SIFMA today sent a letter to Representative Spencer Bachus, chairman of the House Financial Services Committee, in response to his request for public comments on legislative alternatives to the Volcker Rule. The letter was co-signed by the Financial Services Roundtable.
“The far-reaching consequences of the Volcker Rule demand a thorough analysis of the costs and benefits of the current statutory text, the intended goals of the Volcker Rule, and potential alternatives to the Volcker Rule to better achieve those goals without triggering consequences that Congress did not intend,” the letter said. “We believe that the many problems with the Volcker Rule identified by a wide variety of stakeholders demonstrate the need for a substantive re-evaluation by Congress, and we strongly support the Chairman’s initiative to do so.”
In its letter to Chairman Bachus, SIFMA urged Congress to explore one wholesale alternative to Volcker that relies on already proposed capital rules and regulations that are under consideration and being implemented as a result of Basel III and other initiatives, rather than activities restrictions. A risk-based framework with an effective supervisory overlay, under which higher capital charges would apply to riskier activities as determined by the regulators, would be a more targeted and effective means of addressing the concerns underlying the Volcker Rule.
While SIFMA supports a comprehensive re-evaluation of the Volcker Rule, including the risk-based approach, should Congress determine to retain the Volcker Rule framework as enacted, SIFMA believes that several modifications to the existing statute are necessary to achieve its goals without harming the ability of banking entities to continue to provide client-oriented financial services. Those modifications include:
- Reverse the Presumption that All Short-Term Principal Trading is Impermissible: SIFMA believes that Congress should reconsider the structural approach of the Volcker Rule’s approach to proprietary trading and reverse the presumption that all short-term principal trading with the intent to profit from changes in short-term price movements, wherever located within a banking organization, is impermissible. As an alternative, we believe the structure of the statute should define proprietary trading to capture only the types of trading activities that Congress intended to restrict, that is, those that are not related to client-oriented financial services and that are intended to generate profit from short-term price movements for the banking entity.
- Eliminate the “Near-Term Demands” Condition on Market-Making Exemption: SIFMA also believes that Congress should revisit certain of the statute’s exemptions for permitted activities to ensure that they adequately preserve a banking entity’s ability to engage in socially and economically useful client-oriented activities, such as market making. The “near-term” limitation injects uncertainty as to the legality of an activity that Congress intended to permit, and at worst the limitation may effectively prohibit banking entities from making markets in a wide variety of markets altogether. SIFMA recommends that Congress remove the “near-term” limitation or explicitly provide that market makers may build appropriate inventory based on their experience and the exigencies of a particular market.
- Clarify the Exemption for Risk-Mitigating Hedging: SIFMA believes that Congress should amend the hedging exemption to provide a clearer safe harbor for hedging activity. For example, the hedging exemption could be revised to omit the requirement that the activity be designed to reduce “the specific risks” to the banking entity and instead refer generally to activity that is designed to reduce risks to the banking entity. SIFMA also asks that Congress clarify that the hedging exemption is equally applicable to banking entities’ interests in hedge funds and private equity funds.
- Define “Hedge Fund” and “Private Equity Fund” More Narrowly:SIFMA believes the statute defines “hedge fund” and “private equity fund” extraordinarily broadly as any entity that relies on two exemptions in the Investment Company Act of 1940. SIFMA believes the funds portion of the Volcker Rule should be limited to hedge funds that engage in the same type of proprietary trading that is deemed to be too risky for banking entities to engage in directly. SIFMA also believes that congress should address the overbreadth of the definition of those terms to capture only those entities that have the characteristics of a genuine hedge fund or private equity fund as commonly understood.
- Modify Volcker to Only Apply to Insured Depository Institutions and Their Holding Companies: SIFMA believes Congress should also modify the definition of a “banking entity” subject to the Volcker Rule to include only insured depository institutions, companies that control an insured depository institution and companies that are treated as bank holding companies.
- Require a Cost-Benefit Analysis Before Any Implementing Regulations: SIFMA recommends that Congress require the agencies charged with implementing the Volcker Rule to conduct a rigorous cost-benefit analysis before issuing any regulations. Experience has shown that rigorous cost-benefit mandates result in more rational, efficient and transparent regulations that are more likely to reflect Congressional intent.
The full text of the letter can be found at the following link:http://www.sifma.org/issues/item.aspx?id=8589940246
