WASHINGTON Policymakers should consider scrapping a pending requirement that swaps be fenced off in nonbank entities if the Volcker Rule is implemented successfully, a non-governmental group said Thursday.
The Bipartisan Policy Center paper mostly focused on how to implement the Volcker Rule, a Dodd-Frank Act ban on banks' proprietary trading that has been delayed amid disagreement among agencies over how to enforce it. But one of the report's takeaways was that the trading ban may preclude the need for the separate swaps measure.
"We think that if the Volcker Rule is implemented in a way that is consistent with the guidelines that we suggest in this paper, the purpose of the [swaps rule] actually could be fulfilled," Jonathan Macey, a Yale Law School professor and one of the report's authors, said in a conference call to release the paper.
The center urged regulators to take a "wait-and-see approach" on requiring banks to "push out" swaps business to nonbank affiliates, which was championed by former Sen. Blanche Lincoln, D-Ark., and included in Dodd-Frank. The push-out rule "could be repealed" if lawmakers are "satisfied" with the final Volcker Rule, the paper said.
"Once the final regulations implementing the Volcker Rule have been issued, policymakers will be in a better position to assess whether the initial rationale for the Lincoln Amendment remains persuasive and, if so, how best to address those concerns," the paper said. "The Volcker Rule may well achieve the goals of [the swaps rule] in a more comprehensive manner."
Meanwhile, the paper outlined six principles regulators should follow in writing the Volcker Rule, which was first proposed by former Federal Reserve Board Chairman Paul Volcker. The pending proposal by banking and securities regulators for implementing the ban is often derided as too complex, and agencies have struggled to agree on a final version, even though some officials have signaled a resolution is expected by yearend. The appropriate hedging and market-making activities to be exempt from the ban are among the sticking points.
The bipartisan center urged regulators to use data-gathering to help determine what trading is permissible and impermissible under the ban; focus on more general activities and products rather than look at single trades; and avoid applying the ban too generically among differing markets and asset classes.
"We need to avoid the one-size-fits-all" approach, said James Cox, a Duke University law professor and another of the report's authors.
The paper also recommended that agencies phase in the rule to focus first on "products and markets where regulation can be implemented with greater ease and speed than for other products and markets due to differing complexities."
The report also called for "iterative" updates to the rule to allow regulators to refine the ban over time, and recommended that policymakers follow existing Fed rules in applying the rule to activities that occur overseas. The Volcker Rule is generally understood to exempt from the ban trading done "solely outside the United States," but how regulators ultimately define which extraterritorial activities are allowed has sparked controversy.
"In defining what activities are 'solely outside of the United States,' the task force recommends that the financial regulators adopt an approach similar to what has traditionally been contained in the Federal Reserve's Regulation K," the report said. "Under that traditional approach, the activities and investments of foreign banks are considered to be solely outside the United States unless they are conducted or made through an office or subsidiary in the United States."
Cox said the group hopes regulators will draw clear lines in the final rule about what are permissible and impermissible activities.
Regulators "in addition to developing prohibitions that are activity-oriented and product-oriented would nonetheless still develop safe harbors to provide clear guidance as to what is permissible behavior," he said.