US: Foreign Bank Cross-Border Trading under the Volcker Rule
Oct 13, 2015 3:12:15 GMT 4
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Post by Jai R. Massari on Oct 13, 2015 3:12:15 GMT 4
Foreign Bank Cross-Border Trading under the
Volcker Rule: The 'Trading Outside the United States' Exemption’s
Incongruous Consequences
Abstract:
The Volcker Rule’s proprietary trading provisions
prohibit any banking entity from engaging in proprietary trading, which
is defined by the Volcker Rule to encompass short-term trading and
dealing activities in financial instruments for the banking entity’s own
account. Because the term “banking entity” includes all U.S. and
non-U.S. affiliates of a foreign banking organization, the
extraterritorial reach of the Volcker Rule’s proprietary trading ban is
very broad, extending to all of a foreign banking organization’s trading
activities worldwide, regardless of the location, place of
incorporation of the entity in which they are conducted, or the U.S.
nexus of those activities. To limit the broad extraterritorial scope of
the proprietary trading prohibition, the Volcker Rule permits a foreign
banking organization to engage in otherwise prohibited proprietary
trading under a “Trading Outside the United States” or “TOTUS”
exemption. This exemption imposes conditions that generally seek to
limit the risks to and conduct of the foreign banking organization in
the United States. Despite the limitations on U.S. conduct and risk,
the TOTUS exemption specifically permits foreign banking organizations
to engage in some cross-border transactions involving U.S.
counterparties and infrastructure by allowing trading “with or through a
U.S. entity.”
The requirements of the Volcker Rule’s TOTUS
exemption for these cross-border transactions, however, do not
sufficiently take into account the existing framework for trading
activities under U.S. law and market structure. The article illustrates
this disconnect by analyzing two types of securities transactions —
trades on U.S. securities exchanges and internalized trades — conducted
by a hypothetical bank. These simple examples of common securities
transactions highlight the limited utility of the TOTUS exemption for
foreign banks and how the regulations lead to results that seem
inconstant with the policy objectives of the exemption. The article
suggests a few modifications to the TOTUS exemption for regulators to
consider to better align the exemption with the stated policy objectives
as well as existing regulatory requirements and market structure that
govern securities transactions.
prohibit any banking entity from engaging in proprietary trading, which
is defined by the Volcker Rule to encompass short-term trading and
dealing activities in financial instruments for the banking entity’s own
account. Because the term “banking entity” includes all U.S. and
non-U.S. affiliates of a foreign banking organization, the
extraterritorial reach of the Volcker Rule’s proprietary trading ban is
very broad, extending to all of a foreign banking organization’s trading
activities worldwide, regardless of the location, place of
incorporation of the entity in which they are conducted, or the U.S.
nexus of those activities. To limit the broad extraterritorial scope of
the proprietary trading prohibition, the Volcker Rule permits a foreign
banking organization to engage in otherwise prohibited proprietary
trading under a “Trading Outside the United States” or “TOTUS”
exemption. This exemption imposes conditions that generally seek to
limit the risks to and conduct of the foreign banking organization in
the United States. Despite the limitations on U.S. conduct and risk,
the TOTUS exemption specifically permits foreign banking organizations
to engage in some cross-border transactions involving U.S.
counterparties and infrastructure by allowing trading “with or through a
U.S. entity.”
The requirements of the Volcker Rule’s TOTUS
exemption for these cross-border transactions, however, do not
sufficiently take into account the existing framework for trading
activities under U.S. law and market structure. The article illustrates
this disconnect by analyzing two types of securities transactions —
trades on U.S. securities exchanges and internalized trades — conducted
by a hypothetical bank. These simple examples of common securities
transactions highlight the limited utility of the TOTUS exemption for
foreign banks and how the regulations lead to results that seem
inconstant with the policy objectives of the exemption. The article
suggests a few modifications to the TOTUS exemption for regulators to
consider to better align the exemption with the stated policy objectives
as well as existing regulatory requirements and market structure that
govern securities transactions.
Number of Pages in PDF File: 30