Friday, February 10, 2012

European Securities Commissioner Asks Financial Regulators to Confine Volcker Rule to US Territory and Exempt Trading in EU Gov. Securities

In a letter to federal financial regulators implementing the Dodd-Frank Volcker provisions, EU Commissioner for the Internal Market Michel Barnier requested that the Volcker Rule be given no extraterritorial reach and remain confined to the US. He also said that the proposed exemption to the proprietary trading ban for trading in US Government securities should not be limited to trading in US government bonds. All government bonds have similar features and functionalities, he reasoned. The absence of an exemption for non-US bonds would have a negative impact on the liquidity of non-US sovereign markets, he posited, which would be even more significant if the Volcker regulations were to apply to foreign banks beyond their US territorial presence. The Commissioner urged that EU Government securities be given the same treatment as US Government securities under the final Volcker regulations.

The Commissioner emphasized that the principles of proportionality and non-discrimination should be respected throughout the Volcker regulations. In his view, it is questionable to consider subjecting non-US banks with a minimal presence in the US to burdensome reporting and compliance requirements that would require them to actively demonstrate that they do not fall within the scope of the Volcker Rule, or that the transactions they are involved in meet the requirements of the rule. While he fully shares the US commitment to financial reform within the G-20 context, Commissioner Barnier insists that such reforms should be undertaken in a spirit of mutual trust and cooperation so that regulatory overlaps and direct implications for other jurisdictions are avoided. The Commissioner stands ready to engage in a dialogue with US regulators around the regulations implementing the Volcker Rule as codified in Dodd-Frank.

More broadly, he noted that the proposed regulations raise a number of concerns and would appear to have implications that are disproportionate in light of the objective that the rule is trying to achieve. The draft has an extensive, global scope, he noted, which would seem to lead to a number of unintended, non justifiable consequences for non-US banks, markets and institutions.

While he appreciates the desire to avoid loopholes, the Commissioner urged US financial regulators to reconsider their approach and limit the scope of the Volcker Rule only to the territory of the United States. Moreover, the current exemption for non-US banks as well as for activities outside of the US would appear very restrictive. As a consequence, it appears that the regulations would be applied well beyond the US activities of non-US banks, without any justification being provided.

The Commissioner also observed that the regulations could have significant ramifications for financial markets outside the US, particularly if some of the elements lead to uncertainty for financial intermediaries. This not only relates to proprietary trading outside the United States, he said, but also to market making. Given the absence of a clear delimitation between what constitutes banned proprietary trading and allowed market making, reasoned the Commissioner, there is a real risk that banks impacted by the Volcker Rule, as proposed to be implemented, would also significantly reduce their market making activities, thereby reducing liquidity in many markets both within and without the United States.