Manuel Medina-Mora warned that the so-called Volcker rule, which forms part of the 2010 Dodd-Frank financial oversight law and bans banks from using their own funds to make risky trades, could prevent lenders from serving their clients.

The rule, named after U.S. economist and former Federal Reserve Chairman Paul Volcker, makes an exception for trades involving U.S. Treasuries.

Medina-Mora said this should be extended to other sovereign debt, which global banks use for liquidity provisions and managing their asset liabilities at a local level.

"We believe that trading in foreign sovereign debt should be exempted from the application of the Volcker rule," he told a financial conference on the sidelines of a G20 ministerial meeting in Mexico City.

"We are concerned that the adverse impact (of the rule) on the liquidity of foreign sovereign securities could impair the ability of banks to deal with their customers and manage risks."

"The implementation of the rule could have a significant impact on the conduct of monetary policy in many countries around the world," Medina-Mora said.

Some foreign regulators have already asked U.S. banking agencies to expand this exemption to include more sovereign debt, arguing that otherwise it could hurt trading in their bonds.

Bank of Canada Governor Mark Carney, who heads the Financial Stability Board, has called for the rule to be changed to exclude foreign sovereign debt.

So far, U.S. authorities have played down their concerns.

Mexico's top securities regulator also told conference delegates on Friday that he was worried about the issue.

"The extra-territorial aspects of the Volcker rule are quite detrimental," said Guillermo Babatz, head of Mexico's banking and securities commission.

Babatz said he is hearing complaints from banks about this aspect of the Volcker rule and he is concerned about it because many of Mexico's biggest banks are foreign subsidiaries of European and U.S. banks affected by the rule.

Citigroup's Banamex unit is Mexico's second-biggest bank by assets. The largest bank in Mexico is Spain's BBVA Bancomer and Spanish bank Santander is the country's third largest.

(Reporting By Daniel Flynn, additional reporting by Elinor Comlay; Editing by Chizu Nomiyama)

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