Former Federal Reserve Chairman Paul Volcker testified before the Senate Banking Committee on May 9th, arguing that the current proposal for the Dodd-Frank Act's ban on proprietary trading is too complex and should allow for profitable market-making activities. In testimony before the Subcommittee on Financial Institutions and Consumer Protection, Volcker, who first proposed the proprietary trading ban that bears his name, suggested that the regulators charged with writing the rule had gone too far in the data they are requesting banks to provide in order to show they are not engaged in trading on their own behalf.

The Dodd-Frank Act charged five federal regulators - the Federal Reserve, FDIC, OCC, SEC and CFTC - with drafting and implementation of the Volcker Rule. However, when four of the agencies released their draft of the rule last October, it totaled nearly 300 pages and left hundreds of unanswered questions. The proposal was subject to over 17,000 comment letters, many from Wall Street industry groups that have been critical of it, and regulators have already indicated that they will not make the July 21st deadline to finalize the rule.

One issue that has drawn a significant amount of scrutiny involves data collection. Because regulators drew up their proposal for the Volcker Rule using a negative presumption that banks are engaging in proprietary trading, the Fed and other regulators have asked that banks provide details of each transaction to prove that they are not engaged in trading on their own behalf.

The Volcker Rule was intended to prevent banking entities from trading on their own behalf, as opposed to their clients', and will eventually prohibit them from sponsoring hedge and private equity funds. However, several exceptions to the proposed regulation remain, including loan securitization, market making, underwriting and trades designed to hedge risk. In his testimony, Volcker noted that other jurisdictions are moving in a similar direction to Dodd-Frank's ban on proprietary trading. He referenced a U.K. proposal that would further separate commercial and investment banking activities, although those entities could still be part of the same bank holding company.