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Canadian banks to meet with U.S. regulators over Volcker rule

Bank towers in Toronto's financial district

Fred Lum/Fred Lum/The Globe and Mail

A group representing the Canadian banking sector is expected to meet in Washington next week with a group of U.S. regulators, including the Federal Reserve, to talk about the Volcker rule, according to sources.

The meeting comes as the Canadians, including the top financial regulator, Julie Dickson, have been campaigning for changes to the rule, which is a key part of the new regulations the U.S. is creating in an effort to prevent another financial crisis.

The U.S. Securities and Exchange Commission is also expected to be at the meeting.

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Ms. Dickson, who heads the Office of the Superintendent of Financial Institutions, wrote to U.S. authorities in December, saying "OSFI is concerned 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."

Bank of Canada Governor Mark Carney has warned that the Volcker rule could hurt the bond market in Canada and elsewhere because of restrictions it places on the trading of foreign government securities, including Canadian government bonds.

Canada's Big Five banks sent a letter to U.S. regulators two weeks ago, warning that proposed rules designed to limit the risks taken by major financial institutions may violate the two countries' free trade agreement.

The banks say the legislation in question – known as the Volcker rule – will also have serious, unintended consequences in the Canadian mutual fund market if changes aren't made.

U.S. regulators introduced the Volcker rule as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was drafted in the aftermath of the financial crisis. The key initiative was to limit the amount of risk banks take with client funds. Under the Volcker rule, U.S. deposit-taking banks are prevented from investing client money in hedge funds or private equity funds, and other speculative investments, in order to boost profit.

However, the Canadian banking sector argues the changes have unfair consequences for Canada, according to the joint letter sent Thursday by Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and Toronto-Dominion Bank.

Most important, they argue that Canadian banks deserve an exemption to continue operating their own mutual funds, which they say are safe investments. Exemptions have already been made to allow banks in the U.S. and other countries to invest in and operate mutual funds, but the current proposal fails to expressly exclude Canadian mutual funds from what the rule calls a "covered fund" – hedge funds, private equity funds and certain similar funds.

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Canadian banks are affected by the Volcker rule because they each have U.S. branch networks or capital-markets operations. The lack of an exemption for Canadian banks appears to be an oversight, albeit a serious one that has the banks worried if it isn't changed.

"Differing treatment between U.S. Public Funds and Canadian Public Funds directly contravenes NAFTA national treatment obligations," the letter says, referring to the North American free-trade agreement.

"U.S. banks will be able to continue to offer, sell, sponsor and maintain significant ownership interests in U.S. Public Funds globally without regard to the Volcker Rule, while banks that sponsor [Canadian mutual funds]will be unable to escape its restrictions no matter how limited their transactions with U.S. persons may be."

The letter is one of several sent by Canadian organizations recently to U.S. regulators about the changes. The Office of the Superintendent of Financial Institutions sent a letter warning the changes would have a detrimental impact on Canada.

The Volcker rule is named after former U.S. Federal Reserve chairman Paul Volcker, who designed the legislation in response to the credit crisis, as a way to keep banks from making speculative bets in the market that don't directly benefit their client base.

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