Basel III, Banks, Bond Trading and the Volcker Rule

Marketfield Asset Management CIO Michael Aronstein is concerned new rules may pose problems for financial markets as a whole.

Institutional Investor

December 12, 2013

By Robert Stowe England

A raft of new laws and regulations, including Basel III and the Volcker Rule, which was approved by five federal agencies on December 10, has prompted banks to derisk their operations and raise capital levels by retreating from their central role in bond trading and market making. While this might add to banks’ safety and soundness, it presents problems for the broader financial markets, some argue, including Michael Aronstein, president, chief investment officer and portfolio manager for New York–based Marketfield Asset Management, which oversees $18 billion in assets. “There’s no shock absorber in the whole system anymore,” he laments.

Aronstein is worried about the fallout for mutual funds in a world in which banks are no longer either able or willing to absorb and transfer liquidity risk in the markets. Over recent years some mutual funds, he says, have taken on riskier illiquid assets in a search for higher returns. The same funds still have to be able to provide immediate cash to customers who want to redeem their shares. As a result, whereas the need for market liquidity has risen for bond funds, “the dealer community has quietly prepared itself to do nothing,” he adds. “That’s a very, very bad combination in an asset where you promised people daily access to the money.”

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Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

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