Tuesday, March 9, 2010

Call for action on speculation rules

Original posted in the Financial Times:

Germany and France are stepping up the pressure for urgent action by the European Union to regulate speculation in sovereign debt markets, in the wake of the Greek debt crisis.

Angela Merkel, German chancellor, called on Tuesday for the “fastest possible” adoption of new rules to clamp down on the most speculative elements of derivatives trading, including so-called naked transactions, which do not hedge the value of real assets.

Speaking after talks with Jean-Claude Juncker, the Luxembourg prime minister, and chairman of the Eurogroup of finance ministers from the eurozone, she said: “We are all agreed that we must put a stop to financial speculation.”

Mr Juncker also pledged his support for the longer-term German initiative to set up a European Monetary Fund to deal with national debt crises within the 16-country eurozone. But France and Germany seem to be going slow on that idea in favour of their anti-speculation drive, after criticism in both countries.

Axel Weber, president of the German Bundesbank, described the debate over a monetary fund as “unhelpful” and “a sideshow that will distract from the necessary (fiscal) consolidation”.

Christine Lagarde, French finance minister, damned the idea of an EU lender of last resort with faint praise, saying it “does not appear to me to be an absolute priority in the short term.”

Germany and France, working with Luxembourg and Greece, are planning a joint anti-speculation initiative to galvanise action by the European Commission to tighten regulation of derivatives trading, and in particular of credit default swaps (CDS) in the sovereign debt markets.

But even before they had drafted their letter, José Manuel Barroso, Commission president, announced that he was examining “the relevance of banning purely speculative naked sales on credit default swaps of sovereign debt”.

He told the European parliament in Strasbourg that the Greek debt crisis showed the importance of “fundamental reform” of the derivatives market, and promised that legislation would be tabled to EU members before the summer.

Officials in Paris indicated that the four-nation initiative was aimed at relaunching the regulatory process for CDS in particular, which is grinding slowly through the Brussels bureaucracy.

Differences between Berlin and Paris appear unresolved on whether to ban or merely suspend naked short selling of CDS.

While Germany favours a ban, France is more inclined to give regulators the power to suspend such trading. Berlin also wants to make the market for credit derivatives more transparent by forcing buyers to register trades with a European equivalent to the US Depository Trust and Clearing Corporation.

A further restriction could force counterparties in derivatives trades to set aside capital to back transactions.

Gary Jenkins, head of fixed income research at Evolution, said: “It makes no sense to regulate the CDS market in response to the Greek debt crisis. Will it improve the Greek public finances, which were the cause of the sell-off in the markets? The answer to that is clearly no.

“It is also very difficult to separate what a speculative CDS trade is from one that is aimed to reduce risk.”

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