Is there any legislation or proposed legislation in your jurisdiction under which financial institutions are prohibited from dealing in investments as a principal?
The Law of 25th April 2014 on the status and supervision of credit institutions (New Banking Law) replaced the Banking Law of 22nd March 1993. The New Banking Law, among other things, prohibits Belgian credit institutions, as of 1st January 2015, from conducting certain proprietary trading activities, whether directly or through Belgian or foreign subsidiaries.
Proprietary trading activities which the credit institution is itself prohibited from engaging in must be conducted via a separate legal entity outside of the credit institution’s “consolidation perimeter” (i.e. the group or subgroup comprised of the credit institution and its Belgian and foreign subsidiaries), unless such activities fall under one of the exempted categories that relate to services rendered to clients or transactions deemed necessary to ensure sound and prudent management of liquidity or long-term investments.
To which financial institutions do the prohibitions relate?
The prohibition of proprietary trading applies to “credit institutions governed by Belgian law that collect deposits or issue debt securities that are covered by the Belgian deposit protection scheme” (Credit Institutions). The following entities are not considered as Credit Institutions for purposes of the New Banking Law: (1) the National Bank of Belgium (NBB); (2) the European Central Bank; (3) bpost; and (4) companies carrying out capitalization activities governed by the Law of 9th July 1975 on the supervision of insurance companies.
The prohibition also extends to all subsidiaries (Belgian and foreign) within the Credit Institution’s “consolidation perimeter”. The New Banking Law does not define the term “subsidiary”, but states that it will have the meaning ascribed to it in Royal Decrees implementing Article 106, §1 of the New Banking Law.
What exceptions to the ban on proprietary trading are contemplated by the legislation?
The proprietary trading prohibition relates to “trading in financial instruments using its own capital, within the framework of the trading book as defined in Article 4, § 1, 86) of Regulation (EU) No 575/2013”. Also treated as prohibited proprietary trading activities are operations and commitments for own account that are not adequately secured, concluded with (1) undertakings for collective investment with leverage or similar investment vehicles, or (2) undertakings for collective investment that have invested in or are exposed to one or more undertakings referred to in (1) beyond a certain threshold, as defined in the New Banking Law.
Other trading activity is permitted. In addition, subject to certain conditions, the New Banking Law contains a number of exemptions permitting otherwise prohibited transactions if they relate to the trading of financial instruments:
- for clients, for “market-making” purposes, or to cover the Credit Institutions’ own risk, to the extent the Credit Institution can demonstrate that these operations are necessary for it to fulfill its role as an intermediary with clients; or
- for purposes of sound and prudent liquidity management, or for long-term holding of such financial instruments, to the extent the Credit Institution can demonstrate that these operations are necessary for sound and prudent management of liquidity or the investments in question.
To benefit from the exemption, the above-mentioned operations must:
- Remain within the limit of the Credit Institution’s overall trading activities (whatever their nature): the Credit Institution’s trading portfolio cannot exceed 15% of its total assets and the capital required by this portfolio cannot exceed 10% of the Credit Institution’s total capital. If either of these thresholds is exceeded, additional capital will be required.
- Remain within the limits of risk and supervisory measures defined by the NBB Regulation of 1st April 2014 on proprietary trading activity. However, if these limits are not observed, the trading activity will only be prohibited if it exceeds a certain threshold. Such threshold will be defined by the supervisory authority (i.e. the NBB and, in the future, the European Central Bank in accordance with Regulation (EU) No 1024/2013) for each Credit Institution separately in compliance with the maximum threshold imposed by the New Banking Law, i.e. the capital required for market risks associated with the trading operation cannot exceed 1% of the Credit Institution’s total regulatory capital (although this limit may be adapted by Royal Decree based on the evolution of the needs of the real economy).
In addition, the supervisory authority may, under certain conditions, allow a Credit Institution to continue to carry on extinctive management of financial instruments portfolios that have been managed in this way before 1st January 2014.
Can any other entity within the relevant financial institution’s group of companies carry on the prohibited activity?
Assuming that a Belgian entity qualifies as a Credit Institution, the prohibition of proprietary trading will extend to all subsidiaries (Belgian and foreign) within the Credit Institution’s “consolidation perimeter”.
Prohibited proprietary trading activities within the Credit Institution’s “consolidation perimeter” must cease or be transferred to a “related undertaking” outside of the Credit Institution’s “consolidation perimeter”. If proprietary trading activities are transferred to a related undertaking governed by Belgian law, such undertaking must be approved as a stockbroking firm in accordance with the Law of 6th April 1995.
The New Banking Law does not define the term “related undertaking”, but states that it will have the meaning ascribed to it in Royal Decrees implementing Article 106, § 1 of the New Banking Law that are still to be published.
When will the proposed legislation come into effect?
The prohibition of proprietary trading activities will apply as of 1st January 2015. The New Banking Law entered into force on 7th May 2014.