The largest banks in the European Union would face a “narrowly” defined ban on proprietary trading from 2018 under draft plans by Michel Barnier, the EU’s financial services chief.
Regulators would also have until then to gauge whether some banks should split off their trading activities into separately capitalized units, according to the European Commission document obtained by Bloomberg News.
Banks would be caught by the proprietary-trading ban if they are identified by regulators as “systemically important” at a global level or if they surpassed certain financial thresholds, according to the undated document. The EU blueprint also includes measures to boost transparency in the market for securities financing transactions such as repurchase agreements, or repos.
Barnier has pledged to propose bank-structure rules before the end of his mandate later this year, saying it’s a vital part of the EU’s fight against too-big-to-fail banks that has dominated his 5-year-term. The Frenchman has argued for EU-level measures responding to a flurry of national initiatives in the EU and the U.S., where regulators last year approved a proprietary trading ban, the Volcker Rule.
Senior European Parliament lawmakers have already rejected his approach, adding to the obstacles the proposals face before they could become law. A new cohort of lawmakers will enter the EU assembly in July following May elections.
“I see no point in bringing it out now,” Sharon Bowles, chairwoman of the parliament’s economic and monetary affairs committee, said in an e-mail. “Realistically I think the commission needs to hold back on this and consult again when there is a new commissioner.”
It’s “a great shame that it is so late -- it means it will not be examined by the MEPs that have worked on these and related issues in this mandate.”
Barnier intends to unveil his plans by the end of this month, Chantal Hughes, his spokeswoman, said in an e-mail, while declining to comment on the content of the proposals. The measures would need to be adopted by the parliament and national governments to become law.
On structural separation, regulators would have until June 2018 to take a first set of decisions on which banks should be forced to move trading activities into separately capitalized subsidiaries, with implementation of the step required by July 2020.
“The draft proposal does not attempt to choose between the different approaches to bank restructuring favored in the U.S. and the EU: it adopts both and in doing so creates a new approach that is consistent with neither,” Alexandria Carr, a regulatory lawyer at Mayer Brown LLP in London, said by e-mail.
This is an “issue both for global banks, which are already wondering whether it will be possible to create a single operational model that will satisfy the requirements of the different approaches, and also for national governments,” she said.
About 29 lenders would face the proprietary-trading ban foreseen in Barnier’s draft proposal, according to commission data provided in the document. Supervisors would be free to extend the ban to smaller banks if this was “deemed necessary on financial stability considerations.”
Banks not labeled as globally systemically important would still be covered by the EU measure if their assets are more than 30 billion euros ($41 billion) for three consecutive years and if, over the same time period, their total annual trading activities exceed 70 billion euros or 10 percent of total assets.
Earmarked lenders would be barred from investing in hedge funds, or in other entities that sponsor hedge funds, to prevent them from circumventing the proprietary-trading ban. Proprietary trading is when a firm trades for direct gain instead of commission from clients for processing trades.
Structures set up by banks “for buying and selling money market instruments for the purposes of cash management,” wouldn’t be captured. Neither would trading in government bonds, in order “to prevent possible negative consequences in these crucial markets.”
Advocates of proprietary-trading bans argue they will curb excessive risk-taking and make lenders focus more on serving the real economy.
Bank industry groups in the U.S. have responded by raising concerns over possible unintended consequences of the Volcker Rule.
Representatives of the Securities Industry and Financial Markets Association and other groups joined some lawmakers at a Washington hearing this week to warn that capital markets and job creation could take a hit from the measure.
While the EU’s possible ban on proprietary trading would cover only a small group of lenders, the rules on securities financing transactions, of SFTs, would apply to banks and traders throughout the 28-nation bloc.
The planned measures include a requirement for such activities to be logged with trade repositories, and also disclosure rules for when collateral provided in repurchase agreements and other SFTs is recycled in further trades, a process known as re-hypothecation.
“The counterparty receiving financial instruments as collateral will be allowed to re-hypothecate them only with the express consent” of the provider and “only after having them transfered to its own account,” according to the document.
This “will prevent that the same assets are simultaneously credited to different accounts” so “posing a risk to the financial system.”
Changes are needed to provisions in the text on structural separation of banks, including moves to better align the proposals with other initiatives to tackle too-big-to-fail banks, Bowles said.
Possible EU rules on how structural separation would affect banks’ deposit taking “seem to make it less compatible with Vickers,” she said, referring to U.K. measures stemming from the government-commissioned report led by John Vickers, former chairman of Britain’s Independent Commission on Banking.
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