Former Federal Reserve Chairman Paul Volcker is urging regulators to ensure a regulation implementing the so-called Volcker Rule to limit risky trading activities by banks be clear and concise.
On Friday, Volcker submitted a letter to the Financial Stability Oversight Council, urging it to clear up any ambiguities in its recommendations on implementing the rule.
"Clear and concise definitions, firmly worded prohibitions, and specificity in describing the permissible activities will be of prime importance for the regulators as they implement and enforce this law," Volcker wrote. "Bankers and their lawyers and lobbyists will no doubt search for and discover seeming ambiguities within the language of the law. Surely, any such ambiguities need to be resolved in light of carrying the basic intent of the law."
The Volcker Rule would limit depository institutions' proprietary trading and ban their sponsoring or investing in hedge funds and private-equity funds, although the final Dodd-Frank law provided exemptions for the rule.
For example, market-making activities are exempted from the proprietary trading ban. Volcker said the definition of "market making" could be critical as it might be possible to "disguise essentially proprietary wagers on the direction of individual securities or markets."
Volcker also expressed concern over recent reports that bankers are reorganizing their proprietary trading businesses to take advantage of the market-making exemption.
"I am conscious that some of those reports suggest implicit (or even explicit!) exemptions that proprietary trading may continue in that guise," he wrote. "The ability of supervisors should be clear to undertake close scrutiny of trading books if there is a reason to suspect significant proprietary activity may exist and be tolerated by management."
Volcker also suggested defining "trading account" broadly so as not to limit supervisors' examination of trading activities.
At its first meeting on Oct. 1, the FSOC submitted a set of questions to the industry to aide in its study on the Volcker Rule. The comments are due on Friday. The FSOC must complete the study by January and regulators then have nine months to write the rule.
