On 30 January 2014, the EU weighed in with its answer to the “too big to fail” dilemma. The Regulation on structural measures improving the resilience of EU credit institutions will introduce a Volcker-like ban on proprietary trading for selected banks. It will also give local regulators powers to require those banks to separate high-risk trading activities from their core deposit-taking and lending business.

Who will be affected?

The Regulation targets EU banks and parent undertakings identified as being of “global systemic importance” or exceeding a specified financial threshold. The threshold will be passed where the entity has total assets exceeding €30 billion and trading activities amounting to €70 billion, or 10% of assets, over three consecutive years. This calculation includes all branches and subsidiaries.

Third country (non-EU) subsidiaries with EU parents and EU branches of credit institutions with third country parents will not be subject to the Regulation if the European Commission decides that they are already bound by equivalent rules abroad.

Prohibition on proprietary trading

Proprietary trading in financial instruments and commodities will be prohibited for affected credit institutions. Such institutions will also be prevented from investing in:

  • Alternative investment funds
  • Investment products referencing such funds
  • Entities engaging in proprietary trading
  • Entities investing in alternative investment funds

However, targeted banks will be permitted to invest in unleveraged and close-ended funds, for example, private equity and venture capital funds.

Whilst a ban on proprietary trading may sound similar to the Volcker proposals in the United States, the EU has defined proprietary trading in a much narrower way. Volcker bans proprietary trading generally, but the European equivalent prohibits such trading only where it takes place though units or individuals dedicated to entering transactions for the sole purpose of making a profit on the bank’s own account.

Notably, banks caught by the Regulation will still be able trade EU government bonds and buy and sell money market instruments for cash-management purposes.

Separation of trading activities

To avoid the risk that banks will continue to engage in proprietary trading disguised through other transactions, competent authorities in member states must monitor, and will be given the power to require the separation of, other high-risk trading activities. Market making, securitisation and trading in derivatives, if not done for risk-management purposes, are specifically mentioned by the Regulation in this regard.

In assessing trading activities, competent authorities will be required to use certain metrics, including the relative:

  • Size of trading assets
  • Leverage of trading assets
  • Importance of counterparty risk
  • Complexity of trading derivatives
  • Profitability of trading income
  • Importance of market risk
  • Interconnectedness
  • Credit and liquidity risk arising from commitments and guarantees

The European Commission will specify certain limits and conditions relating to the above metrics. In addition to considering these factors, the relevant authority will assess whether there is a threat to the financial stability of the firm in question or the EU financial system as a whole. Following a decision by a national authority that separation should occur, a firm will have six months to submit a separation plan.

As the UK has already introduced ring-fencing provisions through the Banking Reform Act 2013, the European Commission is widely expected to grant the UK a derogation from the separation rules.

Reporting and transparency

Alongside its proposals for structural reform, the EU published further proposals on the reporting and transparency of securities financing transactions (STFs). This regulation is aimed at improving the transparency of shadow banking activities and monitoring STFs to manage the systemic risk inherent in their use.


The proprietary trading ban is due to apply from 1 January 2017, with separation of other trading activities from 1 July 2018.