Examining the Extraterritorial Reach of Dodd-Frank’s Volcker Rule and Margin Rules for Uncleared Swaps — A Call for Regulatory Coordination and Cooperation

The Dodd-Frank Act regulates the global activities of US financial institutions in key areas of their businesses, and, to a limited extent, regulates the activities of non-US institutions conducting business in the USA as a condition of their licence. Regulating activities outside the USA, or extraterritorially, has become a controversial aspect of US financial regulation, in particular with respect to the Volcker rule and the proposed margin and other rules applicable to over-the-counter derivatives. Nevertheless, Dodd-Frank's approach to regulating these activities is consistent with both the recent Supreme Court case of NAB v Morrison, which struck down the conducts and effects test, as well as with international law. The US Congress' justification for extraterritorial application is that it is necessary to protect the safety and soundness of the US financial markets, and to insulate them from the contagion effects of the activities of non-US entities. However, significant concerns have been raised about the competitive impact of this approach on major US financial institutions whose activities will be more constrained than those of their foreign counterparts. In addition, in connection with the Volcker rule, foreign governments among others have raised concern about reduced liquidity in the sovereign debt market. The authors believe the concerns can be addressed through alternative approaches, such as mutual recognition, effective cooperation agreements among regulators, and in the case of the Volcker Rule, significant modification or repeal.