WASHINGTON (Dave Clarke) – A draft proposal of the Volcker rule that cracks down on banks’ proprietary trading gives firms flexibility to hedge risk, and sets stringent limits on such trading beyond U.S. borders to address fears the rule will put U.S. firms at a disadvantage.
The draft posted online by The American Banker publication and widely circulated by the financial industry on Wednesday also contained an exemption for market makers, but an industry group immediately said it was concerned the exemption may not be broad enough.
Kenneth Bentsen, executive vice president of public policy and advocacy at the Securities Industry and Financial Markets Association, raised concerns about whether the exemption is too narrow for trades intended to make markets for customers.
“Upon first glance it seems to have some complex and potential burdensome provisions that may impede Congress’s stated intent to allow for traditional market-making activities, and sponsorship of funds,” he said in a statement.
A supporter of the ban, who requested anonymity to discuss the rule before it is released next week, took aim at how regulators dealt with the exemption for hedging against risk related to trades done for customers.
U.S. banking regulators will discuss the rule at a meeting of the Federal Deposit Insurance Corp board on October 11. The draft says the public will be allowed to comment on the rule until December 16.
The proposed rule narrowly tailors the exemption for proprietary trading done outside of the United States, to address fears that the crackdown will send trading activity offshore, harming U.S. firms and capital markets.
They are: the transaction is conducted by a bank not organized under U.S. laws, no party to the transaction is a U.S. resident, no bank employee involved in the transaction is physically located in the United States, and the transaction is executed wholly outside the United States.
For market-making activity, the draft proposal lays out six criteria that banks must meet for an exemption to the rules, including confining revenue to fees, commissions, and the spreads between bid and ask prices.
Market-makers are key to ensuring market liquidity by standing ready to buy or sell on behalf of customers. Many dealers fear that the Volcker rule will prevent them from performing market-making functions.
Other criteria set out in the draft for a market-making exemption include having a comprehensive compliance program, engaging in bona fide market making activity, and being sure not to exceed the reasonably expected near-term demands of clients.
Banks will also need to make sure they are following the proper registration rules under federal commodity and securities laws, and they must have compensation practices in place to prevent undue risk-taking.
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Category: Business/ Economy
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