"The practical impact of this narrow interpretation is likely to be reduced liquidity in U.S. markets and securities, migration of trading activities to other financial centers outside of the United States, and the development of alternative trading platforms outside of the United States, all of which are likely to lead to job losses," Williams wrote.
Bank of America's fixed income and equities employs more than 1,500 salespeople globally to cover institutional clients, said Edward P. O'Keefe, executive vice president and general counsel. Hedge funds and other non-covered entities are "not scaled for and not in the business of meeting the liquidity demands of customers," he said.
"Hedge funds are purely proprietary traders," O'Keefe said. "Covered banking entities, on the other hand, are expected to provide liquidity to their clients, even in distressed markets, and the agencies should not introduce new risks to the economy by assuming that these other unproven and untested sources of liquidity will materialize."
Two-Year Transition
The Volcker rule is set to take effect in July even if the rule-making is still in progress, and would include a two-year transition period. The Fed would then have the ability to issue one-year implementation extensions on a case-by-case basis.
"I can't see how they would put all of this into effect by July," said Joseph Engelhard, senior vice president of Capital Alpha Partners LLC. "There's no way the banks will have all the infrastructure in place so they will have to delay parts even if they keep it similar to how it is."
The proposal included a series of exemptions for permissible market-making trading, underwriting and hedging transactions. Lawmakers exempted market-making from the rule, along with certain forms of hedging and underwriting, because of concerns that a broad ban on proprietary trading could bring some U.S. and world markets to a halt.
"The proposal will severely limit banking entities' ability to hedge their own risk, thereby increasing rather than decreasing the risk to banking entities and the financial system," the Clearing House Association, American Bankers Association, Sifma and the Financial Services Roundtable said in a joint 173-page letter.
Cost-Benefit Analysis
The industry groups also warned that the cost-benefit analysis in the Volcker rule didn't meet the standards set in a court case overturning an SEC rule last year. The letter referenced the Business Roundtable's victory against the SEC, which overturned the so-called proxy access rule because of an inadequate analysis of the costs. The U.S. Court of Appeals in Washington agreed with the U.S. Chamber of Commerce and Business Roundtable.
Regional banks including PNC Financial Services Group Inc. and US Bancorp submitted a letter urging regulators to increase the threshold for Volcker rule compliance to $10 billion from $1 billion to protect trading by firms that weren't the "principal intended focus" of the measure.