December 10, 2013 6:10 pm

Ringfence fails to halt French trades

Outside the US, France is the country that has got closest to Volcker rule limits on banks betting on securities with their own money.

France in the summer passed a banking reform law that requires its banks to conduct such proprietary trading via a ringfenced subsidiary.

The French law, which also involves a clampdown on high-frequency trading and dealing in commodity derivatives, was an attempt to front-run planned EU-wide legislation stemming from the so-called Liikanen review.

That report, authored by a committee chaired by Finnish central bank governor Erkki Liikanen, went further than the French reform, recommending a complete split between banks’ core lending operations and their entire trading activities, not just their proprietary business. But the reform effort appears to have stalled during its passage through the European Commission bureaucracy, following vocal opposition, particularly from French and German banks.

The French rule, as it stands, is seen by some as a soft-touch compromise, which does little to change the status quo. Marco Mazzuchelli, a member of the Liikanen committee and now a senior banker at Switzerland’s Julius Baer, says: “The French approach, like the Volcker approach, is conceptually wrong. All trading activity has got to be addressed. That’s where the risk is, not just in prop trading.”

Even after the French rule change, banks there still have large trading operations in their main operating businesses. While bankers insist such holdings constitute essential market-making to fulfil client orders or hedge other exposures, critics say the banks are prop trading by another name. “Some of these [interest rate] swaps books are huge with mismatched maturities,” says Mr Mazzuchelli.

Germany has gone down a similar route to France, though its initiative is less advanced.

The UK has chosen a different route altogether. Within the coming weeks, legislation is set to be finalised which will implement the recommendations of the Vickers commission, including its centrepiece ringfencing rule which forces banks to put special safeguards around their high-street operations to protect them from investment bank activities including prop trading.

The rule will have far-reaching consequences for the structure of Britain’s universal banks, which combine retail and investment banking under one roof. Though the law will give banks until 2018 to comply, preparations are already under way. The Financial Times reported this week that HSBC had sounded out investors about the idea of floating its UK subsidiary, as bosses consider the merit of going further than the rules demand.

US policy makers remain convinced, however, that their crackdown is tougher than anyone else’s. Mark van der Weide, a senior Federal Reserve official, said the UK’s Vickers rules and the EU’s Liikanen proposal, both do “far less than what the Volcker rule would do”.

Additional reporting by Tom Braithwaite in New York

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