Suggestions that the amendment to the Volcker rule will increase systematic risk have been cast aside by fintechs as trade associations and lobby groups have welcomed the change.
“[I]t’s important to remember we have experience with the current rule from which we can draw material conclusions,” said Chris Fedele, senior director of global technology and operations management at Broadridge, via email.
“It seems the agencies were focused on all of those factors to ultimately provide greater clarity and certainty of compliance,” he said. “Conclusively these aspects, combined with close cooperation between regulators and bank compliance staff, leads me to believe this will be a positive, sound change for the market.”
The original rule banned banks and large lenders from proprietary trading, the act of making short-term investments with their own funds. Should a position be held for less than sixty days banks had to apply for exemptions. Under the amended version banks will be allowed to assess which short-term positions require an exemption themselves.
“The broad goals were to reduce compliance inefficiencies, address impacts to market liquidity and ultimately comply with the statutory intent of Congress,” said Fedele. “This change helps to thoughtfully address those needs while strengthening the end-to-end compliance process.”
The original rule was established to curtail risky behaviour and protect markets, but banking associations and lobby groups agree the amendment – which will ease compliance requirements – allows regulators to focus on assessing market conditions.
“We appreciate the actions taken […] by the FDIC and OCC, which have started the agencies’ process of finalizing sensible reforms to the Volcker Rule that will help banks better serve their customers and the broader economy,” said Rob Nichols, president and CEO of the American Bankers Association. “These improvements will allow bank supervisors to focus on systemic risk, while providing the tailored and precise oversight that was the Volcker Rule’s original purpose.”
According to Broadridge’s Fedele the change will strengthen the end-to-end compliance process, while Greg Baer, president and chief executive officer of the Bank Policy Institute acknowledged the regulatory burden has been lifted.
“The new Volcker Rule is recognition that the original rule was overly complex and unworkable,” he said. “The changes in the new rule will help reduce the incidental damage the original rule has done to responsible banking activity and legitimate market making activity, and the massive and needless compliance costs it imposed.”
However, a “significant amount of thoughtful review and adjustment” will be required depending on each bank’s business model and risk recalibration, said Fedele, as institutions assess the effects of the amendment. “Processes, procedures, controls and well-established technology” are already in place to ease the transition, he said.
With fintech vendors embedded in much of the compliance process required under US banking rules, the amendment will provide opportunity for those active in the marketplace according to Fedele.
“This becomes another event for us to prove we will support [clients] by delivering regulatory change accurately, quickly in a way that mitigates risk. That’s what I view as the real opportunity- and I imagine any client driven company would agree.”
Additional reporting by Rebekah Tunstead