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CFTC’s Sommers and O’Malia Attack Volcker Rule

When two CFTC commissioners call a financial rule “too complex,” just imagine how the industry will respond.  The seeds for a heated debate on the Volcker rule were planted, yesterday, when the CFTC approved a version of the rule by a three-two margin.

The rule, which is required by the Dodd-Frank Act, bans proprietary trading at banks, while also limiting their ownership of hedge funds and private equity funds.

While the CFTC vote to propose the Volcker Rule has made the biggest headlines, the bigger story may be in the two dissenting views among the commissioners. 

This is what commissioner Scott O’Malia had to say about the CFTC proposal:

 I do not support the commission's version of the Volcker rule. It is an unworkable solution that is entirely too complex and provides the commission with little or no means to enforce or to deter violations of this rule. Obviously we have to comply with the statute and do so in a responsible way, [but] my concern with this fatally flawed rule [is that] this rule does not do that.

He then went on to voice concern over unintended consequences emerging in the final rules:

I think in terms of pages, this might be our biggest day, which is not our proudest moment. It's ridiculous to do a thousand pages [of rule-making] in one day. It's just not possible to get it right, and we should take a more measured approach on considering the number of rules we consider in any one meeting.

Commissioner Jill Sommers, who joined O’Malia in voting against the rule, focused on the politics of the rulemaking process:

Had we planned it better we could have joined the October proposal. Unfortunately, we are proposing rules that are virtually identical to the other agencies' proposed rules well after they have been widely criticized and after many have called for those agencies to start over, including Paul Volcker.

All of this, of course, will become ammunition for financial firms, politicians, other regulators and lobbyists as they continue to challenge proposed financial reforms.  The first opponents firing a salvo on this front appear to be the Bank of Japan and the Japanese Financial Services Agency who have expressed concern over adverse impact of the Volcker rule on trading in Japanese government bonds.  Stay tuned for much more.

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