The Institute of International Bankers has urged Congress to undertake a comprehensive review and assessment of the statutory Volcker Rule, Section 619 of the Dodd-Frank Act based on the principles of comity, the need for international cooperation and the observation of appropriate territorial limits on U.S. regulation. In a letter to House Financial Services Committee Spencer Bachus (R-AL), The Institute said there is no justification for the Volcker Rule to limit transactions by international banks that do not put U.S. financial stability, the safety and soundness of U.S. banks or U.S. taxpayer dollars at risk. They warned that inappropriately imposing U.S. limitations outside the United States would have significant adverse and unintended consequences for international banks, as well as the U.S. economy and U.S. investors. The flow of capital from foreign investors to U.S. companies would be restricted, and liquidity in U.S. markets would be reduced, without any corresponding benefit to U.S. financial stability, U.S. taxpayers or the safety and soundness of U.S. banks. The Institute represents represents internationally headquartered financial institutions from over 35 countries doing business in the United States. The IIB’s members consist principally of international banks that operate branches and agencies, bank subsidiaries and broker-dealer subsidiaries in the United States.
While the U.S. operations of international banks are subject to the Volcker Rule to the same degree as U.S.-headquartered banks, said the Institute, Congress has already properly sought to limit the extra-territorial impact of the Volcker Rule by providing exemptions for
certain activities conducted “solely outside of the United States” (the so called SOTUS exemptions). However, the proposed implementing rules issued by U.S. regulators interpret those exemptions and certain other provisions of the statute in a manner that would significantly and unjustifiably interfere with activities conducted by international banks outside of the United States, without any corresponding benefit for the safety and soundness of U.S. banking, U.S. financial stability or U.S. taxpayers.
Congress provided an exemption for trading and funds activities outside of the United States focused on the actions of banks as principal, which appropriately focuses on where the risk of the activity is taken. By providing this exemption, reasoned the Institute, Congress recognized that if it were to do otherwise and regulate the trading practices of international banks and their non-U.S. affiliates, it would create unwarranted conflicts with foreign regulation and needlessly divert scarce U.S. regulatory resources to matters that do not implicate U.S. financial stability, the safety and soundness of U.S. banks or U.S. taxpayers.
However, the Institute pointed out that the proposed rules layer on additional limitations that make the exemptions too
narrow, cutting off trade with U.S. investors and on U.S. exchanges without any corresponding benefit for U.S. financial stability. For example, under the proposed rules, a trade between a German bank in Frankfurt and a UK bank in London would apparently not qualify for the SOTUS exemption if it were executed on a U.S. exchange. Similarly, a trade between a French bank and a U.S. manufacturing firm over a European trading platform would apparently subject the French bank to the full panoply of regulations under the proposed
rules by virtue of having traded as principal with a single U.S. person.
While the Volcker Rule quite appropriately recognizes that U.S. publicly-traded mutual funds should not be subject to the Volcker Rule’s funds prohibition, said the Institute, no similar recognition is given to comparable foreign investment companies, including funds that engage in public offerings outside of the U.S. For example, regulated investment funds in Canada could not be offered or sold by Canadian banks to Canadian residents while traveling on business or pleasure in the U.S.