The Bond Dealers of America has urged federal agencies to issue guidance clarifying how obligations of municipal market participants will change if federal regulators fail to finish writing the controversial Volcker Rule by the July 21 deadline — an outcome officials have warned is possible.
In a letter sent to the heads of five federal agencies, the 52-member BDA also asked regulators to detail what requirements market participants must meet during the two-year implementation period that begins once the rule is issued.
“As July 21 draws closer, and in the absence of coordinated joint regulatory guidance regarding the obligations of market participants ... the BDA fears that the marketplace will assume the worst,” the letter said. “The result could be that our liquidity concerns become a self-fulfilling prophecy, even prior to the issuance of a final Volcker Rule.”
The BDA’s letter, which urged regulators to “provide clarity to the marketplace as soon as possible,” was addressed to Federal Reserve Board chairman Ben Bernanke, acting Comptroller of the Currency John Walsh, Commodity Futures Trading Commission chairman Gary Gensler, Securities and Exchange Commission chairman Mary Schapiro and Federal Deposit Insurance Corp. acting chairman Martin Gruenberg.
Under the Dodd-Frank Act, the Volcker Rule is supposed to take effect July 21, but regulators, including Bernanke and Daniel Tarullo, a member of the Federal Reserve’s board of governors, have said in recent weeks they may not finalize the rule in time.
“This guidance should set forth clearly the obligations of market participants, if any, until the final Volcker Rule is issued,” said the BDA’s letter, which also asked regulators not to impose restrictions on banks’ activities until the rules are complete.
“No one can comply with a rule that does not exist,” the letter said.
The BDA also asked regulators to provide details about firms’ requirements during the rule’s two-year conformance period, the period banks will be given to bring their activities into compliance after the rule takes effect.
“The BDA hopes that this aspect of the guidance will recognize that there should be few, if any, obligations imposed on market participants during this two-year conformance period,” said the letter.
The group and other muni-market participants have warned for months that the Volcker Rule, which restricts proprietary trading at banks, could hurt the muni industry by dividing the market and boosting issuers’ costs by inhibiting banks from underwriting and trading some bonds.
Bonds issued by states, counties and local governments are exempt from the proprietary trading restrictions, but securities issued by public agencies and authorities — such as turnpike, housing and sewer authorities — are not.