Release Date: March 29, 2017
Contact: Carol Danko, 202-962-7390, [email protected]
Volcker Rule Testimony of SIFMA Witness Ron Kruszewski at HFSC Hearing
Washington, DC, March 29, 2017 – Today, SIFMA Board
Member and Stifel Chairman and CEO Ron Kruszewski testified on behalf of SIFMA
before the House Committee on Financial Services Subcommittee on Capital
Markets, Securities, and Investment on Capitol Hill in a hearing entitled "Examining
the Impact of the Volcker Rule on the Markets, Businesses, Investors, and Job
Creators."
The full written testimony can be found here, with excerpts below:
Introduction
"I am not a proponent of this rule. I believe the Volcker
Rule provides little benefit regarding its purpose when enacted which was to
reduce systemic financial risk by banning proprietary trading."
"[T]he Rule as formulated, implemented, and enforced has had a deleterious
impact on the ability of American businesses to raise capital and grow the
economy. Put simply, the Volcker Rule discourages legitimate and needed
customer-supporting market-making activities by imposing an overly complex and
intent-based compliance regime."
"The Rule has raised the cost of capital for businesses and encouraged
pro-cyclical effects on liquidity in financial markets."
"I do not believe deposit taking banks should be making risky short term,
speculative bets, and in fact the law has long prohibited such activity. But I
do not believe the way to regulate risk, systemic or otherwise, is by
inhibiting trading or traditional market making, which provides liquidity and
depth to our capital markets, but rather through capital and liquidity rules
addressing the balance sheet of our financial institutions."
"It is important to note that the financial crisis was rooted
in the loan book, not the trading book, of our financial institutions."
"Three observations: 1) The Rule is beyond complex; 2) The
Volcker Rule includes a provision called ‘RENT-D, [which] limits market making
so it does not exceed the ‘reasonably expected near term demand’ of
clients, customers and counter-parties. 3) Compliance with Volcker is governed
by five separate agencies, each with their own congressional mandate, their own
philosophy and own approach, [which] creates an uncertain and unwieldy
bureaucracy."
"Stifel helps our clients by assisting them raise growth capital in both
the equity and debt markets. As part of this equation, Stifel commits to make
markets, which benefits both the issuing company and the purchaser of the
equity or debt. Volcker materially impacts our ability to effectively make
markets. This in turn causes the buy-side to demand higher compensation,
reflected in lower equity valuations or higher interest rates. And, higher cost
of capital."
Bad Policy
"The Volcker Rule threatens market liquidity by making the
trading of OTC financial products both slower and costlier for issuers and
investors."
"I would note that while many of the studies of market
liquidity have focused on aggregate conditions, my experience indicates that
small cap and mid-cap issuers appear to have experienced a disproportionately
negative impact from a number of the structural and regulatory changes meant to
improve transparency in markets and financial stability in our financial
system, including the Volcker Rule."
"The fact that smaller firms are challenged in effectively financing
themselves in the debt market has many potential implications for the economy –
all of them negative. Because it is difficult to raise capital, small firms
increasingly are finding it difficult to compete with larger firms. Instead,
they are selling themselves to their larger competitors."
Burdens of the Volcker Rule’s Covered Funds Provisions
"The covered funds provisions of the Volcker Rule result in a
scope far beyond the intended focus on the use of hedge funds and private
equity funds to facilitate indirect, impermissible proprietary trading…. The
covered funds provisions of the Volcker Rule should be amended to limit the
definition of covered fund only to funds that engage in proprietary trading.
This would achieve the goal of prohibiting indirect, impermissible proprietary
trading through a fund without sweeping in core asset management and related
activities that are far removed from the policy goal."
Poorly Implemented
"The SEC, the OCC, the CFTC, the FDIC, and the Federal
Reserve must jointly determine Volcker compliance, and while they have assured
the public they will cooperate on enforcement and supervision, we believe it
will be very difficult, if not impossible, for five different, independent
regulators to jointly enforce a rule this complex. Recent anecdotes from
SIFMA’s membership indeed confirm a lack of coordination."
Principles for Change
"I personally believe the Volcker rule should be repealed. If
not repealed, at a minimum, the Volcker Rule should be modified to: 1) Reverse
language that assumes all trades are proprietary unless proven otherwise; 2)
Eliminate the "reasonable expected near term demand" requirement.
"Any changes should be consistent with the following
fundamental principles: 1) the Rule should not impede market liquidity and
capital formation; 2) the restriction on proprietary trading should be plainly
written and not based on trader intent; 3) restricted proprietary trading
should limit only trading wholly unrelated to customer activity or risk
management; 4)the regulatory regime should be rationalized with a single agency
responsible for implementing, interpreting and enforcing the Rule; 5) the
restrictions on covered funds should target indirect, impermissible proprietary
trading."
Conclusion
"SIFMA and Stifel were opposed to the Volcker Rule when it
was first proposed and have consistently questioned the need for its existence
ever since. SIFMA is committed to assisting policymakers in the Administration,
the agencies, and the Congress, as they study the effects of Volcker and what
do to next."
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SIFMA is the voice of the U.S. securities industry. We represent
the broker-dealers, banks and asset managers whose nearly 1 million employees
provide access to the capital markets, raising over $2.5 trillion for
businesses and municipalities in the U.S., serving clients with over $18.5
trillion in assets and managing more than $67 trillion in assets for individual
and institutional clients including mutual funds and retirement plans. SIFMA,
with offices in New York and Washington, D.C., is the U.S. regional member of
the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.