Are regulators starting to backtrack?
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Are regulators starting to backtrack?

Don’t lobby for a delay or watering down of proposed new regulations – except when it is too close to home for comfort

In the US, regulators have problems of their own, as shown by the astonishing lobbying process around implementation of the Volcker rule.

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 doesn’t go far enough and every shade of opinion in between.

The banking industry pleads for better allowancefor 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: 

"The proposed rule appears to extend well beyond US-insured depository institutions and imposes significant restrictions on Canadian banking entities by limiting their use of US-based resources, personnel and market infrastructure and by preventing them from trading with US counterparties.

"These restrictions may have important adverse consequences for Canada, limiting the liquidity of Canadian markets and hence the resilience of the Canadian financial system. Indeed, the proposed rule may undermine, rather than support, progress toward creating a safer, more resilient and more efficient global financial system."

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 country’s government bonds is conducted with US counterparts. 

Carney says:

“It would be a particular concern if other jurisdictions enacted legislation with a similar home bias. The result would be a fragmentation of global capital markets, reducing their liquidity, financial stability and economic efficiency.”

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 Carney’s senior deputy governor at the Bank of Canada, Tiff Macklem, also chairman of the FSB’s 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:

"Some are calling for a slowdown of the reform process, arguing that a weak global recovery and elevated uncertainty are good reasons to ease up on implementation.

"The global economy is certainly underperforming. The euro area appears to have fallen back into recession, with a sovereign debt crisis that poses clear and present downside risks. In the United States, housing and labour markets have proven stubbornly slow to recover, and there is a large fiscal adjustment still to come.

"But the current challenges are not an excuse for delay. Quite the opposite – they underscore the urgent need to make the financial system more resilient. In a risky world, the need to make the financial system safer and restore confidence is vital. If there is a reproach to be made, it is that progress has not been faster."

Don’t 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.

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