MBA, Trade Groups Ask Agencies to Revise Volcker Rule

Mike Sorohan msorohan@mba.org

October 25, 2018

The Mortgage Bankers Association and other industry trade groups urged federal banking agencies to streamline the "Volcker Rule" to reduce costs for businesses.

The Volcker Rule, enacted as part of the 2010 Dodd-Frank Act, generally prohibits any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring or having certain relationships with a hedge fund or private equity fund ("covered fund"), subject to certain exemptions.

Federal agencies--the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corp., the Securities and Exchange Commission and the Commodity Futures Trading Commission--issued final regulations to implement the Volcker Rule in 2013. Earlier this year, the agencies proposed to amend the 2013 final regulations.

MBA and the trade groups--the Commercial Real Estate Finance Council and The Real Estate Roundtable--commended Agencies' efforts to streamline the current rule, which they viewed as "overly prescriptive and extending beyond statutory intent."

The letter noted the Volcker Rule, in its current form, has not proven to be an efficient tool for achieving its intended policy objectives for a number of reasons, including:

--Unclear definitions inadvertently ensnare permissible activities that are essential to the health and welfare of the U.S. financial system (e.g., market-making, hedging and asset/liability management; and

--A lack of harmonization exists between the Volcker Rule and the extensive risk governance and analytic systems required by the Basel framework and the Dodd-Frank Act's enhanced prudential standards, which are already institutionalized at large banks.

The letter noted the Proposal includes several features that appear to potentially alleviate restrictions on market making and hedging, both of which are essential components of the CRE market the trade groups represent. For example, the Proposal would remove Appendix B to the 2013 Original Rule, which would essentially permit a banking entity with significant trading assets and liabilities to integrate compliance programs and meet these requirements with existing compliance regimes. It also would remove the correlation analysis and "demonstrable reduction in specific risks" requirements for permissible hedging activities and repeal the requirement for enhanced documentation for all covered entities.

However, the letter said other aspects of the Proposal, in particular the proposed accounting test within the "trading account" definition, would make compliance with the Volcker Rule even more challenging and less efficient than it is today. In addition to a general recommendation that the Agencies work to minimize unintended negative consequences stemming from the current Volcker Rule, the Associations are focusing on the following areas of agreement, which they believe will be the most impactful for their members:

--We oppose the proposed accounting-based prong of the definition of "trading account;"
and

--While we support (for purposes of permissible underwriting and market-making activities) generally the proposed presumption of reasonably expected near term demands (RENTD) of clients, customers, or counterparties based on internal risk limits, we recommend that communications regarding breaches of risk limits be integrated into existing supervisory processes rather than creating a new and separate reporting burden.

The CMBS market in particular continues to be an important source of funding for the real economy. The CMBS market saw nearly zero issuance in 2009 but slowly rebuilt with issuance rebounding, albeit unevenly, over the last several years. Today, the CMBS market continues to be a sound source of debt for secondary and tertiary market real estate owners and operators.

In a separate letter, MBA Senior Vice President of Commercial/Multifamily Thomas Kim said the CMBS issue was of particular concern to MBA. He wrote while the proposed accounting-based test would provide greater certainty and clarity, it would come at the expense of accuracy. For example, it could result in long-term investments, including long-term holdings of CMBS, being treated as part of a trading account for Volcker Rule purposes.

"Under applicable accounting standards, many longer-term investments are recorded at fair value, regardless of the period of time that a banking organization holds, or intends to hold, the investment," Kim said. "This outcome would be inconsistent with the purposes of the Rule and could adversely affect CMBS liquidity, in part because the exclusions and exemptions under the 2013 final regulations do not contemplate these longer-term activities. Accordingly, we recommend that the Agencies not adopt this element of the proposal as it would impermissibly sweep in long-term investments, without an available exclusion in many cases."

Additionally, the trade groups noted CMBS is facing severe regulatory impediments, many of them contributing to a secular erosion of secondary market liquidity and a reduction in post-crisis issuance volume. "The Volcker Rule itself has played a material role in how banks allocate their resources and has correspondingly contributed to this liquidity decline," the trade letter said.

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