The American Securitization Forum (ASF) today submitted a letter urging regulators to delay the Volcker Rule's implementation.
"The ASF calls on Congress to enact legislation to amend the implementation of the Volcker statute to at least twelve months after the joint regulators issue their final rules," the ASF said in a statement today.
However, without such legislation, the ASF said that regulators should issue an interim final rule or other regulatory guidance saying that they will not enforce the Volcker Rule until at least twelve months after they adopt final rules.
The Volcker Rule generally bans any banking entityfrom acquiring or retaining ownership interest in — or even sponsoring — a hedge fund or private-equity fund. It also does not allow financial institutions from entering into “covered transactions” under the Federal Reserve Act Section 23A. These transactions cover loans, guarantees or purchases of securities or assets with any hedge fund or private-equity fund for which it serves as sponsor, investment manager or investment adviser. It also prohibits these firms from engaging in proprietary trading.
Despite the securitization exclusion and the Financial Stability Oversight Council study recommendations not to cover securitization, the regulators did not exclude ABS issuers from the proposed rules’ definition of “covered funds.”
The group of policymakers the trade group addressed included the Federal Reserve Board and the Securities and Exchange Commission.
Led by Federal Reserve Chairman Ben Bernanke, the regulators have said that it is unlikely they will finish crafting the final rules prior to July 21. This is the date when Dodd-Frank forces the Volcker Rule to be effective regardless of the unfinished rulemaking process.
In its letter, the trade group warned the regulators that the Volcker Rule's implementation before regulators finalize appropriate rules and exclusions might cause considerable uncertainty and potentially significant disruption in the $344.5 billion ABCP market, as well as the Tender Option Bond market.
The ASF cautioned that the uncertainty might cause some banks to stop considerable lending or participation in these markets well before the rule's July 21 effective date to be sure that they do not violate Volcker's rule statutory implementation.
"Such an outcome could result in material disruption to the securitization markets as some banking entities may feel forced to curtail lending in the face of appreciable legal uncertainty," said Tom Deutsch, executive director of the ASF. "Policymakers need to act now to ensure certainty so that these important sources of credit aren’t curtailed and that further damage isn’t done to our already weak American economy."
The ASF noted that Dodd-Frank's statutory implementation without proper study and regulation has previously caused securitization markets to cease functioning.
For instance, the trade association recalled that the Securities and Exchange Commission issued a no-action letter in July 2010 after major ABS deals were pulled from the market because credit rating agencies refused to consent to ratings inclusion for fear of the withdrawal of the Rule 436(g) provision in Dodd-Frank.
On Tuesday, Timothy Geithner downplayed concerns among foreign nations that the Volcker Rule could harm their liquidity at a hearing with members of the House Financial Services Committee. Please see complete story here.