Volcker Rule Reforms

Securities Trade Group Backs Volcker Rule Reforms

Securities Trade Group A securities industry trade group gave a thumbs up to the reforms of a key bank trading regulation.

SIFMA is the Securities Industry and Financial Markets Association, an American securities industry trade group, and SIFMA recently released, “The 2020 Outlook: Trends in Capital Markets.”

In it, SIFMA gave a positive review of how the reform for the Volker rule has progressed.

“While pure proprietary trading for one’s own account was historically a limited activity for most banks, the ability to trade and take positions in securities has been an essential tool to making markets and ensuring those markets remain liquid.

“SIFMA supports the regulatory agencies’ goal of reducing compliance-related inefficiencies of the Volcker Rule. Revisions issued in August 2019 will help ensure the Rule does not negatively impact capital formation and economic growth, which could exacerbate financial harm during times of stress.”

The Volcker rule, named after former Fed Chair Paul Volcker, barred banks from engaging in proprietary trading. 

It was passed as part of Dodd/Frank, but the rule has received plenty of criticism since its inception. 

Particularly, the rule was heavily criticized by former House Financial Services Committee Chair Jeb Hensarling, a Republican from the State of Texas. 

An article in Market Watch from 2015 noted, “Hensarling then pressed Lew further, cited experts who believe one section of Dodd-Frank known as the Volcker rule has dried up trading in the bond market, making it vulnerable to steep swings.”

Critics like Hensarling argued that it was implemented with far too many rules and it classified as proprietary trading legitimate bank market-making activities. 

While Hensarling retired from the US Congress in 2018, the reforms he championed have been unfolding, particularly in 2019. 

SIFMA continued in its outlook, “The removal of the accounting prong is a positive step forward in ensuring the regulatory definition of ‘trading account’ does not go beyond the statutory definition and Congressional intent. In the face of studies showing the Rule’s negative impact on liquidity, including from the Office of Financial Research, and numerous calls to simplify the Rule, including from former Fed Governor Dan Tarullo and Paul Volcker, it was clear revisions were needed. It is important to be clear on what the changes encompass: the prohibition on proprietary trading under the Rule is statutory and will not go away. However, the revisions do provide market participants with more clarity on compliance as they implement the continuing legal restrictions under the Rule, and they will make it easier for the regulators to ensure compliance.

“The next step in the process is for the agencies to finalize matters pertaining to the covered funds provisions of the Volcker Rule. SIFMA would like to see clarification around certain related definitions as well as exclusions for specific vehicles that we do not believe represent proprietary trading and therefore should not be included in prohibitions.”

The law firm Covington & Burling LLP briefly explained about the removal of the accounting prong.

“The proposed rule sought comment on replacing the short-term intent prong of the ‘trading account’ definition with a new accounting prong. The proposed accounting prong would have defined “trading account” to include any account used by a banking entity to purchase or sell financial instruments such as derivatives, trading securities, and available-for-sale securities that are recorded at fair value on a recurring basis under applicable accounting standards. However, in response to commenters’ concerns that the accounting prong was overly broad and would have scoped in many activities that the Volcker Rule was not intended to address, the final rule does not incorporate the proposed accounting prong. In addition, the final rule does not adopt a related, proposed presumption that activities of a trading desk of a banking entity captured by the accounting prong were in compliance with the prohibition on proprietary trading if the activities did not exceed a quantitative threshold. 

“Instead of adopting the accounting prong, the final rule allows banking entities not subject to the market risk capital prong to elect to define their trading account by reference to either the short term intent prong or the market risk capital prong. The preamble notes that this flexible approach is appropriate because the two prongs capture similar activities, and the ability to elect between them should benefit banking entities with a lower level of trading activity. As a result, the only banking entities that will remain subject to the short-term intent prong are those that are not subject to, and do not elect to apply, the market risk capital prong.”

An update to the Volcker rule was finalized in November 2019

Covington & Burling LLP provided a primer on the changes in the rule which is found here