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Dodd-Frank Volcker Provisions Sponsor Explains GSE Permission

By Jim Hamilton

The Volcker provisions of the Dodd-Frank Act authorize banks and non-bank financial companies to purchase or sell government obligations, including government-sponsored enterprise (GSE), obligations. According to Senator Jeff Merkley, a co-author of the provisions, Dodd-Frank does this on the grounds that such products are used as low-risk, short-term liquidity positions and as low-risk collateral in a wide range of transactions, and so are appropriately retained in a trading account.

Allowing trading in a broad range of GSE obligations is also meant to recognize a market reality that removing the use of these securities as liquidity and collateral positions would have significant market implications, including negative implications for the housing and farm credit markets. By authorizing trading in GSE obligations, noted Sen. Merkley, the language is not meant to imply a view as to GSE operations or structure over the long-term, and permits regulators to add restrictions on this permitted activity as necessary to prevent high-risk proprietary trading activities. When GSE reform occurs, Congress expects that these provisions will be adjusted accordingly. Moreover, as is the case with all permitted activities under Section 619, regulators are expected to apply additional capital restrictions as necessary to account for the risks of the trading activities. (Cong. Record, July 15, 2010. p. S5895).

A consensus is growing that GSE reform legislation will happen next year in the 112th Congress.

Full post as published by Jim Hamilton's World of Securities Regulation on August 26, 2010 (boomark / email).