Broken Promises

It has been nearly two months since Barack Obama first announced measures to ban deposit taking banks from proprietary trading, the so-called Volcker rule. Even though the legislative language produced by the US administration did not receive much enthusiasm in the US Senate, it is difficult not to notice how initiatives such as these which are outside the agreed G20 framework can cause disruption to the multilateral agenda of the regulatory response to the financial crisis.While calls by US politicians to ban proprietary trading, and those by some European leaders to ban credit default swaps linked to sovereign debt, may have some merit in the eyes of the electorates in these markets, they are contributing to confusion among those technocrats on both sides of the Atlantic whose focus it is to work towards the G20 financial reform agenda.The legislative language recently put forward to the US Congress suggested that the Volcker rule would constitute a far-reaching market intervention that could have unintended and unfavourable consequences. The version of the Volcker rule unveiled on Monday by Chris Dodd, the chairman of the US banking committee, is less far reaching that what Obama proposed; Meanwhile in Europe reservations have been expressed by those who warn that the Volcker rule could not be imported in the same way in Europe. The result? Strong rhetoric turning into a watered down provision wrapped in compromise.Time is ticking away and while we wait for regulation that will make the financial system safer, market participants are already doing a lot to improve the transparency and efficiency in the markets. What recent events demonstrate though, is that to have safe, sound and efficient financial markets politicians must work more closely with the industry and the technocrats to produce legislation that is not only desirable, but, most importantly, that allows precise definition and practical implementation.

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