This is just one rule among thousands that have been promulgated under the Dodd-Frank Act, and it shows how dense and complex the banking industry is that adequately defining the difference between proprietary trading and market making to facilitate client business has proved so tricky.
US regulators surely cannot have expected the flood of letters they received during the comment period that closed in mid February, running to many thousands of pages from hundred of interested participants arguing that the Volcker rule goes too far, that it doesnt go far enough and every shade of opinion in between.
The banking industry pleads for better allowance for position-taking and warehousing of inventory in pursuit of facilitating customer business, suggesting the rule risks reducing liquidity in important funding markets.
Many non-US commentators note that the rule exempts position-taking in US government bonds. Some take this exemption as an indicator that US regulators accept that the rule will inhibit liquidity and wish to preserve the treasury market as the bedrock of the US system on which all other traded financial markets depend.
The problem is that the extra-territorial reach of US lawmakers seems to threaten imposing restrictions on foreign banks with operations in the US that may reduce liquidity in other markets.
Mark Carney, governor of the Bank of Canada, writes:
Carney goes on to request similar exemptions from the rule on trading of Canadian government bonds that the US has carved out for US Treasury bonds, saying that a substantial portion of Canadian investor trading with non-Canadians in the countrys government bonds is conducted with US counterparts.
This plea comes from the same Mark Carney who heads the Financial Stability Board (FSB), the body brought together to co-ordinate the international regulatory effort.
His letter to the US Securities and Exchange Commission (SEC) was posted in mid February just days after Carneys senior deputy governor at the Bank of Canada, Tiff Macklem, also chairman of the FSBs committee on standards implementation, delivered a rebuke to those lobbying for a pause in the regulatory onslaught to weigh the costs and benefits of actions undertaken:
Dont lobby for a delay or watering down of proposed new regulations except when it is too close to home for comfort.
For more in-depth news and analysis on regulation and banking, don't forget to check out the March issue of Euromoney magazine.