Industry Groups Weigh in on Proposed Changes to Volcker Rule

SIFMA, ISDA, the Futures Industry Association, and other industry trade associations and a diverse group of banking organizations made recommendations on proposed changes to regulations implementing Section 13 of the Bank Holding Company Act, also known as the "Volcker Rule." The comment period ended on October 17, 2018.

SIFMA asserted that the proposal is inconsistent with the statutory language and could have unintended negative consequences for the capital markets economy by restricting liquidity of banking entities. SIFMA said the proposal would leave untouched the "overbroad" definition of "covered fund," which continues to interfere with banking entities' ability to provide certain financing and asset management services. SIFMA's Municipal Securities Division filed a separate comment letter that addressed the interaction between the Volcker Rule and municipal Tender Option Bonds, a tool used by banks to support market liquidity that SIFMA believes should be exempt from the "covered funds" provisions of the Volcker Rule.

ISDA advocated for revisions that would focus on the core purpose of the Volker Rule: prohibiting short-term speculative proprietary trading. Among other things, ISDA argued that:

1. the "accounting test" set forth in the proposal should not be implemented as it exacerbates overinclusive scoping problems with the current definition;
2. all derivatives entered into to hedge long-term liabilities, and investments in and cash flows from affiliates, should be excluded from the trading account definition;
3. the list of derivatives covered by the liquidity risk management exception should be expanded to include all interest rate derivatives, derivatives that are cleared, FX currency derivatives, inflation swaps, derivatives that reference permissible securities, and options of the foregoing;
4. trading derivatives in connection with U.S. and foreign government and agency securities should be permitted without further restriction; and
5. the proposal’s modifications to the TOTUS (Trading Outside the United States) exemption should be adopted.

The FIA agreed that the continued availability of financing through covered funds is important to the FIA's commercial firms in connection with capital-intensive projects and recommends amending specific regulations to authorize an FCM to provide clearing services with respect to covered funds.