Implementation of the so-called Volcker Rule will do nothing but harm the U.S. equities market and trading because of the lack of clarity regarding what constitutes proprietary trading and market making, according to a former Securities and Exchange Commission official.
The Volcker rule, named after former Federal Reserve Chairman Paul Volcker, hasn’t yet clearly defined the precise definition of what constitutes market making and proprietary trading for banks, according to Robert Colby, an attorney with Davis Polk & Wardwell and former deputy director of the SEC’s Division of Trading and Markets. This position has been echoed by many critics of the rule. Colby made his remarks during a panel discussion Thursday afternoon at the TradeTech conference in New York City.
"The Volcker rule will do nothing but harm the markets," Colby said. "It wasn’t addressed at the problem in the market and will create a level of legal risk in the markets like we’ve rarely seen with a set of new regulations."
To prove this point, he pointed to the fact that the SEC has already received 15,000 comment letters on the proposed rule, which are broken down into two schools of thought on the question of prop trading/market making: either weaken Volcker or make it stronger. Colby told Traders Magazine after the panel that he has reviewed some of the comments and that responders are either for a much stronger version of the rule asking for strict limits on prop trading and market making or for a weaker version that allows banks more flexibility in these activities.
"The prop trading part [of the rule] has conceptual problems," Colby said. "There is this sense among the people who want the rule weakened that it is inherent to a banking entity business that they be able to conduct principal trading activities." And that is the problem with Volcker, as he sees it.
Conversely, proponents of a stronger Volcker rule want to place tight limits on principal trading activities. In the end, the SEC needs to come up with a more clear definition of what these activities are, he added, so banks can comply with the rule.
Colby also said he doubts the Volcker rule will be finalized by the official July 21 deadline.
"The rule will be completed sometime in the third quarter with a compliance schedule to follow," Colby added.
