“Volcker rule” exemption for liquidity management remains half-thought

By Bora Yagiz

The question what distinguishes a “trading account” from a legitimate liquidity management program will be a primary concern as no less than four regulators, namely the Federal Reserve, the Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, finish work on the “Volcker rule” limiting risky trading by banks. The regulators jointly proposed last year the provisions for implementing section 619 of the Dodd Frank Act. Final rules are expected by year end. The July 2012 statutory deadline for what is commonly referred to as the Volcker rule has already been missed, and the 298-pages of proposed rules have attracted more than 17,000 comment letters and sparked a heated debate across the industry. This is because the regulators aim for a complete overhaul of trading activities by severely restraining any “banking entity” from “proprietary trading,” thereby preventing undue risk exposure of consumers’ and taxpayers’ money. The devil will be in the interpretation of many of these rules. The definition of “trading account” will likely be the most critical premise, as the rest of the rules will be built upon it. “The reason to include the liquidity management exclusion is certainly correct, and it should be as simple and broad as possible to avoid any perverse effect on liquidity management practices of the banks,” says Karen Shaw Petrou, Managing Partner at Federal Financial Analytics. “Given the guidance provided by global and domestic rules on liquidity management, the regulators would be well-equipped to detect any abuse,” Ms Petrou adds.