May 14, 2015 / 4:28 PM / 3 years ago

U.S. rejects Canada's claim that Volcker rule violates NAFTA

NEW YORK (Reuters) - The White House has dismissed the Canadian government’s claim that a ban on some proprietary trading on Wall Street violates a free-trade agreement, saying it has the legal right to protect its financial system.

Canada's Minister of Finance Joe Oliver departs after a news conference after a meeting of G-20 finance ministers and central bank governors during the IMF-World Bank annual meetings in Washington October 10, 2014. REUTERS/Jonathan Ernst

The U.S. response came after Canadian Finance Minister Joe Oliver said on Wednesday that the so-called Volcker rule’s ban on U.S. banks’ use of their own money to trade Canadian government bonds probably did not comply with the North American Free Trade Agreement.

The rule, adopted in 2010 but delayed in implementation, is meant to curb the risky proprietary trading blamed for worsening the 2007-2009 financial crisis, which led to bailouts of highly leveraged Wall Street banks by the U.S. government.

“The Volcker Rule is clearly not a violation of NAFTA or any other trade agreement, all of which explicitly safeguard the ability of the United States to protect the integrity and stability of our financial system,” a U.S. Treasury spokeswoman said in an email.

The “prudential” rule protects “taxpayers and the depth, liquidity, and stability of U.S. capital markets,” Treasury said. “NAFTA does not weaken our ability to implement Wall Street reform now or in the future, and neither would any trade agreement we’re negotiating.”

Sensitive to the politics of international trade pacts, U.S. President Barack Obama’s administration is embroiled in a battle with Congress to seal a trade deal known as the Trans-Pacific Partnership.

Under the Volcker rule, U.S. banks could not do proprietary trading of non-U.S. government debt, including Canadian sovereign bonds, unless they meet certain exceptions.

Canada is trying to retain a deep market of demand for its debt. Standard & Poor’s rates it AAA, higher than U.S. debt at AA+.

Oliver said in New York on Wednesday that the ratings should ease Americans’ concern over safety, and he saw a “strong legal basis” that Volcker violates NAFTA.

Canada could argue that the Volcker rule, which is named after former Federal Reserve Chairman Paul Volcker, is discriminatory in its treatment of foreign bonds. NAFTA, however, includes exemptions for prudential regulation meant to safeguard parts of the economy.

Oliver would not elaborate on how the rule violates the Canada-U.S.-Mexico trade deal but said he had met with U.S. Treasury Secretary Jack Lew to seek a Canadian exemption.

Oliver is a key member of Canada’s Conservative government, which faces a close election this year.

On Thursday, a spokeswoman said Oliver’s “comments stand.”

Reporting by Jonathan Spicer; Editing by Lisa Von Ahn

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