The draft Regulation provides for a ban on proprietary trading for those EU banks that are within scope.
However, given the challenges derived from the difficult distinction between proprietary trading and other similar trading activities (for example market making) the Commission has adopted a narrow definition in article 5(4). The definition is as follows: “using own capital or borrowed money to take positions in any type of transaction to purchase, sell or otherwise acquire or dispose of any financial instrument or commodities for the sole purpose of making a profit for own account, and without any connection to actual or anticipated client activity or for the purpose of hedging the entity’s risk as a result of actual or anticipated client activity, through the use of desks, units, divisions or individual traders specifically dedicated to such position taking and profit making, including through dedicated web-based proprietary trading platforms.”
Article 6(2) provides that where an EU bank within scope operates dedicated structures for buying and selling money market instruments for the purposes of cash management, they will not be captured by the prohibition. Trading in EU government bonds is also exempt from the prohibition.
It is important to note that to prevent EU banks that are within the scope of the draft Regulation from circumventing the prohibition by, for example, owning or investing in hedge funds, article 6(1)(b) also prohibits them from investing in or holding shares in hedge funds (or certificates/derivatives linked to these), or entities that engage in proprietary trading or sponsor hedge funds. Unleveraged and closed ended funds are exempted from this prohibition.
Also, article 7 provides that EU banks within scope must ensure that their remuneration policies do not, directly or indirectly, encourage or reward the carrying out by any staff member of proprietary trading.