The
Securities Industry and Financial Markets Association (SIFMA) and the Financial
Services Roundtable (FSR) published a letter in reply to an August 7, 2012 request
for comments on Dodd-Frank Act Section 619, commonly known as the Volcker Rule,
made by Representative Spencer Bachus, Chairman of the House Financial Services
Committee. Chairman Bachus’ letter noted the House will have its first
opportunity to consider Volcker Rule alternatives at a hearing to be scheduled
this fall. The SIFMA-FSR letter, published September 7, 2012, calls for
Congressional reconsideration of the Volcker Rule and advocates an alternative
risk-based approach to proprietary trading regulations.
The
letter addresses three key areas. First, SIFMA and FSR note the attenuated legislative
history of the Volcker Rule, which was accorded two Senate hearings and no
hearing in the House. As a result, these organizations suggest the enacted
version of the Volcker Rule may produce unintended consequences that can be
tempered by an alternative approach or through revisions to the enacted rule.
The
letter also observed that regulatory implementation of the Volcker Rule has
been slow, despite the issuance of proposed rules in October 2011 and the
submission of many thousands of public comments. Said the letter: “We believe
that the fact that the agencies have been unable to agree on final rules nearly
a year after the statutory deadline for final regulations should lead Congress
to investigate whether implementation of the current statutory text is even
possible.” In a footnote, SIFMA and FSR suggested that the conformance period,
already started without final rules, should be extended to give financial firms
more time to meet new regulatory requirements regardless of Congressional
re-evaluation of the Volcker Rule.
Second,
SIFMA and FSR proposed an alternative approach to managing the risks associated
with activities barred by the Volcker Rule. Specifically, these organizations
would prefer a regulatory framework grounded in enhanced capital requirements, more
akin to the Basel III reforms. These rules could be augmented by a ban
on stand-alone proprietary trading.
According
to the letter, these risk-based standards would be more effective than the
enacted Volcker Rule because similar rules already have global reach, a
risk-based approach would place less emphasis on firms’ intentions than does
the existing Volcker Rule, the alternative would focus on institutions’ financial
soundness and systemic risk, and regulators could verify compliance through
horizontal reviews.
Lastly, SIFMA and FSR proposed numerous amendments to the Volcker Rule that they would have Congress consider if the enacted Volcker Rule is retained. A key recommendation is to reverse the presumption against all short-term principal trading. "Proprietary trading" also should be defined in a more targeted fashion with appropriate safe harbors. These and other recommendations are contained in an extensive Part III of the letter and in an appendix.