Canada and Japan sound warnings on Volcker rule

Foreign governments and asset managers are mounting a last-ditch push against the US Volcker Rule, worried that the proposed ban on proprietary trading could exacerbate a liquidity crunch.

Japanese and Canadian regulators have warned the US that the rule - due to be finalised within weeks and put into force in July - could harm world markets by preventing or deterring US banks from trading.

The Volcker Rule is designed to prohibit most “prop trading” by banks, where institutions take positions for their own accounts, but Wall Street has argued that the restrictions will also hamper “market making”, where a bank stands between a buyer and seller of securities.

Jun Mizuguchi, assistant commissioner for international affairs at Japan’s Financial Services Agency, said: “We are afraid that US financial institutions may refrain from trading” Japanese government bonds. In a letter to US regulators, the Canadian Office of the Superintendent of Financial Institutions said the rule could “undermine the liquidity of government debt markets outside of the US”.

European bankers and traders have sounded similar warnings about the potential effect of the Volcker Rule on the $13tn eurozone government debt market. They say prop trading provides much needed liquidity and forcing US banks to pull out would cut demand and add strains to the already stressed market.

Next week Fidelity, AllianceBernstein and TIAA-CREF are due to voice their concern at a congressional hearing, according to participants and congressional aides. It

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