The chief executive of one of the world's largest exchange operators believes federal regulators "missed a real opportunity" with a set of recently proposed Volcker rule changes.
"Even though they changed a few of the reporting and other procedures of Volcker, I think it's somewhat meaningless other than [to reduce] the costs to the dealers to be in compliance with the act itself," CME Group Inc. Chairman and CEO Terry Duffy said June 7 at the Sandler O'Neill Global Exchange and Brokerage Conference.
Implemented in 2015, the Volcker rule marked a signature piece of post-financial-crisis reform by banning proprietary trading at U.S. banks and restricting their investments in private equity firms and hedge funds.
The rule was widely criticized by banking executives, market participants and other industry observers, who claimed that an unclear definition of proprietary trading created confusion at the banks. In May, five federal regulatory agencies introduced a series of changes designed to ease banks' regulatory requirements related to the Volcker Rule. The agencies have since all approved the rule changes, which will eventually send the proposal into a 60-day comment period.
But CME's Duffy is still holding out hope that regulators will target another part of the Volcker rule in the near future: The ban on the proprietary trading of government debt-tied derivatives products.
CME, which Duffy said houses more than 90% of trading in the overall Treasury market, would stand to benefit if proprietary trading were allowed in derivative Treasury products. In the first quarter, the company saw its average daily contract volume for its U.S. 10-year Treasury futures and options products climb 28% year over year, according to a quarterly filing.
The Volcker rule allowed banks to use proprietary trading in government debt products, but only on the cash side, a decision that Duffy said "made absolutely no sense at all." As a result, banks have been missing out on liquidity pools that could help hedge risks from trading in the cash side of such debt products, he said.
"I still think you might see additions to the Volcker rule," he said. "Hopefully, one of them of them is to allow [banks] to proprietary trade on the derivatives side of these products."
