In a comment letter filed with the Commodity Futures Trading Commission (CFTC) on its proposed Volcker Rule, SIFMA and other financial trade associations reiterated the view that the Proposal may unnecessarily constrain permitted activities, including market making, reducing liquidity in many markets and thus harming the U.S. economy.
“There are substantial potential costs to the financial markets, investors and corporate issuers from incorrectly implementing the Volcker Rule,” said Tim Ryan, president and CEO of SIFMA. “Different groups with different interests, including customers, buy-side market participants, industrial and manufacturing businesses, treasurers of public companies and foreign regulators have all said the Proposal would significantly harm financial markets. The negative impacts of decreased liquidity, higher costs for issuers, reduced returns on investments and increased risk to corporations wishing to hedge their commercial activities will damage the U.S. financial markets and the economy.”
Main points made in the comment letter include:
- the costs of the Proposal substantially outweigh the benefits, and the Commission’s cost-benefit analysis is insufficient;
- the swap dealing markets are not well described by the hard-coded criteria in the Proposal’s permitted activities. These criteria should be recast as guidance incorporated in policies and procedures overseen by the regulators through metrics and examinations;
- the Proposal’s negative presumptions are not consistent with the statute and thus inappropriately limit the scope of congressionally-permitted swap activities;
- the Proposal’s implementation of the market making-related permitted activity is overly narrow and does not encompass the market making-related activities of Commission-registered swap dealers;
- interdealer transactions are a critical component of market making in swaps;
- the hard-coded set of criteria appears to reduce the permitted activity to “market making,” rather than “market making-related,” activity, contrary to congressional intent. For example, arbitrage activities related to customer needs should be considered market making-related;
- interaffiliate transactions are a critical component of risk management and swap dealer activity;
- the Commission should not equate status as a “swap dealer” with market making activities under the Volcker Rule;
- the Proposal’s implementation of the risk-mitigating hedging permitted activity is overly narrow and does not accord with the use of swaps as hedges or congressional intent to maintain the critical swap dealing function of banking entities;
- quantitative metrics should serve as signals to highlight opportunities for further discussion of the activities of the trading unit rather than as bright-line thresholds;
- the proposed metrics should be revised and the Commission should not require reporting of any metric that does not provide meaningful data for Commission-regulated instruments;
- “trading unit” should not be defined too narrowly. It should be defined at a level that presents the unit’s activities in the context of the whole and that accounts for the scope of the market in which the trading unit operates;
- the Proposal’s definition of “commodity pool” is overly broad;
- the Commission should narrow the definition of “derivative” to avoid including in the “covered financial position” definition instruments that should not be part of the Volcker Rule proprietary trading restrictions;
- the government obligations permitted activity should include trading in derivatives on permitted government obligations;
- the Commission should exempt from the “trading account” all activities, such as repurchase agreements and transactions related to such agreements, that “are not based on expected or anticipated movements in asset prices;”
- the Commission should confirm that “clear, timely and effective disclosure” to mitigate conflicts of interest can take the form of either periodic or specific disclosures regarding transactions;
- as the Commission intimated, coordination between the Agencies is critical for effective implementation of the Volcker Rule; the Board should have exclusive authority to interpret the Volcker Rule and the final rules, and the Agencies should coordinate examination and enforcement where appropriate;
- the Commission should join with the other Agencies in one common final rule, even if elements of that common rule are inapplicable to entities under the Commission’s jurisdiction; and
- the Agencies should repropose Volcker Rule regulations before finalizing them.
The comment letter was filed by SIFMA, the American Bankers Association, The Financial Services Roundtable and the Clearing House Association.