Statement of Chairman Heath P. Tarbert in Support of Revisions to the Volcker Rule

September 16, 2019

I have voted to approve revisions to the Volcker Rule, among the most well-intentioned but poorly designed regulations in the history of American finance.  My involvement with the Volcker Rule started nearly a decade ago when I served as special counsel to the Senate Banking Committee before the passage of the Dodd-Frank Act.  In fact, I was the staff member responsible for arranging for former Federal Reserve Chairman Paul Volcker to testify before the committee on the original version of the rule that now bears his name.  Having had the opportunity to interact with Chairman Volcker at various points throughout my career, I have always had immense respect for him.  He had a clear-cut vision: banks should be barred from speculating in the markets (a practice known as proprietary trading) and from running hedge funds and private-equity firms.  “If you are doing this stuff,” he would say, “you should not be a commercial bank.”

Five federal agencies—the Federal Reserve, the FDIC, the OCC, the SEC, and the CFTC (together, the “Agencies”)—issued final regulations in December 2013 to implement the statutory language of the Volcker Rule in Title VI of the Dodd-Frank Act.  The basic premise of this law is to restrict financial institutions with deposits insured by the Federal Government from engaging in proprietary trading, but permit trading for market making, hedging, and other traditional financial services activities.

We now have five years of experience with the initial version of the regulations implementing the Volcker Rule, and over that time, a number of legitimate concerns have arisen.  In my view, the initial regulations adopted by the Agencies have metastasized from Mr. Volcker’s original, simple vision to the degree where his distinction between proprietary and non-proprietary trading is hardly recognizable.  I agree with Mr. Volcker that the rule has become overly complex and hard to understand;[i] at this point it is also nearly unadministrable.  Among other things, the regulations create confusion over what is acceptable activity for banking entities.[ii]  Indeed, the Agencies have had to issue 21 sets of frequently asked questions (“FAQs”) in the first three years since the regulations were adopted.[iii]  This is not a model of clear rulemaking.  Furthermore, the Volcker Rule imposes highly intensive compliance burdens that unfairly benefit large Wall Street banks over smaller regional ones.  No one ever intended these results.

In addition, the Volcker Rule has an extraterritorial reach that is breathtaking in its expansiveness, something I witnessed personally several years ago in Australia.  There I met with a senior executive at a local, Australian financial institution.  He handed me his business card, and it listed his title as “Head of Volcker Rule Compliance.”  In Australia!  We have created a mess not just for the United States, but for the whole world.

I do not doubt the good intentions of the original drafters of both the Volcker Rule and its implementing regulations.  I continue to affirm that deposit insurance underwritten by the FDIC and discount window access provided by the Federal Reserve—both ultimately backstopped by U.S. taxpayers—should not subsidize non-banking activities.[iv]  I will not raise the related question whether non-banks affiliated with insured depository institutions should be allowed to engage in proprietary trading.  I recognize that this is a decision for Congress, not me.[v]

As Chairman of the CFTC, my job is to ensure that the derivatives markets are liquid, resilient, and vibrant so they can serve the price discovery and risk management functions critical to our real economy.  I have seen reports that liquidity in bond markets may have been adversely affected by the Volcker Rule.[vi]  I am concerned that the Volcker Rule may also affect liquidity in the derivatives markets.  This could negatively impact the ability of agricultural, energy, manufacturing, and other companies in the real economy to engage in risk mitigation activities.

I am happy to say that the amended regulations we have now adopted help to simplify the Volcker Rule and include a number of important amendments that lessen the burden on smaller regional banks and benefit end users of derivatives.  The amendments seek to tailor the Volcker Rule to increase efficiency, right-size firms’ compliance obligations, and allow banking entities—especially smaller ones—to provide services to clients more efficiently.

The amended regulations adopt a risk-based approach that relies on a set of clearly articulated standards for prohibited and permitted activities and investments.  In particular, the new regulations revise elements of the prohibition on proprietary trading to provide banking entities—including CFTC-registered swap dealers and futures commission merchants (“FCMs”)—with greater flexibility in their trading activities and simplified compliance procedures.

The final regulations also expand existing, and include additional, exclusions from the definition of proprietary trading.  For example, the amended regulations add an exclusion for matched derivatives transactions to facilitate customer-driven swaps, especially by customers of small regional banks, which should benefit end users who rely on derivatives to hedge their commercial risks.  The amended final regulations also expand the list of permissible products for the liquidity management exclusion to include FX forwards/swaps and cross-currency swaps.  Banking entities commonly purchase and sell these instruments for the purpose of managing their liquidity and funding needs.  This can ultimately benefit commercial firms who use banks for loans and other products to hedge their foreign exchange risks arising from import and export transactions.

In addition, the final regulations tailor the compliance and metrics reporting requirements of the Volcker Rule to focus on entities with relatively large trading operations.  As a result, financial institutions on Wall Street will retain their reporting procedures, while smaller and more traditional commercial banks without major trading operations will get some relief.  What is more, the new regulations simplify requirements by clarifying prohibited and permissible activities, so that all institutions—including those headquartered abroad but who lend and deploy capital in the United States—have a better understanding of how to comply with our laws.

I believe laws should be as clear and concise as possible.  The point of having laws is for people to follow them, but before they can follow them they first have to understand them.  As Judge Learned Hand put it 90 years ago, “The language of the law must not be foreign to the ears of those who are to obey it.”[vii]  For too long the Volcker Rule has been just that—very peculiar and virtually unintelligible to market participants and regulators alike.

In short, the amended regulations will provide banking entities and their affiliates (including a number of swap dealers, FCMs, and commodity pools subject to CFTC oversight) with greater clarity and certainty about what activities are permitted under the Volcker Rule.  The revised regulations will also generally reduce the compliance burden for these entities, which will benefit those end users of derivatives who are critical to our real economy.  These changes, which will make the Volcker Rule simpler without reducing its fundamental benefits, are something we should all support.

Statement by the Directors of the Division of Clearing and Risk and the Division of Swap Dealer and Intermediary Oversight Concerning the Treatment of Separate Accounts of the Same Beneficial Owner

September 13, 2019

As Directors of the Division of Clearing and Risk and the Division of Swap Dealer and Intermediary Oversight, we wish to reemphasize that all registrants, in particular futures commission merchants (“FCMs”), must comply at all times with all Commission regulations and derivatives clearing organization (“DCO”) and self-regulatory organization rules.

On July 10, 2019, the Divisions issued CFTC Letter 19-17 (the “Letter”), which makes clear what firms must do to comply with the Commission’s requirements under CFTC Rule 1.56(b) as applied to separate accounts of the same beneficial owner.  Since that time, we have received questions from industry participants about certain aspects of the Letter.  We believe that the Letter is comprehensive and therefore do not think that any further clarifications by our Divisions are required.  Accordingly, we expect that industry participants are working hard to do what is necessary to conform their documentation, policies, and practices to the Commission’s requirements.  We further expect that these efforts—which we fully appreciate may be considerable—will nonetheless be concluded by September 15, 2020.

Industry participants have also asked whether there is an inconsistency between the statement in CFTC Letter 19-17 that “the FCM must retain the ability ultimately to look to funds in other accounts of the beneficial owner, including accounts that may be under different control,” on the one hand, and the statement in Joint Audit Committee Alert 19-03 that “the FCM must have at all times the absolute right to look to funds in all accounts of the beneficial owner, including accounts that are under different control,” on the other (emphasis added).  These statements are not inconsistent with each other if they are interpreted properly.

To wit, an FCM and its client (and the client’s asset manager) can, consistent with Regulation 1.56, agree to a protocol to address those rare occasions where margin calls in one account of the beneficial owner at the FCM are not timely met.  On such an occasion, the FCM would promptly follow a specific series of defined steps before resorting to liquidation or accessing the funds in the other accounts of the beneficial owner held at the FCM.  We fully expect that DCOs and FCMs and their customers will agree that FCMs must retain, at all times, the discretion to determine that the facts and circumstances of a particular shortfall are extraordinary and therefore necessitate accelerating the timeline and relying on the FCM’s protocol for liquidation or for accessing funds in the other accounts of the beneficial owner held at the FCM.

We do not believe that any further clarification by our Divisions is required.  We fully expect DCOs and FCMs and their customers will find solutions that satisfy the Commission’s requirements, as clarified in the Letter, by September 15, 2020.  We will not be extending this timeline at any point.  As such, we encourage DCOs and FCMs and their customers to work together and to rely on their professional advisors as necessary to meet the expectations that we have laid out for them.