Following the United States' lead in implementing the Volcker Rule, on January 29, 2014, the European Commission proposed a Regulation of the European Parliament and of the Council on structural measures improving the resilience of EU credit institutions.
Generally speaking, the proposed regulation aims at enhancing financial stability in the EU by means of structural reform of large banks. More specifically, and subject to certain thresholds and exceptions, the proposed regulation prohibits credit institutions and entities within the same group from (a) engaging in "proprietary trading" in financial instruments and commodities, or, (b) with their own capital or borrowed money and for the sole purpose of making a profit for their own account, (i) acquiring or retaining, directly or indirectly, units or shares of alternative investment funds (AIFs) or (ii) investing, directly or indirectly, in derivatives, certificates, indices or any other financial instrument the performance of which is linked to shares or units of AIFs. The proposed regulation would apply to EU credit institutions and their EU parents, their subsidiaries and branches, including those in non-EU countries, and 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 could be exempted from the prohibition if they are subject to a legal framework deemed to be equivalent to the proposed regulation.
In addition to the prohibition on proprietary trading, the proposed regulation provides that trading activities of a bank (i.e. market making, investing in and sponsoring risky securitisation and trading in certain derivatives) must be separated from the bank's non-trading activities (i.e. taking deposits that are eligible under the Deposit Guarantee Scheme, lending, financial leasing and money brokering, safekeeping and administration of securities) if the risks related to such activities are found to exceed certain thresholds and meet certain conditions linked to these metrics. Furthermore, a competent authority can require separation of a particular trading activity if it considers that the activity in question threatens the financial stability of the bank or the EU, taking into account the objectives of the proposed regulation.
Provided that the final text of the proposed regulation is adopted by the European Parliament and Council by June 2015, the prohibition on proprietary trading is scheduled to become effective on January 1, 2017 and the provisions relating to the separation of trading activities from credit institutions will become effective on January 1, 2018.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
