Volcker Rule Testimony of SIFMA Witness Ron Kruszewski at HFSC Hearing

Washington, DC, March 29, 2017 – Today, SIFMA Board Member and Stifel Chairman and CEO Ron Kruszewski testified on behalf of SIFMA before the House Committee on Financial Services Subcommittee on Capital Markets, Securities, and Investment on Capitol Hill in a hearing entitled “Examining the Impact of the Volcker Rule on the Markets, Businesses, Investors, and Job Creators.”

The full written testimony can be found here, with excerpts below: 

Introduction

“I am not a proponent of this rule. I believe the Volcker Rule provides little benefit regarding its purpose when enacted which was to reduce systemic financial risk by banning proprietary trading.”

“[T]he Rule as formulated, implemented, and enforced has had a deleterious impact on the ability of American businesses to raise capital and grow the economy. Put simply, the Volcker Rule discourages legitimate and needed customer-supporting market-making activities by imposing an overly complex and intent-based compliance regime.”

“The Rule has raised the cost of capital for businesses and encouraged pro-cyclical effects on liquidity in financial markets.”

“I do not believe deposit taking banks should be making risky short term, speculative bets, and in fact the law has long prohibited such activity. But I do not believe the way to regulate risk, systemic or otherwise, is by inhibiting trading or traditional market making, which provides liquidity and depth to our capital markets, but rather through capital and liquidity rules addressing the balance sheet of our financial institutions.”

“It is important to note that the financial crisis was rooted in the loan book, not the trading book, of our financial institutions.”

“Three observations: 1) The Rule is beyond complex; 2) The Volcker Rule includes a provision called ‘RENT-D, [which] limits market making so it does not exceed the ‘reasonably expected near term demand’ of clients, customers and counter-parties. 3) Compliance with Volcker is governed by five separate agencies, each with their own congressional mandate, their own philosophy and own approach, [which] creates an uncertain and unwieldy bureaucracy.”

“Stifel helps our clients by assisting them raise growth capital in both the equity and debt markets. As part of this equation, Stifel commits to make markets, which benefits both the issuing company and the purchaser of the equity or debt. Volcker materially impacts our ability to effectively make markets. This in turn causes the buy-side to demand higher compensation, reflected in lower equity valuations or higher interest rates. And, higher cost of capital.”

Bad Policy

“The Volcker Rule threatens market liquidity by making the trading of OTC financial products both slower and costlier for issuers and investors.”

“I would note that while many of the studies of market liquidity have focused on aggregate conditions, my experience indicates that small cap and mid-cap issuers appear to have experienced a disproportionately negative impact from a number of the structural and regulatory changes meant to improve transparency in markets and financial stability in our financial system, including the Volcker Rule.”

“The fact that smaller firms are challenged in effectively financing themselves in the debt market has many potential implications for the economy – all of them negative. Because it is difficult to raise capital, small firms increasingly are finding it difficult to compete with larger firms. Instead, they are selling themselves to their larger competitors.”

Burdens of the Volcker Rule’s Covered Funds Provisions

“The covered funds provisions of the Volcker Rule result in a scope far beyond the intended focus on the use of hedge funds and private equity funds to facilitate indirect, impermissible proprietary trading…. The covered funds provisions of the Volcker Rule should be amended to limit the definition of covered fund only to funds that engage in proprietary trading.　 This would achieve the goal of prohibiting indirect, impermissible proprietary trading through a fund without sweeping in core asset management and related activities that are far removed from the policy goal.”

Poorly Implemented

“The SEC, the OCC, the CFTC, the FDIC, and the Federal Reserve must jointly determine Volcker compliance, and while they have assured the public they will cooperate on enforcement and supervision, we believe it will be very difficult, if not impossible, for five different, independent regulators to jointly enforce a rule this complex. Recent anecdotes from SIFMA’s membership indeed confirm a lack of coordination.”

Principles for Change

“I personally believe the Volcker rule should be repealed. If not repealed, at a minimum, the Volcker Rule should be modified to: 1) Reverse language that assumes all trades are proprietary unless proven otherwise; 2) Eliminate the “reasonable expected near term demand” requirement.

“Any changes should be consistent with the following fundamental principles: 1) the Rule should not impede market liquidity and capital formation; 2) the restriction on proprietary trading should be plainly written and not based on trader intent; 3) restricted proprietary trading should limit only trading wholly unrelated to customer activity or risk management; 4)the regulatory regime should be rationalized with a single agency responsible for implementing, interpreting and enforcing the Rule; 5) the restrictions on covered funds should target indirect, impermissible proprietary trading.”

Conclusion

“SIFMA and Stifel were opposed to the Volcker Rule when it was first proposed and have consistently questioned the need for its existence ever since. SIFMA is committed to assisting policymakers in the Administration, the agencies, and the Congress, as they study the effects of Volcker and what do to next.”

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SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $18.5 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. 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 http://www.sifma.org.