Occupy the SEC Awaits Agency Votes on Final Version of the Volcker Rule: Promulgation of Vital Component of Dodd-Frank Already Delayed by Two Years

On December 10, 2013, the Federal Reserve, the Office of the Comptroller of the Currency (“OCC”) and Federal Deposit Insurance Corp. (“FDIC”) are scheduled to vote on a final version of regulations implementing Section 619 of the Dodd-Frank Act, better known as the “Volcker Rule.”  The Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission(“SEC”) are also expected to vote on the regulation around that same time.

Occupy the SEC (“OSEC”) urges these financial regulators to vote favorably on the Volcker Rule, instead of re-proposing it, as has been suggested by the U.S. Chamber of Commerce and other pro-bank lobbyists.  A vigorously enforced Volcker Rule could help avert another financial crisis similar to the Great Recession of 2008.  That crisis was caused in large part by excessive bank speculation in trading markets, and the Volcker Rule seeks to reduce the risk associated with these activities by prohibiting proprietary trading by government-backstopped banks.

In February 2012, OSEC issued a 325-page comment letter to the banking regulators urging vigorous and robust implementation of Section 619.  OSEC also issued letters to members of Congress in the summer of 2012 during the government’s investigation into JP Morgan’s “London Whale” trading losses, which could have been averted with a strongly enforced Volcker Rule.  In February 2013, OSEC filed a lawsuit against the above-mentioned financial regulators and the Department of Treasury for their delay in implementing the Volcker Rule, which by Congressional mandate should have been finalized by October 2011.

OSEC will issue an analysis of the Rule once the final version, which is expected to exceed 1000 pages, is issued later this month.

Occupy the SEC is a group of concerned citizens, activists, and financial professionals that works to ensure that financial regulators protect the interests of the public, not Wall Street. For further information, visit  http://occupythesec.org or email info {at} occupythesec .org.

 

Asset Managers Hate Volcker, Makes the Regulators’ Case for Them

Tom Brathwaite made an interesting observation in his Financial Times piece “Volcker conundrums fuel confusion over rule” (12/20/11). Wall Street banks are counting on their ‘less-tainted’ rivals, the non-bank affiliated Asset Management firms, to lobby on the banks’ behalf and protect them from the Volcker Rule’s market making restrictions.

“The banks have cried wolf so often on financial regulations that they are likely to be ignored. But there is some substance this time. And if the likes of Goldman Sachs and Morgan Stanley get a deaf ear in Washington, their only hope is that less-tainted financial institutions will have more success.”

The idea that Washington is turning a deaf ear to the likes of Goldman Sachs and Morgan Stanley sounds a bit off-key. What is perhaps even more curious is the fact that the independent Asset Managers, as non-banks, are immune from the Volcker restrictions on proprietary trading and market making. So what’s really going on?

Alliance Bernstein’s Volcker comment letter broadcasts a fear that prohibiting banks from market making will have a disruptive effect on global markets until replacement market makers emerge. They argue that the market making restrictions at the banks need to be relaxed in order to mitigate this disruption. Lord Abbet makes the same case and describes the interrelationship between proprietary trading and market making during the ’08 meltdown.

“If dealer banks had been prohibited from building positions and were instead forced to find a buyer for every security sold, prices would have fallen much further than they did.  Banks were able to absorb the avalanche of high-yield securities in their trading accounts and were at the same time able to perform a function that long-only asset managers could not: hedge the risk.”

Under the Volcker Rule, a bank’s inability to absorb an avalanche of high-yield securities in its trading accounts isn’t a bug, it’s a feature. High yield securities remain at artificially inflated levels precisely because the banks can still absorb them in their trading accounts. The Asset managers are making the regulator’s market making limitation case for them.

There is no evidence that the current level of trading activity is desirable or optimal; indeed, numerous proposals to implement transaction taxes are based on the view that the amount of trading activity system-wide should be reduced. Volcker is designed to curb speculative position-taking at government-backed banks.  It is the regulators’ responsibility to ensure that trading activity migrates out of government-backstopped banks. Regulators should not take measures to preserve the current level of trading activity. If trading is not economical when no longer supported by artificially cheap funding, that likely means that it does not serve a legitimate real-economy purpose.  Restricting market making at the banks removes a source of artificially cheap funding to the market.

It appears that many pundits and Asset Managers assume that a priority of the regulators writing the Volcker rules is to maintain the status quo in spite of the statute. In fact, their arguments actually strengthen the regulators’ hand to change the status quo. Simply put, the proprietary trading and market making definition need to be tightened.