FREE: Unprecedented foreign regulator complaints to change Volcker

Author: Danielle Myles | Published: 7 Feb 2012
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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, Japan and Canada have taken the unusual move of participating in the Volcker rule’s 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 she’s 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 said.

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 rule’s 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.

“It’s 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 can’t be construed as an attempt to overcome the rules for their own financial interest.

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 dialogue.

A public and unusual move

With less than a week until the comment period closes, it’s not known whether other foreign regulators’ concerns will be raised in private or through the rule’s comment solicitation process.

It’s 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 we’ve 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 Volcker’s treatment of sovereign debt.

“These letters could help the US regulators build their case as to why they need to have an exemption,” Miller said.

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.

IIB’s 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.

Sifma’s (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 Sifma’s 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.