The House Financial Services Subcommittee on Capital Markets, Securities, and Investment examined the impact of the Volcker Rule on the U.S. capital markets.
In a summary of the hearing, the Delta Strategy Group listed the following "key takeaways" from industry panelists:
- The Volcker Rule has had an adverse impact on market liquidity and "leads to higher capital costs for borrowers of all sizes."
- The rule has effected a shift to U.S. Treasuries that is creating more risk in that market.
- The rule treats every trade as proprietary unless demonstrated otherwise, which materially impacts the market-making ability of banks.
Subcommittee Chair Bill Huizenga (R-MI) called the rule a "solution in search of problem" because it addresses activities that were not the cause of the financial crisis. However, Subcommittee Ranking Member Carolyn Maloney (D-NY) said risk levels on bank trading desks have been steady, and market-making activity – a major source of trading revenue for banks – is not prohibited by the Volcker Rule. Other panelists claimed that market making might not be expressly prohibited but it is, in fact, limited by the rule since trades are viewed as proprietary unless demonstrated otherwise.
Investment Company Institute General Counsel David Blass testified that the Volcker Rule is adversely affecting registered funds and similar non-U.S. funds that were not intended to be the subject of the regulation. He noted that "[t]he agencies responsible for implementing the Volcker Rule failed to provide a complete carve out for registered funds, which has resulted in these funds being treated like banking entities."
Commentary / Steven Lofchie
The most significant commentary was probably that of Investment Company Institute General Counsel David Blass, particularly given the fact that registered investment companies are likely the primary investment vehicle for individual accounts. His points were as follows: (i) even if one believes that the Volcker Rule provides some benefit, the rulemaking and interpretative process that the Rule requires makes it almost impossible to obtain any regulatory advice or relief, (ii) the Volcker Rule disadvantages U.S. companies, and (iii) the Volcker Rule has diminished liquidity in securities in which registered investment companies trade (which obviously has the effect of raising costs).
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