EBF response to the US Agencies' consultation on the Volcker rule

13 February 2012

EBF is of the opinion that the Volcker Rule is likely to have detrimental effects on market liquidity and will make raising capital harder, both in the US and abroad. The Volcker Rule will generally impair the ability of banks to make markets in their clients' bonds.

EBF would like to know whether the impact of the Volcker Rule in global capital markets has been properly and fully assessed. Secondly, EBF would like to point out that proprietary trading was not endorsed by the G20 leaders in Pittsburgh as an area of the financial system that required reform.

As a member of the Institute of International Bankers (IIB), EBF supports the various submissions made by the IIB in respect of the Volcker Rule. The European banking industry has committed, and continues to commit, significant time and effort in order to understand the Volcker Rule proposal, and the issues it presents, better. EBFwould like to share the significant concerns of its members regarding the extraterritorial application of the Volcker Rule.

It is the position of the EBF that the Volcker Rule’s extraterritorial application to global non-US operations of non-US banks should be reconsidered. This view is shaped by the very real possibility that the application of the Volcker Rule as currently proposed would interfere with the rights of non-US jurisdictions to regulate and supervise their banks. This could lead to an unintended reduction in much needed international cooperation amongst supervisory authorities, a situation which would inevitably lead to greater regulatory divergence.

EBF would therefore suggest the following:

1. The Volcker Rule generally prohibits banking entities from (a) engaging in proprietary trading or (b) sponsoring, or acquiring, or retaining an ownership interest in a private equity fund, or a hedge fund. The Volcker Rule contains certain exemptions. Notably, proprietary trading and fund investment activities that take place “solely outside the US” on the grounds that the rule’s focus is on financial stability of the United States and protecting the US taxpayer. However, the exemptions proposed are inconsistent with the original intention. In fact, the scope of the Volcker Rule has been expanded to cover a broad range of non-US trading and fund activities over which Congress did not intend to extend US jurisdiction. Further, the envisaged compliance requirements are unduly burdensome, as they require foreign banks to report on activity on a worldwide basis, even if such activities do not affect the US. EBF therefore urges the Agencies to amend this exemption in order to avoid any inappropriate extraterritorial application of the Volcker Rule, and to ensure that the exemption is in line with policymaker’s original intentions.
2. The US government securities exemption from the prohibition on proprietary trading should be broadened to cover EU Member State government securities (and non-US government securities more generally) in order to avoid discriminatory treatment of such securities. The exemption proposed has the potential to affect the liquidity and pricing of EU and other countries’ sovereign debt adversely. Reducing liquidity in these non-US markets can only generate systemic risk in global financial markets, to the detriment of the US market.
3. The "Super 23A" requirement, as proposed in the Volcker Rule, would impose a worldwide prohibition against any non-US bank lending to or otherwise transacting with any hedge funds or private-equity funds it sponsors, manages or advises, even when such funds bear no relation to the US. This requirement is unduly broad and extraterritorial in reach. EBF urges the Agencies to narrow the scope of Super 23A’s application in order to avoid intruding on business that is solely outside the US. Also (non-US) securitisations will probably be hampered by the Volcker rule because securitisation vehicles could be seen as covered funds. As a result, covered transactions like liquidity and credit support or support letters of credit (L/C) by non-US banks to these vehicles would not be possible.
4. The definitions of “covered funds”, “foreign equivalent funds”, “banking entity” and what constitutes “control” should be changed, so as to avoid any inadvertent discriminations, such as the inclusion of Undertakings for Collective Investment in Transferable Securities (UCITS) funds or any other (regulated) European funds that do not exhibit the characteristics of a hedge fund or private equity fund and inconsistencies, such as  compelling a banking entity with a stake of 25 per cent in another one to file confidential information to which it probably has no way to access as a result of lacking effective control. EBF also recommends explicitly excluding covered funds and securitisations from the definition of “banking entity”, as this would have harmful and probably unintended consequences.
5. The Volcker Rule includes further restrictions on banking activities that even if permissible pursuant to an exemption would impose high risk exposures, material conflicts of interest, or threaten the safety and soundness of the banking entity or the financial stability of the US (collectively, the “Prudential Backstops”). The Prudential Backstops should be explicitly limited in application to the US operations of non-US banks. The overarching “backstop” of safety and soundness should be left in the foreign bank’s home country regulator’s hands. Such a regulators is in the best position to regulate its own banks.

Finally, we would like to point out that previous concerns over the extraterritorial application of banking and securities legislation in the context of the US-EU economic and commercial relationship have often been addressed with success through bilateral discussions, whether via long-standing forums such as the EU-US Financial Markets Regulatory Dialogue on financial services, or ad hoc arrangements such as the EU-US technical working group on derivatives regulation. It is important that US regulators trust in the regulations developed by their foreign counterparts and do not seek to impose their requirements unnecessarily or inappropriately. Against the background of its regular contacts with the European institutions, the EBF will, therefore, invite the European Commission to request the arrangement of a more structured dialogue with the Agencies to resolve the remaining questions and serious and significant issues posed by the Volcker Rule.

Full response

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