This is the latest in the “On regulation” series of posts – it is also a somewhat timely post as the Volcker Rule is very much on the front of the pink pages in recent days.
Before we have a look at the recent events, let me explain briefly what the Volcker Rule is. The Volcker Rule emanates from the Dodd-Frank Wall Street Reform and Consumer Protection Act, and was drafted by Paul Volcker, a former Fed Chairman.
The rule sets out to restrict banks from proprietary trading activity that could damage the capitalization/cash base of the banks, as Paul Volcker argued that such trading lead (in part) to the 2007-2008 financial crisis.
The best metaphor I have heard used to describe the rule is that ‘it is intended to separate the Casino from the Bank’ – specifically Main Street deposits should NOT be used by Wall Street Investment Banks to conduct proprietary trades. Of course not all retail banks have investment banking divisions, so Volcker does not impact all investment managers.
The rule was originally slated for formal introduction in July 2012, but a recent move has seen a two-year grace period extended after a period of intense lobbying by the banking and asset management industries.
Recent news on a Bank’s proprietary trading desk woes have brought to the fore the whole question of how the connectivity of the retail banking world and the investment banking world can collide and interact in a way that leads to market jitters.
Some argue it is exactly this type of activity, and exposure to loss, and disruption to the global financial system – that the Volcker rule sets out to prevent. Others argue that the Volcker rule does not go far enough, since it allows for legitimate “hedging” activity to reduce risk exposure and that the trading activity in question could be classified as same.
Another question being asked which is closer to my own field of operation is – how does Volcker impact the funds industry? This is a question many people are asking since there is a lot of noise on the street and not everyone sees the connection…well it all ties back to sections of the Volcker rule which seek to include sponsorship of and investment in ‘covered funds’ – covered funds is intended to include hedge funds and private equity funds, but also includes (whether intentionally or not) UCITS funds.
The act does not include US Mutual (40 Act) Funds, and so the European industry through its trade and regulation bodies, primarily EFAMA, have been lobbying actively to have UCITS removed from the definition of scope for ‘covered funds’, arguing it is unfair that they are included and 40 Act funds are not. Many argue the rule as drafted did not intentionally set out to include UCITS.
Some US Banks which have a large European asset management business – such as J.P.Morgan – had pulled together working groups to explore plans to rebrand their European fund range and to appoint an independent custodian.
I am sure we will see more discussion on the merits and de-merits of the Volcker Rule, and as the impact on the funds industry becomes clearer I will update the blog…