The President of the EU Council of Ministers (ECOFIN) has concerns regarding the proposed regulations implementing the Volcker Rule provisions of the Dodd-Frank Act and the implications this could have for the interaction between EU and US markets. In a letter to the federal financial regulators charged with implementing the Volcker Rule, Margrethe Vestager said that it is vitally important that the dividing line between market-making and proprietary trading is drawn in the right place to allow markets to continue to function effectively and properly, and to avoid a reduction in bank market-making activities. The Minister noted that US government securities have been taken completely out of the scope of the Volcker Rule, while non-US government securities remain within the scope.
ECOFIN understands that this exemption aims to avoid unintended implications for market-makers in sovereign debt markets. However, as it stands, the proposed regulations would give US Treasury bonds preferential treatment over, for example, EU sovereign debt, and thus create an un-level playing field in sovereign debt markets. This would be a major concern for EU Member States, said the Minister, who urged the financial regulators to minimize distortions on international capital markets and use an economic rationale for an extension of the exemption to foreign government bonds with a similar risk structure to US government bonds. The Minister also urged the federal financial regulators to reconsider the proposed regulation in this respect in order to ensure equal treatment.
ECOFIN also has concerns regarding the potential extraterritorial consequences for non-US banks, whose non-US operations may be captured within the scope of the US draft regulations. There have been suggestions that trades otherwise unconnected to the US, but which are transacted through US exchanges and counterparties, may be captured under the proposed regulations. This would not only raise questions about extra-territoriality, noted the Minister, but is also neither in the interest of the US nor consistent with the original intent of the legislation. ECOFIN supports the desire to ensure a level playing field within the US, and to prevent banks from circumventing the regulation by moving offshore.
However, it is important to ECOFIN that the permitted activities of EU firms within the EU will not be subject to the regulations, and in particular that EU firms with US operations do not suffer from competitive disadvantages when it comes to their non-US business, simply by virtue of also operating in the US. The Minister urged the regulators to prevent the possibility of extraterritorial applications of the Volcker Rule.