SIFMA Says Volcker Rule Threatens to Freeze Corporate Bond Market

An overly restrictive Volcker rule would artificially limit banks’ ability to facilitate trading, report charges

The rule named for Paul Volcker has drawn fire as too restrictive. (Photo: AP) The rule named for Paul Volcker has drawn fire as too restrictive. (Photo: AP)

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The securities industry’s leading advocate on Thursday spoke out against the Volcker rule’s restrictions on propriety trading, warning that an overly restrictive implementation of the rule could severely reduce liquidity in the $1 trillion U.S. corporate bond market.

At its Thursday media briefing, the Securities Industry and Financial Markets Association released an Oliver Wyman study that quantifies the potential economic effects of the Volcker rule, which is one of the most controversial elements in the Dodd-Frank Wall Street reform act.

“An overly restrictive implementation of the Volcker rule as proposed would artificially limit banking entities’ ability to facilitate trading, hold inventory at levels sufficient to meet investor demand, and actively participate in the market to price assets efficiently–reducing liquidity across a wide spectrum of asset classes,” according to the Oliver Wyman executive summary.

Any meaningful reduction in liquidity could cost investors $90 billion to $315 billion in mark-to-market loss of value on their existing holdings as assets start to freeze up, the Oliver Wyman report warns Further, it estimates that reduced liquidity could hit corporate issuers with an additional $12 billion to $43 billion annually in borrowing costs if investors demand higher interest payments as their holdings grow increasingly illiquid.

This is not the first time that Oliver Wyman has conducted a study for SIFMA. A year ago, the global consulting firm, which is a part of Marsh & McLennan Cos., was commissioned by SIFMA to publish another report, “The Volcker Rule: Considerations for Implementation of Proprietary Trading Regulations.”

“Those of you who have followed us know that we disliked the Volcker rule when it came out,” said SIFMA CEO and President Tim Ryan at the media briefing, held at the Barclays Capital headquarters in New York that were occupied by Lehman Brothers until the 2008 market crash.

Ryan noted that regulators have come to market participants with 1,400 separate questions about the Volcker rule’s implementation, suggesting the degree to which the rule’s restrictions would burden trading floors. He then pointed to remarks earlier this week by JPMorgan Chase CEO Jamie Dimon, who joked that the rule will force his traders to sit next to a lawyer and a psychiatrist during market hours so they can get through the trading day.

In a sign of the times, The Wall Street Journal on Thursday reported that two of the four executives in charge of Goldman Sachs’ securities division will leave that company as it struggles with losses in its trading operations.

The management committee executives leaving Goldman are David Heller and Eisler, seasoned traders with 40 years of combined experience in equities sales and trading, as well as fixed-income sales and trading in interest rates, foreign exchange and some derivatives.

“Messrs. Heller and Eisler weren’t nudged out of the company, according to people familiar with the matter,” The Journal reported. “But weaker trading revenue and tighter regulations that are limiting risk-taking at Goldman and other securities firms took their toll on both men, these people said.”

Just a day before the media briefing, Ryan released a statement critical of the Commodity Futures Trading Commission's adoption of a proposal implementing the Volcker rule.  

"As with the earlier proposal from the other regulators, today's CFTC proposal addressing the Volcker rule is complex and has the potential to have a major impact on liquidity in markets,” Ryan said. “It could inhibit the ability of financial institutions to effectively make markets which will, in turn, hurt capital formation."   

Read Volcker Rule Proposal Approved by FDIC; Wall Street Fumes at AdvisorOne.com

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