The Financial Times reports that as an alternative to a ban on speculative trading in CDSs they suggest a bar on so-called naked transactions, in which investors buy swaps without holding a direct investment in the underlying debt, and tighter regulation of short-term swaps in the bond markets.
Germany and France on Wednesday called on the European Union to consider banning speculative trading in credit default swaps and set up a compulsory register of derivatives trading.
The move came as Angela Merkel, German chancellor, called for EU institutions to be given “more teeth” both to control speculation and to police the deficit spending of member states. François Fillon, French prime minister, said after talks in Berlin that both governments were “very much in agreement in tackling extreme speculation”.
The two leading economies in the eurozone are asking for an immediate investigation of the role and effect of speculative trading in CDSs in the sovereign bonds of European Union member states. Their request came in a letter sent on Wednesday to José Manuel Barroso, president of the European Commission, and José Luis Rodríquez Zapatero, Spanish prime minister and current chairman of the EU ministerial council.
As an alternative to a ban on speculative trading in CDSs they suggest a bar on so-called naked transactions, in which investors buy swaps without holding a direct investment in the underlying debt, and tighter regulation of short-term swaps in the bond markets.
A growing European consensus on the need for tougher regulation of CDS trading was reflected by Lord Turner, chairman of the UK Financial Services Authority, who warned that naked trading in corporate CDSs could force companies into default.
The Franco-German initiative, backed by Luxembourg and Greece, also calls for regulators to be given “unlimited access” to a register of derivatives trading in order to identify who is trading and what they are doing.
The Basel-based Financial Stability Board is co-ordinating the G20’s response to the financial crisis and will try to encourage similar regulations in different jurisdictions. If regulations are not co-ordinated globally, then traders will simply migrate to the markets where there are no regulations
© Financial Times
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