(Refiles to fix dateline to Nov 15, from Nov 14.)
* Rules to target proprietary, electronic trading - sources
* Uncertainty lingers over final draft law, subsequent vote
* Bankers still fear a hit to business, cost of funding
By Lionel Laurent and Matthias Blamont
PARIS, Nov 15 France is expected to reject tough
rules proposed by Europe to curb the riskier activities of
banks, after months of lobbying by the industry.
The draft rules to be unveiled next month will focus on
banks' proprietary, high-frequency and algorithmic trading,
sparing market-making - the buying and selling of securities on
behalf of clients, according to two sources briefed on the
"Market-making is not being considered as a risky or
speculative activity," one of the sources said.
French President Francois Hollande is therefore steering
towards rejecting a call by the European Union's Liikanen
Commission last month for most market-making and trading
activities to be ring-fenced from mainstream business.
Banks like BNP Paribas and Societe Generale
have been lobbying against any restrictions that could
give foreign rivals such as those in the U.S. an advantage.
Talks between banks and government officials ended this week.
Banks are concerned that the rules will add costs and
complexity at a time when the industry is only just recovering
from a year-long drive to restore investor confidence by selling
assets and cutting staff.
"We are convinced that (market-making) is something which is
a solid economic client-related activity...In our mind, what is
speculative is very limited," BNP Chief Financial Officer Lars
Machenil told analysts earlier this month.
Hollande, who swept to power in May on a promise to separate
banks' risky activities from those deemed useful to the economy,
is juggling rising unemployment and a slump in poll ratings as
he attempts to narrow France's deficit and lift competitiveness.
The government is due to unveil the final draft law in
mid-December and parliament could still change or reject the
"The government knows market-making is vital to the
economy," one of the sources said.
Proprietary trading, where banks take risks in financial
markets with their own money, is under the spotlight because it
can expose banks to big losses.
Around 5 to 10 percent of capital-markets revenue in 2011
was estimated to be proprietary-related at BNP and SocGen, the
two biggest investment banks in France. That is a combined 500
million euros to 1 billion euros ($635.6 million-$1.3 billion).
The banks have cut back proprietary trading in anticipation
of tougher rules.
The challenge is deciphering what is a proprietary trade and
what is a market-making position.
"I think the temptation for the regulators is to put it all
in the risky basket and then leave it up to the banks and their
lobbying efforts to see what to take out again," said Yohan
Salleron, fund manager at Mandarine Gestion in Paris.
Both BNP Paribas and Societe Generale earn an estimated 250
million euros in annual revenue from high-frequency trading,
which is also expected to be restricted as part of the draft
High-speed electronic trading is also being scrutinised by
regulators across the world after the "flash crash" of 2010 -
which saw U.S. stocks inexplicably sink in a matter of minutes -
and this year's near-collapse of market-maker Knight Capital
after a software glitch.
"The authorities are worried about algorithmic trading,
too," a banking source said. "It's difficult to show how it
benefits the economy."
$1 = 0.7867 euros)
(Additional reporting by Matthieu Protard; Editing by Elaine