The CME Group has warned that the proposed Volcker rule could impede the primary dealer system used by the US Treasury to sell government debt.
In a comment letter filed this week, Craig Donohue, chief executive of CME, the US’s largest futures market, wrote that the Volcker rule’s exemption for US Treasury debt did not go far enough by failing to extend to the use of Treasury derivatives such as futures and options contracts.
US lawmakers added the exemption to the Dodd-Frank Act in order to preserve the ability of US dealers, which include the largest US banks and non-banks, such as Jefferies, and foreign banks, such as RBS, to underwrite the regular sales of US government debt.
The US Treasury sells at least $160bn in coupon securities each month in order to fund the budget deficit and relies on the primary dealer system to purchase and distribute the debt to investors.
Mr Donohue wrote in a comment letter on Monday that the cash Treasury exemption should be extended, as “primary dealer banks rely heavily on the market for Treasury futures and options”.
Separately, the California Public Employees’ Retirement System Investment Office, or Calpers, the US’s largest pension fund, said that while it “strongly supports” Volcker, Treasury futures “are used by many market participants and primary dealers as hedging instruments”.
Morgan Stanley also called for the Treasury exemption to be extended to derivatives, saying “futures and derivatives are integral to the orderly functioning of the US government bond market”.
CME, which dominates the trading of Treasury futures and derivatives, said that without allowing banks to take proprietary bets on Treasury futures and options, usually in the form of short hedges, the result could be fewer bids for Treasuries at government auctions. It also raised the possibility that the status of primary dealers could be imperilled.
“The responsibility of a primary dealer bank [is] to stand ready at a moment’s notice to transact as a counterparty with the Federal Reserve Bank of New York,” wrote Mr Donohue. “Failure to participate …could result in [the Fed] withdrawing the bank’s primary dealer status.”
The New York Federal Reserve, which operates the primary dealer system on behalf of the Treasury, declined to comment.
The Treasuries exemption has also sparked a stream of letters from foreign governments such as the UK and Japan. They argue that the exemption would hand a liquidity advantage to US obligations that would not exist for other countries’ debts and raise their costs of borrowing.
Many foreign banks have called for the exemption to be struck from the law. The European Banking Federation wrote: “The exemption proposed has the potential to adversely affect the liquidity and pricing of EU and other countries’ sovereign debt.”
Goldman Sachs in its comment letter also warned that US banks may not be able to continue as primary dealers in other countries’ sovereign debts.
The bank said the Volcker rule’s exemption for market-making and underwriting may not be sufficient to “satisfy …obligations as primary dealers of sovereign debt in non-US jurisdictions where they may, for example, be required to purchase allotments even if they cannot be resold to customers in the near term”.
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