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* EU reform seen as compromise to keep France, Germany happy
* Proprietary trading ban would only affect biggest lenders
* Exemptions from bans available to national regulators
* Proposal unlikely to be approved until 2015 at earliest
By Huw Jones
LONDON, Jan 6 (Reuters) - Banks in the European Union facelimits on taking market bets with their own money under a draftEU proposal that represents a central plank of attempts toprevent a repeat of the financial crisis of 2007 to 2009.
Policymakers want to rein in excessive trading risks in theEU banking sector, whose assets total some 43 trillion euros($59 trillion), that could threaten depositors if trades gowrong and potentially put taxpayers on the hook in a rescue.
Yet the EU proposal, seen by Reuters on Monday, has alreadybeen described as a watered-down measure designed to ensureapproval across the bloc and which is less rigorous thanequivalent "Volker Rule" regulations being introduced in theUnited States.
Despite its language banning proprietary trading - wherebanks trade on their own account and not on behalf of a customer- one financial industry lobbyists called the proposal a"cop-out compromise".
The lobbyist said it gives countries like France and Germanyleeway to avoid splitting up their big universal banks intoseparate deposit-taking and more risky investment bankingoperations.
Brussels had already signalled it would stop short of tooradical measures given political unease over breaking up bigbanks and giving a competitive advantage to non-EU rivals.
The proposal is being finalised by EU financial serviceschief Michel Barnier, who will formally publish it as a draftlaw within weeks, with further changes possible before then.
"Barnier does not want to make any waves during theremainder of his term," one financial industry official said.Barnier's term ends when the current commission is replaced onOct. 31.
GLOBALLY SYSTEMIC
The proposal would apply to all the bloc's banks, but proprietary trading would only be banned at about 30 toplenders, defined as having total assets of more than 30 billioneuros, or who are already deemed to be "globally systemic" suchas Barclays, BNP Paribas and Deutsche Bank.
Proprietary trading is defined narrowly, so a bank cancontinue to trade on behalf of customers and make markets, orquote buy and sell prices in securities.
"Accordingly, desks, units, divisions or individual tradersspecifically dedicated to taking positions for making a profitfor (their) own account, without any connection to customeractivity or hedging the entity's risk, would be prohibited," theproposal says.
Some trading activities, like lending to private equityfunds, deals involving derivatives and complex securitisations,and typically carried out for customers, may also have to becarved out into separate entities.
The United States has gone further and has just approved itsVolcker Rule, which imposes a mandatory ban on leading banksfrom making bets on securities or other assets on their ownaccount. The rule will take effect in July 2015, but is beingchallenged by U.S. banks in the courts.
With the European Parliament going to the polls in May and anew European Commission appointed by October, approval of whatwill be highly contested legislation is unlikely before 2015 andwon't take effect until about 2017.
Barnier's proposal seeks a pan-EU approach that would allownational initiatives in the pipeline to continue, and draws on areport from Finnish central bank governor Erkki Liikanen.
UNILATERAL STEPS
Liikanen recommended a mandatory separation of a bank'sdeposit-taking activities from significant proprietary trading,but France, Britain and Germany, representing a large chunk ofEU banking assets, have already taken unilateral steps to tacklerisks from trading.
Britain, for example, is introducing its "Vickers" reformwhich requires deposit-taking arms of banks to be ring-fenced,or protected with an extra cushion of capital.
The EU proposal sets out "derogations" or exemptions from anautomatic proprietary trading ban, so Germany, for example,won't have to necessarily physically split up Deutsche Bank.
Exemptions would be allowed if a national supervisorintroduces special measures to ensure the effective separationof certain activities to prevent financial instability, awording financial experts say gives countries leeway.
Alexandria Carr, a regulatory lawyer at Mayer Brown inLondon, said Barnier was seeking a compromise with everyone.
"It (the measure) seeks to compromise between Volcker andVickers, to compromise between the lobbying of the consumerassociations and the financial sector, and to compromise betweenthe positions of the UK on one hand and France and Germany onthe other," said Carr.
"It remains to be seen whether the proposal that theCommission publishes will take a more defined position but, onthe present draft, the concern must be that in seeking to pleaseeveryone, the Commission will please no-one," Carr said.
Some financial experts have also interpreted the proposal asexempting huge banks like HSBC because of its globalstructure based on country-focused subsidiaries.
The proposal also seeks to stop banks from circumventing anyban by preventing them from holding stakes in hedge funds thatcould take trading bets on their behalf.
