Canada Seeks Volcker Rule Tweaks

Terry Flanagan

Exemptions needed for trading in non-U.S. securities, authorities say.

Implementation of the Volcker Rule holds implications for the global banking system, and U.S. authorities are being urged to consider these before adopting a final rule.

U.S. financial institutions and markets, and their supporting infrastructure, are deeply connected to the broader global financial system, said Julie Dickinson, head of the Office of the Superintendent of Financial Institutions Canada (OSFI, in a letter to U.S. banking and securities regulators.

“Indeed, in many cases they represent core segments for global financial intermediation,” said Dickinson. “Thus, 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.”

The Volcker Rule, as proposed by federal banking regulators and the SEC, prohibits banking entities from engaging in prop trading, i.e., in trading for their own account.

The proposed rule, whose comment period expires on Jan. 13, 2012, implements exemptions for underwriting and market making-related activities. For each of these permitted activities, the proposed rule provides a number of requirements that must be met in order for a banking entity to rely on the applicable exemption.

The Volcker Rule 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 U.S. financial systems, said Dickinson.

Canadian financial institutions use U.S.-owned infrastructure to conduct financial transactions in support of their market-making activities in Canada, and in their risk management activities more broadly in support of their Canadian and U.S. banking operations.

Examples include active reliance on the systems operated by The Depository Trust & Clearing Corporation (DTCC) for clearing and settlement of transactions involving US securities; regular use of U.S. financial exchanges for transacting futures and options derivatives involving both Canadian dollar and other currencies to manage financial risk exposures; and the ubiquity of other U.S.-owned infrastructure in global financial markets, such as Bloomberg and the custodial services provided by some major US banking groups.

OSFI said additional exemptions from the restrictions on proprietary trading should be given to foreign government securities, at least for banking groups whose parent bank is located outside of the U.S.

Many foreign banks play important market-making roles in the trading of government securities in their home jurisdictions.

They also actively rely on government securities of their home jurisdiction to efficiently manage their liquidity and funding requirements at a global enterprise-wide level, a practice that will be further reinforced in the future by new bank liquidity requirements that have been proposed by the Basel Committee on Banking Supervision.

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