International banks have stepped up talks with Toronto business and government groups about moving some trading operations from New York to the Canadian city to avoid the reach of the Volcker rule, according to financial-industry leaders in the US and Canada.
The Volcker rule, part of the Dodd-Frank Act, would prohibit US banks with federally insured from trading for their own benefit. It would also require international banks with US trading teams to meet 17 metrics daily assuring regulators they're not involved in proprietary trading.
To avoid that burden, foreign banks are looking hard at moving operations to a city outside the US, in a similar time zone, so they can more seamlessly continue operations during the American continents' trading cycle, according to Bloomberg's Financial Regulation newsletter.
"We're having conversations we weren't having a year ago, and we're hearing from companies that might not have given us time before — international banks, US banks with global operations," said Janet Ecker, president of the Toronto Financial Services Alliance, a group of firms and government agencies working to make the city a global financial hub. The discussions likely reflect banks' concerns over Volcker's trading and fund-investing restrictions scheduled to take effect July 21. Federal Reserve Chairman Ben Bernanke said on February 29 that regulators probably won't have the rule ready by July, though no new deadline has been announced.
The conversations involve "strategic discussions companies are having about where they want to go and what they want to move," Ecker said in a telephone interview.
Wayne Abernathy, executive vice president for financial institutions and regulatory affairs at the American Bankers Association, said shifting operations from New York to Toronto would mean "good, high-paying jobs would leave the US".
"Given today's technology, creating the kind of infrastructure you'd need for Toronto to work would be much less onerous than it might have been 20 years ago," Abernathy said in a telephone interview.
Because responsibility for trading migrates across continents during the business day, financial institutions pass their trading books across time zones to provide clients with service at any hour. In the Americas, many foreign institutions now pass their books to New York.
International banks, worried that Volcker's bookkeeping requirements would be too burdensome, long ago warned they might look at trading centres outside the US. Interviews with Ecker, US regulatory attorneys and the Institute of International Bankers indicate bankers are increasingly looking to Toronto as an alternative.
The financial services industry comprises nearly one-quarter of Toronto's GDP, with more than 330,000 jobs in the region directly or indirectly linked to the industry. Moody's Analytics recently predicted that by 2017, Toronto will become one of the largest global banking centres — overtaking London in the number of banking jobs. Moreover, the city is a 90-minute flight from New York.
"Toronto looks great because it has a very strong regulatory system," Sally Miller, IIB's chief executive officer, said in a telephone interview. "It's not like you're moving stuff to a place that doesn't have rigorous banking oversight. So that's another positive when you explain to the customer why you're doing this."
Large international banks contacted for this story didn't reply to requests for comment.
Donald Lamson, counsel with Shearman & Sterling LLP, said banks may be reluctant to discuss the issue publicly.
"If I'm thinking of moving my bank operations to Toronto or another city, I have to make sure my other trading counterparties are doing it, too," Lamson said in a telephone interview.