(Bloomberg News) The world's largest banks demanded a wish list of changes to a proposed U.S. ban on proprietary trading, seeking to escalate the lobbying effort against the Volcker rule five months before it takes effect.

In scores of comment letters filed yesterday, bankers and their trade associations said the so-called Volcker rule would increase risk, raise investor costs, hurt U.S. competitiveness and be vulnerable to legal challenge.

"The proposal, if implemented in its current form, will overly restrain our customer-facing market-making business and our risk-mitigating hedging activities to the detriment of our customers," Colm Kelleher, co-president of Morgan Stanley's institutional securities group, and Jim Rosenthal, the firm's chief operating officer, wrote in a letter posted to the Commodity Futures Trading Commission's website. "Moreover, we believe that the proposal, if implemented as is, would have severe negative consequence for the markets and the U.S. financial system."

The rule, named for former Federal Reserve Chairman Paul Volcker, was included in the Dodd-Frank Act to restrict risky trading at banks that operate with federal guarantees. The Fed and three other regulators released the 298-page proposal in October, seeking comment on how it would affect market-making, liquidity, foreign institutions and private equity and hedge fund investments. The CFTC released its proposal separately in January.

Uncertainty, Volatility

Reduced liquidity resulting from the Volcker rule would lead to "price uncertainty, market volatility, higher transaction costs, and a reduced ability for corporations and other market participants to raise capital and hedge their risks," the Morgan Stanley executives said in their letter.

"Regardless of how the final rule turns out, it will be a shock to the U.S. financial system, as banking entities will need to take extraordinary measures to attempt to implement it," Barry Zubrow, executive vice president of JPMorgan Chase & Co. wrote in a 67-page letter.

Goldman Sachs Group Inc. joined its Wall Street rivals in submitting comments by yesterday's deadline. David Wells, a company spokesman, said Goldman Sachs wouldn't release or comment on its response, which hadn't been posted by regulators.

Volcker, who championed the trading restrictions while serving as an adviser to President Barack Obama, defended the regulators' proposal in his own comment letter yesterday, challenging banks' arguments that the rule would hurt markets.

'Spectacular' Losses

"The recent years of financial crisis have seen spectacular trading losses in large commercial and investment banks here and abroad," said Volcker, 84. "Consequently, the stability of important banks was jeopardized, contributing to a financial crisis of historic dimension."