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G20 Officials Really Want The U.S. To Water Down The Volcker Rule

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* Volcker rule criticized for unintended

* France, Italy optimistic US will consider their concerns

By Elinor Comlay

MEXICO CITY, Feb 26 (Reuters) - Finance officials from the Group of 20 economic powers expressed confidence that the United States could water down one of the centerpieces of its banking reforms, which critics see as a risk to debt markets and banks.

Senior G20 officials said they felt Washington was listening to their fears over the U.S. Volcker rule, which is designed to curb banks' trading for their own profit. It exempts trade in U.S. Treasuries, but not other countries' sovereign debt.

"The way it was initially formulated was a quite domestic vision, not global enough," said Bank of France governor Christian Noyer at the weekend meeting of G20 central bankers and finance ministry officials in Mexico City.

"This has been thoroughly explained to the United States... They perfectly understand the legitimacy of this reaction, which does not call into question the philosophy behind the rule."

The rule, named after former Federal Reserve Chairman Paul Volcker, aims to stop banks in the U.S. from taking risks with customer deposits. But Canadian, European and Mexican officials, among others, say that, as proposed, it could hurt trading in their government debt and potentially harm liquidity.

"There is a concern that it could have (an) unintended consequence, that it will restrict the traditional role that banks have played as go-betweens," a UK treasury official attending the G20 meetings said.

He added though, that "very constructive" talks were underway with U.S. officials and that the British government was "very confident" they would resolve matters successfully.

Bank of Italy Governor Ignazio Visco said he believes the United States will now look at ways in which the rule could be reworked to make it more fair internationally.

The International Monetary Fund said it was "very attentive" to the debate on the rule, but it has not taken a stand on it.

"We will look at the economic and financial consequences as we normally do," said IMF Managing Director Christine Lagarde.

In the final G20 communique there was no mention of the Volcker rule, part of the 2010 Dodd-Frank Act set of reforms. Proposed in October, it is scheduled to be implemented in July.


HARMING LIQUIDITY

At a conference organized by the Institute of International Finance that ran on Friday and Saturday in Mexico City, the Volcker Rule was a hot topic among speakers and attendees.

"It's clearly a rule that discriminates against all trading that takes place in sovereign debt that's not U.S. debt," said Luis Tellez, head of Mexico's stock exchange.

Bankers and non-U.S. regulators are also concerned about a dip in liquidity as a result of the rule.

One JPMorgan executive criticized the United States for trying to push it through despite the international concerns.

"It's playing with fire. You don't do that with medicine and you shouldn't do it with economic policy and financial regulation," said Jacob Frenkel, chairman of JPMorgan Chase International.

Canada's central bank governor Mark Carney, who heads the Financial Stability Board, in January called for the rule to be changed to exclude foreign sovereign debt.

Industry trade groups and big banks affected by the rule have in recent weeks bombarded regulators with comments, most of which were opposed to the proposal.

Regulators' next steps could include either adopting the rule or crafting a new one to put out for public comment again.

Even some U.S. regulatory officials are concerned.

"There is a considerable risk that as proposed, the regulatory infrastructure to implement the Volcker rule could unduly impede the competitiveness... of our financial markets and hinder the flow of capital," Republican SEC Commissioner Troy Paredes in Washington said on Friday.

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