The global propriety trading market is set to undergo major changes amid evolving regulations. Already, the United States has begun to tighten regulations. The European Union is considering an outright ban. In response, some banks are considering spin-offs and other measures to adjust to changing conditions. These movements could reshape the global financial system as banks are adapting to changing regulatory environments, and seize opportunities to expand operations in emerging markets.
Propriety trading refers to firms trading directly for profit, instead of trying to earn money off of commission. As investing directly in the stock market or another financial market involves a lot of risk, some believe that banks should not be allowed to trade directly. For this reason, some governments are now considering banning or regulating propriety trading. Government officials believe that doing so will make the financial system more stable and protect consumers.
Governments Beginning to Regulate Propriety Trading
Many people feel that banks were overexposed to investment markets when the 2008 financial crisis broke out. As a result, many banks nearly collapsed and governments were forced to intervene. Now, some governments are looking to make sure that a similar crisis does not happen again.
The United States has already restricted propriety trading through the recent adoption of the Volcker Rule. This extensive set of regulations, weighing in at over 900 pages, will restrict banks and their ability to invest directly in markets. Although there are numerous exceptions and loopholes.
While details have not yet been released, the European Union may be set to ban propriety trading all-together, at least for the continent’s largest banks. It appears that the regulations may exempt smaller banks. Either way, it’s expected that large banks can continue trading until at least 2020. This will soften the blow from increased regulations and give banks plenty of time to adjust their operations.
Banks Moving Propriety Trading Units
These developments in advanced economies may explain why some banks are looking for new countries to conduct trading in. Morgan Stanley, for example, has asked for permission from the Reserve Bank of India to conduct trading on its own accounts. Whether or not the Reserve Bank will approve remains to be seen, but if so it could set a precedence followed by other banks.
Meanwhile, some banks are looking to spin off their propriety trading units. The Royal Bank of Canada is currently considering a spin-off, largely in response to the Volcker Rule. At the center of the bank’s considerations is the Global Arbitrage Trading unit which contributes 1.5% of RBC’s revenues each year and has operations in North America, Europe, and Asia.
Most major banks are now working to understand the full implications of the changing regulatory environment. Besides the Royal Bank of Canada and a few other firms, however, most companies have not yet made any public statements. Regardless, any firm currently engaged in direct trading for profit will be looking to adjust and possible reshape its operations.
Future Uncertain for Propriety Trading
So far, the United States and Europe are taking the lead in increasing regulations. How major financial centers across Asia and the rest of the world will react remains unknown. It’s possible that regulators in these centers will follow suit and increase their own regulations. It’s also possible that regulations will allow banks to continue direct trading in these offshore financial centers, which could lead to banks moving operations overseas.
With the rapidly changing regulatory environment, the global financial system will likely evolve in the coming years. It’s possible that banks will shift away from direct investing, which could create opportunities for new companies to enter the market, or for existing trading firms to expand their operations. It’s also possible that banks will simply shift operations and investment units overseas. Either way, the coming years should see plenty of change and transition for the global propriety trading market.