In the wake of the U.S. financial collapse in 2008, Canadian banks -- which were largely spared the devastation in the U.S. -- were lauded as an example of a properly regulated banking industry. One of the people praising Canadian finance was Paul Volcker, the former head of the Federal Reserve.

But it seems Canadian financial institutions don’t feel the same way about Volcker -- or at least the financial reform named after him.

The “Volcker Rule,” a core part of the U.S.’s financial reform package passed last year, would limit the ability of U.S. banks to engage in proprietary trading -- buying and selling financial instruments for their own benefit. (Banks would still be allowed to trade on behalf of clients.)

That has many in Canada’s financial industry evidently upset. In a letter to U.S. government officials sent last month, the Investment Industry Association of Canada argued that the Volcker Rule could potentially destabilize Canada’s financial sector by making it harder to trade government debt and to take actions that minimize risk.

Canadian banks engage in the sort of proprietary trading that the Volcker Rule would prohibit. And because of the deep ties between the U.S. and Canadian financial industries -- with a significant portion of trading in Canadian securities taking place using U.S. infrastructure -- the rule would apply to Canadian transactions and institutions, the letter explained.

That could essentially force the Volcker Rule on Canada, where no such legislation is in the works.

The IIAC argued that the rule amounts to an “extra-territorial” expansion of U.S. regulating activity into Canada. And it hinted at a possible challenge to the law under NAFTA rules.

“The Volcker Rule will clearly interfere and raise the costs of cross-border dealing in Canadian securities. As a result, the Volcker Rule may contravene the NAFTA trade agreement,” the letter stated.

That has some critics upset at what they see as an attempt by Canadian banks to interfere in U.S. legislation.

“The Investment Industry Association of Canada perfectly illustrates how ‘trade’ agreements can reach inside nations' borders and interfere with public interest regulations that have nothing to do with the flow of goods between countries,” writes Travis McArthur at Public Citizen. “Since NAFTA was enacted, bankers have gotten much more aggressive in their attempts to block regulation through trade deals. For example, the Korea FTA, passed by Congress in October, included much worse restrictions on financial sector regulations than NAFTA. On top of that, the General Agreement on Trade in Services of the WTO has its own set of rules that conflict with policies on capital controls, bans on risky financial services, size limits on banks, and ‘firewalls’ between banking and investment services.”

In a separate letter, also sent last month, the Office of the Superintendent of Financial Institutions, which answers to Canada’s finance minister, asked U.S. regulators for an exemption to the Volcker Rule for trade in Canadian government debt. Such an exemption exists in the rule for U.S. government debt, but not that of foreign countries.

Not exempting foreign countries “would undermine the liquidity of government debt markets outside of the US and could significantly impede the ability of foreign banks to efficiently manage their liquidity and funding requirements at an enterprise­ wide level,” the letter stated.

The Volcker Rule was passed as part of the Dodd-Frank Act last summer. It’s set to go into effect in July, 2012.

The U.S. had a rule similar to Volcker for six decades as part of the Glass-Steagall Act, a financial reform law passed in the 1930s in the wake of the Great Depression. It was repealed under the Clinton administration in 1999. Many economists argue that its repeal allowed U.S. banks to engage in the risky behaviour that caused the 2008 financial collapse.

Canada does not have a Volcker Rule, nor is it likely to get one.

“The proprietary trading done by the Canadian banks has not as yet created a financial problem in Canada,” David Peters and Douglas Peters, two leading Canadian economists, wrote last year.

They concluded that “at this time it would seem that the Volcker Rule as applied in the U.S. would not be something Canada should adopt.”

RELATED: U.K. APPROVES BANK REFORMS SIMILAR TO VOLCKER RULE