A rule limiting proprietary trading by U.S. banks may be extended to overseas firms with operations in the country, according to four people familiar with the matter.
Regulators next month will issue a proposal to carry out provisions of the so-called Volcker Rule, part of the Dodd-Frank financial-regulation law, that will clarify the types of offshore trading allowed under the rule, the people said.
The Volcker Rule, designed to reduce the types of risky investments blamed for triggering the financial crisis, has prompted U.S. banks such as Goldman Sachs Group Inc. (GS) to close proprietary-trading operations. Overseas banks say that a strict interpretation of the rule may also force them to fire or relocate U.S. employees who are involved in proprietary trading, even if no American money is at risk.
“There is no question that we would lose jobs,” said Wayne Abernathy, vice president of the American Bankers Association in Washington. “A lot of what the banks have been doing in recent years to diversify their services are activities that can easily be done by foreign competitors.”
The rule, named for the former Federal Reserve Chairman Paul Volcker, includes exemptions for government-guaranteed investments, hedging, market-making and insurance-company transactions. It also exempts proprietary trading conducted “solely” outside of the U.S.
Subject to Interpretation
The language of the bill is subject to interpretation by regulators at agencies including the Federal Reserve and the Federal Deposit Insurance Corp. Dodd-Frank, signed into law by President Barack Obama last year, requires regulators to adopt rules to carry out the provision by Oct. 18.
Regulators are considering how to define operations conducted “solely” outside of the country. Trading managed in the U.S. or involving U.S.-based advisers may be subject to the rule even if it takes place overseas and has no U.S. investors, the people said.
“There has been a question how to interpret the phrase in the Volcker Rule ‘solely outside the United States,’” said Satish Kini, co-chairman of the banking group at law firm Debevoise & Plimpton LLP. “There was some hope with respect to funds, whether they were formed outside the United States and their interests were not offered to U.S. persons, whether that would be sufficient.”
The proposal may still change, the people said. Five regulators, including the Fed, the Office of the Comptroller of the Currency and the Securities and Exchange Commission, must approve the proposal separately. The Treasury Department is responsible for coordinating the regulation. The proposed rule will be released for public comment and can be changed before it becomes final.
The Institute of International Bankers, which represents firms such as London-based HSBC Holdings Plc (HSBA) and Paris-based Societe Generale SA, is arguing that the Volcker rule shouldn’t apply if trading takes place offshore and doesn’t put U.S. investors or the financial system at risk.
The rule “should focus on where the risk of the activity is held,” Sally Miller, the institute’s chief executive officer, wrote in a May 10 letter to the regulators. “The statutory text focuses on the location of the activities a bank engages in.”
Moving Jobs Overseas
Foreign banks often employ New York-based investment advisers and managers to work on offshore proprietary trading. If such trading were forbidden under the Volcker Rule because U.S. employees are involved, the banks would simply move those jobs overseas, Miller said.
“It’s a jobs issue -- if we can’t use a U.S. sub-adviser, we’re going to use an adviser sitting in London or Frankfurt, so that job is not here anymore,” Miller said in an interview. “Allowing foreign banks to employ U.S. firms as sub-advisers encourages foreign banks to invest in U.S. securities.”
International banks employ more than 250,000 U.S. citizens and permanent residents, according to IIB. Credit Suisse Group AG, Societe Generale and Deutsche Bank AG are among the overseas banks that manage trades in the U.S. and would be affected by the rule.
U.S. bank executives, including JPMorgan Chase & Co. (JPM) Chairman and Chief Executive Officer Jamie Dimon, argue that the Volcker Rule places domestic banks at a disadvantage to foreign rivals that aren’t subject to the same restrictions in their home countries.
“If America adopts a lot of things very different than the rest of the world,” U.S. competitiveness will be damaged, Dimon told investors at a Feb. 15 meeting at JPMorgan’s New York headquarters.
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