Financial Regulatory Forum

EU’s Barnier pledges to tackle speculators

By Reuters Staff
March 17, 2010

By John O’Donnell

BRUSSELS, March 17 (Reuters) – The European Commission plans to propose controls on certain government debt derivatives as soon as June in an effort to crack down on speculation blamed for aggravating Greece’s borrowing problems.

Curbing speculation by hedge funds in credit default swaps, a form of debt insurance, is high on the EU’s political agenda as finance ministers consider a possible bailout of Greece, the euro zone’s most troubled economy.

On Wednesday, Michel Barnier, the European commissioner in charge of financial market regulation, said he would propose rules to control naked selling of credit default swaps — the sale of the insurance contracts to buyers who do not own the debt — as soon as June.

Speaking to members of the European Parliament who will vote the proposals into law, former French foreign minister Barnier said he would be proposing laws on naked selling and credit default swaps.

France and Germany in particular have criticised naked selling of CDS, while the United States and Britain are among countries that oppose an outright ban on the trade although they favour regulation of derivatives’ markets generally.

Investors who own government debt buy CDS when they want to hedge against the risk of a government defaulting on its debts. The value of a CDS goes up and down depending on the likelihood of default.

In Greece’s case, the cost of CDS contracts soared when it became clear that the government was running the risk of defaulting on its borrowing. But in a vicious cycle, the rising cost of CDS increased fears that Greece could default.

In some cases, those buying the CDS did not own any Greek debt; they were just hoping to see the value of their investment rise, a form of speculation that officials such as Barnier are now keen to stamp out.

U.S. officials, notably Gary Gensler, the chairman of the U.S. Commodity Futures Trading Commission, have concerns about how a ban on naked selling could be imposed, but do want to see such derivatives trading moved onto exchanges so it can be better regulated and the market protected against manipulation.

The world’s 20 most prosperous countries — the G20 — have promised to move as much of such derivatives trading as possible onto regulated exchanges by 2012. The market is currently mostly ‘over-the-counter’ — not traded on an exchange.

On Wednesday, Mario Draghi, chairman of the Financial Stability Board and a key player in moves to regulate financial markets, said he would outline in October how to tackle the off-exchange derivatives market, which has a notional value of $600 trillion — 12 times the size of the global economy.

Draghi said the FSB would define which derivatives should be standardised and moved onto more transparent clearing houses.

“The first step is centralising the CDS trading,” said Draghi, who is also a member of the European Central Bank.

“Centralisation means clearness and transparency. For many banks that means a loss of money.”

Industry officials say it will be difficult to curb such speculation without similar steps by the United States because EU curbs would shift trading to Wall Street.

So far, Washington has signalled that a ban on naked selling of CDS is unworkable, and Gensler was in Brussels on Tuesday to discuss the issue with finance officials.

Draghi also said such a ban would be difficult to introduce and that it would be better to move derivatives trading onto exchanges. (Additional reporting by Huw Jones; Editing by Ruth Pitchford) ((Contact John O’Donnell on +32 2 287 6817 or +32 473 92 48 90; john.odonnell@thomsonreuters.com))

Keywords: EU SHORTSELLING/

Wednesday, 17 March 2010 09:07:35RTRS [nLDE62G0Q2] {C}ENDS

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