Industry Groups Urge Caution On Financial Rules

November 9, 2010

NASDAQ

Maya Jackson Randall and Jeffrey Sparshott

WASHINGTON -(Dow Jones)- Industry groups are formally urging U.S. regulators to proceed with caution as they look to implement key provisions of the sweeping financial regulatory overhaul aimed at limiting banks' risky trades and monitoring risks to the financial system.

The U.S. Chamber of Commerce, in comments to the newly formed Financial Stability Oversight Council, argued that regulators should "heed caution and err on the side of non-designation" when it comes to the issue of deciding which non-bank firms should be subjected to tougher financial regulations.

The council, which was created by the Dodd-Frank financial regulation bill and plans to hold a meeting on Nov. 23, is seeking public comment on draft regulations affecting large non-bank financial firms as well as on the Volcker rule, a regulation designed to discourage banks from engaging in risky trades with their own money. The council must study and make recommendations on implementing the Volcker rule by late January, and then those recommendations will be used to develop regulations.

"To the greatest extent possible, the council should consider a combination of clearly defined criteria for designation, and avoid applying a blanket designation to capture as many institutions as possible for fear that they may pose a systemic risk," the chamber said in comments to the oversight council.

Additionally, the Financial Services Roundtable argued that companies should not be subjected to heightened supervision simply because they have received funds from the Troubled Asset Relief Program (TARP) or other government aid.

"Many companies had no choice but to participate in such programs after markets stopped functioning properly," said the group, which represents the financial services industry. "Furthermore ... participation did not mean a rescue was necessary nor that an institution was systemically risky."

The financial regulatory overhaul, also known as the Dodd-Frank Act, paves the way for regulators to label certain non-bank firms as "systemically important," which would bring them under new federal oversight, all in an effort to help regulators better monitor the financial system for potential threats.

The overhaul also established the Volcker rule, which the Chamber of Commerce called "unworkable," warning that it would put U.S. firms at a competitive disadvantage.

However, proponents of the new financial rules are urging regulators to fight efforts to weaken the regulations, calling for "robust" implementation of the Volcker rule in particular.

"It is now up to FSOC to guarantee that the Volcker rule not be undercut by exceptions and loopholes," said U.S. Public Interest Research Group Consumer Program Director Edmund Mierzwinski in his comments to the council, arguing that bankers have written the rules for Wall Street for far too long.

Mierzwinski argued that the Volcker Rule provisions are among the most important of the Dodd-Frank Act because it would end the kind of risky bets that contributed to the financial crisis.

The new council needs to signal clearly from the very beginning that it intends to apply the Volcker rules "strictly and effectively and that evasion will not be tolerated," he said.

Still, the Chamber of Commerce, which opposed the Volcker rule during debate on the financial regulatory overhaul on Capitol Hill, argued that it will be difficult for regulators to define proprietary trading--when a firm trades with its own money for direct gain--which the Volcker rule seeks to limit.

"Hedges or positions taken for clients will be fundamentally indistinguishable from proprietary trading, so deciding which trades are permissible will depend on a regulator's subjective judgment," the chamber wrote in its comments to the oversight council.

Businesses need certainty, the giant business group argued, adding that the council will need to clearly define proprietary trading in order to provide that certainty to business firms and financial markets.

The chamber also voiced concern about whether the rule will mesh with international accounting and bank-capital requirements.

It also said the rule could impact policymakers' efforts to create jobs.

"We believe that the Volcker rule is in fact harmful to the ability of the United States to sustain vibrant capital markets and the liquidity needed to create private sector jobs," said the chamber. "In its current form, the Volcker rule will likely add to regulatory uncertainty for banking entities and will hurt the global competitiveness of the financial services industry at a time when growth is most needed."

In addition, The Securities Industry and Financial Markets Association urged the oversight council to "carefully and surgically" implement the anti- proprietary trading rule. It also suggested that the council shouldn't issue final regulations until October 2011.

The securities association, which represents securities firms, banks and asset managers, also cautioned against restrictions on proprietary trading that would eliminate market-making and risk-reducing activities.

"SIFMA has urged the FSOC to adopt a careful, staged approach to implementation of the proprietary trading restrictions with a firm grounding in market realities," it said.

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