What do you want? The Volcker Rule! When do you want it? Last summer when you said we’d have it! | FT Alphaville

What do you want? The Volcker Rule! When do you want it? Last summer when you said we’d have it!

It’s Friday quiz time! Ready? Here goes:

  • Take a couple of clued-up Brooklynites in their 30s.
  • Add section §619 of Dodd-Frank, aka the “Volcker Rule”.
  • Now throw in a lawyer.

What do you get?

[Hint: It's America.]

If you guessed ‘a lawsuit‘ about how it’s taking so long for regulators to put a ban on proprietary trading in place’, you were right!

According a press release on Wednesday:

Occupy the SEC (OSEC) has filed a lawsuit in the Eastern District of New York against six federal agencies, over those agencies’ delay in promulgating a Final Rulemaking in connection with the “Volcker Rule”

The branch of Occupy that’s filing this suit is the same branch that submitted a 325-page comment letter to the agencies on the Volcker Rule back in February 2012 — and no, it wasn’t that it was in really big font or something, though admittedly the note which the press took of the page count was a bit weird.

The content of the letter from last year set forth arguments in support of a strong implementation of the rule, complete with penalties. And it was critical of what it referred to as the “lax regulatory posture” of the agencies tasked with turning Dodd-Frank into a reality. The letter also answered a considerable number of the questions posed by the Notice of Proposed Rulemaking (NPR).

As Yves Smith of Naked Capitalism noted at the time, most of the comment letters responding to NPRs are from the industry itself and various lobby groups, so it was refreshing to see such a thorough effort on behalf of the 99 per cent — to stick to the strap-line of Occupy for a moment.

But that was February 2012. A year has passed, and banks won’t need to comply with the Volcker Rule until July 2014. Occupy the SEC is not amused by the delay. Again from their press release:

[The Volcker Rule] amends the Bank Holding Company Act of 1956 …to specify that the agencies under the Defendants’ control “shall” adopt rules carrying out the provisions of §619 within nine (9) months after the completion of a study by FSOC relating to the Volcker Rule. The FSOC completed that study in January 2011. As of February 2013, the Defendants have yet to heed [the] statutory mandate.

Hence the lawsuit bringing up the following issue (emphasis ours):

While some banks have pared down their proprietary trading activities in anticipation of a fully implemented Volcker Rule, such activities nevertheless persist, thereby putting at risk money that is held by bank depositors like the Plaintiffs. The longer the delay in the Volcker Rule’s final implementation, the greater the risk that is placed on the Plaintiff’s deposits.

JPMorgan’s $6bn loss on credit derivatives traded by its Chief Investment Office is held out as an example of the dangers of prop trading. Predictable. And fair enough.

The Plaintiffs are asking the court to compel the agencies to get a rocket up their rule-making and implement §619 of Dodd-Frank “within a timeframe established by the court”.

While this is clearly a group effort by Occupy SEC, choosing two Brooklynites as Plaintiffs, who also have checking accounts at JPMorgan Chase and Wells Fargo, could be rather deliberate, as pointed out by Wall Street Parade on Friday:

To bring a lawsuit of this nature, plaintiffs who have a legitimate stake in the outcome must be named on the suit. Occupy the SEC has wisely selected two individuals, Eric Taylor and Kristine Ekman, who live in Brooklyn and hold insured deposit accounts with two major Wall Street firms. That’s highly relevant because the Brooklyn residences allow this case to be filed in the Federal District Court for the Eastern District of New York rather than the Southern District that covers the Wall Street area and lower Manhattan. Wall Street has been getting extremely sweet deals in that District Court for the past two decades, raising concerns as to whether the 99 percent can ever obtain justice there.

Even if the case completely fails, we can see how it’s rather important to make the point that as an active deposit-holding citizen, one is concerned about the pace or form of regulation. However the bigger conversation will centre around what was intended by the Volcker Rule and if that can, should, and will be implemented in any meaningful form. As FT Alphaville has noted previously, the fact that it matters what was intended by a trade is especially interesting, and presents quite the challenge for regulators who need to codify it.

Also of note is the lawyer of the two Plaintiffs, who is himself an active member of Occupy the SEC. He has been around the block, rebutting common assertions made by opponents of the Volcker Rule, e.g. that it will negatively impact liquidity and is therefore not desirable. In American Banker a year ago, he wrote:

While the Volcker Rule will broaden spreads in illiquid products, those wider spreads will more accurately reflect the actual risks inherent in such products. Spreads in illiquid markets are, at present, artificially narrow. Much of the liquidity that exists, especially in the market for esoteric financial products, is actually funded by taxpayers, and to a lesser extent, bank depositors.

Without a dataset to back that up, nod or shake your head as you like.

It’s his very first point that is rings more clearly in our ears:

In any case, from a more pragmatic perspective, complaints about the Volcker Rule’s effects on liquidity and the supposedly benign nature of proprietary trading are akin to crying over spilled milk. The Volcker Rule is law, as Congress saw fit to pass it after extensive research and industry input. The regulators do not have the power to undo that fact. The only relevant issue at this point is whether the agencies stay true to Congressional intent in their implementation of Section 619.

Related links:
Volcker is all up in your bonus – FT Alphaville
The Volcker Rule riddle – FT Alphaville
Reform group sues regulators over Volcker rule delays - Thomson Reuters