Under the Volcker Rule, a provision of the 2010 Dodd-Frank Act, banks are prohibited from engaging in proprietary trades – or risky investments with client money – and investments in private equity and hedge funds, Risk.net reports.
While the Volcker Rule does lend exemptions to trading in U.S. Treasury and municipal bonds, overseas critics argue that the exemptions are unfair, as U.S. banks are key providers of market liquidity in foreign bond markets.
Many critics are concerned about how subsidiaries of foreign banks in the U.S. will be affected and say that the Volcker Rule puts these institutions at a disadvantage, strategically and financially.
“The concerns of European regulators have been raised formally with high-level regulators in the U.S.,” Maria Teresa Fabregas Fernandez, acting head of the European Commission’s unit securities market, said, according to Risk.net. “Those concerns also focus on the exemption that is only provided for the trading of U.S. government bonds, and that could have an impact on the liquidity of non-U.S. government bonds. Given the situation going on in Europe right now, we have to be very sensitive about that issue.”
Not all regulators oppose the rule. A U.K. financial authority said that the final report of the Independent Commission on Banking, a U.K. financial committee, planned to institute a similar rule. In the September 2011 report, the ICB recommended that critical banking functions of retail banking operations are conducted with the entity’s own capital.
“The U.K. authorities have targeted the same objectives as the Volcker Rule in the Vickers report, so we have some sympathy for what they are trying to achieve,” David Bailey, the acting head of the U.K. Financial Services Authority’s department of infrastructure and policy, said, according to Risk.net.
Commodity Futures Trading Commissioner Jill Sommers suggested that a re-proposal of the Volcker Rule will be necessary.
“There is concern from both central banks and regulators around the world about how Volcker will be implemented,” Sommers said, Risk.net reports. “The CFTC fully intends to coordinate with other U.S. regulators, so if they end up reproposing the rule, we will be part of that and not on a separate track.”