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Regulators would also have until then to gauge whether some banks should split off their trading activities into separately capitalised units, according to the European Commission document obtained by Bloomberg News. Banks would be caught by the proprietary-trading ban if they are identified by regulators as “systemically important” at a global level or if they surpassed certain financial thresholds, according to the undated document. The EU blueprint also includes measures to boost transparency in the market for securities financing transactions such as repurchase agreements, or repos.
About 29 lenders would face the proprietary-trading ban, according to commission data provided in the document. Supervisors would be free to extend the ban to smaller banks if this was “deemed necessary on financial stability considerations". Earmarked lenders would also be barred from investing in hedge funds, or in other entities that sponsor hedge funds, to prevent them from circumventing the proprietary trading ban.
While the EU’s possible ban on proprietary trading would cover only a small group of lenders, the rules on securities financing transactions, of SFTs, would apply to banks and traders throughout the 28-nation bloc. The planned measures include a requirement for such activities to be logged with trade repositories, and also disclosure rules for when collateral provided in repurchase agreements and other SFTs is recycled in further trades, a process known as re-hypothecation. “The counterparty receiving financial instruments as collateral will be allowed to re-hypothecate them only with the express consent” of the provider and “only after having them transfered to its own account", according to the document. This “will prevent that the same assets are simultaneously credited to different accounts” so “posing a risk to the financial system".