SIFMA Comments on Proposed Changes to the Volcker Rule

Washington, D.C., October 17, 2018 – In a comment letter on the proposed changes to the Volcker Rule, SIFMA expressed its support of the goal of making the Volcker Rule regulations more simple, transparent and efficient, while noting that portions of the proposal fail to meet this goal and would undermine the ability of banking institutions to act for customers in the capital markets.

“The Volcker Rule as currently implemented unnecessarily restricts banking and capital markets activities explicitly permitted by Congress to the detriment of customer facilitation,” said SIFMA president and CEO Kenneth E. Bentsen, Jr.  “The rule’s current structure negatively impacts capital formation and economic growth and could exacerbate financial harm during times of stress.  The regulators’ willingness to revisit the rule is an important recognition of the underlying problems with the current rule, and while an important first step at simplification, our comments provide substantial recommendations to assist in achieving their goal.”

SIFMA’s comments, which address the proprietary trading, covered funds and compliance and metrics provisions of the proposal, were sent to the proposing Agencies:  the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission.

SIFMA’s Municipal Securities Division also filed a comment letter on the proposed changes.  That letter addresses several questions raised by regulators in their proposing release about the interaction between the Volcker Rule and municipal Tender Option Bonds (TOBs), a tool used by banks to support market liquidity. The letter recommends, consistent with Congressional intent, that TOBs be exempt from the Covered Funds provisions of the Volcker Rule.

Proprietary Trading:

SIFMA believes many of the proposed amendments to the proprietary trading provisions would improve the efficiency of financial markets, promote the safety and soundness of the U.S. financial system, and allow banking entities to better serve their customers.

However, the inclusion of an extremely overbroad accounting prong undermines many of these benefits by expanding the regulatory definition of “trading account” far beyond the statutory definition and Congressional intent.  The proposed accounting prong would prohibit banking entities from engaging in a wide range of longer-term transactions that do not implicate the concerns of the proprietary trading provisions of the statute.  SIFMA believes this would likely result in decreased long-term investment in the U.S. capital markets and decreased liquidity in times of stress.

This accounting prong, or any other third-party prong, is unnecessary to capture the potential proprietary trading of the vast majority of banking entities which are subject to the Volcker Rule.  Banking entities with limited trading assets and liabilities are eligible for a rebuttable presumption of compliance, and banking entities which calculate risk-based capital ratios under the U.S. Market Risk Capital Rule have their short-term proprietary trading activities captured by the market risk capital prong and the dealer prong.

While SIFMA agrees a third prong should apply to banking entities that do not fall into either of these categories—noting it would be a very small number—it believes this should be carefully tailored to the statutory standard and include a rebuttable presumption component and a reasonable challenge procedure through which a banking entity would have the opportunity to demonstrate to its primary regulator that positions held for fewer than 60 days do not constitute proprietary trading.

Covered Funds:

SIFMA believes the definition of “covered fund” under the Volcker Rule is significantly overbroad and unduly complex.  Because of this, the rule unnecessarily restricts the ability of banking entities to serve the public interest in promoting U.S. economic growth and job creation by prohibiting or restricting their ability to provide asset management services, customer facilitation services and long-term debt and equity financing to U.S. businesses indirectly through fund structures, even though they are expressly permitted to do so directly.

The unnecessary prohibitions and restrictions affect, and impose burdens upon, a wide range of activities of banking entities, from organizing and offering retail funds for asset management clients, to providing wealth management services to individuals and families, to structuring investments and transactions for clients, to using fund structures to make safe and sound extensions of credit to, and long-term equity investments in, a wide variety of companies, including small and medium-sized companies, technology and other start-ups, renewable energy companies and minority-owned businesses, located in both urban and rural areas, between the coasts and elsewhere.

While the proposal contains very few specific items concerning covered funds, SIFMA strongly supports the Agencies’ efforts to reconsider various aspects of the covered fund provisions of the original rule and to focus on bringing the covered fund regulations into better alignment with the purposes of the statute.  SIFMA particularly supports efforts to reduce excess demands on available compliance capacities at banking entities and allow them to more efficiently provide services to clients, consistent with the requirements of the statute.

Compliance and Metrics:

SIFMA strongly supports the Agencies’ goal of reducing compliance-related inefficiencies of the Volcker Rule, noting certain elements of the Proposal, such as revisions which would provide banking entities with flexibility to integrate their Volcker Rule compliance programs into their existing compliance programs, are entirely consistent with that goal.

However, the Proposal would significantly expand the number and scope of the metrics reporting requirements, negating the benefits of any simplifications in the compliance approach and resulting in a significant increase in the reporting burden for many banking entities.

SIFMA believes the proposed changes are inconsistent with the purposes of the metrics as explained by the Agencies when adopting the rule, which was to function as an early warning indicator which provided the Agencies with information to assist them in their onsite supervisory activities, not as a tool to replace such onsite review and examination.

Because the Proposal would only provide the Agencies with information that is either already available to them or that would not enhance their supervision of banking entities, the Proposal is unlikely to do anything to assist the Agencies in their onsite supervisory activities.  SIFMA believes any unnecessary duplication of reporting should be eliminated and the Agencies should allow banking entities and the Agencies to focus more efficiently on any genuine safety and soundness issues.


Notes to Editors:

Bipartisan references to complexity of the existing Volcker Rule:

  • Press Release, Opening Statement on the Volcker Rule Proposal by Federal Reserve Vice Chairman for Supervision Randal K. Quarles (May 30, 2018), (“[T]he objective behind this proposal is straightforward: simplifying and tailoring the Volcker rule in light of our experience with the rule in practice.  This is a goal that is shared among all five agencies and among policymakers at those agencies with many different backgrounds.”); 83 Fed. Reg. at 33434 (“Based on experience since adoption of the 2013 final rule, the Agencies have identified opportunities, consistent with the statute, for improving the rule, including further tailoring its application based on the activities and risks of banking entities.”)..
  • Jay Powell, Chairman of the Federal Reserve, 2017 AFA Panel Session: Low Interest Rates and Financial Markets, American Finance Association Meeting (Jan. 7, 2017) (“What the current law and rule do is effectively force you to look into the mind and heart of every trader on every trade to see what the intent is . . . If that is the test you set yourself, you are going to wind up with tremendous expense and burden and I would say really quite marginal benefit.”)
  • Daniel K. Tarullo, Former Vice Chairman for Supervision, Federal Reserve, Departing Thoughts (Apr. 5, 2017) (“[S]everal years of experience have convinced me that there is merit in the contention of many firms that, as it has been drafted and implemented, the Volcker [R]ule is too complicated. Achieving compliance under the current approach would consume too many supervisory, as well as bank, resources relative to the implementation and oversight of other prudential standards.”)

SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate for legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit