The PRA has published its Proprietary Trading Review (the Review) pursuant to section 9 of the Financial Services (Banking Reform) Act 2013 (the 2013 Act). The 2013 Act introduced a wide range of reforms affecting the financial sector, including the ring-fencing regime.

Background

At the time the 2013 Act came into force there was significant discussion in relation to whether the UK should introduce stronger restrictions or a ban on proprietary trading for UK banks and certain other UK firms (similar to the Volcker Rule in the US). Although strong restrictions on proprietary trading were introduced for ring-fenced banks, it was decided that a full ban on proprietary trading for all banks was not appropriate. Instead, it was decided that the PRA should undertake a review of proprietary trading following the introduction of the ring-fencing regime, focussing on a number of topics such as the risks involved in proprietary trading, the adequacy of the PRA’s powers and the effectiveness of overseas restrictions on proprietary trading.

Outcome of the Review

At its core, the Review assesses whether the PRA should be granted further powers in relation to, or whether further restrictions should otherwise be placed on, proprietary trading carried on by PRA authorised deposit takers and investment firms incorporated in the UK. In summary, the Review concludes that it is “the PRA’s view… that there is no compelling need for further powers”.

In reaching its conclusion, the Review makes reference to (among other things) the capital requirements attaching to any firms conducting proprietary trading, the additional restrictions on ring-fenced banks (the PRA found “no evidence of [classic proprietary trading] taking place in… the ring-fenced banks”), and the “substantial supervisory powers” of the PRA to mitigate the risks associated with proprietary trading (including supervisory powers and expectations in relation to controls, governance and risk management and senior management attestations). The Review also acknowledges that certain forms of proprietary trading (such as hedging) are important for banks’ risk management.

However, the PRA recognises that the global financial system is rapidly changing and innovating, and that new risks may emerge. The Review notes that “the PRA will continue to monitor a number of indicators that could indicate a growth in the risks arising from proprietary trading activity by relevant authorised persons, and will investigate if these show a substantially higher trend.”

Clive Cunningham
Clive Cunningham
Partner
+44 20 7466 2278
Mark Staley
Mark Staley
Senior Associate
+44 20 7466 7621
Harry Millerchip
Harry Millerchip
Associate
+44 20 7466 6447