by Kyle Colona on February 17, 2012
As the deadline period for comments on the Volcker Rule provisions of the Dodd Frank financial reform measure draws to a close, Congressional lawmakers have crossed the political divide to express their concerns over the impact the rules would have down on Main Street.
In fact, Bloomberg News is reporting that a letter from Republican and Democratic Senators stated that the proposed rule could have an adverse impact on small businesses that rely on market making activity of financial firms in order to access the capital markets.
The overarching issue is how federal regulators can limit banks proprietary trading activity while not impeding what some consider their legitimate market making capacity that fuels liquidity in the credit markets where small businesses seek financing to launch and sustain their outfits.
“As market-makers reduce or eliminate inventory, liquidity is reduced and trading spreads widen,” the senators said in the letter. “This will increase trading costs paid by investors, thereby reducing returns for investors large and small alike.”
The letter was sent to the federal regulators charged with implementing the Volcker rule, and the lawmakers’ key concern is that the rule as it was initially crafted places restrictions on private equity and hedge-fund units and in so doing could impede venture capital and that would also increase risk, raise investor costs, and hurt U.S. competitiveness as overseas markets have fewer rules over proprietary trading.
Meanwhile in a related Reuters story, a head honcho at the Federal Reserve’s division of banking supervision acknowledged the challenge in reining in proprietary trading in order to protect the capital markets without stepping all over market making plays.
The Fed chieftain, Mark Van Der Weide, reportedly told a gathering of the Federalist Society that it is an “understatement to say that the Volcker rule is a complicated statute that presents complicated implementation challenges.”
Herr Van Der Weide also said that distinguishing proprietary trading from market making is “one of the most difficult tasks – probably the most difficult task for regulators and banking entities,” according to Reuters. The stumbling block is that proprietary trading and market making involves banking acting as principal in a trade, holding that trading position for a “short period of time, and profiting from price changes during that time.
Perhaps a simple fix could a requirement that proprietary trading be done from separate entities under a bank holding company format that has built in firewalls and adequate capital reserves, but then when have government agencies ever been pragmatic when policy often falls victim to partisan politics?
In any event some form of the Volcker Rule will inevitably be implemented that will not make big banks, lawmakers, or small businesses happy until the next financial crisis comes along as it will surely do in the fullness of time.
Kyle Colona is a New York based freelance writer and a Feature Writer for the Compliance Exchange and Wall Street Job Report. He has an extensive background in legal and regulatory affairs in the financial services sector and his work has appeared in a variety of print and on-line publications.