Financial Executives International’s Committee on Corporate Treasury (CCT) today filed comments with federal regulators on the proposed “Prohibitions and Restrictions on Proprietary Trading and Certain Interests in and Relationships With, Hedge Funds and Private Equity Funds,” commonly known as the Volcker rule.
In early 2010, President Obama proposed a ban on proprietary trading and named it after former Federal Reserve Chairman Paul Volcker. The Volcker rule was included as part of the Dodd-Frank Act, which can be found in Section 619 of the law. In Oct. 2011, the Federal Reserve and other regulators issued a proposed joint rule published in the Federal Register on Nov. 7. The Volcker rule prohibits insured depository institutions and banking entities from engaging in short-term proprietary trading of any security, derivative, and certain other financial instruments for a banking entity's own account, with certain exemptions. However, due to the complexity of the rule, regulators agreed to extend the time for public comment for another 30 days, ending Feb. 13, 2012. The Volcker rule is scheduled to go into effect July 2012.
The challenge for federal regulators in implementing the proprietary trading ban has been where exactly to draw the line between these activities and the market-making practices on which even non-financial companies rely. As the CCT letter states, “while the Volcker rule does not have direct impact, reduced liquidity affects all market participants, including corporate treasurers utilizing these markets for financing, liquidity management, capital formation, and risk management activities.” For example, the corporate bond market may be affected as banking entities and dealers may be unwilling or unable to play the support role they once played due to the restrictions under the proposed Volcker rule. This would reduce liquidity in and access to the market and increase the costs of borrowing for companies.
Paul Volcker, however, recently reasserted the need for the ban despite some of these potential impacts, contending that speculative trading and too much risk-taking helped contribute to the 2008 financial crisis.
CCT also raised the issue that the Volcker rule is yet another regulatory bolt that corporate treasurers must brace for in the wake of the financial crisis, essentially requiring them to keep a constant eye toward Washington and pending legislative and regulatory requirements. While much of the financial reform efforts have been directly targeted at banking entities, treasurers and senior financial executives from non-financial companies must also cope with the liquidity effects and increased costs of: money market fund reform, over-the-counter derivatives regulation, Basel III, and now the Volcker rule. CCT asked regulators to take time to consider the overall impact to non-financial companies when crafting the final rule.
To read the CCT comment letter on the Volcker rule, click here.