Canada wants Volcker rule bonds exemption extended

DAVOS, Switzerland Jan 25 (Reuters) - Canadian and other major government bond markets should be exempted from the United States' controversial Volcker rule, Bank of Canada Governor Mark Carney said on Wednesday, upping the stakes in a growing row over the rule's impact overseas.

The Volcker rule, mandated by the 2010 Dodd-Frank financial oversight law, aims to restrict banks from engaging in speculative investments that do not benefit their customers, and will apply to foreign banks' U.S. subsidiaries as well as to domestic institutions.

However, there is growing concern from foreign governments - the issue has been raised in the UK, Japan and Canada - that the new rule and other parts of the Dodd Frank financial oversight law will give American regulators increasing jurisdiction over non-U.S. banks.

Carney expressed concern that U.S. Treasuries' exemption from the rule would create an unlevel playing field for government bond markets.

"We note with interest that the Volcker rule in the United States carves out the U.S. Treasury market," he told Reuters television.

"It doesn't carve out the Canadian government bond market, it doesn't carve out the Gilt market in the UK, the Bund market in Germany etc., but it reaches into those markets in terms of affecting what institutions potentially can do," he said.

"And we think that is at best inconsistent and quite probably unwise."

Asked if he would like to see this "carve out" extended to other markets, Carney replied: "That is a minimum of logic."

The Bank of Japan and Japan's banking regulator have also told the U.S government they are worried the Volcker rule could hurt trading in Japanese government bonds.

The measure also worries the primary bond dealers who dominate the market for Britain's borrowing.

Regulators released their Volcker rule proposal in October and are gathering feedback on the more than 350 questions that regulators posed to help them finalize the rule.

Supporters say the rule - named for former Federal Reserve Chairman Paul Volcker - will make the financial system safer and more stable.

Banks and the Chamber of Commerce have strenuously argued that the trading restrictions will have unintended consequences, because it will be hard to distinguish proprietary trading from trades that banks make for their customers' benefit.

If the Volcker rule accidentally cracks down on bank's "market making" trades, it could severely hurt liquidity and the economy, critics argue.

"We've had some discussions. We'll have more with our U.S. colleagues about it," Carney said. "This all happens in a long spirit of mutual cooperation between Canadian authorities and U.S. authorities, so I'd be confident that where this ends up will be good for both the U.S., for Canada and the global system."