Canada Bond Traders Worry Over Unclear Costs of New Regulations

New rules that require banks to hold more capital on their books are making Canadian bond traders uneasy about the possible rising costs of their business.

“We’re bombarded with all these rules changes and we need to evolve and adapt,” Martin Bellefeuille, managing director and head of fixed-income trading at Desjardins Securities, said at the Bloomberg Canadian Fixed Income conference Tuesday in New York. “There are some questions, I’ll say candidly, we don’t have answers to. And as a dealer, we have to know what the costs of these changes are.”

Global regulators introduced stricter rules for banks in the wake of the 2008 financial crisis, which saw some lenders fail due to insufficient funding and liquidity. While Canadian banks remained relatively unscathed, they are following regulations put in place elsewhere, such as higher capital requirements.

“We’re all at different levels of discovering how much capital each business line uses and what’s the cost of that capital,” David Duggan, managing director fixed income and head of rates trading and sales at National Bank of Canada, said at the conference.

The capital requirement, known as the net stable funding ratio, is part of the Basel III global financial regulations aimed at stabilizing the financial system. Banks will be required to maintain stable long-term funding greater than the value of assets and balance-sheet activities, such as bond trading.

But making it more expensive for banks to hold securities by raising capital requirements is “the real inhibitor” of the trading business, said Fredrik Nilsson, managing director and global head of fixed income trading at the Bank of Nova Scotia.

“It materially increases the costs of business, it materially increases the cost of holding inventory,” Nilsson said.