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EU launches backlash on Volcker rule

Friday 27 January 2012 – by Karina Whalley

The European Commission has threatened to replicate extraterritorial measures in Europe if US does not drop similar proposals being brought in under the Volcker rule.

In an interview with the Wall Street Journal on Friday, Michel Barnier, EU commissioner for the internal market, said he will contest the proposal with US Treasury Secretary Timothy Geithner in a meeting next month.

“I will talk to Mr Geithner next month. … We can’t accept extraterritorial consequences or Europe will be tempted to do the same thing,” Barnier told the WSJ.

The EU is concerned the proposal will hinder US banks’ ability to trade European sovereign bonds which could reduce liquidity in the markets and drive up funding costs for EU member states. Japan and Canada have also expressed concerns over the rule’s potential negative impact.

The controversial legislation, named after former Federal Reserve Chairman Paul Volcker, aims to prevent swap dealers and other bank entities from engaging in proprietary trading and from investing in certain hedge funds or private equity funds.

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.

Like the EU, Japan is adamant that the extraterritorial clause is removed from the legislation and has raised concerns over the rule’s adverse impact on the Japanese government bonds market due to increased operational and transactional costs of trading the bonds.

The country’s central bank and the financial regulator warned that Japanese banks could be forced to dramatically reduce or even cease their US operations which would badly hit liquidity and pricing of the Japanese bonds.

The Canadian financial services watchdog wrote a letter to US authorities in December warning that the draft rules will significantly limit Canadian banks’ ability to manage their risks and liquidity.

Within the US, the 298-page proposal has been blasted by industry groups for being overly complex and for potentially undermining the competitiveness of US markets. Some US regulators including commissioners of the Commodity Futures Trading Commission say the set of rules is unworkable.

The proposal is currently open for public comment until 13 February.

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