This report discusses proprietary trading carried out by relevant authorised persons. It discusses the extent of this activity, the risks it poses to the safety and soundness of firms, the tools the 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 the PRA, are sufficient to mitigate the risks proprietary trading poses to financial stability and the safety and soundness of firms.
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, the PRA was required to review the case for further restrictions on proprietary trading within a year of the commencement of ring-fencing. The review could then be informed by the experience of other countries that had taken different approaches to the issue.
The report concludes that the PRA already has substantial supervisory powers which can be and are used to mitigate the risks created by proprietary trading in its various forms where appropriate, and hence that it does not need new powers to address the risks.
As mandated in the legislation, this report has been submitted to HM Treasury and laid before Parliament.