IFLR & Morrison Foerster poll: key takeaways

Author: | Published: 29 May 2018
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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 Rule

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 that is?

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 other jurisdictions

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] investments

Susan Gault-Brown, Morrison & Foerster

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 market making.

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 repeal.