Fed Should Delay Parts of Volcker for Some Funds, Sifma SaysYalman Onaran
Wall Street’s main lobbying group asked the Federal Reserve to extend the deadline for complying with some provisions of the Volcker Rule limiting banks’ investments in private-equity and hedge funds.
The Securities Industry and Financial Markets Association said a poll of its members shows 14 of them plan to seek extensions for about 2,965 illiquid funds before the July 21 compliance deadline. To prevent a time crunch on analyzing every request, the Fed would be better off issuing blanket extensions on some categories of funds, the organization wrote in a letter to the central bank.
Doing so would “enable banking entities to more effectively bring their activities and investments into compliance in a safe and sound manner,” the Washington-based organization said.
The Volcker Rule, named after former Fed Chairman Paul Volcker, who proposed it in 2009, aims to curb banks’ use of their own funds to make risky bets in capital markets. Its main components seek to prevent proprietary trading and limit how much banks can invest in funds that take risky positions. The Sifma letter didn’t request extensions for the trading element.
Banks’ investments in hard-to-sell private-equity funds pose the biggest difficulty for compliance by member firms, the group said. Another challenge is posed by U.S. banks’ stakes in foreign funds, Sifma said. Three such firms have indicated they’d seek extensions for 1,202 foreign funds, while non-U.S. banks that have operations in the country are looking at about 5,000 funds that might fall under the rule, according to Sifma.
“The Volcker Rule has been law for more than four years,” said Simon Johnson, an economics professor at the Massachusetts Institute of Technology and an adviser to the Treasury’s Office of Financial Research. “It does not inspire confidence in these management teams to learn they are not ready.”
The Volcker Rule was part of the 2010 Dodd-Frank Act to prevent financial crises like that one that shook global markets two years earlier. The Fed and other regulators spent more than three years trying to write specific guidelines for implementing the rule. The Fed was given leeway to consider extending compliance deadlines in case banks have a difficulty divesting investments.