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Paul Volcker is about to fire back at critics of the proposed rule that bears his name.
The former Federal Reserve chairman is expected to file a comment letter on the so-called Volcker rule before a Monday deadline, contending the U.S. financial system will be safer and healthier with a ban on proprietary trading by banks, according to people familiar with the situation.
Mr. Volcker also is likely to resist recent attacks on the Volcker rule from money managers, financial firms and foreign governments, including claims that banning banks from trading with their own money could reduce liquidity in the financial markets. Critics of the proposed rule contend corporate borrowing and trading might cost more as a result.
According to people familiar with Mr. Volcker's thinking, his comment letter will argue that too much liquidity in the market can cause investors to bid up asset prices with the expectation there will always be a buyer.
The Volcker rule is one of the most controversial parts of the Dodd-Frank financial-overhaul law. Proposed rules were announced in October by the Federal Reserve, Federal Deposit Insurance Corp., Securities and Exchange Commission and Office of the Comptroller of the Currency. The Commodity Futures Trading Commission proposed identical rules in January.
The rule goes into effect in July, and proprietary-trading operations banned under the rule must be divested by 2014, according to law firm Davis Polk & Wardwell LLP. Banks will get an additional three years to comply under certain circumstances. Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley and other firms have closed proprietary-trading desks or seen traders leave in anticipation of the Volcker rule.
In a sign of the fierce opposition, several major financial firms are expected to submit multiple comment letters by Monday's deadline expressing concerns with the Volcker rule. The Securities Industry and Financial Markets Association, a Wall Street trade group, plans to file five letters, according to Rob Toomey, the group's general counsel. The proposal for the rule included hundreds of questions from regulators.
Many companies and foreign governments already have filed comments, while others are asking for more time. Money manager BlackRock Inc. will submit a comment letter that says the Volcker rule could hurt the asset manager's clients and corporate-bond issuers.
Barbara Novick, BlackRock vice chairman and head of government relations, said the current version of the Volcker rule might make it difficult for Wall Street dealers to "make markets" by buying and selling securities from their clients. Critics also worry the rule will put U.S. banks at a disadvantage relative to non-U.S. financial firms that aren't bound by the curbs.
Mr. Volcker is expected to argue in his letter that critics are overlooking many of the benefits of the rule. For example, U.S. bank-holding companies with investment-banking units will be able to tell clients they are far less likely to face potential conflicts of interest, because they won't have proprietary-trading activities.
The former Fed chairman also plans to push back on critics who claim proprietary trading didn't play a role in the financial crisis, people familiar with his thinking said. Betting with a firm's own money can cause employees to be more focused on individual profit than the well-being of clients, Mr. Volcker believes.
Mr. Volcker is expected to concede that the rule is complex but that this is largely unavoidable, according to people familiar with his thinking. And some of the most complicated parts of the proposed rule were inserted at the request of banks, such as definitions of what kinds of trading positions will be labeled proprietary, these people said.
Mr. Volcker dismisses concerns by the U.K., Japan and others about restrictions on trading of sovereign bonds, according to people familiar with his thinking.
The European Commission's commissioner for the internal market, Michel Barnier, told regulators in a letter Thursday that the absence of an exemption for non-U.S. bonds would "have a negative impact on the liquidity of non-U.S. sovereign markets." Mr. Barnier asked that European Union bonds receive "the same treatment as U.S. Government securities."
Mr. Volcker believes the proposed rule would have little impact on the trading of foreign sovereign bonds, according to people familiar with his thinking. He has told people in conversations about the rule that critics forget that a big bet on European sovereign debt helped sink securities firm MF Global Holdings Ltd. in October.
Volcker Stands Up For Namesake Rule - Yahoo! Finance
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