The Volcker Rule has had an adverse impact on market liquidity
and "leads to higher capital costs for borrowers of all
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
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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