The European Commission has published a legislative proposal for a Regulation introducing structural reforms to the EU banking sector.
The proposed Regulation will apply to credit institutions' EU parents, their subsidiaries and branches, including in third countries. It will also apply to branches and subsidiaries in the EU of banks established in third countries. However, foreign subsidiaries of EU banks and EU branches of foreign banks might be exempted if they are subject to equivalent separation rules.
The impact assessment and the executive summary of the impact assessment also relate to the Commission's legislative proposal for a Regulation on reporting and transparency of securities financing transactions (SFTs), which was also published on 29 January 2014. That proposal is intended to enhance regulators' and investors' understanding of SFTs with the aim of preventing banks from circumventing the structural reforms by moving activities to the shadow banking sector.
Prohibition on proprietary trading
The Commission proposes that a credit institution within the scope of the Regulation and entities within the same group must not engage in proprietary trading in financial instruments and commodities. For these purposes “proprietary trading” covers activities specifically dedicated to taking positions for making a profit for own account, without any connection to client activity or hedging the entity's risk.
Credit institutions subject to the proprietary trading prohibition will also be prohibited from investing in or holding shares in hedge funds or entities that engage in proprietary trading or sponsor hedge funds. However, unleveraged and closed-ended funds, such as private equity, venture capital and social entrepreneurship funds, will be exempted from this prohibition.
Potential separation of trading activities
The Regulation permits credit institutions within its scope to engage in trading and investment banking activities, other than proprietary trading, at the discretion of their competent authority. The Regulation refers to these activities as “trading activities”, defined broadly as activities other than certain core banking activities, including taking deposits eligible to deposit guarantee scheme protection, lending and retail payment services.
Competent authorities will be obliged to review trading activities that exceed certain thresholds, including in particular activities that are considered to be close to proprietary trading, such as market making, or that played a key role during the financial crisis, such as investing and sponsor activities in risk securitisations and trading in certain derivatives.
The Commission proposes to adopt the final the final text of the Regulation by June 2015.