Will banks' market-making activities for exchange-traded funds run afoul of the proposed Volcker Rule for banning banks' proprietary trading businesses? The Financial Times reports that Bank of America, the NYSE and a broker-dealer trade group, the Securities Industry and Financial Markets Association (SIFMA), are all pushing for ETFs.

In a letter to regulators, BofA said that ETFs should be included in the rule exemptions to allow bank to engage in activities such as "seeding ETFs and engaging in 'create-to-lend' transactions, as they currently do today."

"Market makers in exchange-traded funds enter into a number of transactions, such as creating and redeeming ETF shares," SIFMA said in its own letter, adding that "banking entities are acting in a role that combines underwriting and market-making, but does not appear to fit within either narrow forms of these permitted activities provided in the [Volcker] proposal."

Federal Reserve chairman and Volcker rule namesake Paul Volcker though warned that banks may hide speculative risk by using complex products. In his letter to the US regulators, Volcker wrote: "Various arbitrage strategies, esoteric derivatives, and structured products will need particular attention, and to the extent that firms continue to engage in complex activities at the demand of customers, regulators may need complex tools to monitor them." 

Edited by: HFD


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