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* Hokmark seeks to shield market making
* Document sets scene for battle in parliament, EU states
* Proposals likely to be challenged by other EU lawmakers
By Huw Jones
LONDON, Jan 6 (Reuters) - Draft European Union rules forcingbanks to isolate their risky trading activities should be easedto take national measures into account and avoid harmingmarkets, an EU document written by a senior lawmaker hasproposed.
The 28-country bloc is in the process of approving a lawthat would force banks to legally separate trading activitiesabove a certain size so their collapse in any future marketmeltdown wouldn't hurt customer accounts.
The draft law is seen by some lawmakers as essential to reinin banks whose market bets helped trigger the 2007-2009financial crisis in which taxpayers bailed out lenders.
In the document seen by Reuters on Tuesday, Gunnar Hokmark,a Swedish centre-right member of the European Parliament whichhas joint say with EU states on the draft law, proposesamendments ditching terminology such as "separation" and addingprotections for trading activities which raise capital for theeconomy.
The original draft set a January 2014 cut-off, after whichnational measures that rein in trading risks could not be takeninto account when it comes to exemptions.
Britain was seen as benefiting from this deadline as it hasalready approved its own law on the issue, with lenders such asLloyds and Barclays set to submit their plansto comply.
Yet France and Germany gained no such evident clearance andremain keen for their universal banks such as Deutsche Bank and BNP Paribas, which house trading anddeposits under one roof, not to be overly disrupted.
Banks hope the new EU financial services chief Jonathan Hillwill scrap the divisive draft law altogether given the uneaseamong some member states.
Hokmark, in charge of steering the measure throughparliament, also seeks to ease European Central Bank concernsthat, if unchanged, the EU law could harm market-making or banksoffering investors somewhere to buy and sell shares.
He proposes a new provision saying some parts of banks'trading activities are essential to funding the economy.
"This should be reflected in the deliberations around thebank structural reform ... It is important to state that thereis nothing telling us that trading is more risky than lending,rather the opposite."
His proposed changes may infuriate lawmakers on the left butmay find favour with some on the right and among some memberstates who fear a duplication of rules.
Hokmark also says that overall riskiness of tradingactivities should be considered, not just size alone, whensupervisors decide if the new EU rules apply to a bank.
He also rejects the draft law's ban on a bank investing inhedge funds or private equity, adding a welter of other rulesaimed at making banks safer should also be taken intoconsideration. (Editing by David Holmes)
