Volcker ease allows data to take precedence

By Emma Olsson | 30 January 2020

US banks are no longer feeling the pressure of the Volcker Rule following a shortening of its reach and increased focus on the data economy, regtech providers claim.

“I think there's plenty of regulatory complexity that is pushing [banks] to want to go external. And I think that Volcker is not that driver, [it] is kind of done … now it’s just minor tweaks to it,” says Mary Kopczynski, chief executive and founder of regtech 8of9 and regulatory update platform RegAlytics.

“But the things that are driving them to regtech in my view are GDPR, CCPA and all these data privacy, data protection rules and the reason for that is because the banks are suddenly recognising that if they now have to be responsible for the data that they have owned. Now it's in their interest to start outsourcing data and getting it from somewhere else and getting it somewhere external with someone else vetting that data.”

Rich Heller, senior vice president of sales at ClauseMatch says that banks increasingly investing in regtech solutions, but that Volcker is no longer a driver.

“A big piece of growing regtech over here is around data security because we do not have the standard of GDPR. California has the CCPA, but I think a lot of the banks here in the US certainly are looking at those guidelines as benchmarks that they're going to have to comply with eventually because of the heavy focus on data security.

“And then you also have on top of that cybersecurity. So there may be some regulatory relief from Dodd Frank or the Volcker Rule, but I think there's elevated awareness of data and cybersecurity that makes them have to continue to invest and continue to understand where they need to understand and I think the biggest gap that we see is regulatory change management,” says Heller.

Regtech spending is on the rise across financial services, with 2019 figures from KPMG expecting $76bn in spending to be seen by 2020, compared to $10.6bn in 2017. The regulatory uncertainty of the past decade has provided impetus for greater investment, Kopczynski and Heller agree.

“Volcker has been a very long and arduous regulatory change-making process, so the industry has been talking a lot with the regulators about how to make Volcker more workable,” says Kopcznyski.

The most recent alterations to the Volcker Rule include an easing of compliance burdens, a re-defining of short-term intent prongs and a reversal of the 60-day rebuttable presumption, instead presuming that financial instruments held for 60 days or longer are not within the short-term intent prong. The amendments were finalised on October 8 by the Federal Reserve, the Commodity Futures Trading Commission (CFTC), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Securities and Exchange Commission (SEC).

The Federal Reserve voted today on the “covered funds” provision of the Volcker Rule, which had prevented banks from engaging in proprietary trading through ownership in investment funds. The new vote indicates a move to eliminate a restriction on venture capital funds owned by banks. Federal Reserve vice chairman Randal Quarles noted that the changes do not alter the Volcker Rule’s primary prohibition of proprietary trading, CNBC reported.  

“A lot of these banks full on sold lines of business that were making them a lot of money in response to the initial Volcker Rule and they really did not like it,” says Kopczynski.

“But what [the amendment] did is it clarified that the stuff that’s left behind is legal, so it identified that if a financial instrument is held for 60 days or fewer, it fits within this definition of short-term intent. Why this is relevant is because there are a lot of instruments out there like mortgages that you trade for 30, 60, 90, 180, 240 days that may not really fall in the intent of prop trading, you might be doing it at the behalf of customers or you’re buying it for yourself as a market maker …. I’m sure a lot of people were fighting for long term to be 240 days or more, some people were fighting for the opposite, but in the end they picked 60 days and that’s just what it is.”

The clarification of certain Volcker ambiguities was intended to streamline the compliance process for large banks, as well as remove requirements such as stress-testing for smaller banks, which Heller says will provide them with a greater advantage. However the Volcker amendments will also separate the most effective regtechs from those who have failed to provide an efficient solution.

“From a fintech and regtech perspective, I would say it’ll be an opportunity for them to showcase their value add,” says Kopczynski.

“Because if they went in with the original Volcker and they built a technology that broke out a short term and a long term prong, this should make the Volcker Rule switch easy, because all they do is switch it from whatever they arbitrarily picked to 60 day instruments. And if it’s not easy and the bank is still picking up the phone and calling the big four and spending another $30m to assess this regulation, well then it’s a testament to the fact that there hasn’t been appropriate regtech implemented yet.”

Amendments to the Volcker Rule, or Volcker 2.0, became effective on January 1, 2020, but banks have until January 1, 2021 to achieve mandatory compliance. According to Kopczynski, an efficient Volcker-centred regtech solution will still be necessary for banks.

“I think what I would suggest to financial institutions is to start speaking up about how affordable this transition was because of regtech or not,” she says.

“Because by now, they should be better at this. So if they can look at their original Volcker implementation, the second round of Volcker implementation and this one, if it’s not smaller than the previous ones, then they’re doing it wrong.”

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