Published On: Thu, Jan 12th, 2012

Japan FSA and BOJ Letter on Volcker Rule

Re: Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds

Dear Sirs / Madam
We are writing this letter to request your due consideration of our concerns about the implementation of the proposed Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds (hereinafter called “Restrictions”). We would like to make two points.

First, we would point out the importance of taking due account of the cross-border effect of financial regulations and the need to collaborate with the affected countries. We are sure that you would agree that regarding extraterritorial application of financial regulations the home authorities bear the primary regulatory and supervisory responsibilities.

Considering the potentially serious negative impact on the Japanese markets and associated significant rise in the cost of related transactions for Japanese banks, we would appreciate your refraining from extraterritorial application of the Restrictions, or your amending the definition of “control” and “affiliate” so as not to include such foreign joint ventures and foreign subsidiaries which are controlled by foreign banking groups.

On our side, we are making strenuous efforts to improve the quality of supervision further, and assure you that we will continue to monitor closely and effectively the activities of Japanese financial groups in your country.

Second, we are concerned that the proposed Restrictions would have an adverse impact on Japanese Government Bonds (JGBs) trading. They would raise the operational and transactional costs of trading in JGBs and could lead to the exit from Tokyo of Japanese subsidiaries of US banks. Some of the Japanese banks might be forced to cease or dramatically reduce their US operations. Those reactions could further adversely affect liquidity and pricing of the JGBs. We could also see the same picture in sovereign bond markets worldwide at this critical juncture. We would appreciate your expanding the range of exempted securities substantially, to include JGBs.

For our comments in more detail, please find the Annex attached, describing the points that the proposed Restrictions would result in the following:
1. The imposition of the proposed Restrictions directly on foreign entities (i.e. entities established outside the US) owned by foreign financial groups.
2. A potentially serious negative impact on the JGB market and other sovereign debt markets, since exempted securities are limited to US-treasuries, etc.
3. The squeezing of US dollar funding through the Restrictions on short-term FX swap arrangements.
4. The creation of uncertainties about decisions on investment in non-US funds.

We would like to take this opportunity to remind you of a discriminatory treatment against domestic and foreign banks under the Swap Push-out Rule, Section 716 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The author of this clause made clear on the record of Congress that the exclusion of uninsured branches and agencies of foreign banks from the exemption and safe-harbor provisions of this rule was an unintended oversight. We request to clarify that, when applying this clause in your regulation, uninsured US branches and agencies of foreign banks are treated in the same way as insured depository institutions under the provision of the rule, including the safe-harbor application, as originally intended by lawmakers.

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