Citigroup warns that Volcker Rule would raise costs for borrowers

Citigroup Inc., the nation's second largest municipal-bond broker last year, said this week that applying the Dodd-Frank Volcker Rule to the state and local debt market would raise costs for borrowers.

Municipal securities brokers like Citigroup allow investors to more easily trade in the $3.7 trillion market, reducing state and local costs, Citigroup Managing Director Howard Marsh said in the Jan. 27 filing with the Federal Deposit Insurance Corp.

Citigroup appealed to the FDIC, which is currently responsible for writing rules to implement the legislation, requesting that municipal securities be exempt from the rule.
The Municipal Securities Rulemaking Board, a self-regulating group that governs the municipal market, also asked regulators to exempt such debt from the Volcker Rule, according to Bloomberg. Expanding the exemption would help prevent a market split, the board said in a letter to regulators.

The Volcker Rule is a provision of the Dodd-Frank that prohibits financial institutions from engaging in proprietary trading and market-making.

Citigroup, however, contends that such practices are necessary in the municipal-bonds market.

“The proper functioning of the over-the-counter municipal securities market from an investor perspective is highly dependent on robust market-making and liquidity intermediation activity by municipal securities dealers,” Citigroup said in the filing.

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