Earlier this year, the European Commission published a proposed regulation on the structural reform of EU banks which aims to “stop the biggest and most complex banks from engaging in the risky activity of proprietary trading”. The proposed regulation originates from the report published by a high-level expert group chaired by Erkki Liikanen (governor of the Bank of Finland) and is also based on already existent national rules in certain Member States, the global think on the issue arising from the Financial Stability Board Principles, and on developments in other jurisdictions.

The proposed regulation, which is seen as the “final cog in the wheel to complete the regulatory overhaul of the European banking system”, shall apply to a small number of very large banks which otherwise might still be “too-big-to-fail, too-costly-to-save and too-complex-to-resolve”. In essence, the proposed regulation will apply to the the largest EU banks and groups, that is, those that are identified as global systemically important banks for the purposes of the Capital Requirements Directive. The Commission estimates that circa 29 EU banks may be caught by this proposed regulation.

The main proposals of the regulation are to:

  1. Ban proprietary trading in financial instruments and commodities, applicable from January 2017. The term ‘proprietary trading’ is drafted very narrowly, and entails those risks where there are no tangible benefits for the bank’s clients or the wider economy;
  2. Grant supervisors the power and, in certain instances, the obligation, to require the transfer of other high-risk trading activities to separate legal trading entities within the group, applicable from January 2018; and
  3. Provide rules on the economic, legal, governance, and operational links between the separated trading entity and the rest of the banking group.

In order to prevent banks from attempting to circumvent this proposed regulation by shifting their activities to the less regulated shadow banking sector, the Commission has also adopted accompanying measures aimed at increasing transparency of certain transactions in the shadow banking sector (that is, the proposed regulation on reporting and transparency of securities financing transactions. For more information on the proposed EU regulation regarding reporting and transparency of securities financing transactions please click here).

At this stage the Commission’s publication is merely a proposal, and would have to be approved both by the European Parliament and the Council prior to being adopted.

A copy of the proposed regulation can be found by clicking here.