US regulators are facing a flood of foreign complaints about the “Volcker rule” aimed at banning proprietary trading at banks, increasing the chances that the measure may be watered down.
Monday was the last day for financial firms and industry bodies to comment on the proposed rule, named for Paul Volcker, the former Federal Reserve chairman. A deluge of comment letters had arrived, with more expected to be sent electronically, before Monday’s midnight deadline.
Foreign banks have complained about the rule’s impact on their activities and subsidiaries in the US. Under the current proposal, foreign banks with US subsidiaries would be prevented from proprietary trading – or trading on their own account – in a similar way to US banks.
“Volcker acts like a giant set of handcuffs on foreign banks,” said Douglas Landy, partner at law firm Allen & Overy, which is representing Canadian banks.
Proponents have argued that the rule is intended to apply to all large financial institutions in the US, regardless of where they are based, so as to create a level playing field. Still, many US government officials said they expect the Volcker rule to be watered down.
That has delighted many US banks but irritated proponents – including Mr Volcker, who says the scale of lobbying from the UK in particular is ironic, given the echoes between the Volcker rule and UK proposals on “ringfencing”, or separating deposit-taking activities from riskier businesses at banks.
“That approach, as a matter of regulatory philosophy and policy, resembles the seemingly less draconian US restrictions on proprietary trading,” Mr Volcker writes in a Financial Times op-ed.
Mr Volcker has pushed back against what he calls “the smoke screen of lobbyists dedicated to protecting the interests of some highly compensated traders and their risk-prone banks.”
Representatives of foreign governments, including Japan and Canada, have warned that the rule could curb their ability to fund themselves in government bond markets. Mr Volcker said those arguments ring hollow, adding: “How often have we heard complaints by European governments about speculative trading in their securities, particularly when markets are under pressure?”
The Volcker rule, which is due to be finalised by July, contains an exception for “market-making” activities in US Treasuries. The exception does not apply to non-US government bonds, prompting foreign accusations of double-standards.
The definition of market-making for other securities also has become a key area of debate. Many market participants say distinguishing between proprietary trading and trading on behalf of clients will be difficult, if not impossible. Regulators have pushed back on that claim.
The California Public Employees’ Retirement System, the largest US public pension fund, joined Mr Volcker in supporting the proposal, in part because it would help minimise the systemic risk posed by large financial institutions.
In response to claims that the proposed rule may lead to an increase in trading costs, Calpers said that “is an acceptable cost for reducing risk in the financial system”.
“We acknowledge that the systemic protections afforded by the Volcker rule come at [a] price”, Calpers wrote in its letter to regulators.
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