Banks are lobbying for their trading activities related to exchange traded funds to be exempt under the “Volcker rule,” the Financial Times reports.

The Volcker rule, named for former Federal Reserve Chairman Paul Volcker, is designed to restrict proprietary trading by commercial banks that hold deposits. Financial institutions are facing stricter regulation in the wake of the credit meltdown.

Banks are among the so-called authorized participants that make markets in ETFs and help facilitate trading.

“But those activities could fall foul of the proposed Volker rule,” the FT reports.

NYSE Euronext and the Securities Industry and Financial Markets Association are backing the ETF exemption for banks.

The banks’ trading activities are “essential to the liquidity of that market,” NYSE Euronext said in the article.

Meanwhile, Volcker has warned that banks may use complex products to hide speculative risk, while critics have identified ETFs as a potential source of systemic risk, the FT said.

“Some people have talked about ETFs as the next time bomb,” said Joseph Saluzzi of Themis Trading in the story. “It’s a field that should certainly be regulated heavily, especially with so many retail traders participating.”

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