Sydney has been told it cannot trade any players into the club this year or next unless the club is prepared to bring about an immediate end to the cost of living allowance.

The Swans are extremely unhappy with the AFL directive, which also prevents the club from recruiting any restricted or unrestricted free agents until the end of the 2016 season.

It means the club will only be able to replace a player who retires or seeks a trade out of the club with a draft pick or picks.

The Swans lost Nick Malceski to Gold Coast as a free agent this week and have young forward Tim Membrey on the way to St Kilda, with Ryan O'Keefe and Lewis Roberts-Thomson retiring.

Following discussions last month, the league wrote to the Swans last week confirming the club's recruiting would be restricted to draftees, delisted free agents and promoted rookies.

Should the club choose to pursue a restricted or unrestricted free agent, or trade a player in, its COLA payments would cease immediately.

As it stands, COLA will be phased out over the next two years and replaced in 2017 with a new rent subsidy that will be paid from the league to lower-paid players.

The AFL's position is that it is helping Sydney manage its contractual obligations this year and next by phasing COLA out over a period of two years.

The league said on Thursday that the intention of the 'phasing out' process was to help Sydney honour existing contracts, rather than "attract players from other clubs or use that transitional amount to compete with other clubs for the services of players not on their list."

Sydney chief executive Andrew Ireland said the club had hoped to change the league's mind, given COLA was put in place by the AFL and the Swans had never had a choice but to pay it.

"We're not happy about it, we don't understand it and we'll continue to talk to them about it. We think we're being penalised for complying with AFL rules," Ireland said.

"The only way we've been able to recruit players in the past is by losing other players and creating enough salary cap space to bring players in, like every other club.

"We haven't broken any rules, we've complied with the AFL's rules and this is their rule. The only reason players have received COLA is because the AFL has said we have to pay it.

"It wasn't optional. We argued for it and we believed we should have kept it, but in the end they put the rule in place and we had to comply."

Sydney was able to lure Lance Franklin as a free agent last year on a huge contract, but the club made room for him by losing Jude Bolton, Shane Mumford, Jed Lamb, Andrejs Everitt and Tony Armstrong.

The club might lose Membrey to the Saints for nothing, given the club has secured the rights to three Swans Academy players in the draft and will only make just one or two other 'live' picks in the draft.

Sydney currently holds a 'live' third round pick in the draft, as well as the second round selection it received as compensation for Malceski's departure.

Greater Western Sydney has not been similarly restricted, with the league advising the club that "due to its Total Player Payment position, list structure and contractual commitments, it would be permitted to retain the COLA levels at $800,000 for the 2015 year and $600,000 for the 2016 year," with no trade or free agency bans.

The AFL Players Association made clear its unhappiness with the ban on Thursday night, with chief executive Paul Marsh saying the AFL's directive would have an adverse impact on players both at Sydney and other clubs.

Marsh said the league's decision would make make it more diffcult for Sydney players to leave the club via a trade, while preventing others from considering joining the club as a free agent.

"We believe this directive is a reaction to concerns around COLA, and rather than addressing the core issue, an introduction of this new restriction is simply unfair to the club and players," Marsh said.

"The central tenet of free agency is that it enables eligible players to go to a club of their choice, however from next year, those players will not be able to go to Sydney in the next two years.

"This is fundamentally wrong and unfair on those players who have earned the right to choose where they play."