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opinion

A long list of financial industry groups, law firms and academics have had something to say about draft federal legislation to create a new Canadian capital markets regulator.

By the time the comment period closed in December, the federal Finance department had logged roughly 70 responses, many of them critical.

Curiously, there was silence from Quebec and Alberta, two provinces that vigorously oppose the creation of a national securities regulator.

And yet Ottawa's plan to regulate "systemic risk" may have sweeping implications right across the country, reaching deep into activities, investments, trading platforms and a myriad of financial institutions. Even provinces and territories who aren't joining the national securities regulator could feel the long arm of the new regulator's powers.

This sets up potential conflicts between jurisdictions and raises the prospect of another constitutional showdown.

In 2011, the Supreme Court of Canada ruled that Ottawa had overstepped its bounds by trying to force a national securities regulator on the provinces. At the same time, the court recognized the federal government's key role in protecting against threats to financial stability – so-called systemic risks.

And that is precisely what Ottawa is aiming to do with its Capital Markets Stability Act and the companion legislation, the Provincial Capital Markets Act.

A key problem is that only five provinces are on board – Ontario, B.C., Saskatchewan, New Brunswick and tiny Prince Edward Island. If it's poorly managed, the new regime may create overlap, or worse, regulatory gaps.

And no one, it seems, knows precisely where the power of the existing regime ends and where systemic risk regulation begins.

"The concept of systemic risk is a broad power, not a narrow power," explained Anita Anand, a University of Toronto law professor and an expert in capital markets regulation.

"Once you start walking down the road of regulating in this area, there are any number of issues that can be put on the table at any time. It's very difficult to know what they are before they arise."

Would Ottawa's power to regulate systemic risk, for example, extend to some of the activities of iconic Quebec and Alberta institutions, such as the Caisse de dépôt, the Desjardins Group or Alberta Treasury Branches? Quebec and Alberta would almost certainly object.

Caisse spokesman Maxime Chagnon said the pension fund manager is "following the matter closely."

The federal government has no business looking into the activities of these organizations because they are not a source of systemic risk, according to Yvan Allaire, executive chairman of the Montreal-based Institute for Governance of Private and Public Organizations.

"What they are proposing is crazy," Mr. Allaire said. "The law is not required because what is vulnerable is being tightly regulated now at the federal level already."

One could make a strong case that the opposite is also true. If Ottawa can't regulate the activities of these organizations, it could severely impair its ability to fully protect against systemic risk.

The Canadian Bankers Association has warned that its members fear the work of the newly created Capital Markets Regulatory Authority may create potential conflicts with "non-participating provinces" and get in the way of existing oversight by the Bank of Canada and the federal Office of the Superintendent of Financial Institutions.

Likewise, three of Canada's largest pension fund managers – the Ontario Teachers' Pension Plan Board, Ontario Municipal Employees Retirement System and Healthcare of Ontario Pension Plan – are protesting the legislation as a needless and inappropriate intrusion into their operations.

Perhaps foreshadowing a potential showdown with Quebec, a blog post by law firm Blake Cassels & Graydon LLP characterized Ottawa's efforts to regulate systemic risk a "War Measures Act for Canada's Financial System."

Finance Minister Joe Oliver is pushing ahead. The government plans to issue regulations by the spring, enact legislation by the end of June and put the whole regime in place by the fall.

The government is an awkward spot. The 2008 financial crisis showed that risks to the system can be found in the most unexpected places. Mitigating those risks requires broad national powers.

But a chunk of the country isn't co-operating, setting the stage for either ineffective regulation, a fed-prov fight, or both.