Featured Product

    OFR Paper Examines Effects of Volcker Rule on Corporate Bond Trading

    August 06, 2019

    OFR published a working paper that examines the effects of Volcker rule on corporate bond trading. The paper examines the impact of the Volcker rule, which bans proprietary trading by commercial banks and their affiliates, with some exceptions. The paper finds evidence that the rule has increased the cost of liquidity provided by firms it covers, but not decreased the firms’ exposure to liquidity risk. It also finds that the rule has decreased the market share of covered firms. Customers appear to be trading more with non-bank dealers, who are exempt from the Volcker rule, but cannot borrow at the discount window of FED.

    The study used the underwriting exemption of the Volcker rule combined with the regulatory TRACE dataset to identify the Volcker rule’s impact on bank holding company affiliated dealers’ trading in the corporate bond market. This identification strategy separates out the effects of market liquidity and other contemporaneous changes in financial regulation. Using regulatory data on secondary market transactions in corporate bonds, the authors classify round-trip trades of different duration completed by all dealers. The analysis in this paper makes use of three datasets to obtain information on corporate bond transactions, bond characteristics, and dealer type, including transaction data and round-trip trades, bond characteristics and underwriter information, and Volcker-covered status of dealers. Using a novel within-dealer, within-security identification strategy, the paper examines intended and unintended effects of the Volcker rule on covered firms’ corporate bond trading, using dealer-identified regulatory data. The underwriting exemption was used to isolate the Volcker rule’s effects separate from other post-crisis changes in bank regulation and broader trends in market liquidity. 

    A reduction of the riskiness of covered dealer trades in this market was one of the intended effects of the Volcker rule. The paper found no evidence of the rule’s intended reduction in the riskiness of covered firms’ trading in corporate bonds. The markups significantly increased for trades by covered dealers, even after controlling for other contemporaneous effects. This increase in costs of 20 to 45 basis points per round-trip trade represents a statistically and economically significant change in corporate bond market liquidity. After controlling for the 16-month transition period immediately following the implementation of the rule, these effects remain persistent. It was further found that covered dealers are losing corporate bond market share to non-bank dealers as a result of the Volcker rule. Overall, the paper suggests that the rule in its current form is not reducing dealer risk-taking in corporate bonds and may be increasing the spreads charged by covered dealers. The results of this study, however, cannot be extrapolated to the effects of the rule on trading in other asset classes. 

     

    Related Links

    Keywords: Americas, US, Banking, Securities, Volcker Rule, Covered Bonds, Proprietary Trading, Corporate Bond, OFR

    Related Articles
    News

    OSFI Outlines Prudential Policy Priorities for Coming Months

    OSFI has set out the near-term priorities for federally regulated financial institutions and federally regulated private pension plans for the coming months until March 31, 2022.

    May 06, 2021 WebPage Regulatory News
    News

    BIS Announces TechSprint on Innovative Green Finance Solutions

    Under the Italian G20 Presidency, BIS Innovation Hub and the Italian central bank BDI launched the second edition of the G20 TechSprint on the lookout for innovative solutions to resolve operational problems in green and sustainable finance.

    May 06, 2021 WebPage Regulatory News
    News

    EBA Proposed Regulatory Standards for Central Database on AML/CFT

    EBA proposed the regulatory technical standards on a central database on anti-money laundering and countering the financing of terrorism (AML/CFT) in EU.

    May 06, 2021 WebPage Regulatory News
    News

    ECB Responds to EC Consultation on Crisis Management Framework

    ECB published its response to the targeted EC consultation on the review of the bank crisis management and deposit insurance framework in EU.

    May 06, 2021 WebPage Regulatory News
    News

    ACPR Publishes Version 1.0.0 of RUBA Taxonomy

    ACPR published Version 1.0.0 of the RUBA taxonomy, which will come into force from the decree of January 31, 2022.

    May 06, 2021 WebPage Regulatory News
    News

    BCBS, CPMI, and IOSCO to Survey Market Participants on Margin Calls

    BCBS, CPMI, and IOSCO (the Committees) are inviting entities that participate in market infrastructures and securities markets through an intermediary as well as non-bank intermediaries to complete voluntary surveys on the use of margin calls.

    May 05, 2021 WebPage Regulatory News
    News

    ECB Amends Decision on TLTRO III

    ECB published Decision 2021/752 to amend Decision 2019/1311 on the third series of targeted longer-term refinancing operations or TLTRO III.

    May 05, 2021 WebPage Regulatory News
    News

    Central Bank of Ireland Issues Draft Template for AnaCredit Reporting

    The Central Bank of Ireland published Version 2.7 of the draft credit data template and rules for monthly AnaCredit reporting by banks.

    May 05, 2021 WebPage Regulatory News
    News

    OSFI Consults on Revisions to BCAR and Leverage Requirements Returns

    OSFI proposed revisions to the Basel Capital Adequacy Reporting (BCAR) and leverage requirements returns for the 2023 reporting, with the comment period ending on July 09, 2021.

    May 04, 2021 WebPage Regulatory News
    News

    EBA Seeks Views on Revisions to Nonperforming Loan Data Templates

    EBA published a discussion paper on review of the standardized nonperforming loans (NPL) transaction data templates, along with the proposed revised NPL data templates.

    May 04, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6936