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Volcker Rule Compliance, I Strongly Oppose the Agencies’ Proposal Because It Streamlines the Wrong Priorities of §619 of the Dodd-Frank Volcker Rule (The Rule)

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Volcker Rule Compliance, I Strongly Oppose the Agencies’ Proposal Because It Streamlines the Wrong Priorities of §619 of the Dodd-Frank Volcker Rule (The Rule) BIG DATA | BIG PICTURE | BIG OPPORTUNITIES We see big to continuously boil down the essential improvements until you achieve sustainable growth! 617.237.6111 [email protected] databoiler.com October 16, 2018 Attention to: Ms. Ann E. Misback, Secretary, Board of Governors of the Federal Reserve System (FED) Mr. Brent J. Fields, Secretary, Securities and Exchange Commission (SEC) Mr. Christopher Kirkpatrick, Secretary, Commodity Futures Trading Commission (CFTC) Mr. Robert E. Feldman, Executive Secretary, Federal Deposit Insurance Corporation (FDIC) Legislative and Regulatory Activities Division, Office of the Comptroller of the Currency (OCC) Email: [email protected]; [email protected]; [email protected]; [email protected] Subject: Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds Agency Docket No./ File No. RIN DEPARTMENT OF TREASURY - OCC OCC-2018-0010 1557-AE27 FED R-1608 7100-AF 06 FDIC 3064-AE67 SEC S7-14-18 3235-AM10 CFTC 3038-AE72 On behalf of Data Boiler Technologies, I am pleased to provide the FED, SEC, CFTC, FDIC, and OCC (collectively, the “Agencies”) with comments regarding the proposal to revise section 13 of the Bank Holding Company Act (a.k.a. Volcker Revision).1 As a former banker and currently an entrepreneurial inventor of a suite of patent pending solutions for Volcker Rule compliance, I strongly oppose the Agencies’ proposal because it streamlines the wrong priorities of §619 of the Dodd-Frank Volcker Rule (the Rule). The Agencies’ proposal destroys financial stability protections in the following ways: Downplay the Risks of Unreasonable Activities (see Sub-B §_.4(d)/(c)) a) Deviate from the Rule’s principles, ‘reasonable inventory’ in particular b) Blindside about risky positions and dodge regulatory oversight c) Proprietary trading related “market timing” issues and flash crashes Deadly if Toxic Retain and Reflate at Banks (see Appendix 1) a) Troubled Asset Relief Program (TARP) in reverse b) Abandon prudent investment in Treasury and other U.S. agency securities c) Reckless pursuit of higher risks and reignite risk of recession Demolish Healthy Hierarchy and Contrary to Preventive Protections (see Section II. G.) a) Invite gaming and misuse of exemptions (e.g. Sub-C(a)iv, vii, viii, §_.14) b) Resources deploy to wrong places and dissuade control improvement (see Appendix 2) c) Widen gap between G-SIBs and tier two banks increases susceptibility to crisis Deposit Insurance Costs Out-weighed its Benefits, Not Volcker (see Appendix 3) a) Downsides of using deposit insurance to protect against financial crisis No guarantee of banks’ solvency, and bank gambles with others’ money Deposit insurance does little to no help to rescue a Too-Big-To-Fail (TBTF) large bank Orderly liquidation authority creates a moral hazard and bankruptcy may be better2 b) Agencies are accountable to prevent failure, not “scene cleaning” after alleged crimes 1 https://www.sec.gov/rules/proposed/2018/bhca-3.pdf 2 https://www.brookings.edu/blog/up-front/2017/06/05/a-primer-on-dodd-franks-orderly-liquidation-authority/ P.O. Box 181, North Weymouth, MA 02191 Page 1 of 113 (Public) BIG DATA | BIG PICTURE | BIG OPPORTUNITIES We see big to continuously boil down the essential improvements until you achieve sustainable growth! 617.237.6111 [email protected] databoiler.com c) 21st Century Glass-Steagall Act to complement the 1933’s deposit insurance mechanism3 The Agencies’ proposal is stuffed with loopholes hidden in the details: “Subterfuge” of the Agencies’ proposal Implications Accounting prong Sub-B §_.3(b) + trading account/ Wide open backdoors to proprietary trading, see Sub-B §_.3(d)-1. desk redefinitions §_.3(d)-3. Reliance on internal set limit Sub-B §_.4(b), (e). Downplay risk of unreasonable activities amid cases of blindsided Eliminate the need for a definition for “market maker risky positions and dodged regulatory oversight. Trade under the inventory”. No longer require banks to conduct a guise of market-making exclusion even it would not fit the SEC’s demonstrable analysis of historical customer demand, market-making definition per se. Weaken stance against “conflict of current inventory of financial instruments, and market interest” (Subpart B §_.7(a)) when controls may be bypassed through and other factors regarding the amount, types, and transfers in-and-out of category between available-for-sale and hold- risks of or associated with positions in financial till-maturity and/or a flipping-switch between dealing with “client” vs instruments (remove purpose test/ short-term prong). “counterparty”. See Sub-B §_.3(e) Eliminate problem by turning a blind eye to it no demonstration of Presumption of compliance Sub-B §_.3(c) how exclusions are qualified, see Sub-B §_.4(c), (d), (f), (g) Reservation of authority on high-risk assets and high- Trim almost everything, the residual “High-Risk Asset” and “High-Risk risk trading strategies Trading Strategy” [i.e. Sub-B §_.7(b) Backstop] is hard to enforce Carve-out ASC-815 derivatives + no correlation Invite gaming of control, instruments/ inventory unaccounted for, analysis + demonstrably reduce (or otherwise blindside about ‘specific risk’/ hide desk(s) losses, bets and abuses to significantly mitigate) risk be removed cover losses, violate Fed Reg. 5542, see Sub-B §_.4(h), §_.5(b) Remove §_.20(c) Appendix B + replace ownership test Allow toxic to retain and reflate at banks, circumvent sponsor limit, with vague fund characteristics, carve-out non- opposite the President’s “America First” principles, see Appendix 1 traditional structured Hedge Funds / Private Equities Not only does the Agencies’ proposal narrow the Rule’s scope to an unacceptable level, it asks Congress to empower regulators with unprecedented discretions. Such discretions may corrupt the authorities to act not in the best interest of public. Besides, the Agencies do not deserve additional discretions because they have not used their authorities wisely to prevent the last crisis. The so-called “risk approach” to reasonable inventory is false-teaching. RENTD must be preserved. Some sort of “purpose test” or “guilty until proven otherwise” clause is essential, unless the Rule’s footnote 711 is removed to restore a trade-by-trade scrutiny of suspicious activities. We offer innovative technology as a desirable option to resolve the Volcker revision challenges (see Appendix 4). Also, we introduce a concept called “stress RENTD” to address issue of market-makers only willing to provide liquidity to market in good time, but not bad time. We hope our suggestions will be helpful to shake-up regulatory reforms in the 21st century. Feel free to contact us with any questions, or if our expertise might be required. Thank you. Sincerely, Kelvin To MSc Banking, MMGT, BSc Founder and President Data Boiler Technologies, LLC This letter and the enclosure are also available at: www.DataBoiler.com/index_htm_files/DataBoiler%202018Comments%20VolckerRevision.pdf 3 Covered fund requirements are indeed the Rule’s heaviest burden (see Appendix 2), yet the comprehensiveness of this provision is effective to push banks to decisively exit hedge funds (HFs) and private equity funds (PEFs) and the like businesses. We see an opportunity to streamline this part of the Rule by rewritten it to become the 21st Century Glass Steagall Act (i.e. prohibited banks from participating in HFs, PEFs, and the like businesses). To ensure shifted risks won’t come back to haunt banks (i.e. monitor the banking entity’s investments in, and transactions with, any covered funds), the industry as a whole may look into the asset gathering and fund distribution processes, and use behavioral science to ensure “exit only, no re-entry” – like “letting go” of bad habits/toxic assets. We will be glad to discuss further specifics with the regulators, industry groups, and banks, and/or testify in front of Congress upon request. P.O. Box 181, North Weymouth, MA 02191 Page 2 of 113 (Public) BIG DATA | BIG PICTURE | BIG OPPORTUNITIES We see big to continuously boil down the essential improvements until you achieve sustainable growth! 617.237.6111 [email protected] databoiler.com Table of Contents Appendix 1: Why regulators should NOT allow toxic to retain and reflate at banks ........................................................................ 6 Appendix 2: Resources deploy to wrong places and dissuade control improvement ...................................................................... 7 Appendix 3: Effectiveness in respond to 2008 liked crisis: 1933 Deposit Insurance versus 21st Century Volcker ............................ 8 Appendix 4: Innovative RiskTech as desirable option to solve Volcker revision challenges ............................................................. 9 Answers to Specific Questions ........................................................................................................................................................ 13 I. Background - B. Agency Coordination: Questions 1-2 ............................................................................................................. 13 II. Overview of Proposal - G. Banking Entity Categorization and Tailoring: Questions 3-11 ....................................................... 15 III. Section by Section Summary of Proposal ............................................................................................................................... 18 Subpart
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