Regulations to implement the Volcker Rule have hit the street. Now a new phase of the battle to reign-in proprietary trading by banks is at hand. If past is prologue, a tough and divisive battle looms. Meanwhile, the industry, regulators and customers will be dealing with the uncertainty that has bedeviled all concerned since Dodd-Frank was enacted.
How did we get here? How did a ten-page provision in legislative language end up being a 298 page proposed rule? When the industry, its lobbyists, its supporters on Capitol Hill and regulators all do what they do best, a complicated, lengthy and unwieldy set of rules is the result.
From the beginning, the banking industry has been openly opposed to the Volcker Rule. The effort to sidetrack it was unsuccessful, but the legislation did provide for exceptions to the rule to be developed by regulators.
That created the opening, and ever since enactment of the bill, industry representatives have been working to ensure the proposed regulations define, as generously as possible, the types of exceptions under which banks may trade through their own accounts. Regulators made an attempt to deal with all these issues. The resulting rules regarding market making trades, trades with and for international customers and others will allow limited proprietary trading to take place.
Now the rule is under attack by some for being too weak and others for being too cumbersome and unwieldy. Congressional hearings and proposals to repeal the Volcker Rule can be expected. A classic Washington stand-off is unfolding.
All of this will extend the uncertainty hanging over this process. The industry and its supporters may well harbor hopes that a Republican victory in the 2012 election would result in both Houses of Congress and the White House being in the hands of those supporting Volcker Rule repeal. So it may well be deep into 2013 before anyone can confidently assert the Volcker Rule process is complete.
Isn’t there a better way to write and enforce rules like this? Since we’re in the midst of football season, it occurs to this writer that we need look no farther than the regulation of play in the National Football league to know that the answer is "yes!"
As the Volcker Rule is one of many, many rules regulating the playing field in the banking industry, let's isolate one of the many rules governing play in professional American football and see if it offers us any guidance. Here is how the Digest of NFL Rules (as cited on NFL.com) describes the rule against roughing the passer:
"No defensive player may run into a passer of a legal forward pass after the ball has left his hand (15 yards). The Referee must determine whether opponent had a reasonable chance to stop his momentum during an attempt to block the pass or tackle the passer while he still had the ball."
There, in fifty-one words, some very complicated concepts are laid out. One can only imagine if a rule like that were published today and subjected to the process we now see unfolding in the Volcker Rule debate. The representatives of defenders would hire lobbyists to explore the potential that terms such as "momentum," "reasonable chance" and "run into" provided an opening for exceptions to be granted. The resulting interpretation of the rule would most likely resemble something a lot like what we see proposed in Federal Register now on proprietary trading.
But that's not what happened in the NFL. What happened is a very simple rule was promulgated and well trained referees have been deployed to enforce it. They watch the game closely with a knowledge of previous interpretations of the rule, the history of the players and the exigencies of the current situation. Making a determination of whether a defender had a "reasonable chance" to avoid contact requires him to consider all of these factors and make a decision that allows the game to be played for the benefit of the customer (i.e. fans) while protecting the health of the players and the integrity of the game.
Is it too late to roll-back the proposed rule, revert to a much simpler restatement of the Volcker legislative language and then actually put in place a sufficient number of savvy regulators to watch over the proprietary trading practices of the industry? Maybe, but it wouldn’t be a bad way to cut through all the uncertainty surrounding this issue and just get down to business.
Peter A. Peyser is a managing principal at Blank Rome Government Relations LLC.