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The showdown between financial institutions and regulators over the ban on proprietary trading and fund investments officially begins today.
This is the day financial regulators – including the SEC, Federal Reserve, FDIC and other agencies – have set as the deadline for public comment on the so-called Volcker Rule prohibiting institutions from trading certain securities and making certain investments in funds for their own accounts. The final rule – named after former Federal Reserve Chair Paul Volcker – is set to take effect on July 21, which is the two-year anniversary of passage of the Dodd-Frank financial reform legislation.
A lot of voices are competing to be heard in the final debate on Volcker. If you’re looking for perspective from non-U.S. banks, law firm Allen & Overy is a good place to start.
Allen & Overy has submitted six separate letters to regulators on behalf of some two dozen of the largest non-U.S. banks. Representing the biggest financial institutions in Canada, Europe and Asia, Allen & Overy contends that Volcker would hamstring non-U.S. banks’ operations and significantly curtail revenue. The institutions also opposed the Rule for its expansion of U.S. law extraterritorially.
In addition to the SEC, Fed and FDIC, the letters were submitted to the Office of Comptroller of the Currency and the Commodities Future Trading Commission. Allen & Overy’s comments include:
- A letter representing the six largest Canadian banks;
- A letter seeking an exemption for trading non-U.S. government securities;
- A letter seeking relief for securitizations and structured products from the prohibition of fund investments;
- A letter seeking to broaden the exemption of “trading account” transactions to include foreign clearing houses not registered with the SEC or CFTC;
- A letter detailing the inconsistencies between the Volcker Rule and the Title VII derivatives provision of Dodd-Frank;
- A letter representing the Regulated Covered Bond Council, the U.K. covered bond trade association.
Among institutions signing the letters were Royal Bank of Canada, ScotiaBank, HSBC, Societe Generale, DeutscheBank, Standard Chartered and TDBank. The letters will be available on the agencies website after filing or you can contact us for copies of the letters.
Spearheading the effort for the bank group has been Douglas Landy, head of the U.S. Financial Services Regulatory Practice at Allen & Overy in New York and a former staff attorney at the New York Federal Reserve. He is joined by an international team of Allen & Overy lawyers in the U.S, Europe and Asia.
“In its current form the Volcker rule represents a serious over-reach by lawmakers and regulators, extending jurisdiction beyond U.S. borders – and beyond what’s reasonable,” Mr. Landy said.
“In fact, if the Rule were approved as it exists now, no trade anywhere in the world involving a share listed on a U.S. exchange or U.S. fund investment could be executed without being subject to Volcker restrictions,” he added. “In the face of such extreme restrictions on their daily business, many non-U.S. banks will have no choice but to simply transfer many of their operations to other countries due to the unwarranted application of the rule, which won’t benefit anyone.”
Last fall, shortly after the new rule was floated, a team of A&O attorneys in the U.S. and Europe formed a coalition that has come to be known as the Volcker Foreign Bank Group. It consists of in-house counsel, compliance officers, business managers and senior officers at some of the largest financial institutions outside the U.S.
As the discussions grew, the group eventually gained the ear not only of other banks, but also of foreign regulators, central bankers, finance ministers and other stakeholders in Canada, Germany, the UK, France, Luxembourg, Australia and elsewhere.
The crux of foreign bankers’ complaint, Mr. Landy explains, resides in the “extraterritoriality” of the Volcker Rule. The proposed rules are so narrowly constructed that they would permit non-U.S. banks to trade only in transactions done solely outside of the United States – what has become known as the SOTUS exemption.
Indeed, as Volcker was conceived:
- No trading would be permitted by a banking entity organized under U.S. or state law, or controlled by a bank organized under U.S. law. Trading would be prohibited U.S. subsidiaries of foreign banks, as well as by foreign subsidiaries of U.S. banks;
- No party to a transaction can be a U.S. resident, as defined by an eight-part test;
- No personnel of a bank involved in a transaction can be physically located in the U.S;
- No part of the transaction can be executed inside the U.S. — but nowhere in the rule is “executed” clearly defined. It is unclear whether it refers to the signing of final documents or, more broadly, to all steps necessary to execute a transaction, including using a U.S.-based stock exchange or clearing corporation.
“In short, Volcker acts like a giant set of handcuffs on foreign banks,” Mr. Landy said. “Most industry watchers expected that the draft rule would only apply to activities by foreign banks within the United States. But the draft blows this expectation out of the water and greatly expands the reach of U.S. law into many other jurisdictions.”
If Volcker were to take effect as written, he illustrates, “A German bank that wants to trade from Frankfurt with Wal-Mart Germany, a subsidiary of the American company, would be subject to Volcker restrictions. No reasonable observer could have expected that result.”
Mr. Landy notes that the Volcker rule would impose a disproportionately expensive, ongoing compliance burden upon non-U.S. banks for their trading and fund investment activities. “In the longer term it could encourage non-U.S. banks to transfer operations and staff outside the United States in order to escape application of the rule.”
In Europe, Volcker has become a hot-button issue at the highest levels. Earlier this month, UK Chancellor of the Exchequer George Osborne warned that the Rule could have a devastating impact upon foreign equity and debt markets — and governments’ attempts to sell their sovereign debt—while the EU still teeters on the edge of a financial crisis.
