Canada ramps up fight against Volcker rule

Mon Feb 13, 2012 11:48am EST
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By Louise Egan

OTTAWA (Reuters) - Canada stepped up pressure on Washington on Monday to rewrite its controversial Volcker rule to remove restrictions on Canadian bank activities that it says do not threaten the U.S. financial system.

Bank of Canada Governor Mark Carney, who is also chairman of the Financial Stability Board, a global watchdog set up by the Group of 20 nations, and Finance Minister Jim Flaherty laid out their complaints about the rule, included in the 2010 Dodd-Frank financial oversight law, in letters to their U.S. counterparts.

Canada's banks are so interconnected with U.S. financial system that the law's ban on proprietary trading would rob the Canadian government bond market of needed liquidity and hamper bank-sponsored hedge funds unnecessarily, they argued.

The draft rule targets activities that actually help strengthen Canada's financial system, they said.

"The Volcker rule as drafted would also potentially apply to Canadian banks' much larger Canadian operations, which pose no risk to U.S. taxpayers or U.S. financial stability," Flaherty wrote in his letter to U.S. Treasury Secretary Timothy Geithner.

"The Volcker rule could apply to transactions between Canadian banks that are simply facilitated by U.S.-based financial infrastructure, such as U.S. clearing houses. This could have unintended adverse consequences for the U.S. financial system," he wrote.

The rule prohibits banks that receive government backstops such as deposit insurance from making risky trades with their own funds.

It makes an exception for U.S. Treasuries. Canada has been one of the most outspoken countries requesting that the exemption be extended to their own government debt markets.   Continued...