More foreign regulators are expected to contact US authorities
with complaints about the proposed
Volcker Rule's restrictions on sovereign debt trading.
According to former regulators counsel, complaints by
financial authorities hold more sway than market
participants in the rulewriting process. This extra
pressure makes it almost inevitable that there will be more
flexibility in sovereign debt trading.
Central banks and securities regulators in the UK,
have taken the unusual move of participating in the Volcker
rules public comment process. And the
European Commission is reported to be speaking with the US
Treasury sometime this month.
But this could be just the start of the list.
Institute of International Bankers (IIB) CEO Sally Miller
told IFLR that shes heard from members and elsewhere that
other countries officials may be formulating statements
regarding sovereign debt restrictions.
I understand that more might be forthcoming, she
IFLR understands, from a separate unnamed source, that the
Reserve Bank of Australia (RBA) is considering this. The RBA
declined to comment on the issue.
A number of foreign governments are concerned about the
rules extraterritoriality and impact on foreign sovereign
debt markets, according to Donald Lamson, Shearman &
Sterling counsel and former Office of the Comptroller of the
Currency (OCC) counsel.
And he agreed there are rumblings of more countries
financial authorities speaking out. I think we will see
others getting involved in this, he said.
This is a win for financial institutions which have similar
concerns regarding proprietary trading and market-making in
non-US sovereign debt.
Its difficult for any of the agencies to dismiss
these as self-interested concerns of industry
participants, said Satish Kini, Debevoise & Plimpton
partner and former US Federal Reserve counsel.
This is their peers complaining, so I think the Fed
and the other regulators will give those concerns very serious
attention, Kini added.
Bob Colby, a Davis Polk & Wardwell partner formerly with
the US Securities and Exchange Commission, agreed that foreign
financial authorities comments will be viewed differently
by the drafting regulators as they cant be construed as
an attempt to overcome the rules for their own financial
This is especially true of the bank regulators drafting the
rule (OCC and Federal Reserve) which are thought particularly
sensitive to their foreign counterparts given their frequent
A public and unusual move
With less than a week until the comment period closes,
its not known whether other foreign regulators
concerns will be raised in private or through the rules
comment solicitation process.
Its unusual for foreign regulators and central banks
to voice their opposition to foreign rules so publicly, Lamson
said. Usually they work behind the scenes with one another.
Colby said that foreign authorities rarely comment on
regulatory proposals at all, and almost never speak out in
public ways like weve seen with Volcker.
The UK, Japanese and Canadian authorities choice to
file their comments shows the seriousness of their concerns
(extraterritoriality and the impact on liquidity in their
sovereign debt markets).
Banks and bank associations are encouraging these formal
public statements as a way to help US regulators justify, in
the long-term, changing Volckers treatment of sovereign
These letters could help the US regulators build their
case as to why they need to have an exemption, Miller
Bank associations have been lobbying within their countries
as well as directly to the US regulators. Nathalie Clark,
general counsel of the Canadian Bankers Association (
which filed comments to the Volcker Rule) said the
association has been voicing its concerns to domestic
regulators for some time.
Solution for sovereigns
Formal opposition to the treatment of foreign government
securities makes it clear that the drafters will have to do
something to accommodate sovereign trading as much as possible,
Lamson said. The question is how.
IIBs proposal is for at a minimum
foreign banks be able to prop trade in their aown country debt.
Miller said the IIB is still formulating its suggestions for
how other countries debt could be held.
Sifmas (Securities Industry and Financial Markets
Association) managing director and associate general counsel
Rob Toomey said the Association believes trading in sovereign
debt should generally be treated as a permitted activity, in
accordance with foreign regulators propositions.
We spot-on agree with the positions taken by these
foreign authorities - how they are viewing the restrictive
interpretation of market making and how that impacts their
debt, he said, adding that Sifmas views will be
laid out in full in their comment letter.
And anyone opposing broader flexibility with sovereign debt
trading has been warned against references to MF Global. "It's
inaccurate to use MF Global as an example that would justify
the rule," Lamson said.
The brokerage would never have been covered by Volcker. And
if it were a bank that was captured, it would have had lending
and other limits that would prevented its risk-taking with
sovereign debt trades.