Fed Gov. Raskin Says Too Broad Market-Making and Hedging Exemptions Prompted Her Dissent from Proposed Volcker Regulations

Explaining her dissent from the proposed interagency regulations implementing the Dodd-Frank version of the Volcker Rule, Federal Reserve Board Governor Sarah Bloom Raskin said that the market-making and hedging exceptions from the ban on proprietary trading are far too broad. In remarks at the Colorado Graduate School of Banking in Boulder, she viewed proprietary trading as an activity of low or no real economic value that should not be part of any banking model that has an implicit government backstop. The Volcker Rule in the Dodd-Frank Act, which should have the biggest impact on the largest and most complex financial institutions, prohibits proprietary trading by federally insured banks and their affiliates, such as broker-dealers. According to the Fed official, proprietary trading by such financial institutions is a capital markets activity quite distinct from the prototypical banking relationship that exists to allocate financing from depositors to projects that produce value.

As written by Congress, the Volcker Rule provides limited exemptions to the proprietary trading ban, thus permitting activities that would otherwise constitute proprietary trading if they constitute hedging or market-making and do not threaten the soundness of the bank or the stability of the financial system as a whole. Thus, federally insured financial institutions and their affiliates can operate in narrow circumstances along the lines of a low-road banking model where there are sufficient guard rails in place to protect the integrity of the banking system. These guard rails are those limited exemptions based on safety and soundness and financial stability.

Dodd-Frank mandates that the SEC, CFTC and the banking regulators craft their implementing regulations to reflect the broad prohibition on proprietary trading activities by regulated banks, albeit with exemptions. The regulators then need to carefully examine whether exemptions like market-making or hedging can be conducted by the financial institution within the guard rails of safety and soundness and financial stability and therefore fit within the exemptions as Congress intended.  

Governor Raskin dissented in the vote for approval of the proposed implementation of the Volcker Rule. One reason for her dissenting vote was the central banker’s sense that the guard rails in the proposed regulations were insufficient. She was concerned that, as proposed, the guard rails were too broad and would allow banks to be able to go too far off the road. Further, she was concerned that the guard rails as crafted could be subject to significant abuse that would be very hard for even the best regulators to catch. 

The Fed Gov. believes that it is very important that the guard rails be strong and be set very close to the road because of the potentially severe dangers of, and costs associated with, proprietary trading by financial institutions with access to the federal safety net. In fact, it is not inconceivable to think that the potential costs associated with permitting hedging and market-making within these exemptions still outweighs the benefits that society supposedly receives from permitting these capital market activities. The potential compliance, regulatory and other costs could be so great as to eliminate whatever value may arguably be derived by virtue of these capital market activities. 


While some name increased market liquidity as a benefit of proprietary trading, the Fed official pointed out that it is traditional banking that promotes true liquidity through taking deposits and lending. Conceding that proprietary trading may have increased liquidity in opaque financial markets, Governor Raskin queried if this type of market liquidity actually benefitted consumers and retail investors and small business owners. She also noted that the Volcker Rule does not prohibit proprietary trading by all market participants. Thus, conventional investment banks and hedge funds can still continue to support the markets.