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The Resource for the Global Finance Profession

Flaherty: Volcker Rule Could Hinder Canadian Progress

  • By Andrew Deichler
  • Published: 2012-02-13

Canadian Finance Minister Jim Flaherty sent a letter to U.S. Treasury Secretary Timothy Geithner over concerns that the proposed Volcker Rule could hinder Canada’s post-crisis efforts to strengthen its financial system.

Although Flaherty supports the objectives of the Volcker Rule, he is concerned that it would have an “unprecedented extraterritorial reach and significant cross border effects” that would prove problematic for Canada, due to the relationship between the Canadian and U.S. financial systems. Flaherty is particularly troubled over the impact that the rule could have on the liquidity of Canadian government debt markets, as well as on the risk management practices of Canadian banks. He also fears that the rule could negatively affect Canadian bank-sponsored mutual funds.

Flaherty said he respects the right of U.S. regulators to extend new restrictions on U.S. bank activities to activities carried out by Canadian banks in the U.S. “However, 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,” he wrote. “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.”

Flaherty argues that this practice could have inadvertent consequences on the U.S. financial system. “For example, by imposing a high compliance burden on the use of U.S. financial infrastructure, the proposed Volcker rule could force foreign banks to clear and settle transactions in non-U.S. jurisdictions, or to avoid U.S. exchanges altogether,” he wrote.

The rule would also hinder Canadian bank-sponsored mutual funds’ ability to provide services to Canadian clients, Flaherty continued. According to the rule, Canadian mutual funds are considered to be on par with hedge funds and private equity funds, despite being inherently similar to U.S. mutual funds (which are exempt from the rule). If the rule remains as drafted, a Canadian covered banking entity could be barred from continuing to sponsor a fund if it has unit-holders in the U.S., even temporarily. “This would be inconsistent with the longstanding regulatory practice of the Securities and Exchange Commission to allow Canadian mutual funds to deal with Canadians temporarily resident in the U.S.,” Flaherty wrote.

Flaherty noted that Bank of Canada Governor Mark Carney, and the Superintendent of Financial Institutions, Julie Dickson, have also submitted comment letters to U.S. regulators over Volcker Rule concerns. The Investment Industry Association of Canada, the Canadian Bankers Association, and the asset management affiliates of Canada’s five largest banks have also commented on the rule. Flaherty urged the U.S. to carefully evaluate these comments.

“I am sure that it is possible to place limits on risk-taking within U.S. financial institutions and to reduce the potential risks to U.S. taxpayers without imposing significant constraints on the Canadian financial sector or conflicting with Canada’s own proven regulatory model,” wrote Flaherty.


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