DealBook notes a little discussed exemption in the Volcker Rule, one that has not been well received by other countries.

“The rule says that United States banks--and possibly certain foreign banks that do business in America--would be restricted in trading foreign government bonds. Yet the rule, conveniently, provides an exemption for United States government securities. Every other country is out of luck.”

Is there any logic to this? Or is this merely a sneaky way to boost liquidity in Treasuries at the expense of sovereign debt of other countries? 

The authors of the bill perhaps thought that as the risk-free standard in the world, U.S. Treasury bonds were deserving of the exemption, as they are hardly “risky”  in the traditional sense. Even after Standard & Poor’s downgraded the debt, they remain the flight-to-safety standard.

To be sure, the rules allows for legitimate marketing making in foreign debt. Still, foreign government officials are convinced that liquidity will suffer. European countries and Japan have apparently been the chief critics. Canada’s big banks are also miffed, and have suggested the rule may be a violation of NAFTA.

All in all, this is yet another instance in which the rule-writers are having trouble defining what constitutes legitimate trading and market making and what amounts to unreasonable prop trading. The line is so very fine. It will be interesting to see how the final rule set grapples with this issue.

For more:
- here’s the article

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