1. FED

1) Volcker Rule Gaps May Leave Uncertainty About Trading Bans

More than a year after they began crafting the details of the Dodd-Frank Act’s ban on proprietary trading by U.S. banks, regulators released their first version of the so-called Volcker rule while acknowledging that hundreds of questions remain unanswered.

There aren’t bright lines on many questions and that will make it difficult for banks to put in place their compliance regime.

2) U.S. Panel Proposes Criteria for Systemically Risky Firms

The U.S. Financial Stability Oversight Council approved the draft of a rule setting standards for leverage and debt that will help the panel determine which non-bank financial firms require Federal Reserve scrutiny.

“One of the most important things that the Dodd-Frank Act did was to give us the authority to designate non-bank institutions that pose those type of risk to the system and to give them to the Fed to provide a tougher level of supervision,” Geithner said at today’s meeting at the Treasury Department in Washington. The rule would help build a more “resilient, more stable financial system,” he said.

3) Fed Says Dealer Easing of Hedge Fund Lending Terms Slows

The number of Wall Street dealers tightening financing rates offered to hedge funds outnumbered those easing as Europe’s debt crisis escalated, a Federal Reserve survey shows.

While overall credit terms offered to counterparties were little changed, the survey was “in contrast with the broad- based easing that had been seen since the inaugural survey in June 2010,” the Fed said in the report today.

4) Top Forecasters Say Best Over for Dollar as Fed Will Ease

The most accurate foreign-exchange forecasters say the dollar’s best quarterly rally since 2008 has no chance of continuing to year-end as a slow economy spurs the Federal Reserve to flood the world with more U.S. currency.

Analyst Comment: The Fed could start discussing the expansion of its balance sheet by the end of this year and begin with the asset purchases in early 2012. The bias will be for a modest retracement in the dollar from current levels. Investors are already extraordinarily long of dollars.

2. Euro zone Crises

1) Trichet Sees ‘Systemic’ Risk Amid Debate on Greek Writedowns

European Central Bank President Jean-Claude Trichet warned of threats to the financial system as the conflict among political leaders intensified over how to extricate Europe from the debt crisis.

Trichet’s message comes as Slovakian lawmakers vote on the euro region’s retooled bailout fund. The country is the only member of the 17-nation euro area that hasn’t ratified the measure agreed between leaders in July to fight turmoil that has spread from Greece to larger nations including Italy. Slovakia’s largest opposition party, which pledged to reject the motion today, said it will back the revamp in a second vote if it fails to pass the first time.

2) Geithner Says Europe Must Go Beyond Bank Recapitalization Plan

U.S. Treasury Secretary Timothy F. Geithner said European leaders must go beyond a planned recapitalization of banks to resolve the continent’s sovereign- debt crisis.

Geithner will be in Paris on Oct. 13-14 for a meeting of Group of 20 finance ministers. European officials are striving to meet an end-of-month target set by French President Nicolas Sarkozy to get to grips with the crisis, which has propelled Greece to the brink of default, shaken world markets and fueled speculation that the 17-nation currency might not survive in its current form. European leaders are due to meet on Oct. 23.

European Union and International Monetary Fund officials indicated Greece will get an 8 billion-euro ($11 billion) loan next month under a 110 billion-euro bailout, as European leaders move to reopen talks on a new package that may mean deeper writedowns on Greek debt.

3) Slovak Parties Seek Talks on EFSF Vote Repeat as Europe Watches

Slovakia’s opposition leader said lawmakers must find a way to approve Europe’s enhanced bailout fund, which was rejected yesterday amid a dispute over the future of Prime Minister Iveta Radicova.

Slovakia “must sign up to the rescue fund,” Robert Fico said late yesterday, adding that his party, which didn’t back the measure yesterday, is awaiting a proposal from the ruling coalition.

Analyst Comment: Eventually a yes vote will be secured. Does Slovakia really want to be alone among 17 euro-zone members states on this one, and when the future of Europe is at stake?

4) Cost of Swapping Euro Payments to Dollars Falls to 3-Week Low

A measure of how much European banks pay to fund in dollars declined to the lowest in more than three weeks as lawmakers in Slovakia vote on the euro area’s enhanced bailout fund.

Slovakia’s approval of the revamped European Financial Stability Facility is needed to enact the plan to prevent contagion from the debt crisis that has spread from Greece.

Analyst Comment: There is hope that we are just weeks away from a having comprehensive strategy to recapitalise the banks and restore confidence in Europe.

5) Spain’s ‘Blank Check’ Offers Rajoy Room on Deficit: Euro Credit

Spaniards will probably hand opposition head Mariano Rajoy a record mandate in elections next month. Unwilling to risk his lead in polls, the People’s Party leader hasn’t told voters what he’d do with it.

Five weeks before the Nov. 20 election that polls suggest he’ll win, Rajoy hasn’t said how he’ll cut spending or change labor rules. He’s pledged tax breaks for small businesses, said he “wouldn’t like” to cut pensions and vowed a “true” bank restructuring, without saying what that means.

That hasn’t stopped Spaniards from telling pollsters they’ll hand the PP its largest-ever majority as the country struggles with Europe’s highest jobless rate amid a three-year economic slump. With an outright majority and few election pledges to deliver on, Rajoy may be free to slash the budget deficit, overhaul labor rules and shield lenders from the sovereign-debt crisis.