Volcker Rule - White Paper - Market Making Under the Proposed Volcker Rule - Darrell Duffie - January 16, 2012

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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
Dodd-Frank Timeline, "Volcker Rule," CFTC
Proposal Date Comment Deadline Final Rule Released
February 14, 2012 April 16, 2012 December 10, 2013

January 2012

The research by Dr. Duffie centers on two unintended consequences of the as-proposed Volcker Rule:

  • Higher market execution costs and delays, more volatility in the face of supply and demand shocks, a loss of price discovery, and higher costs of financing for homeowners; and
  • Migration of market making to the outside of the regulated bank sector, which could affect financial stability.

The paper elaborates upon the above points, citing examples of decreased liquidity, or decreased "immediacy" experienced during the financial crisis of 2007-2009. Additionally, Duffie suggests that migration of market making activities from regulated banks to hedge funds and broker-dealers will alter the regulatory oversight of market making.

Duffie suggests an alternative approach, which would use capital and liquidity requirements, such as those of the Basel III requirements, to buffer the risks of market making.


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