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Japan regulators slam US Volcker rule

Friday 13 January 2012 - by Karina Whalley

 Japan has slammed the US Volcker rule for potentially wreaking havoc on Japanese government bonds and warns it could harm sovereign bond markets worldwide.

The Bank of Japan and the country's Financial Services Agency wrote to key US financial regulatory bodies in a letter released on Thursday, urging for the rule to be modified, in particular its extraterritorial clause, and to exclude Japanese government bonds altogether from the proposals.

"We would point out the importance of taking due account of the cross-border effect of financial regulations and the need to collaborate with the affected countries," said the letter, signed by Masamichi Kono, vice commissioner for international affairs at the FSA and Kenzo Yamamoto, executive director of the BoJ.

The country is concerned that the Volcker rule will have an "adverse impact" on the Japanese government bonds market as it will raise operational and transactional costs of trading the bonds and could lead to an exodus from Tokyo of Japanese subsidiaries of US banks, according to the letter dated 28 December.

The BoJ and FSA also warned that Japanese banks could be forced to "cease or dramatically reduce" their US operations which would badly hit liquidity and pricing of the Japanese bonds.

"We could also see the same picture in sovereign bond markets worldwide at this critical juncture," said the letter, addressed to Mary Schapiro, chairman of the Securities and Exchange Commission among others.



The authorities have therefore demanded that Japanese government bonds be excluded from the Volcker proposals.

The BoJ and FSA are also worried about the extraterritorial reach of the draft regulation.

The Volcker rule applies to any banking institution, wherever situated, that has a US branch, agency or bank subsidiary, as well as to the institution's other subsidiaries and affiliates around the globe.

Because of the "potentially serious negative impact" on Japanese markets and the rise in related transaction costs for Japanese banks, the letter says the extraterritorial clause must be removed.

Otherwise the BoJ and FSA want the Volcker's definition of "control" and "affiliate" to exclude such foreign joint ventures and foreign subsidiaries which are controlled by foreign banking groups.


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