Largest EU banks to be banned from investing in hedge funds

The 30 or so largest banks in the European Union (EU) could be barred from proprietary trading or investing in hedge funds by 2018.

The ban on banks trading with their own money is part of plans drafted by Michel Barnier, the EU financial services chief, and could be implemented from 2018, according to Bloomberg News and Reuters, with each obtaining a copy of the draft.

The move would affect all EU banks that are considered systemically important or pass certain financial thresholds, and the ban could be extended to other institutions if ‘deemed necessary on financial stability considerations’ Bloomberg reports, quoting the document.

‘Desks, units, divisions or individual traders specifically dedicated to taking positions [of] making a profit for [their] own account, without any connection to customer activity or hedging the entity’s risk, would be prohibited,’ Reuters cites the document as saying.

The ban on investing in hedge funds is meant to prevent the banks from skirting the ban on proprietary trading. The banks would also be prohibited from investing in entities that sponsor hedge funds and from lending to private equity funds.

Regulators may also decide by 2018 to oblige some banks to split off their trading activities into separately capitalized units, the document states. As a further measure, the document notes that regulators would require greater transparency in securities financing transactions such as repurchase agreements (repos).

The measures are meant to reduce risks in European financial institutions and would mainly affect institutions with total assets of €30 bn ($40 bn) or more, according to Reuters. The news agency reports that Barclays, BNP Paribas and Deutsche Bank would be among the institutions affected.

The move comes after the US approved the Volcker Rule ‒ scheduled to take effect in July ‒ which bars the main banks in the country from proprietary trading. Banks are challenging the Volcker Rule in court.