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

    EIOPA Report Analyzes Use and Impact of Long-Term Guarantee Measures

    EIOPA submitted—to the European Parliament, the Council of the European Union, and EC—its 2020, fifth, and last annual report on long-term guarantee measures and measures on equity risk.

    December 03, 2020 WebPage Regulatory News
    News

    BIS, SNB, and SIX Announce Successful Completion of CBDC POC

    The BIS Innovation Hub Swiss Centre, SNB, and the financial infrastructure operator SIX announced the successful completion of a joint proof-of-concept (PoC) experiment as part of the Project Helvetia.

    December 03, 2020 WebPage Regulatory News
    News

    EBA Sets Out Treatment of Certain Banking Book Positions Under FRTB

    EBA published the final draft regulatory technical standards for calculation of own funds requirements for market risk, under the standardized and internal model approaches of the Fundamental Review of the Trading Book (FRTB) framework.

    December 03, 2020 WebPage Regulatory News
    News

    EIOPA Consults on Integrating Climate Change into SII Standard Formula

    EIOPA published discussion paper on a methodology for the potential inclusion of climate change in the Solvency II (sometimes also written as SII) standard formula when calculating natural catastrophe underwriting risk.

    December 02, 2020 WebPage Regulatory News
    News

    EU Issues Corrigenda to Investment Firms Directive and Regulation

    EU published, in the Official Journal of the European Union, corrigenda to the Directive and the Regulation on the prudential requirements and supervision of investment firms.

    December 02, 2020 WebPage Regulatory News
    News

    MAS Proposes Changes to Rules Arising from Banking Amendment Act

    MAS proposed amendments to certain regulations, notices, and guidelines arising from the Banking (Amendment) Act 2020.

    December 02, 2020 WebPage Regulatory News
    News

    PRA to Elaborate on Approach to Transposition of CRD5 by Mid-December

    PRA published a statement that explains when to expect further information on the PRA approach to transposing the Capital Requirements Directive (CRD5), including its approach to revisions to the definition of capital for Pillar 2A.

    November 30, 2020 WebPage Regulatory News
    News

    RBNZ Consults on Aspects of Insurance Act, Solvency Standards & IFRS17

    RBNZ launched consultations on the scope of the Insurance Prudential Supervision Act (IPSA) 2010 and on the associated Insurance Solvency Standards.

    November 30, 2020 WebPage Regulatory News
    News

    SRB Sets Out Work Program for 2021-2023

    SRB published the work program for 2021-2023, setting out a roadmap to further operationalize the Single Resolution Fund and to achieve robust resolvability of banks under its remit over the next three years.

    November 30, 2020 WebPage Regulatory News
    News

    EIOPA Consults on KPIs on Sustainability for Non-Financial Reporting

    EIOPA is consulting on the relevant ratios to be mandatorily disclosed by insurers and reinsurers falling within the scope of the Non-Financial Reporting Directive as well as on the methodologies to build these ratios.

    November 30, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 6191