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Volcker Touts Proprietary Trading Limits and Floating NAV

  • By Konstantine Kastens
  • Published: 2012-05-15

Former Federal Reserve Chairman Paul Volcker told a Senate Banking subcommittee on May 9 that the contentious rule restricting investment banks from proprietary trading, which bears his name, is intended "to assure maintenance of a flow of credit to businesses and individuals and to provide a stable, efficient payment system and safe depository."

In response to criticism that the Volcker Rule will interfere with routine market-making, Volcker dismissed such concerns as "nonsense," following that clear enough distinctions exist between the two practices through indicators, such as the size of a trade relative to the position, volatility and value-at-risk of a trade. He insisted the rule will be enforceable and should have no obstruction to market-making.

Senators also raised questions about the potential constraint on market liquidity under the Volcker Rule, which regulators are now scrambling to finalize before the July 21, 2012 deadline.

Volcker called it a mistake to assume highly liquid markets are always in the public interest, citing the recent housing bubble crash fueled by high demand for below-standard mortgage securities. "If the markets are too liquid, it can give rise to behavior that is not very useful in terms of the basic fitness of banking or finance markets," he said.

Offers support for MMFs

In his written testimony, Volcker extended his support for structural change within the financial system to the solvency of money-market mutual funds, or MMFs. He referred to MMFs as "truly hidden in the shadows of banking markets" due to their demand-depository function without bank-like capital requirements, insurance protection, nor regulatory surveillance.

With that, Volcker endorsed calls to remove money-market funds from their current stable $1 net asset value (NAV) and allow the NAV to float, a proposal soon expected to be unveiled by the U.S. Securities and Exchange Commission. "They should be treated as ordinary mutual funds, with redemption value reflecting day by day market price fluctuations," Volcker noted in his submitted remarks.

AFP opposes a floating NAV and recently sent a letter to Congress addressing its concerns over this matter. 

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