IFLR speaks with Morrison & Foerster partner
Susan Gault-Brown and of counsel James Schwartz on the poll
results and what to expect next for the Volcker
Eighty-percent of respondents to the poll agreed that the
Volcker Rule is an example of a complex regulation that is not
working well with several compliance burdens associated with
trading, funds and external activity at fault. Why do you think
James Schwartz (JS): The Volcker Rule is
unusually detailed and prescriptive; including its preamble,
the Rule release ran to more than 1,000 pages. There are no
real precedents for the Rule in the US, and it has few if any
counterparts in other jurisdictions. It's not exactly
surprising that the market would find the rule problematic.
There are no real precedents for the Rule in
the US, and it has few if any counterparts in
James Schwartz, Morrison & Foerster
Just under 65% of respondents feel that it would be a good
idea to make the Federal Reserve Bank the primary Volcker Rule
regulator. Why do you think the market thinks the previous
decentralised authority isn't working?
JS: There are at least a couple of issues
with the current situation. The first is that, to the extent
regulatory changes to the Rule might be deemed desirable, there
is a need to get all of the agencies on board. The second is
that different agencies may make differing determinations as to
whether particular actions by banking entities are permissible
or not, or may need to coordinate with each other to achieve
consistency in their approaches.
More respondents think that the definition of banking
entity is too broad and should be amended, but there is no
consensus as to whether it should apply to just systematically
important financial institutions (Sifis), or to all US banks
and their subsidiaries. Why the uncertainty?
Susan Gault-Brown (SGB): Given that the
purpose of the limitations that the Volcker Rule puts on
banking entities is to limit systemic risk, it is
understandable that more information would be needed to
determine if that goal would be best served by focusing solely
on Sifis or by looking instead to all US banking entities.
Why do you think that nearly three-quarters of respondents
want the definition of covered fund to be changed? How could
the reach of a covered fund be clarified?
SGB: The covered fund definition is
intended to capture high-risk, illiquid investments (ie the
types of investments regulators would like to restrict banking
entities from making). Rather than describing these investments
prescriptively by statutory provision (such as Investment
Company Act section 3(c)(1) and 3(c)(7)), regulators could use
a more principles-based approach.
Regulators could use a more principles-based
approach for [high-risk, illiquid]
Susan Gault-Brown, Morrison &
Do you expect regulators to expressly recognise that
illiquid and low volume markets require dealers to take a
different approach than dealers in liquid markets, as
respondents suggested was necessary?
JS: It is difficult to foresee exactly what
changes the regulatory agencies or Congress might make to the
reasonably expected near term demand (RENTD) requirement. What
is clear, though is that, despite the Volcker rule referencing
the 'liquidity, maturity, and depth of the market' in
connection with RENTD, many banking entities have found it
difficult to substantiate their RENTD analyses in markets that
are illiquid and low volume. Given the difficulties with RENTD,
it may be that the concept of RENTD will generally be made less
important to compliance for purposes of proprietary trading and
Overall the survey implies that the rules should be
redefined but not removed. Do you expect that this
administration will do that?
JS: While an earlier proposal contained in
the CHOICE Act (which did not become law) would have done away
with the Volcker Rule entirely, more recent proposals would
keep the rule but amend it.
So it does appear that amendment is more likely than