PRA to Impose No Further Restrictions on Proprietary Trading by Banks
PRA published a report that reviews the extent of proprietary trading engaged in by PRA-authorized deposit takers and investment firms incorporated in UK. The report discusses the extent of the proprietary trading activity, the risks it poses to the safety and soundness of firms, the tools PRA has to mitigate these risks, and the experience of other countries in restricting proprietary trading within the banking sector. It also addresses whether the ring-fencing regime, together with the other tools available to PRA, are sufficient to mitigate the risks proprietary trading poses to financial stability and soundness of firms. The analysis concludes that, at present, no further restrictions ought to be imposed on proprietary trading by banks.
The report has been prepared pursuant to Section 9 of the Financial Services (Banking Reform) Act 2013. During the debates which preceded the 2013 Act, the question arose as to whether the UK should impose some form of ban on proprietary trading by all banks, as, for instance, the United States had with the Volcker Rule. Parliament took the view that there should be strong restrictions on proprietary risk-taking within ring-fenced banks, but that a complete ban for all banks was not justified by the evidence available at the time. Instead, PRA was required to review the case for further restrictions on proprietary trading within a year of the commencement of ring-fencing. As mandated in the legislation, this report has been submitted to HM Treasury and laid before Parliament. This report, which is a result of the mandated review, concludes that no further restrictions ought to be imposed on proprietary trading by banks.
The review also points out that PRA already has substantial supervisory powers for mitigating the risks created by proprietary trading in its various forms, where appropriate; therefore, it does not need new powers to address these risks. Different risks are addressed using different tools, including capital requirements, disclosure, supervisory expectations concerning controls, governance and risk management, and senior management attestation. The analysis also highlights that certain policy measures in the implementation phase will improve the treatment of some proprietary trading risks within banks. Prominently, the fundamental review of the trading book, being implemented as part of the Basel 3.1 package, will clarify the boundary between banks’ trading and banking books and will improve the capitalization of trading book risks. There is some risk that conditions may change to make proprietary trading, including classic proprietary trading, more attractive for firms within the banking sector once again. While this seems unlikely at present, it is possible. Thus, PRA will continue to monitor a number of indicators that could indicate a growth in the risks arising from proprietary trading activity by relevant authorized persons and will investigate if these show a substantially higher trend.
Related Links
Keywords: Europe, UK, Banking, Proprietary Trading, Volcker Rule, Credit Risk, Market Risk, Ring Fencing, Basel, PRA
Featured Experts

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.

Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Related Articles
ESAs Publish Reporting Templates for Financial Conglomerates
ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.
EBA Publishes Report on Asset Encumbrance of Banks in EU
EBA published the annual report on asset encumbrance of banks in EU.
US Agencies Publish Updates for Call Reports, FFIEC 101, and FR Y-9C
FED updated the reporting form and instructions for the FR Y-9C report on consolidated financial statements for holding companies.
EBA Proposes Guidelines for Establishing Intermediate Parent Entities
EBA issued a consultation paper on the guidelines on monitoring of the threshold and other procedural aspects of the establishment of intermediate EU parent undertakings, or IPUs, as laid down in the Capital Requirements Directive.
EC Adopts Financial Reporting Changes Arising from Benchmark Reforms
EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.
BIS Bulletin Examines Key Elements of Policy Response to Cyber Risk
BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.
HMT Updates List of Post-Brexit Equivalence Decisions in UK
HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.
EBA Issues Erratum for Technical Package on Reporting Framework 3.0
EBA published an erratum for technical package on phase 1 of the reporting framework 3.0.
APRA Publishes FAQ on Measurement of Credit Risk Weighted Assets
APRA updated a frequently asked question (FAQ), for authorized deposit-taking institutions, on the measurement of credit risk weighted assets.
ECB Letter Sets Out Strategies to Address Issue of Nonperforming Loans
ECB published a letter from Andrea Enria, the Chair of the Supervisory Board of ECB, answering questions raised by the President of the Bundestag (the German federal parliament) on how ECB assesses the financial stability of the euro area in the context of the significant level of nonperforming loans.