MAKE NO BONDS ABOUT IT: EXEMPTING FOREIGN GOVERNMENT OBLIGATIONS FROM THE VOLCKER RULE

Matthew S. McElroy, DLA Piper

Abstract

U.S. financial regulators are considering exempting foreign government obligations from the Volcker Rule’s prohibition on proprietary trading. The operative provision, § 13(d)(1)(J) of the Bank Holding Company Act, governs such exemptions and sets a very high bar for regulators to meet when seeking to make exemptions. The provision requires that five regulatory agencies unanimously agree to the exemption. The agencies must also determine that the exemption satisfies a strict substantive standard—that it “promote[s] and protect[s] the safety and soundness of the banking entity . . . and the financial stability of the United States.”

Regulators may jointly agree to make an exemption for sovereign debt because they are facing intense political pressure to do so. Foreign governments, including several close allies of the United States, have spoken out publicly against the Volcker Rule. These governments are asking U.S. regulators to exempt sovereign debt from the trading prohibitions in the Volcker Rule because of the adverse effects it will have on their debt markets. In addition, their concerns support the case that the substantive standard in § 13(d)(1)(J) is satisfied.