SIFMA Seeks Changes to Volcker Rule

The Securities Industry and Financial Markets Association is calling for changes to the so-called Volcker Rule.

Named after former Federal Reserve chairman Paul Volcker, the rule would restrict federal-insured banks’ ability to trade for their own benefit.

The rule comes in the wake of the 2008 financial crisis, when highly leveraged banking institutions lost huge sums on proprietary investments.

The Volcker Rule was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act that became law in 2010.

To define the rule, federal agencies in November 2011 released a 300-plus-page draft posing 1,400 questions. The public had until Monday to comment. Until the rule is defined, it is not in effect. It is  currently expected to be completed in July.

“The proposed regulations are unworkable, not faithful to Congressional intent, and will have negative consequences for U.S. financial markets and the economy,” said Tim Ryan, president of SIFMA.

With regard to the Volcker Rule’s treatment of the municipal bond market, the association focused on two main problems.

First, the proposed draft would allow banks to buy, sell, and hold municipal bonds but would exclude roughly 41% of all such bonds, according to David Cohen, the association’s managing director and associate general counsel.

Excluded would be bonds issued by semi-autonomous public agencies and authorities. The exclusion “does not appear to have been arrived at based on a difference between the credit underlying the municipal securities.”

Further, “the proposal would make much of the ordinary and necessary market making activity of the municipal market impermissible proprietary trading of banking institutions in the municipal market, and the result [would] be a material and adverse effect on the liquidity of and price volatility within the municipal market,” Cohen said.

The different status of exemption from the Volcker rule will create “tremendous confusion in the municipal market. ... Depending on the law of a particular state, municipal securities for the same purpose may be issued by different entities.”

On a second muni-related topic, the association said that the current draft incorrectly bars banks from issuing and holding tender-option bonds. The draft does not explicitly bar TOBs but does bar banks from holding risky “covered funds,” Cohen said, which are defined so broadly as to include TOBs. This portion of the Volcker Rule was meant to limit banks’ investments in private equity and hedge funds.

TOBs are based on municipal bonds and are “not a speculative investment.”

“Tender-option bonds performed well throughout the financial crisis,” Cohen said. “[TOB programs] constitute a sizable portion of the short-term municipal market, and a disruption of tender-option bonds will disrupt the short-term municipal market.”

In a separate letter to the federal agencies considering the Volcker rule, the association and three other financial organizations call for the agencies to write a new version of the rule and “repropose” it. This is necessary so that after extensive revisions are made to it, the public will have a new chance to comment on it, they wrote.

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