Canadian banking regulators are lobbying U.S. regulators over the impact of the so-called Volcker Rule, which aims to restrict banks’ proprietary trading and private equity operations.
In a letter to the U.S. Treasury’s Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corp., and the Securities and Exchange Commission, Canadian regulators say that while they support the objective of the rule — to prevent banks’ trading activities from posing a threat to bank solvency and financial system stability — the proposed restrictions could also hinder the risk management practices of foreign banks, and hurt the liquidity of certain markets.
The Office of the Superintendent of Financial Institutions says it is concerned that “the current draft of the proposed restrictions could inadvertently hinder the ability of foreign financial institutions to efficiently manage their risks, thereby potentially undermining the financial condition of those entities and the systemic stability of foreign financial systems.”
“This is an especially acute concern for Canadian banks and the Canadian financial system more broadly given the deep inter-linkages that have existed for many decades between the Canadian and US financial systems,” it notes, pointing out that Canadian financial institutions use US-owned infrastructure to conduct financial transactions in support of their market-making activities in Canada, and in their risk management activities generally.
OSFI says it’s worried that the draft regulations “may have the unintended consequence of significantly impeding Canadian and other foreign financial institutions’ ability to manage their risks in a cost-effective manner, which could give rise to prudential concerns in Canada and abroad. In other words, OSFI would not wish to see US regulators taking actions that may enhance the stability of their financial system at the cost of undermining the stability of other systems around the world.”
It also suggests that the rule could undermine the ability of foreign banks to efficiently manage their liquidity. It calls for the U.S. regulators to provide exemptions from the restrictions on proprietary trading to foreign government securities, at least for banks based outside of the U.S., saying that without an exemption, the rule could undermine the liquidity of government debt markets outside of the U.S., and “could significantly impede the ability of foreign banks to efficiently manage their liquidity and funding requirements at an enterprise-wide level.”
“When implementing reforms like the Volcker Rule it is important to not only focus on the implications for the U.S. financial system, but also to take care that these restrictions do not give rise to prudential issues for other jurisdictions,” it concludes.
In addition to OSFI, industry lobby groups, the Canadian Bankers Association and the Investment Industry Association of Canada, have also submitted comments on the proposal. The IIAC also calls for U.S. authorities to extend an exemption to foreign government securities, and also suggests that the rule would impose extraordinary compliance burdens on foreign firms, and says that it may violate NAFTA. It requested a 90-day extension in the rule’s comment period.
The CBA echoes OSFI’s concerns about the rule’s impact on market liquidity, and also worries about the possible impact on futures and swaps markets under a forthcoming proposal from the Commodity Futures Trading Commission; and, it too, calls for a 90-day extension.
The Volcker rule is scheduled to be implemented in July. In late December, U.S. regulators extended the comment period on the proposed rule by 30 days until February 13.