Mining the Volcker Rule Hearing for Nuggets
By George Bollenbacher, Kinetix Trading Solutions
Congressional hearings are always a combination of theater: platforms for advocacy, a stage for members of Congress to pontificate, photo ops, and – once in a while – an opportunity to get under the covers of the workings of government. The January 18, 2012 joint hearing of the House and Senate committees on “Examining the Impact of the Volcker Rule on Markets, Businesses, Investors and Job Creation” had all these elements, with a special twist. While many hearings are about laws that are under consideration, this one was about the implementation of a complex section of the Dodd-Frank Act that had already been passed by Congress.
As a result, the witnesses and the members often seemed to be talking to someone not in the room at the time, perhaps not unheard of in a hearing like this, but a bit disconcerting nonetheless. Unless the VR could be repealed, which some people espouse but which doesn’t look likely, the correct subject of the hearing would be “How do we implement this rule?” For that question, the responses of the first panel, made up of the five regulators responsible for the implementation, were the most important.
The first nugget from the regulators’ testimony was that they really do want to know what people think about their rules. To be sure, the regulators have a mandate, as expressed by Dodd-Frank, to restrict principal transactions by banks to underwriting, market making, risk hedging, and a few other categories. They have done their best to balance the needs of markets against the language of Dodd-Frank, but they recognize how complex and uncertain their job is. In fact, Dan Tarullo, a Fed Governor, said, in effect, “If you have a better mousetrap, let us see it.” And the other regulators backed him up on that.
In addition, they were unnanimous that they didn’t want to hamstring legitimate underwriting or marketmaking activities. Perhaps the most revealing comments were from Mary Shapiro of the SEC to the effect that they did not forsee a trade-by-trade enforcement, and from Gary Gensler of the CFTC that they expected compliance at the “policies and procedures” level, not at the trade level. In general, the regulators indicated that inadvertent violations would not engender penalties, perhaps just warnings.
The second panel was made up of industry representatives, along with such comentators as Professor Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown. There were the expected claims that the rule would cost banks millions in compliance costs, and would severely impact market liquidity, mostly without substantial proofs, as well as the usual claims that it would cost US jobs. On a more practical note, Mark Standish of RBC Capital Markets, representing the Institute of International Bankers, pointed out that government debt of every country but the US was penalized by the rule, and that the ability of foreign banks to hedge their dollar exposure may be hampered by it.
All in all, the hearing was the usual Washington theater - positions being expounded, regulators explaining themselves, and members flitting in and out for their five minutes on the stage. In the end, the most important takeaway is that the regulators understand the impossibility of examining every trade for compliance, and that they will place a heavy emphasis on the policies and procedures banks put in place. When you think about it, that’s not a bad outcome at all.