Financial Regulatory Forum

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.

    BRUSSELS, March 16 (Reuters) – The derivatives market remains a “dark ocean” that needs more transparency but it was unclear if a ban on credit default swap trading would work in practice, a top U.S. regulator said on Tuesday. (more…)

By Huw Jones and Krista Hughes

LONDON/BASEL, Switzerland, March 8 (Reuters) – European Union finance ministers will discuss next week how to dampen speculation on sovereign credit default swap markets, sources said, as central bankers worry some selling practices pose wider risks.

Greek debt has come under pressure as the country seeks to tackle a ballooning deficit and some politicians say speculators using CDSs, intended to insure against any risk of debt defaults, are amplifying the country’s problems.

“The European Commission may bring forward an initiative at the 16 March Ecofin,” an EU diplomat said.

BRUSSELS, March 5 (Reuters) – The European Union’s executive body said a meeting on Friday with supervisors and investment industry officials has helped shape a planned law on derivatives due later in the year.

The meeting was held amid pressure from France, Germany and Luxembourg to crack down on what they see as hedge funds using credit default swaps to push Greek government bonds and the euro lower.

“It was a useful meeting and it will feed into preparation for rules on derivatives that we will propose in the Summer,” a spokeswoman for EU Internal Market Commissioner, Michel Barnier, said.

By Huw Jones

LONDON, March 5 (Reuters) – European governments are exploring ways to curb trade in credit default swaps but may have to settle for requiring greater disclosure rather than banning certain forms of speculation.

France, Germany and Luxembourg say “speculators” — typically code for hedge funds — used CDS contracts to bet on Greece defaulting and send the euro lower.

Faced with such political pressure, the European Commission has called national supervisors, credit rating agencies, hedge funds and investors to meetings in Brussels on Friday to help it decide if European Union action is needed in the CDS market.

By John O’Donnell and Ilona Wissenbach

BRUSSELS, March 1 (Reuters) – Germany has taken steps to identify speculators in Greek debt to try to prevent them from profiting unduly from any bailout of the ailing euro zone economy, a source with direct knowledge of the matter told Reuters.

The probe by the country’s financial watchdog is part of delicate deliberations in Germany as to whether it should help bail out Greece, which is grappling with mounting debts.

“It would be bad if it were to emerge after a rescue that the money had gone into the pockets of speculators,” the source told Reuters.

– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –

By Richard Beales

NEW YORK, Jan 4 (Reuters Breakingviews) – Lawmakers and bank-bashers have pinned blame for the financial crisis — and in particular the collapse of American International Group — on the credit default swap (CDS) market. Changes to and tighter oversight of the giant market are needed. But action should address real, not imaginary, problems. Reuters Breakingviews offers some advice.

1) Don’t ban CDS instruments. They didn’t cause AIG’s downfall — poor risk management did. AIG built up exposure out of all proportion to its ability to cover losses. It was an old trader’s game: selling out-of-the-money options to bring in what looked like risk-free revenue — until the unthinkable happened and losses swamped all previous profits.

By Umesh Desai

HONG KONG, Dec 21 (Reuters) – Credit default swaps in Asia will now follow a standardised trading format designed to facilitate centralised clearing, improve transparency and in the long-run raise transaction volumes, a trade body said on Monday.

From Monday on, CDS or insurance-like contracts that protect against defaults and restructuring, will adopt standard coupon sizes and the payment of full first coupons, the International Swaps and Derivatives Association said in a statement.

The move follows similar changes in Europe and North America

Entities in Japan will now trade CDS with standard coupons of 25 basis points (bps), 100 bps and 500 bps and full first coupons going forward.

By Jonathan Spicer

NEW YORK, Dec 15 (Reuters) – CME Group Inc began clearing U.S.-based credit derivatives on Tuesday, aiming to capitalize on a government push to safeguard a private market blamed for exacerbating the financial crisis.

The launch of CME’s clearinghouse for credit default swaps (CDS) coincides with the date large dealers promised to offer clearing to their clients. It comes more than a year after the venture was announced, and more than nine months after rival IntercontinentalExchange Inc began clearing CDS.

CME, the world’s largest derivatives exchange operator, has from the beginning promoted its clearinghouse as one friendly to buyside firms, six of which are founding members. Citadel Investment Group was CME’s original partner.

By Kevin Drawbaugh

WASHINGTON, Dec 11 (Reuters) – The U.S. House of Representatives approved the biggest changes in financial regulation since the Great Depression on Friday, marking a win for the Obama administration and top Democrats in Congress.

The sweeping bill, which will have to be reconciled with any measure the slower-moving Senate might eventually approve, aims to safeguard the financial system and ward off future crises of the type that punished the nation in the past year with its deepest recession since the 1930s.

The House voted 223-202 to pass the 1,279-page bill, which was hammered out in the months since last year’s crisis convinced Democrats of an urgent need for reform. All of the chamber’s Republicans and 27 Democrats voted against bill.