Andrew Harrer/Bloomberg NewsThe Commodity Futures Trading Commission, led by Gary Gensler, is one of five regulatory agencies writing the Volcker Rule.In the wake of JPMorgan’s multibillion-dollar trading loss, regulators are under pressure to beef up the proposed Volcker Rule.
On Thursday, the Commodity Futures Trading Commission held a public roundtable to solicit ideas from banks, academics and other experts on the contentious rule, which seeks to ban banks from making risky bets with their own money. The trading commission is one of five regulatory agencies writing the rule, borne from the Dodd-Frank financial regulatory law.
The effort has also faced an onslaught of opposition from Wall Street lobbyists, who argue that the Volcker Rule could stifle their ability to hedge against risk. But the ban on proprietary trading, regulators noted on Thursday, exempts most transactions that involve hedging.
“Some commenters have said if we’re too prohibitive in one area, we may limit banking entities ability to engage in risk-mitigating hedging,” Gary Gensler, chairman of the trading commission, said at the roundtable. “On the other hand, if we follow comments of some of the banking entities, then the rule’s allowance for permitted hedging might swallow up Congress’s intent to limit the risk of proprietary trading.”
The roundtable, which also featured testimony from major investors like the California Public Employees’ Retirement System and the rule’s supporters like Sheila Bair, came against the backdrop of JPMorgan’s recent trading blunder, which is so far pegged at roughly $3 billion. (JPMorgan was invited to the roundtable but did not attend). The bank’s losses in recent weeks provided fodder for advocates of a strong Volcker Rule, who say that the crackdown should rein in the sort of risk-taking that prompted the problem.
Named after Paul A. Volcker, the former chairman of the Federal Reserve, the rule was intended to prevent future bank bailouts. Ms. Bair, the former chairwoman of the Federal Deposit Insurance Corporation, likewise argued on Thursday that banks ought to not place risky wagers while enjoying government backing.
“Don’t let insured deposits fund that activity,” said Ms. Bair, who was known for haranguing banks while she was their regulator.
JPMorgan was conspicuously absent at the roundtable. The bank was invited to speak, but stepped back in the aftermath of the trading loss. JPMorgan said the cancellation was because of a scheduling conflict and was unrelated to the trading loss.
Other big American banks kept their distance, too. But Wall Street still made its voice heard, dispatching industry lawyers and trade groups to testify. Barclays and Credit Suisse, two large European banks, also appeared on Thursday.
Banks have warned that the Volcker Rule would jeopardize profits and the broader health of the economy. Noting that the definition of proprietary trading is imprecise, Wall Street says that the rule threatens to spill into legitimate practices like market-making and hedging.
Some regulators were skeptical of those claims.
“We heard from some folks today that tout tragedy if a sturdy Volcker Rule is approved,” Bart Chilton, a Democratic member of the trading commission, told DealBook on Thursday. “That’s foolish phooey. There are tremendous perils for not having a strong Volcker Rule: namely another budget-busting bank bailout.”