U.S. Regulators to Defend Volcker Rule Ban on Proprietary Trades
January 20, 2012, 6:53 AM ESTBy Phil Mattingly and Cheyenne Hopkins
Jan. 18 (Bloomberg) -- U.S. House Republicans will press federal regulators on the merits of a proposal to ban banks from trading for their own account, as one regulator acknowledged the rule could put banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. at a competitive disadvantage.
Acting Comptroller of the Currency John Walsh acknowledged that banks without U.S. operations could benefit from the rule, saying that foreign jurisdictions “have not adopted restrictions resembling those in the Volcker rule.”
“U.S. banks competing with these foreign banks will operate at a competitive disadvantage,” Walsh said in testimony prepared for today’s House Financial Services joint subcommittee hearing in response to a question from the panel’s Republican members.
Regulators have been on the defensive since the Federal Reserve and three other agencies released the first draft of the rule in October. Lawmakers, the largest banks and financial firms and international regulators have criticized the 298-page proposal as too complex and potentially damaging for financial markets.
“The proprietary trading prohibition in the Volcker Rule statute itself will undoubtedly affect the trading behavior of banking entities,” Fed Governor Daniel K. Tarullo said in his prepared remarks. “Indeed, that is what Congress intended in enacting these provisions.”
Proprietary Trading
The proposed rule, named for former Federal Reserve Chairman Paul Volcker, would ban banks from proprietary trading while allowing them to continue short-term trades for hedging or market-making. It also would limit banks’ investments in private-equity and hedge funds. Required by the Dodd-Frank Act, the rule must be in place by July 21.
Lawmakers included the rule in the law to cut down on the type of trading that may put banks with access to U.S. deposit insurance or the Fed discount window at risk. Financial firms, in comment letters to regulators and in public statements, have voiced concerns that the rule may restrict market liquidity, specifically in corporate bonds.
Foreign regulators including Canada’s Office of the Superintendent of Financial Institutions and the Bank of Japan also have voiced concern in letters to U.S. regulators over the impact the rule may have on the liquidity of markets for non- U.S. government bonds.
Foreign firms also have questioned the reach of the rule, which may ban proprietary trading or investment in funds that touch the U.S. in any way, including through exchanges and information or technology systems.
‘Unwarranted Interference’
The proposal applies to foreign firms “in a manner that not only constitutes an unwarranted interference in the non-U.S. activities of international banks conducted in accordance with home country laws and regulations, but also exacerbates the adverse impact of the Volcker Rule on U.S. markets and the U.S. economy,” Mark Standish, the president and co-chief executive officer of RBC Capital Markets Corp., said in testimony prepared for the hearing on behalf of the Institute of International Bankers.
Consumer groups and supporters of the rule have leaned on regulators to stick to the implementation timeline and pushed back against assertions that the rule will damage capital markets.
The arguments from financial firms “are all founded on the irrational assumption that, once bank proprietary trading ceases under the Volcker Rule, others will not expand to meet demand,” Wallace C. Turbeville, a former Goldman Sachs banker, said in testimony prepared for the hearing on behalf of Americans for Financial Reform, an umbrella organization made up of consumer groups, labor unions and civil rights law firms.
‘Specious’
“It is specious to the point of misleading to suggest that the needs for liquidity currently provided by banks will not be filled,” he said.
Tarullo called the proposal released by regulators “the most feasible,” knocking down alternatives including self- reporting of violations of principles-based rules by covered firms or creating “definitive bright lines” on what type of trading is permitted or banned.
“The more nuanced framework contained in our proposal was designed to realize some of the advantages of both of these approaches while minimizing their potential adverse effects,” Tarullo said in his testimony.
Regulators Pressured
Republican Representatives Spencer Bachus of Alabama and Randy Neugebauer of Texas, the chairmen of the full committee and the investigations subcommittee, respectively, have opposed the proposal from its inception and have pressured regulators to pull back the scope of the rule.
Neugebauer, along with 120 of his House colleagues, called on regulators to resubmit the proposal and consider extending the implementation timeline.
“If the proposed regulations are implemented in their current form, those regulations will dramatically reduce liquidity across multiple markets, which will in turn make it more expensive for businesses to borrow, invest in research and development and create jobs,” Bachus, along with Republican Representatives Shelley Moore Capito of West Virginia, Scott Garrett of New Jersey and Jeb Hensarling of Texas, wrote in a Dec. 7 letter to regulators.
Regulators, bowing to pressure from lawmakers and industry groups including the Financial Services Roundtable and the U.S. Chamber of Commerce, announced in December a 30-day extension of the comment period to Feb. 13. The extension also gave the Commodity Futures Trading Commission time to complete its largely similar proposal, which was finalized and released for comment on Jan. 11.
‘Thoughtful, Balanced’
“As with all of our rules, the CFTC is working to implement the Volcker Rule in a thoughtful, balanced way -- not against the clock,” CFTC Chairman Gary Gensler said in testimony prepared for the hearing.
The two Republicans on the five-member CFTC commission opposed the proposal.
“The challenge to regulators in implementing the Volcker rule is to prohibit the types of proprietary trading and investment activity that Congress intended to limit, while allowing banking organizations to provide legitimate intermediation in the capital markets,” Martin Gruenberg, the acting chairman of the Federal Deposit Insurance Corp., said in testimony prepared for the hearing.
--Editors: Maura Reynolds, Lawrence Roberts
To contact the reporter on this story: Phil Mattingly in Washington at pmattingly@bloomberg.net; Cheyenne Hopkins at Chopkins19@bloomberg.net.
To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net
