Is there any legislation or proposed legislation in your jurisdiction under which financial institutions are prohibited from dealing in investments as a principal?

In Australia there is no prohibition on financial institutions (FIs) dealing in investments as a principal. However, dealing in investments by FIs is regulated by a combination of bank, securities and market regulation, and supervision.

FIs that are authoried deposit-taking institutions (ADIs) (principally banks, credit unions or similar organisations) are regulated by the Australian Prudential Regulation Authority (APRA), both in regards to prudential capital, conduct and risk. Whether as a principal or otherwise the APRA regulation includes an ADI’s activities in dealing in investments, such as debt or equity securities, derivatives or other financial products (financial product, as defined under the Australian Corporations Act 2001). Where an FI is not an ADI, for example, if it is a trustee of a mortgage trust or an issuer of, or counterparty to, a financial product, or any dealing in a financial product in Australia, it is regulated by the Australian Securities and Investments Commission (ASIC) and not by APRA. The ASIC is also responsible for market supervision where a financial product is listed on the Australian Securities Exchange (ASX). Disclosure obligations under the ASX listing rules will also apply to any dealing in ASX-listed securities.

The following is a very brief summary of some regulatory and supervisory matters relevant to an FI that undertakes proprietary trading (it is not exhaustive).

APRA regulation

Under the Australian Banking Act 1959 (CTH), the APRA has power to make and enforce banking standards. The APRA has issued prudential standards and guidance notes in relation to capital, liquidity, operational risk, counterparty risk, outsourcing, funds management and securitization, covered bonds and other matters. They specify the systems and processes that ADIs need to have in place if they are holding proprietary and client trading book positions in financial products (these include actual and derivative positions in those products), and also the methods for calculating credit/counterparty risk and the prudential capital required to be allocated to cover those positions.

ASIC regulation

Where a party conducts financial services business in Australia, it will require a financial services licence issued by the ASIC. Where that party is an ADI and that business is regulated by the APRA and only conducted with wholesale clients, no licence is required. There are a range of other licensing exemptions that may apply; however, most ADIs hold a financial services licence because they conduct financial product transactions with retail clients. Those transactions may include proprietary trading. The ASIC’s licensing requirements include some basic capital (but not measured and managed as the APRA does, in an ongoing and dynamic fashion), fitness, conduct and reporting requirements. In its market supervision capacity, the ASIC deals with insider trading, short-selling and other aspects of market regulation that may affect an FI which is involved in proprietary trading. The ASIC also issues guidance and recommendations in relation to certain types of products and activities, for example, in late January 2014 the ASIC issued guidance relating to structured products.


Proprietary trading by FIs (or other parties) in ASX-listed securities (or derivatives relating to those securities which establish reportable positions) is subject to disclosure to the ASX. Market supervision of the ASX is the ASIC’s responsibility.

In this way, Australia’s prudential and financial services regulatory regime may be seen as achieving some of the aims of the Volcker Rule without an overt prohibition on proprietary trading or investments in hedge funds.

Potential changes

We note that in November 2013, the Australian Government announced a wide-ranging inquiry into Australia’s financial system. The Inquiry Panel is due to provide an interim report for consultation in September 2014 and a final report and recommendations in November 2014. The term of reference of the inquiry are broad but relevantly includes a review of financial regulation and risk in the financial system. It is unclear whether the inquiry will consider an Australian equivalent of the Volcker Rule.

To which financial institutions do the prohibitions relate?

There is no prohibition on proprietary trading. Please see our response in question 1 for Australia regarding the FIs to which different restrictions apply.

What exceptions to the ban on proprietary trading are contemplated by the legislation?

Not applicable as there is no legislation or prohibition on proprietary trading. Please see our response in question 1 for Australia regarding the FIs to which different restrictions apply.

Can any other entity within the relevant financial institution’s group of companies carry on the prohibited activity?

Depending on the terms of the particular standard, some restrictions apply on an ADI group-wide level and others are limited to the ADI entity itself.

When will the proposed legislation come into effect?

Not applicable as there is no legislation or prohibition on proprietary trading. Please see our response in question 1 for Australia regarding the FIs to which different restrictions apply.

Links to the proposed legislation and any other relevant material