Preventative Regulation


2012 was to be the year that the Dodd-Frank Wall Street Reform and Consumer Protection Act finally came to fruition in full. Rules would be clearly defined, procedures implemented and the Volcker Rule would be out of draft form, ready to implement at banks’ proprietary trading desks.

But such is not the case.

Here we are about halfway through the year and the issue is still in turmoil. The Volcker Rule has yet to become absolute and final and yet banks and other financial firms are expected to implement draft procedures by July of 2014. The rules in Dodd-Frank are intentionally broad and vague in order to allow the SEC and CFTC the authority to interject itself when needed.

That has dealt compliance departments at banks, hedge funds and asset management firms headaches the size of the Grand Canyon. Traders and market makers at bulge bracket firms are becoming increasingly overburdened by the rules and restrictions set forth in Dodd-Frank.

“It’s a real pain because everything keeps changing,” said one market maker at a major bank. “They keep everything loosely defined so they can cast a wide net of regulation over everyone. How am I supposed to do my job properly when I have to continuously read up and reeducate myself on new material week by week? It’s ridiculous.”

One of the primary issues at the SEC is the commission’s lack of manpower. The regulator has been given the daunting task of crafting many of Dodd-Frank’s rules and regulations from scratch. Congress has yet to provide the regulator with adequate funding for new hires and technology spends and thus, the agency is nearly a year behind on its rulemaking endeavors.

Profitable market making and propritetary trading operations owned by banks can easily be exempt by moving outside U.S. jurisdiction. Another valid argument is that market making is essential to the capital markets space, especially in less liquid symbols. Take big firms out of the equation and you’ve got a massive issue surrounding liquidity when the SLKs and Merrills of the world go away.

“The problem with the SEC and Dodd-Frank is blanket regulation. They want to cover everything despite the fact they’re unable to handle that sort of responsibility,” said the market maker.

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