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Barclays Capital BARCLAYS CAPITAL February 13, 2012 Via Electronic Delivery Office of the Comptroller of the Currency Ms. Jennifer J. Johnson 250 E Street, SW Secretary Mail Stop 2-3 Board of Governors of the Federal Reserve Washington, D.C. 20219 System 20th Street and Constitution Avenue, NW Docket No. OCC-2011-0014 Washington, D.C. 20551 RIN: 1557-AD544 Docket No. R-1432 Mr. Robert E. Feldman RIN: 7100 AD 82 Executive Secretary Federal Deposit Insurance Corporation Ms. Elizabeth M. Murphy 550 17th Street, NW Secretary Washington, D.C. 20429 Securities and Exchange Commission 100 F Street, NE RIN: 3064-AD85 Washington, D.C. 20549 Mr. David A. Stawick Release No. 34-65545; File No. S7-41-11 Secretary RIN: 3235-AL07 Commodity Futures Trading Commission Three Lafayette Centre 1155 21st Street, NW Washington, D.C. 20581 Attention: Comments Re: Restrictions on Proprietary Trading and Certain Interests in, and Relationships with. Hedge Funds and Private Equity Funds Ladies and Gentlemen: Barclays Capital footnoteappreciate 1. s the opportunity to submit these comments on the regulations that the above-listed U.S. financial regulatory agencies (the "Agencies") have proposed for the Barclays Capital is the investment banking division of Barclays Bank PLC. Barclays Capital provides large corporate, government, and institutional clients with a comprehensive set of solutions to their strategic advisory, Financing, and risk management needs. Barclays Capital has offices around the world and employs over 25,000 people. end of footnote. purpose of implementing Section 619 ("Section 619," commonly known as the "Volcker Rule") of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). footnote 2. Barclays welcomes the efforts of Congress and the Agencies to enact effective oversight regulations to provide consumers, the markets, and banking institutions with a stable financial system. We appreciate the importance, as expressed in the Preamble, of defining parameters to effectuate the Volcker Rule while preserving the benefits of market making and other activities that meet client needs. We recognize that regulatory oversight is important to the restoration of public trust that banking entities cannot do without. We support the notion of protecting government-backed deposits and ensuring that behavior by any single institution does not jeopardize the stability of the international financial system. Nevertheless, we submit that the Volcker Rule should not be implemented in such a way as to disrupt global financial markets. We believe our comments address issues facing many market participants who rely on banking entities to facilitate access to capital, including within the United States, where financial markets are the deepest and most efficient in the world. Barclays endorses portions of the Preamble and the Proposed Rule in which the Agencies have interpreted important aspects of the Volcker Rule. For example, the Preamble appropriately provides that the government obligation exemption encompasses the purchase or sale of enumerated government obligations on a forward basis, including the to-be-announced ("TBA") market, footnoteand th 3.e Agencies properly recognize the need to differentiate market making principles and the variability in trading patterns among different types of markets as described in Appendix B to the Proposed Rule. footnote 4. regarding the permissibility of portfolio hedging, which allows banking entities to mitigate risk efficiently across trades and trading units. footnoteWe believ 5. e that the underwriting exemption, as set forth in the Proposed Rule, generally effectuates the aims of the statute while largely avoiding undue interference with established markets, although we note the importance of certain technical changes to the requirements for that exemption. footnote 6. The regulations that are the subject of these comments consist of Notice of Proposed Rulemaking (the "Preamble") and the accompanying proposed rule text (the "Proposed Rule") that would implement the Volcker Rule. For purposes of this letter, we refer to both the joint notice of proposed rulemaking, 76 Fed. Reg. 68846 (proposed Nov. 7, 2011), and the Commodity Futures Trading Commission's (the "CLTC") notice of proposed rulemaking as the "Proposed Rule," but we cite to pages of the Federal Register version of the joint notice of proposed rulemaking (the "NPR"). end of footnote. page 2. See footnote 164 of the Preamble, NPR at 68878. We believe that this is a very important clarification in light of the TBA forward market for agency mortgage backed securities. By significantly improving liquidity in the market for agency mortgage backed securities, the TBA market helps to ensure tighter spreads for agency issuances, lowering mortgage rates and borrowing costs for consumers. end of footnote. See NPR at 68960. end of footnote. The Agencies recognize in the Preamble that Section 619(d)(1)(C) is intended to permit portfolio hedging: "Notably, and consistent with the statutory reference to mitigating risks of individual or aggregated positions, |Proposed Rule Section 5(b)(2)(ii)| would include the hedging of risks on a portfolio basis." NPR at 68875. end of footnote. See, e.g., the comments regarding the Proposed Rule's underwriting exemption made by the Securities Industry and Financial Markets Association ("SlFMA"), a trade association of which Barclays is a member, in its letter pertaining to the proprietary trading-related provisions of the Proposed Rule. end of footnote. Nevertheless, as more particularly set forth in this letter, we are concerned that certain key aspects of the Proposed Rule are deficient and will lead to a significant negative impact on the efficient functioning of the U.S. and international financial systems, with a particularly disruptive effect on the capital markets. page 3. We respectfully submit that, as currently proposed, these aspects of the Proposed Rule will have significant unintended and negative consequences on U.S. and global economies, on U.S. job creation and retention, and on the liquidity, the cost and the availability of capital in the U.S. and global financial markets. We also expect related repercussions for many companies to which the Volcker Rule was not, by its terms, intended to apply (i.e., entities which would not be covered by the term "banking entity"), but which nonetheless depend on such markets to fund their operations. Our comments and alternative proposals focus on mitigating these negative consequences. We believe that our suggested modifications to the Proposed Rule, which are consistent with statutory parameters, better further the goals of the Agencies to carry out Congress' intent to safeguard affected banking entities and promote the financial stability of the United States. In summary, our comments and alternative proposals include the following: We believe that the Proposed Rule represents an inappropriate one-size-fits-all approach to the market making and hedging exemptions that does not properly take into account the way market intermediaries operate, especially in less liquid markets. We propose a reformulation of these exemptions, including a presumption of compliance for so long as a trading activity is conducted in a manner consistent with tailored quantitative metrics. In light of the function that banking entities perform in the international markets for non-U.S. government obligations, the final rules should include an additional exemption for trading in such instruments. The exemption for trading in government obligations does not cover trading of ex change-traded futures or options on such instruments, failing to recognize the importance of trading in related exchange-traded futures and options to the underlying market in the cash instruments themselves. We recommend that the Agencies use their authority under Section 619(d)(1)(J) to include an exemption to permit trading in exchange-traded futures and options on (i) the obligations exempted by the statute and in Section .6(a) of the Proposed Rule, and (ii) non-U.S. government obligations for which we also request an exemption. The proposed elements of the trading "solely outside of the United States" exemption are excessively restrictive, negate legislative intent, will have an inappropriate extraterritorial impact and will harm U.S. asset managers and other entities. As such, the exemption for trading solely outside of the United States (the "offshore trading exemption") should be modified in the final rules to omit the requirements that no party to the relevant transaction may be a resident of the United States and that the relevant transaction must be executed wholly outside of the United States. We believe that the intertwined provisions in the Proposed Rule regarding the definitions "banking entity" and "covered fund" and the so-called "Super 23A" prohibitions should be modified to avoid presumably unintended far-reaching and adverse consequences. page 4. Among other changes, we recommend narrowing the definition of "covered fund" to more closely approximate the characteristics of a hedge fund or private equity fund, and carving out fund activities conducted solely outside of the United States (the "offshore funds exemption") from the application of Super 23A. We recommend that the Agencies provide for a "phase-in" approach to implementation of the Proposed Rule's reporting, recordkeeping and compliance program requirements over the conformance period. In order to avoid duplicative, unnecessary,
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