The Volcker Rule and ultra transparency

In his NY Times Dealbook article, Andrew Ross Sorkin discusses the Volcker Rule and the cost of good intentions.  Specifically, he focuses on how it is hard to tell the difference between market making and proprietary trading.

But the real debate has moved to the rules for banks involving “market making” — finding and matching buyers and sellers. The question is whether it will become so complex under the new legislation, that it will further push up trading costs for customers.

On Naked Capitalism, Yves Smith cites the Occupy the SEC's Volcker Rule comment letter on how to deal with this issue of regulatory complexity.

In issuing implementing regulations, the Agencies have avoided simple, bright-line rules that could have clearly delineated exactly what is and is not permissible under the statute .... The absence of bright-line rules was not a happenstance or unintended consequence;  it was a conscious choice ... Simple bright-line rules make the compliance process easier, both for the regulated and the regulator.

To aid in the enforcement of the Volcker Rule, whether the Agencies adopt simple, bright-line rules or regulatory complexity, banks should be required to provide ultra transparency.

With disclosure on an ongoing basis of each bank's current asset, liability and off-balance sheet exposure details, regulators will not be dependent on summary reports but will be able to ask other market participants for help in assessing compliance.

More importantly, while the current proposed Volcker Rule has no penalties for compliance failure, with ultra transparency, the market can discipline the banks for taking on inappropriate levels of risk.