Europe targets credit default swaps traders

Europe turned its sights on Tuesday on the controversial trade in insurance against sovereign loan defaults, the latest consequence to arise from market panic over spiralling Greek debts.

European Commission chief Jose Manuel Barroso told the EU parliament in Strasbourg that commission regulators "will examine closely the relevance of banning purely speculative naked sales on Credit Default Swaps (CDS) of sovereign debt."

So-called "naked" selling means taking out insurance on bonds or other types of debt without actually owning them, which is seen as a purely speculative gamble and which observers say accounts for most CDS sales.

"It is not justified to buy an insurance by unseen interventions on a risk, on a purely speculative basis," Barroso said, adding that financial services overlord Michel Barnier will present draft legislation this year.

The commission will also "push for international coordination," he added, warning that "these markets are as mobile as they are opaque." The commission chief said the issue would be raised "notably at the level of the G20."

The German government said on Monday that Chancellor Angela Merkel and French President Nicolas Sarkozy were working on new rules for derivatives markets, with a proposal on such products to be handed to the commission.

Derivatives have been thrust further into the spotlight by reports of coordinated market action by multi-billion-dollar hedge funds to bring down the value of the euro as the Greek crisis hit fever pitch.

"We need to proceed with an in-depth analysis on Credit Default Swaps markets so as to better determine how these markets function and if they are the subject of questionable practices," Barroso added.

"The commission stands ready to use its powers in the field of competition policy, if needed" to stamp out unwanted effects on national credit ratings, Barroso underlined.

Speaking in Luxembourg earlier on Tuesday, Merkel said France, Germany, Greece and Luxembourg will together present plans to the commission seeking tighter regulation of CDS trading.

"We are agreed there is a need to limit financial speculation," she said, "without banning" such products, but that "rapid" action is required to ensure "the primacy of states over speculators."

The commission first announced plans last October to move the trading of over-the-counter derivatives, many of which change hands privately outside of exchanges, into organised trading platforms by the end of 2010.

It said then that the collapse of US investment bank Lehman Brothers in 2008 had highlighted the risks of such derivatives in the absence of a central clearing party.