Volcker Rule - Comment Letters

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Dodd-Frank Timeline, The Volcker Rule
Proposal Date Comment Deadline Final Rule Released
October 12, 2011 February 13, 2012 December 10, 2013

Listed below are comment letters addressing the restriction and/or prohibition of banking entities from engaging in proprietary trading of derivatives and from owning or sponsoring hedge funds and other private funds. The U.S. Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, and the Office of the Comptroller of the Currency jointly issued the proposal for the Volcker Rule at its October 12, 2011 open meeting. Regulators received over 17,000 letters on the rule, though the vast majority were form letters from various grassroots organizations requesting swift implementation of the rule in its entirety, without exemptions that would "water down" the rule.

Below is an assortment of letters that represents the viewpoints of various market participant segments. A list of all of the letters can be found HERE.

On February 16, 2012, the CFTC published its version of the Volcker Rule, with a comment deadline of April 16, 2012. Although many of the letters were resubmissions of letters submitted to the SEC and other Prudential Regulators, some specifically address the CFTC rule. Those letters can be found HERE.

Paul A. Volcker - February 13, 2012

Volcker Rule
February 13, 2012

The comment letter by Paul Volcker, former chairman of the Federal Reserve, includes a commentary on the Volcker Rule, which serves as a justification for the rule and as a "rebuttal" to critics of the rule. Volcker argues that "commercial bank proprietary trading is at odds with the basic objectives of financial reforms: to reduce excessive risk, to reinforce prudential supervision, and to assure the continuity of essential services." Also from the letter:

"The questions and objections raised in comments on the proposed rules appear to fall into four broad categories:

  1. Proprietary trading by commercial banks is not an important risk factor;
  2. Needed liquidity in trading markets will be imperiled;
  3. The competitive position of U.S. based commercial banking institutions will be adversely affected;
  4. The proposed regulation is simply too complicated and costly.

My short answer to each of these objections is: 'not so.'"

In the letter, Volcker offers a detailed rationale of his position.

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Occupy the SEC - February 13, 2012

Volcker Rule
February 13, 2012

From the comment letter:

"During the legislative process, the Volcker Rule was woefully enfeebled by the addition of numerous loopholes and exceptions. The banking lobby exerted inordinate influence on Congress and succeeded in diluting the statute, despite the catastrophic failures that bank policies have produced and continue to produce. Nevertheless, the Volcker Rule, in its current statutory form still has the potential to rein in certain speculative trading practices by banking entities that enjoy ready access to customer deposits and virtually limitless funding through various Federal Reserve programs."

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International Centre for Financial Regulation - February 13, 2012

Volcker Rule
February 13, 2012

From the comment letter:

"We do not believe the proposed rule, as structured, represents a practicable, sustainable piece of regulation. The clarity which regulations need is removed by the difficulties of framing manageable exemptions, as well as the complexity of coordination among five organisations. We adopt this view not because we sympathise with the firms who will have to comply, but because the lack of clarity and serious scope for unforeseen consequences make the rule, and the activities it is intended to govern, opaque."

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Goldman Sachs - February 13, 2012

Volcker Rule
February 13, 2012

From the comment letter:

“It is [clear] that Congress did not intend the Volcker Rule to inhibit banking entities from lending, undermine their asset management businesses or disrupt their ordinary-course operations. Yet, we believe that certain aspects of the Proposed Rule do adversely affect these core activities without generating any appreciable benefits to the safety and soundness of the financial system.”

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Citigroup - February 13, 2012

Volcker Rule
February 13, 2012

Citigroup "believes the final rule should be revised to require each institution to establish a risk architecture that prescribes a customer-focused business model for market-making and related activities. This risk architecture should include a comprehensive set of risk limits, selected and sized appropriately to a banking entity’s client model, products and financial capacity. Use of risk limits and capital as benchmarks will assist horizontal comparisons across the industry and harmonize Volcker Rule compliance with the broader capital and regulatory risk management construct being developed internationally. This approach will focus market-making on servicing customers and ensuring safety and soundness."

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Managed Funds Association - February 13, 2012

Volcker Rule
February 13, 2012

In the comment letter, MFA focus on three key aspects of the Proposed Rule:

  • whether covered entities may continue to engage in legitimate market making activities;
  • whether covered entities may continue to engage in legitimate distribution activities; and
  • whether foreign banks may continue to invest in offshore funds sponsored and managed by U.S. non-banking entities.
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Canadian Banks - February 13, 2012

Volcker Rule
February 13, 2012

From the comment letter:

“We respectfully request that the Agencies consider further the likely costs to financial markets and market participants in both the U.S. and Canada before imposing an untested prudential regulatory scheme on banks that are well-regulated outside the United States.” The Canadian Banks “also believe that, as currently drafted, the Proposed Rule would both violate existing U.S. treaty obligations under the North America Free Trade Agreement and otherwise reverse a productive history of regulatory cooperation.”

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Invesco - February 13, 2012

Volcker Rule
February 13, 2012

In the comment letter, Invesco explains that they believe “prohibited proprietary trading must be carefully and narrowly defined in the Proposed Rule in order to avoid significant unintended adverse consequences on the capital markets, capital formation and the broader economy. [They also] believe that the Proposed Rule, as currently drafted, could increase systemic risk by decreasing market liquidity, driving up investor costs, increasing price volatility and triggering both immediate and long-term devaluation of assets.”

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CME Group - February 13, 2012

Volcker Rule
February 13, 2012

CME Group provides the following suggestions in the comment letter:

  • The Agencies’ final rules should unambiguously state that market making-related activities in exchange-traded futures and options are among the permitted activities in which a covered banking entity may engage
  • The Agencies should clarify that treasury futures and options are permitted investments under Section 619(D)(1)(A)
  • If the Agencies disagree that treasury futures and options are permitted investments under Section 619(D)(1)(A), then the Agencies should use the exemptive authority in Section 619(D)(1)(J) to add treasury futures and options on treasury futures to the list of permissible proprietary trading activities for covered banking entities
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Morgan Stanley - February 13, 2012

Volcker Rule
February 13, 2012

“The Proposal, while not intended to do so, in practice, would excessively restrain the risk-mitigating hedging activities of U.S. banking entities and potentially damage their safety and soundness, which is contrary to one of the central purposes of the Volcker Rule. [To] promote the safety and soundness of U.S. banking entities and the stability of the U.S. financial system, the regulations should encourage hedging activities and provide U.S. banking entities with broad ability to hedge their risks.”

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Consortium of Major Financial Institutions - February 13, 2012

Volcker Rule
February 13, 2012

From the comment letter:

“This submission discusses the negative impact on the market for privately placed structure finance securities that will result from the failure of the Proposed Rule to properly apply the market-making exemption in the Volcker Rule to the purchase of covered fund interests. In particular, because the structured finance market depends heavily on dealer to provide liquidity, prohibiting banking entities from engaging in market-making in such securities will significantly impede the secondary market. Without a viable secondary market, demand for new issuances will also suffer. If not revised, this aspect of the Proposed Rule would contravene congressional intent and have significant adverse effects on important segment of the securities market.”

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Vanguard - February 13, 2012

Volcker Rule
February 13, 2012

From the comment letter:

"The Proposal will impact the fixed income market in three significant ways:

  1. by curtailing the availability and depth of liquidity;
  2. by increasing transaction costs; and
  3. by limiting price discovery. The Proposal will have this negative impact because of the limitations found in the exemption for market making activity and the narrow definition of Government Securities."
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Securities Industry and Financial Markets Association - February 13, 2012

Volcker Rule
February 13, 2012

In the comment letter, SIFMA recommends that the Agencies modify the Proposed Rules as follows:

  • Because ABS Issuers are not hedge funds or private equity funds, the Agencies should, as intended by the Securitization Exclusion, exclude such issuers from the Proposed Rules’ definition of “covered funds”
  • Further, because we do not believe issuers of insurance-linked securities were intended to be “covered funds” under the Volcker Rule, the Agencies should exclude ILS Issuers from such definition.
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HSBC Bank USA - February 13, 2012

Volcker Rule
February 13, 2012

HSBC “urges the Agencies to reconsider the extraterritorial reach of the Proposed Rule by making the following changes:

  • expanding the ‘solely outside the United States’ exemption so that proprietary trading activities of non-U.S. banks that do not result in additional risk being added to the U.S. financial system fall outside the scope of the Volcker Rule
  • extending the exemption for proprietary trading in U.S. government obligations to cover non-U.S. government obligations, state and municipal agency obligations and derivatives on each of these categories of securities
  • broadening the scope of the Proposed Rule’s exemptions for market making, risk-mitigating hedging, customer facilitation and other permitted activities”
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International Swaps and Derivatives Association - February 13, 2012

Volcker Rule
February 13, 2012

Summary of key points from the comment letter:

  • "The proposed rule would impose difficult restrictions on swap dealer portfolio management. These restrictions will drive up costs, resulting in higher prices or the unavailability of product to customers, and reduced competition as swap dealers leave the markets."
  • "The proposed rule would isolate the US swap market from the global market and decrease US market capacity, competitiveness and liquidity, to the detriment of US customers and all banking entities (US or non-US based) that would try to continue to serve them."
  • The proposed rule fails to “clearly describe the key characteristics of both prohibited and permitted activities.”
  • "The proposed rule does not meet the fundamental fair notice goal of regulation."
  • "Although a metrics-based approach maybe the only way to establish standards and assess compliance with such an inherently confusing rule, compliance and enforcement will inevitably be labor intensive, costly and confused."
  • "The proposed rule mistakenly treats certain securitization vehicles as “covered funds” and separates these vehicles from sponsoring, advising or organizing banking entities that are providers of swaps needed to effect securitizations."
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The Clearing House - February 13, 2012

Volcker Rule
February 13, 2012

From the comment letter:

“We urge the Agencies to reject an implementation approach for the Volcker Rule that is based on the assumption that harm to the markets, customers and financial institutions resulting from unnecessarily restrictive regulations can be corrected after the Agencies evaluate the conformance period experience… It is critical, however, that the final rules not be based on the unrealistic expectation that harmful and unintended consequences could be reversed following the conformance period. The final rules must provide a truly meaningful ability to adjust as experience and circumstances warrant. Any other approach would create the very harm to the financial system that the Dodd-Frank Act and the Volcker Rule were designed to prevent.”

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Credit Suisse - February 13, 2012

Volcker Rule
February 13, 2012

From the comment letter:

“In order to eliminate or mitigate the feared chilling effect and better implement the Congressional intent of the rule, the Agencies should revise the Proposal by:

  • removing some of the purported defining characteristics of prohibited proprietary trading that may likewise manifest themselves in connection with legitimate trading activity, and
  • reverse the negative presumption implicit in the regulations so as to encourage banking entities to continue to take an active role in the U.S. financial markets”
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Barclays Capital - February 13, 2012

Volcker Rule
February 13, 2012

Barclays Capital includes the following suggestions in their comment letter:

  • "We believe that the Proposed Rule represents an inappropriate one-size-fits-all approach to the market making and hedging exemptions that does not properly take into account the way market intermediaries operate, especially in less liquid markets. We propose are formulation of these exemptions, including a presumption of compliance for so long as a trading activity is conducted in a manner consistent with tailored quantitative metrics.
  • In light of the function that banking entities perform in the international markets for non-U.S. government obligations, the final rules should include an additional exemption for trading in such instruments.
  • We recommend that the Agencies provide for a "phase-in approach" to implementation of the Proposed Rule‘s reporting, recordkeeping and compliance program requirements over the conformance period."
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Consortium of Financial Institutions - February 13, 2012

Volcker Rule
February 13, 2012

The undersigned financial institutions express their concern “that the proposal would require each of our organizations in extremely short order to develop and implement compliance, internal controls, record-keeping and reporting regimes simply to ―prove a negative‖ that we are not engaged in impermissible proprietary trading or funds activities. [They] also are greatly concerned that the proposal would hamper the ability of our organizations to meet the liquidity needs of our customers, including small, middle-market and municipal customers, and would reduce liquidity more broadly in the marketplace. Furthermore, [they] are concerned that the proposal would actually increase, rather than reduce, the risks to the safety and soundness of banking organizations.”

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Wells Fargo - February 13, 2012

Volcker Rule
February 13, 2012

From the comment letter:

“Wells Fargo submits that the definition of "covered fund" should exclude any subsidiary of a banking entity, all the securities of which are owned by the banking entity and its knowledgeable employees, provided that such employees own less than 5% of the securities of the subsidiary. This would permit a banking entity to continue to engage in permissible activities (including permissible merchant banking and venture capital activities) through its wholly owned subsidiaries, and through its subsidiaries that are otherwise wholly owned, but in which a limited number of investment professional employees co-invest to provide them with ‘skin in the game.’”

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Bank of America - February 13, 2012

Volcker Rule
February 13, 2012

From the comment letter:

“We believe that alternatives to the approaches taken in the Proposal are available that would fulfill the requirements of the statute, are within the authority of the Agencies to adopt, more closely reflect congressional intent and cause less damage to our individual and corporate customers, market liquidity, cost of capital, the availability of credit, U.S. competitiveness, safety and soundness and U.S. financial stability. We respectfully submit that the Agencies should use the discretion and authority granted to them by Congress to implement the Volcker Rule in a less burdensome and needlessly costly manner.”

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JP Morgan Chase - February 13, 2012

Volcker Rule
February 13, 2012

From the comment letter:

“We have two core concerns with how the proposed rule has interpreted the Section 619. First, it has in some areas turned the statute’s narrow prohibition into a more general prohibition on risk taking, and put banking entities in the position of having to rely on ambiguous or incomplete exceptions to the proposed rule in order to continue some of their core functions… Second, the proposed rule appears to take the view that banking entities, their customers, and the economy must pay almost any price in order to ensure absolute certainty that there can never be an instance of prohibited proprietary trading.”

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IntercontinentalExchange - February 12, 2012

Volcker Rule
February 12, 2012

“In addition to modifying the definition of banking entity, the Agencies should expand the exemptions for non-U.S. trading… The Agencies interpretation of the Volcker Rule will serve as a material disadvantage to U.S. exchanges, precluding foreign banks from participating in U.S. markets. ICE suggests the Agencies define the scope of transactions solely outside of the U.S. to exclude transactions if the transaction is entered into by a foreign banking entity that is not organized under U.S. law and not recorded as an asset by a U.S. branch of the foreign banking entity.”

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NYSE Euronext - February 9, 2012

Volcker Rule
February 9, 2012

“In particular, we are concerned with aspects of the Proposal that, if not flexibly applied, would restrict the ability of market makers to accumulate and manage inventory positions, and cause an undue emphasis on the source and nature of revenues and fees in determining whether activity is related to market making or prohibited proprietary trading. We believe that one unintended consequence of this would be an adverse impact on the liquidity of the nation’s securities markets, which would harm investors and companies needing efficient access to capital.”

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Consortium of Canadian Financial Institutions - January 19, 2012

Volcker Rule
January 19, 2012

From the comment letter:

We respectfully request that the Agencies:

  • explicitly exclude from the definition of “covered fund” all Canadian and other Foreign Public Funds
  • expressly permit all Foreign Funds to exclude from the term “resident of the United States” certain omnibus accounts and non-U.S. person who are temporarily present or resident in the U.S., but otherwise eligible to invest in Foreign Funds, for purposes of the foreign fund exemption
  • narrowly interpret the term “affiliate” as used in the term “banking entity” to ensure that no fund is prohibited from engaging in trading for its own account or investing in covered funds
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Darrell Duffie, Stanford University - January 16, 2012

Volcker Rule
January 16, 2012

In his comment letter, Stanford Professor, Darrell Duffie, writes:

The Agencies’ proposed implementation of the Volcker Rule would reduce the quality and capacity of market making services that banks provide to U.S. investors. Investors and issues of securities would find it more costly to borrow, raise capital, invest, hedge risks, and obtain liquidity for their existing positions. Eventually, non-bank providers of market-marking services would fill some or all of the lost market making capacity, but with an unpredictable and potentially adverse impact on the safety and soundness of the financial system. These near-term and long-run impacts should be considered carefully in the Agencies’ cost-benefit analysis of their final proposed rule. Regulatory capital and liquidity requirements for market making are a more cost effective method of treating the associated systemic risks.

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Kay Hagan, US Senate - January 13, 2012

Volcker Rule
January 13, 2012

From the comment letter:

Congress made clear that the private funds provisions of Section 619 should focus on preventing banking entities from circumventing the general prohibition on proprietary trading by engaging in short-term trading strategies through the investment of capital in liquid funds. It was not, however, intended to restrict or prohibit other legitimate structures—including foreign funds, joint ventures, venture capital funds, loan funds, securitization vehicles, and structure notes—that are not usually thought of as private equity or hedge funds and do not relate to trading the firm’s own capital.

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SIFMA - December 29, 2011

Volcker Rule
December 29, 2011

In their comment letter, SIFMA explains:

  • An overly restrictive implementation of the Volcker rule (as proposed) would artificially limit banking entities' ability to facilitate trading, hold inventory at levels sufficient to meet investor demand, and actively participate in the market to price assets efficiently -reducing liquidity across a wide spectrum of asset classes
  • In the US corporate bond market, any meaningful reduction in liquidity could have significant effects:
    • Cost investors -$90 to 315BN in mark-to-market loss of value on their existing holdings, as these assets become less liquid and therefore less valuable
    • Cost corporate issuers -$12 to 43BNper annum in borrowing costs over time, as investors demand higher interest payments on the less liquid securities they hold
    • Cost investors an additional - $1 to 4BN in annual transaction costs, as the lever and depth of liquidity in the asset class is reduced
  • Our analysis focuses on the US corporate bond market as an example -the Volcker rule obviously covers other asset classes where liquidity provision by banks also has significant value to the economy as a whole
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Canadian Bankers Association - December 21, 2011

Volcker Rule
December 21, 2011

From the comment letter:

"The limited exemptions in the Volcker Rule, as currently proposed, would have a significant and negative impact on the liquidity of Canadian government and corporate debt, the competitiveness and efficiency of Canadian financial institutions and our financial markets, and the capacity of the Canadian regulators to supervise the Canadian banking entity."

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Michael Honda, US House of Representatives - December 20, 2011

Volcker Rule
December 20, 2011

From the comment letter:

"As a representative of Silicon Valley, I request reconsideration of your proposed rule written to implement Section 619, otherwise known as the Volcker Rule, of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The proposed rule could negatively suppress the innovative and economic potential of Silicon Valley and our nation, if it restricts venture capital investments, contrary to clear Congressional intent."

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Consortium of Financial Institutions - November 29, 2011

Volcker Rule
November 29, 2011

From the comment letter:

We are writing to:

  • highlight the interplay between the swap dealer designation and the Volcker Rule's prohibition on proprietary trading;
  • underscore the impact to banks of being are registered swap dealer under the Volcker Rule;
  • request that the Commissions broaden the availability of exemptions to the swap dealer definition to ensure that the combination of Title VI Regulation and the Volcker Rule does not result in unintended consequences, including a substantial decrease in derivative products and services for small and mid-size end-users.
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US Chamber of Commerce - November 17, 2011

Volcker Rule
November 17, 2011

From the comment letter:

The Chamber respectfully requests:

  • The Volcker Rule Proposal to be withdrawn and re-proposed when the Commodity and Futures Trading Commission publishes a proposed rule on this complex, multidisciplinary, and interlocking rule
  • When the Volcker Rule Proposal is re-proposed that the stakeholders be given a 150 day comment period, or in the alternative if there is no withdrawal that the current comment period be extended to 150 days, to conform to comment periods for far less complex rules
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