have stabilized recently, and some investors

have bet volatility will fall and equities will rise.

TheS&P500’sdailyrange CboeVolatilityIndex Ratioofbearishbetsto
bullishonesonVIXfutures
byleveragedfunds,weekly

5

0

times

JFMA MJJ A

3000

2800

2900

Aug. 1 5 7 9 13 15 19

Daily high

Closing level

Daily

low

25

15

20

August

Futures traders are pricing

as certain a cut next month,

with a further one or two

cuts likely by the end of the

year.

The more Mr. Trump talks

tough on trade, hurting the

market, the more the Fed is

likely to cut rates.

Equally, if Mr. Trump can

persuade the Fed to slash

rates—as he recommended in

a tweet on Monday—it is less

risky for him to ramp up the

action on trade.

T

his creates some per-

verse signals. Lower

rates can help stocks

by boosting the valuation of

future profits, even if profits

are likely to be lower in an

economy held back by rising

tariffs.

Disentangling exactly how

much stocks would be down

by if the Fed wasn’t expected

to respond is impossible, but

prices would surely be lower.

Put this together and the

Trump put is less reliable

than many think, especially

when combined with Fed

moves. Even if the Trump

put exists, the president

could be freed to become

more aggressive on trade if

the Fed helps out with lower

rates.

At least as likely is that

the Trump put fails, either

because the president thinks

electoral success rests more

with bashing trade partners

than supporting stocks, or

because trade partners fail to

play along. Be wary.

suffer.
“There’s the possibility of
policy error here by both
sides,” Mr. Milligan said.
Last week might be an ex-
ample of the Trump put hav-
ing little lasting power—it
took just one day for stocks
to reverse all the gains from
the tariff delay.
The logic of the Trump
put is questionable, too. If
Mr. Trump cares so much
about the stock market, why
is he pursuing trade policies
that are anathema to Wall
Street in the first place?
The obvious answer is that
he has multiple goals, some
of which differ from those of
global investors.

H

e’s also unpredictable,
which increases un-
certainty for investors
about government policy.
Making things still more
complex, Mr. Trump’s actions
overlap with the Federal Re-
serve and the more-powerful
“Powell put,” the idea that
Fed Chairman Jerome Powell
will ease monetary policy to
rescue a falling stock market.
This is both controver-
sial—the Fed should be

Continued from page B1

Tw e e t s o n

Trade Have

Limits

3000

2250

2500

2750

April 2018 ’19

April 10, 2018

‘Greatprogress’ontradetalks

Dec. 3

‘Verygoodthingswillhappen’

1.4%

1.1%

Feb. 22, 2019

Having‘goodtalks’withChina

June 7

‘Goodchance’of

Mexicodeal

July 1

Nofurtherincreaseintariffs

Aug. 13

Sometariffincreasesdelayed

Nov. 1

Tradetalks‘aremovingalongnicely’

1.7%

1.3%

1.1%

1.1%

1.4%

1.4%

0.6%

1.1%

May 4

‘Lookforward’tomeeting

withChinesepresident

S&P500one-daychange

1 2

3

4 5

6

(^78)
1 5
6
7
8
2
3
4
Sources: Macro Risk Advisors (dates); Refinitiv (index); Twitter, news reports (comments, actions)
Select days when U.S. actions or President Trump's comments
helped ease trade tensions
S&P500
Shareholders are growing
more vocal in Japan, lodging
protest votes against chief ex-
ecutives, presidents and other
company directors.
Embarrassing bosses like
that was once rare in the con-
sensus-based corporate cul-
ture. But the taboo is weaken-
ing, as part of a yearslong
push to improve Japanese
companies’ profitability and
corporate governance and en-
courage more involvement
from investors.
It hasn’t led directly to the
ouster of many leaders. But it
has given stockholders a new
weapon as they try to nudge
companies around to their
way of thinking. In some
cases, such as with Olympus
Corp., investors have man-
aged to get their nominees
onto boards.
Seth Fischer, founder and
chief investment officer of
Oasis Management Co., a
Hong Kong-based hedge-fund
manager, said his firm was
using Japan’s stewardship
code to push for change, in-
stead of trusting that compa-
nies would take the initiative
themselves. “For far too long,
investors in Japanese compa-
nies would say, ‘If only the
company would...,’” Mr.
Fischer said.
Mr. Fischer said his firm
began talking privately to one
company it invests in last
year, writing letters and
meeting with senior manag-
ers.
He declined to name the
company but said the activ-
ism, among other things,
helped spur share buybacks,
higher dividends and invest-
ment in new information
technology. In addition, he
said, it removed two directors
and added an external direc-
tor put forward by Oasis, and
the chairman retired.
“Our general policy is that
we will always try to work
with management first,” Mr.
Fischer said. “In this case, we
were not making progress ini-
tially, but as things continued
privately, and we were on the
verge of announcing a public
campaign with proxies, the
company went forward with
our proposals.”
In Japan’s equivalent of the
proxy season, a record 355
listed companies saw at least
one significant rebellion dur-
ing this year’s annual general
meetings, according to finan-
cial consultant IR Japan. It
defines that as a result where
at least 20% of votes were
cast against the appointment
of one or more directors, or
in favor of a shareholder pro-
posal not endorsed by man-
agement. That compares with
293 such votes last year.
BYSURYATAPABHATTACHARYA
ANDRIVERDAVIS
Japanese Shareholders Challenge Management