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 government's position.
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"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 proposals.
"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 reform package.
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."
(Additional reporting by Matthieu Protard; Editing by Elaine Hardcastle)