SIFMA slams “unworkable” Volcker
The Securities Industry and Financial Markets Association (SIFMA), a US-based sell-side trade body, has branded the US’s proposed
ban on prop trading for deposit-taking institutions as unworkable and likely to
have adverse consequences for US financial markets.
In a letter to the Securities Exchange Commission (SEC), Tim
Ryan, president and CEO of SIFMA, said the so-called Volcker rule – part of the
Dodd-Frank Act – will lead to decreased market liquidity and higher costs, with
American companies finding it more expensive to raise capital.
The trade body said contrary to Congress’s intent when it
called for the ban, the current proposed rule would limit market making
activity, decrease market liquidity across all asset classes, raise costs
for issuers, reduce returns on investments and increase risk to
corporations wishing to hedge commercial risks.
In its submission to the SEC, SIFMA raised a number of
issues with the Volcker rule, arguing that the definition of activities
permitted under the rule was “far too narrow”, drawing the wrong line between
proprietary trading and market making. The lobby group also believed a bank’s
ability to hedge its own risk would be severely limited, thereby increasing systemic
risk, and that transaction costs and bid-ask spreads would increase as a
SIFMA has suggested a reorienting of the rule, calling for
the proposed regulation to refocus on allowing critical financial
intermediation as performed under the activities permitted by the statute –
such as market making, underwriting, customer facilitation, hedging and trading
“The [current] approach to market making [which limits a
bank’s ability to facilitate trading] should be replaced by one in which
trading units are allowed to engage in customer-focused principal trading under
the statutorily permitted activities,” read the SIFMA submission. “Hard-coded
factors for permitted activities should be removed from the rule itself and
become incorporated into guidance. The agencies should rely on quantitative
metrics, policies and procedures and examinations to oversee the system. The rule
should not analyse the permitted activities on a transaction-by-transaction
The SEC’s version of Volcker was jointly proposed by the
Board of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation and the Office of the Comptroller of the Currency.
“The agencies’ current economic assessment is so flawed that
they may not finalise the rule without first re-proposing it for public comment
with a proper economic analysis.” SIFMA said.
The Commodity Futures Trading Commission handed down its
version of the rule – presently undergoing public consultation – on 12 January.
Congress is presently reviewing both versions of the rule
and many industry players doubt it will be implemented on schedule by July.
Read more news analysis on the Volcker rule.