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U.S. Volcker Rule Could Hurt Liquidity, Bipartisan Senators Say

Feb. 16 (Bloomberg) -- A proposed U.S. ban on proprietary trading may limit liquidity and restrict bank market-making for clients, six Republican and Democratic senators told the Federal Reserve and other regulators.

“The proposed rule, as drafted, could adversely affect Main Street businesses by reducing market liquidity and increasing the cost of capital,” the senators said in a letter today. “There is evidence that this is already beginning to occur.”

The letter was signed by Democratic Senators Tom Carper of Delaware, Mark Warner of Virginia and Chris Coons of Delaware; and Republicans Pat Toomey of Pennsylvania, Mike Crapo of Idaho and Scott Brown of Massachusetts. The prop-trading ban is part of the Volcker rule, named after former Fed Chairman Paul Volcker, within the 2010 Dodd-Frank Act overhaul of Wall Street rules. The ban was backed by lawmakers seeking to limit risky trading at banks that operate with federal guarantees.

“As market-makers reduce or eliminate inventory, liquidity is reduced and trading spreads widen,” the senators said in the letter. “This will increase trading costs paid by investors, thereby reducing returns for investors large and small alike.”

The letter was sent to regulators charged with implementing the Volcker rule, including the Federal Deposit Insurance Corp., Securities and Exchange Commission, Commodity Futures Trading Commission and Office of the Comptroller of the Currency.

Venture Capital

The proposed rule’s limits on banks’ private equity and hedge-fund investments may restrict venture capital, the senators said.

“We urge you to address the definition of covered funds in order to prevent disrupting commonly held corporate structures, used mainly for ordinary course lending and investing, and to conclude that venture capital funds are not covered by the Volcker rule,” the senators said.

In scores of comment letters filed on Feb. 13, bankers and their trade associations said the rule would increase risk, raise investor costs, hurt U.S. competitiveness and be vulnerable to legal challenge.

“The proposal, if implemented in its current form, will overly restrain our customer-facing market-making businesses and our risk-mitigating hedging activities to the detriment of our customers,” Colm Kelleher, co-president of Morgan Stanley’s institutional securities group, and Jim Rosenthal, the company’s chief operating officer, wrote in a Feb. 13 letter.

The lawmakers responsible for the provision’s inclusion in Dodd-Frank -- Democratic senators Carl Levin of Michigan and Jeff Merkley of Oregon -- urged regulators in a Feb. 13 letter to be more forceful in implementing the rule.

“The Volcker rule demands Wall Street change its culture,” Merkley and Levin wrote in their own comment letter.

To contact the reporters on this story: Silla Brush in Washington at; Phil Mattingly in Washington at

To contact the editor responsible for this story: Maura Reynolds at

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