GAO: Regulators need more info before curbing proprietary trading

{mosads}Proprietary trading is when a financial firm makes investments with its own funds in pursuit of its own profits, as opposed to conducting trades to serve the needs of customers. Under the Dodd-Frank financial reform law, such trading was curbed under what is popularly known as the “Volcker Rule” — named after former Federal Reserve Chairman Paul Volcker, who advocated for it.

Republicans jumped on the GAO report as confirmation that Dodd-Frank would put American companies at a competitive disadvantage to foreign counterparts.

“The GAO report confirms that neither European nor Asian regulators or legislators will establish similar proprietary trading restrictions that the Dodd-Frank Act imposed on U.S. financial institutions,” said House Financial Services Committee Chairman Spencer Bachus (R-Ala.). “This will unquestionably harm the ability of American companies to compete and create jobs. Once again, the rhetoric of Dodd-Frank supporters that the world would follow the U.S. lead on financial regulatory reform is shown to be a myth.”

Meanwhile, the two Democratic senators that crafted the language cracking down on proprietary trading said they were disappointed by the study.

“At best it is incomplete. At worst it is misleading,” said Sens. Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.).

They contended that Dodd-Frank required the GAO to study all proprietary trading, but that it only looked at trading done at trading desks specifically devoted to proprietary trading, which accounts for “just a fraction” of that activity. The GAO said it was “not feasible” to study the entire market, because firms did not maintain records except at specialized proprietary trading desks.

“The report reminds us of the story of a man who dropped his keys at night and then began looking for them under a nearby parking lot light, not because he dropped them there but because that was where the light was,” they said.

In fact, the GAO cited their difficulty in obtaining accurate proprietary trading information as a hurdle for regulators to clear.

“Regulators have yet to gather comprehensive information on the extent, revenues, and risk levels associated with activities that will potentially be covered, which would help them assess whether expected changes in firms’ revenues and risk levels have occurred,” the study stated.