WASHINGTON - One definite impact that the Volcker Rule will have on the derivatives industry is in the commodities area, Federal Reserve Board Gov. David Tarullo said Thursday, although he stressed the amount of derivatives banks currently hold that will have to be "pushed out" is "relatively small."

During a hearing before the Senate Banking Committee, Tarullo was asked if the controversial Volcker Rule and its ban on proprietary trading would have any impact on currently high gasoline prices.

"The derivatives 'push out' rule is where you are probably going to see the effect here ... . I had mentioned earlier that there was a relatively small proportion of derivatives that would need to be pushed out of most national banks, but commodities is one of those areas," Tarullo told the committee.

"So if there is an effect, that's probably where you are going to see it," he said.

Posed the same question, Jacqueline Mesa, director of the Office of International Affairs at the Commodity Futures Trading Commission, said "given what is going on currently in the prices, it's no difference from normal practice that we have heightened surveillance in these markets." 

She added that the CFTC is making sure that regulation on an international scale is consistent "because oil markets are global."

Pressed on why the limits imposed by the CFTC on positions in the energy market have yet to be implemented, Mesa said the final rule indicated a year would pass before the rule takes effect.

With respect to the deadline for regulators to implement the Volcker Rule, Tarullo said "there is obviously a real possibility that we don't meet the July 21st date, although I personally think we should keep trying to do so."

If regulators are not going to have the rule ready by that date, "I think it's incumbent on the regulators to provide some guidance for firms to let them know exactly what the expectation will be and not let this hang out there as an unknown," he said.

"I think we should be able to do that if needed," Tarullo added.

As for the time needed by banks should the deadline be extended, Tarullo said the Fed has the authority to change the conformance period statute.

"I think we can deal with both issues here without legislation and will go ahead and do so," he said.

The Volcker Rule's ban on proprietary trading explicitly excludes market making, but Tarullo told the Senate panel that distinguishing that activity from prop trading "is not a straight forward one and is one that varies from instrument to instrument because of the different liquidity characteristics."

The ban in the Volcker Rule also covers sovereign bonds but exempts U.S. Treasury debt. Tarullo defended this exemption by stressing the important role played by U.S. government bonds -- not just between governments and financial institutions, but "the use of the instruments in a lot of regulatory apparatus."

This, he said, was the likely motivation for excluding Treasuries from the ban.

The purpose of the hearing was international coordination on financial regulatory reform, and Tarullo said the highest priority internationally with respect to derivatives should be the harmonization of margin rules.

"And at least as of this moment, I have not detected any important divergence in the potential views of countries as to how they would apply those rules," he said.

He did note, however that the U.S. continues to set the pace in implementing regulatory reform, while the rate of progress varies among other jurisdictions.

"The Europeans are probably closest to us, but they too are somewhat behind," Tarullo said.

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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