OTTAWA - A national securities regulator must be created because the smooth running of Canada's financial markets is critical to the overall economy, the federal government argued before the Supreme Court of Canada on Wednesday.

Regulating Canada's capital markets is of national importance, Robert Frater, a lawyer for the Attorney General, said in opening remarks as two days of hearings began on the constitutionality of Ottawa's proposed creation of a national securities regulator.

"The fact that the subject matter of this act affects the economy as a whole is something that we say every Canadian with a pension knows, that every Canadian that lost their job in the market meltdown in 2007 and 2008 knows, that every business that needs money to grows knows," Frater told the court.

"The type of comprehensive securities regulation that this act provides is not a narrow concern about securities trading."

Finance Minister Jim Flaherty is hoping the court will greenlight the constitutionality of having a single regulator governing the country's capital markets. However, several provinces are seeking to block the proposed legislation that would allow each province and territory to voluntarily opt-in to a federal regulatory scheme.

David Tavender, a lawyer for the Alberta government, warned that the federal government could, in future, amend the legislation to make a national regulator mandatory and take over the regulation of the financial markets.

"That threat is not idle," Tavender said.

Justice Rosalie Abella questioned the efficacy of the proposed legislation and its plan to allow provinces to opt in to a national regulator or maintain their current regulatory structure.

Chief Justice Beverley McLachlin also asked federal lawyers to explain the difference between the proposed legislation and the current structure, since the securities legislation in each of the provinces is very similar.

"Is there anything, any group, any issue that is covered by this legislation that is not currently covered by provincial securities commissions?" McLachlin asked.

Peter Hogg, another lawyer for the federal Attorney General, said no, but noted the provinces are limited to policing what happens within their borders.

"Ten provinces each regulating a piece of trade as a whole creates such a fragmented system the provinces are essentially incapable of fully regulating the system," he said.

Jean-Yves Bernard, a Quebec government lawyer, said the substance of the federal legislation was the same as the provincial laws.

"There's nothing in this proposed act that could not be passed by the provinces," Bernard told the panel of the nine justices.

In addition to Alberta and Quebec, British Columbia, Saskatchewan, Manitoba and New Brunswick are expected to present arguments that the securities markets should remain under provincial jurisdiction.

Only Ontario is firmly on side with the federal government, although smaller jurisdictions have been mostly willing to go along.

"The current system is outdated and inefficient," Ontario Premier Dalton McGuinty said Wednesday.

"When a business wants to have a securities transaction in different parts of Canada, they have to get multiple approvals. This raises the cost of investing in Canada, something that affects all of us. It's costing us jobs."

Ontario wants any new regulator to be located in the province, which McGuinty suggested is the "Wayne Gretzky" of Canadian financial players.

"When it comes to getting ice time and scoring goals in financial services, we're the strongest player on the team, so we should be on the ice when it comes to the location of a national securities regulator."

The legal issue is whether trading in securities is a matter of contractual, property and civil rights, or can be considered to come under the federal power to regulate matters of trade and commerce.

Alberta and Quebec have said that for Ottawa to take over what has been recognized for 80 years as provincial domain, it must pass a high threshold.

Both the Alberta and Quebec courts of appeal have rejected the federal government's proposal. The Alberta court said it has always been up to the provinces to regulate the professions, specific industries, some types of contracts and forms of property. In a split decision, the Quebec Court of Appeal pointed out that provincial jurisdiction in securities regulation has been recognized repeatedly for the last 80 years by various bodies, including the Supreme Court of Canada.

Canada is the only country in the G20 that does not have a national securities regulator.