EU agrees rules to curb bank trading risks

* Exemption for Britain's banks stands

* Law applies to about 30 big banks in Europe

* ECB's Coeure: more safeguards needed to avoid opt outs (Adds Jonathan Hill quote, details on approval process)

By Francesco Guarascio and Huw Jones

LUXEMBOURG/LONDON, June 19 (Reuters) - EU finance ministers agreed a draft law to rein in trading risks at banks on Friday, including an exemption for Britain's lenders because they already face similar curbs.

The deal marks a coup for Britain, whose own banking reform will be accepted as a substitute for the EU law, as the country gears up for a referendum on its membership of the 28-member European Union, with financial services a key focus.

At a meeting in Luxembourg, the bloc's finance ministers gave the green light to the new EU regulations, aimed at preventing a repeat of the 2007-09 financial crisis.

"The structural reform of banks is a very central element to completing the reform of promoting banking stability," said Janis Reirs, finance minister of current EU president Latvia.

The law will apply to banks with trading operations of more than 100 billion euros ($113 bln).

Currently "about 30 of the biggest banks in Europe would be within the overall scope," the EU financial services commissioner, Jonathan Hill, told journalists after the meeting.

The reform was proposed by the European Commission in January 2014 but discussions have been protracted as Britain, France and Germany have their own rules to stop risky trading getting out of control.

EU ministers watered down the Commission's proposal to ensure that market-making at so-called universal banks like BNP (Paris: FR0000131104 - news) Paribas and Deutsche Bank (Xetra: 514000 - news) - where retail and investment banking are under the same roof - can continue, to avoid crimping funding for the economy.

National regulators would also have more discretion than originally envisaged when separation of trading takes place.

The Commission's proposal to ban proprietary trading - or banks taking market bets with their own money - was scrapped, and instead such trading would have to be conducted in a separate unit.

The European Parliament has to approve the final version of the law and further changes are possible, although what form they could take is far from clear; many lawmakers have made it clear they want the law to be strengthened to stop banks being "too big to fail", while others want it to be watered down.

It is also unclear how long this process will take, as the new rules must be debated by Parliament's economic affairs committee before negotiations with member states can be held. It could take several months before a law is adopted.

RETAIL SHIELD

The decision to exempt Britain's banks from the law confirmed a Reuters report.

Under Britain's own rules - the Vickers reform - retail banks in Britain such as HSBC and Lloyds will have to separate out their retail arms and cushion them with extra capital by 2019 to shield them from any blow outs on the investment banking side.

British officials say the Vickers reform goes further than rules in other member states, and finance minister George Osborne told the meeting in Luxembourg that the EU draft law recognises there are different banking systems across the bloc.

The draft law was an example of the "kinds of issues that I think need to be aired in the next couple of years so we get a more stable and more predictable relationship" between countries inside and outside the euro, Osborne said.

After last-minute tweaks, France swung behind the deal but its finance minister, Michel Sapin, said there were still concerns it could set a precedent by giving a member state an exemption in what is meant to be a single EU market.

The European Central Bank supervises top euro zone lenders and its executive board member Benoit Coeure said more safeguards were needed to ensure uniform application of the EU law within the currency area's banking union so that some countries don't opt out, a view Osborne sympathised with.

"It illustrates this tension, and this is just one I suspect of many examples there we would see in the coming years of the pressure of operating a single market of 28 and the integration of the euro zone... and operation of the banking union," Osborne said.

($1 = 0.8850 euros) (Writing by Huw Jones; Editing by Pravin Char and Susan Fenton)