Monday, March 19, 2012

Canadian Investment Industry Says Volcker Rule May Violate NAFTA

The Volcker Rule may contravene the NAFT A trade agreement, said the Canadian investment industry, since it will clearly interfere with and raise the costs of cross-border dealing in Canadian securities. In a letter to the SEC and other federal financial regulators crafting regulations implementing the Dodd-Frank Volcker Rule provisions, the Investment Industry Association of Canada said that the Volcker Rule also runs counter to G20 and Financial Stability Board objectives for coordinated policymaking across jurisdictions. The association urged the SEC to extend the proposed exemption from the proprietary trading prohibitions for U.S. Treasury bonds and U.S. state and municipal bonds to foreign government securities, particularly to the securities of Canadian federal and provincial governments.

The proposed Volcker Rule regulations imposing prohibitions on proprietary trading will adversely impact the liquidity and pricing of Canadian government securities for U.S., Canadian and other investors, said the association, and are an unprecedented reach of U.S. law to non-U.S. financial institutions and markets. In this regard, the Volcker regulations introduce uncertainty and costs in respect of the conduct of trading for foreign financial institutions that have a significant primary and secondary market presence in the United States.

The Volcker restrictions on proprietary dealing in Canadian government securities are of particular concern to the Canadian banks and investment industry. These government debt securities represent a relatively high proportion of overall securities market-making and principal dealing carried out by the affiliates of Canadian banks and dealers. The Volcker restrictions on proprietary trading, the limitations on the exemption in the proposed rule for market-making, and related compliance required to manage the distinction between client market-making and proprietary dealing, will result in more restrained market-making activity, interfering with the efficiency and liquidity of the traded marketplace.

For example, the Rule could influence the timing and accumulation of large blocks of securities to meet client purchase and sale orders, impacting the liquidity and pricing of large transactions. The damaging impact on market making activity would adversely affect the liquidity and pricing of Canadian debt for U.S., Canadian issuers and investors alike.

Moreover, in the view of the association, the application of the Volcker Rule to Canadian government securities is an unprecedented departure from existing regulatory treatment. U.S. regulators have taken the position that foreign broker-dealers that execute transactions for U.S. investors placed through a registered U.S. broker-dealer are subject to Canadian regulatory standards. There is nothing in the statutory text of the Volcker Rule or legislative history to suggest that Congress intended the SEC and federal banking agencies to depart from their long-standing approach to apply U.S. banking and securities law to cross-border transactions, said the association.

The extra-territorial application of these proposed compliance requirements appears to be quite extensive, said the association. It is realistically not feasible that a Canadian firm can limit compliance with these reporting requirements to the U.S. affiliates of the organization, or only to their U.S.-facing activities, reasoned the association, as the compliance requirements would be triggered whenever a U.S. counterpart participated in a trade.

Thus, a Canadian firm with U.S. operations may be required to implement the reporting and record-keeping requirements of the proposed regulations on a global basis, including all non-U.S. operations. While it is unclear how U.S. regulators would examine such compliance programs, noted the industry group, the compliance burden could be extensive and costly for Canadian firms, and may be inconsistent with home country laws.

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