On Monday, former Federal Reserve Chairman Paul Volcker filed a comment letter against, ironically, the Volcker Rule. One of his argument will include that with a ban of proprietary trading by banks, it will make for a healthier and safer U.S. financial system.
The letter arrived just in time for Monday’s comment letter deadline.
According to The Wall Street Journal, Volcker’s letter will also contend that with too much liquidity in the marketplace, investors will bid up asset prices under the expectation there is always a buyer. From this stance, Volcker could face criticisms that banning banks from proprietary trading could reduce the market’s liquidity.
Volcker’s letter is also likely to argue the rule’s benefits have been glossed over such as U.S. bank-holding companies with investment-banking sections will be able to communicate to clients a lack of possible conflicts of interest due to no proprietary trading.
He is also expected to discuss proprietary trading’s role role in the financial crisis and by using a firm’s own money, employees may be more focused on individual profits their clients’ returns and safety,
Volcker has previously said that rule will have a small effect on the trading of foreign sovereign bonds but has noted that these types of instruments helped sink MF Global Holdings Ltd. in October.
But what exactly is the Volcker Rule? It is part of the Dodd-Frank Act and it’s somewhat of a work in progress.
Back in October, the Federal Reserve, the FDIC, the SEC and the OCC all proposed rules, followed by the CFTC in January. The rule will go into effect come July with the banned proprietary-trading operations to divested by 2014, reported The Wall St. Journal.
Then, banks will have three additional years to comply under different situations. With the upcoming July date, some firms have already shut down their proprietary-trading desks and watched traders exit. This includes Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley.
Firms to Send Letters
In addition to Volcker’s Monday comment letter, firms also expected to fire some off of their own. This includes five separate ones by the trade group, the Securities Industry and Financial Markets Association, according to Rob Toomey, the group’s general counsel. The group has previously included a huge number of regulators’ questions with its proposal.
Many comment letters have already been filed, but Goldman Sachs and BlackRock Inc. are also expected to submit one. For Black Rock, they will argue that Volcker rule may hurt their clients and corporate-bond issuers. Through Barbara Novick, BlackRock’s vice chairman and head of government relations, the firm said that the rule’s present version could cause problems for Wall Street dealers to “make markets” through buying and selling clients’ securities.
Other firm concerns include that the Volcker rule places U.S. banks to the detriment of non-U.S. financial firms that don’t have the constraints.
UPDATE the letter just was released and can be found at the following link-http://online.wsj.com/public/resources/documents/Volcker_Rule_Essay_2-13-12.pdf