George Osborne, the UK's Chancellor of the Exchequer, voiced concerns about the potential negative effects the proposed Volker Rule provisions may have on the liquidity of global funding markets and particularly non-US sovereign debt markets. Osborne communicated these concerns via a January 23, 2012 letter to Fed Chairman Ben Bernanke.
In particular, Osborne is concerned with: (1) the effect of proprietary trading restrictions on the liquidity of global funding markets and particularly non-US sovereign debt markets; and (2) the planned breadth of exemptions to proprietary trading restrictions for firms carrying out activities which have little economic consequence for US markets.
Mr. Osborne fears that the present version of the Volker Rule regulations would make it more difficult and costlier to provide market-making services in non-US sovereign markets.
I am concerned that the regulations could have a significant adverse impact on sovereign debt markets, including here in the UK. In particular, although we understand that the primary legislation makes an exemption for market-making activities, in practice the regulations would appear to make it more difficult and costlier to provide market-making services in non-US sovereign markets. Any consequent withdrawal of market-making services by banks would reduce liquidity in sovereign markets, which in turn would engender greater volatility and make it more difficult, riskier and costlier for countries such as the UK to issue and distribute their debt.
The Chancellor also voiced concerns that the proprietary trading restrictions will continue to have implications for firms foreign to the US which use US exchanges or other market infrastructure to carry out their business.
[T]here may be a risk that the proprietary trading restrictions continue to have implications for firms foreign to the US which use US exchanges or other market infrastructure to carry out their business. Unless exemptions are sufficiently broad the risk, is that the legislation could dis-incentivise transactions with US counterparties. This could result in a reduction in market liquidity,leading to investors experiencing higher costs delays, and potentially greater price volatility. Over the medium term, this may encourage a migration of market making to outside the regulated banking sector.
Mr. Osborne urges further dialogue with UK officials to ensure that there is clear understanding of the underlying financial stability objectives of the extra-territorial aspects of the Volcker rule. As the UK Parliament takes up legislation enacting the Independent Commission on Banking's recommendations to ring-fence retail banks from investment banks, open lines of communication between UK and US officials will help minimize unintended consequences of regulatory reforms on either side of the Atlantic.