Volcker Rule Violates NAFTA, Canada’s Oliver Wants Exemption

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The Volcker Rule, which restricts U.S. banks’ trading of foreign debt, violates the North American Free Trade Agreement and should be changed, Canada’s Finance Minister said.

Joe Oliver, speaking Wednesday in New York, called on the U.S. to grant Canada an exemption from the Volcker restrictions, citing the trade relationship between the two countries and Canada’s strong credit rating. The U.S. Treasury denied Oliver’s claim that the Volcker Rule violates Nafta.

While bilateral trade is strong, “there’s one avenue where American investors cannot enjoy the Canadian advantage and that is the ban on proprietary trading of non-U.S. government securities by U.S. banks, a policy known as the Volcker Rule,” Oliver told a U.S.-Canada securities summit.

“The Volcker Rule is clearly not a violation of NAFTA or any other trade agreement, all of which explicitly safeguard the ability of the United States to protect the integrity and stability of our financial system,” Suzanne Elio, a Treasury spokeswoman, said in an e-mail late Wednesday.

The Volcker Rule seeks to curb banks’ use of their own funds to make bets in capital markets. The measure, proposed by former Fed Chairman Paul Volcker, was part of a broad regulatory overhaul to prevent future crises at banks with stockpiles of deposits or whose collapse could damage the financial system.

‘Legal Basis’

“Our credit rating actually is better than the U.S. government, let alone its municipalities,” Oliver said. “And I also believe with a strong legal basis this rule violates the terms of the NAFTA agreement,” he said, declining to elaborate.

Standard & Poor’s rates Canada AAA, one level above its AA+ grade for the U.S.

The summit included a panel discussion on the impacts of the Volcker Rule, which took effect last month, although a “conformance” grace period on proprietary trading extends until July 21.

The rule restricts U.S. banks from proprietary trading of Canadian government debt. Oliver’s comments took aim at what he called a missed opportunity for U.S. investors -- signaling a concern that rules placed on U.S. banks could affect demand for Canadian bonds.

The rule is a “key prudential financial regulation that prohibits risky proprietary trading while protecting taxpayers and the depth, liquidity, and stability of U.S. capital markets,” Elio said in the e-mail.

The Volcker rule also places some restrictions on the U.S. operations of Canadian banks, Kate Payne, a spokeswoman for the Canadian Bankers Association, said in an e-mail.

Oliver has previously raised the issue with U.S. Treasury Secretary Jack Lew, most recently in a meeting in Davos earlier this year.

“I just wanted to raise the issue again because we believe it would be advantageous from a Canadian perspective to have more buying from U.S. banking institutions, and we clearly don’t believe there’s any additional credit risk posed by that,” Oliver told reporters after his speech.

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