02.13.2012
By Terry Flanagan

From Volcker to the Buy Side

The creator of the much-contested Volcker Rule sends a direct message to the buy-side.

The 2008 financial crisis brought upon an onslaught of regulatory changes for global market participants. February 13 marks the public-comment deadline for the much-contested Volcker Rule, which stemmed from the all-encompassing Dodd-Frank Act to restrict banks from hosting proprietary trading desks. Paul Volcker, the rule’s creator and former Federal Reserve Chairman is expected to make a comment letter in response to the current wave of naysayers.

As expected, prop kings, such as Goldman Sachs, have contested the rule, but they’re not alone.

For the buy-side, such desks sometimes serve as important market-makers and those that blurred the lines now pose significant challenges for the asset management community in need of liquidity.

BlackRock’s Vice Chairman and Head of Government Relations Barbara Novick, told the Wall Street Journal that the firm believes “the current version of the Volcker rule might make it difficult for Wall Street dealers to make markets by buying and selling securities from their clients.”

BlackRock, the world’s largest money manager, is not alone among the buy-side’s heaviest hitters that are protesting the rule.

The firm is just one that sits on The Credit Roundtable, a group of large institutional fixed income managers, including investment advisors, insurance companies, pension funds, and mutual fund firms, representing more than $3 trillion in fixed income assets under management. The group has been in talks with regulators on the Volcker rule and voiced concerns over higher trading costs, and for fixed income investors, a valuation reduction.

“A major concern with the proposal is the potentially major negative impact it could have on trading in the bond market because of reduced liquidity,” said Bob Auwaerter, principal and head of fixed income at Vanguard, another signatory of the Roundtable, in a public statement.

Alongside Paul Volcker himself, others feel that the buy-side should be applauding the rule.

“Buy-side fund managers may have fewer concerns about a bank competing on trades, thus both may benefit from the new dynamic,” said Ron Geffner, a partner within the financial services group at Sadis & Goldberg.

While most regulatory changes are intended to improve the financial system, improvements don’t come without a price.

The Volcker Rule may increase volatility in corporate bonds, which can pose difficulties among sustained economic weakness in the global markets. Additionally, an increased regulatory eye on one asset class means more opportunity for mischief in others.

CalPERS (California Public Employees Retirement System) also told the Journal that it is likely traders will increase hedging with credit-default swaps, and says the regulators need to monitor alternative markets.

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