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 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.

Financial Stability

About 29 lenders would face the proprietary-trading ban, according to European 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.”

Earmarked lenders would also 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.”

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.

Small Group

While the proprietary-trading ban 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.”

(Source: Bloomberg)