Former FDIC chairwoman Bair advocates for tighter Volcker Rule

Sheila Bair

Former FDIC chairwoman Sheila Bair said on Thursday that U.S. lawmakers should institute a stricter Volcker Rule through the removal of a hedging activities exemption.

“I would tighten the rule,” Bair said, according to CNBC News. “A hedge should not be allowed unless it is a hedge.”

Other financial industry parties, however, have expressed concern regarding an overly restrictive Volcker Rule that could possibly damage liquidity, discourage hedging activities and increase costs to market players.

“There is no hedge you can put in place that does not create another risk,” Josh Cohn, counsel to the International Swaps and Derivatives Association, said, CNBC News reports.

The Volcker Rule, a provision of the 2010 Dodd-Frank Act, would prevent institutions that receive government securities protections from trading for their own accounts. The rule does, however, lend an exemption to market-making and risk-hedging activities.

Bair maintains that the public should be made aware of hedging activity and hedging performance, adding that the rule should also prohibit compensation based on the hedge’s profits, CNBC News reports.

“A good hedge should lose money,” Bair said, according to CNBC News.

Though the Volcker Rule is supposed to be finalized by July, regulators have indicated that it is likely that they will overshoot that deadline. Banks will have until July 2014 to come into full compliance with the rule.

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