NEW YORK (

TheStreet

) -- Canada's bank regulator has joined the country's largest banks in opposing provisions of the Volcker Rule that would restrict proprietary trading of non-U.S. sovereign debt, arguing such a move could threaten the stability of economies outside the U.S.

The regulator "would not wish to see U.S. regulators taking actions that may enhance the stability of their financial system at the cost of undermining the stability of other systems around the world," wrote Julie Dickson, head of the Office of the Superintendent of Financial Institutions Canada (OSFI), in a letter to U.S. financial regulators Wednesday.

Canadian bank regulatory chief Julie Dickson

OSFI is concerned that the draft regulations of the Volcker Rule "may have the unintended consequence of significantly impeding Canadian and other foreign financial institutions' ability to manage their risks in a cost-effective manner, which could give rise to prudential concerns in Canada and abroad," according to the letter, which was sent to the U.S. Treasury Dept., the

Federal Reserve

, the Federal Deposit Insurance Corp. and the Securities and Exchange Commission.

The letter notes that Canada's financial institutions rely heavily on "US-owned financial system infrastructure," for example clearing trades through the Depository Trust and Clearing Corp. or using U.S. exchanges for Canadian dollar futures and options trades.

It also makes the case that foreign banks "play important market-making roles in the trading of government securities in their home jurisdictions," while also relying on those securities "to efficiently manage their liquidity and funding requirements at a global enterprise-wide level."

While placing broad restrictions on banks' proprietary trading, the Volcker Rule, one of the most controversial parts of last year's landmark Dodd Frank Financial Reform legislation, would allow such trading in U.S. government securities. In seeking comment on the proposed rule, U.S. regulators asked whether U.S. agencies should adopt similar exemptions for foreign sovereign debt and/or the debt of international and multinational development banks.

Dickson's letter was published a week after a more sharply-worded missive from Canadian banks' main trade group, the Investment Industry Association of Canada, which argues "the Volcker Rule may contravene the NAFTA trade agreement," because it "will clearly interfere and raise the costs of cross-border dealing in Canadian securities."

The Canadian letters have caught the attention of U.S. banks such as

Goldman Sachs

(GS) - Get Report

,

Morgan Stanley

(MS) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

,

Citigroup

(C) - Get Report

and

Bank of America

(BAC) - Get Report

which want as many allies as they can find in opposing the Volcker Rule, which they believe will put a severe dent in their profitability.

"If they were to be implemented exactly as they were written they will force the U.S. banks to virtually dismantle their international fixed income businesses and really require a major change

in corporate bond trading within the United States," Hintz told

Bloomberg Television

Friday.

While Hintz sees a possibility for a change in the rules, he also notes a major obstacle.

"It's an election year, and Goldman Sachs is not the most popular company that I can think of," he says. "How powerful is Wall Street on Capitol Hill right now? I don't think it's very powerful at all."

--

Written by Dan Freed in New York

.

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