Following a report from the so called “Liikanen group” in October 2012, a proposal for a regulation on “structural measures improving the resilience of EU credit institutions” was released by the EU Commission on the 29th of January 2014.
The regulation has two main elements:
Ban on proprietary trading and investment in hedge funds
- Prohibition of proprietary trading
- Prohibition on owning, sponsoring or having exposure to hedge funds (defined as AIF’s using leverage)
Potential separation of “certain trading activities” from the credit institution.
- The competent supervisor decides whether “certain trading activities” need to be separated to prevent financial stress and systemic risk.
- The decision is based on a review of trading activities based on certain metrics. EBA will define the metrics and the EU Commission will decide on relevant limits for the metrics.
- Market making, securitisation and derivatives are mentioned as areas for review.
Institutions in scope for the regulation are all EU G-SIFIs and banks over a threshold of € 30 bn in total assets and trading activities of at least € 70 bn or 10% of total assets.
The Commission estimates that 30 European banks would be in scope for the regulation if it was to apply today, including 16 mid-size European banks and six Nordic banks, plus a handful of EU branches to US and Japanese banks. The Commission envisage that the first list of covered bank’s will be available in July 2016, and intend to update the list on an annual basis. (please note that this is does not mean that these banks are separated, it means they are in scope for ban of prop trading and for review of trading activities)Latest developments
Council and EP negotiations are ongoing. The Commission originally estimated mid 2015 for adoption of the regulation adn 2017 for finalisation of the first supervisory assessment, which is no longer possible.