British gilt dealers have told the government they are worried that US rules on proprietary trading due to come into force this year will curb their ability to act as market makers, potentially making it more difficult for the UK government to conduct bond sales on financial markets.
Minutes published on Friday from the annual consultation meeting between Britain's Debt Management Office, the finance ministry and gilt market makers and investors said that "strong concern" had been expressed at the potential impact of proposed rules on short selling and the Volcker Rule.
The later initiative, named after former Federal Reserve Chairman Paul Volcker, aims to prevent banks from carrying out speculative trades for their own profit and is designed to stop banks from taking risks with customer deposits. Analysts said this could make it difficult for banks to operate as market makers for sovereign debt, because trading desks often buy bonds at auction to sell on to clients at a later date. All banks with US operations would likely be affected.
One strategist who asked not to be named said the rule could restrict the type of positions market makers enter into. "If a market maker puts on a position in anticipation of customer flow, because you haven't got flow on the other side, there's a natural degree of running some risk while you're waiting for the other side to appear. The spirit of the Volcker Rule would seem to prevent such positions, which would make it impossible to be a market maker," the strategist said.
Japan's central bank and financial regulator have already told the US government they are worried that the Volcker Rule could hurt trading in Japanese government bonds, and urged the US authorities to exempt JGBs from the rule. Canada has also complained about the rule's impact.
The UK Treasury declined to comment on the record. Regulators and banks have until February 13 to submit their views on the Dodd-Frank law, of which the Volcker Rule is a component. Britain sells its government bonds via a network of 21 banks, or market makers, who earn their position by committing to buy a certain percentage of bonds at auction.