The European Union will draft new rules to tighten oversight of derivatives markets and set new fines for manipulating trades in complex financial instruments that some blame for worsening the financial crisis.
EU Financial Services Commissioner Michel Barnier said Monday that regulators had to know more about derivatives and the investors behind them. He would demand all products and trading to be registered with trade depositories that regulators could access.
"These people don't like coming out in the light so we are going to flood them with light," he said.
The $600 trillion sector is largely unregulated at present, with many trades taking place privately between investors. Derivatives are financial contracts that do not require a trader to own the underlying security or financial asset. They include swaps, options and more complex instruments.
Barnier said his proposal, due in late July or early September, would cover "all eligible over-the-counter derivatives markets" — those which don't operate on an exchange — and include capital and liquidity requirements. He gave few details on specific limits that the EU would set.
He also wants to review existing market abuse and financial market oversight laws to cover over-the-counter derivatives in a way that could see traders fined for manipulating the market by spreading false information.
He said those changes would also aim at increasing transparency on derivatives for raw materials such as oil and metals, where industries complain that increased trading has caused volatile price changes for their key ingredients.
Barnier told reporters that he would also draft a separate law in October to regulate credit default swaps, a type of insurance against a borrower going bankrupt that have become a lucrative market for traders.
European leaders have complained loudly that speculators used credit default swaps on Greek government debt to bet the country would default on its borrowings — that raised pressure on the country to the point where it was forced to ask for a bailout.
Barnier said his officials were currently investigating trades on Greek debt.
A French diplomat speaking under condition of anonymity said France wanted the Group of 20 rich and emerging nations to launch national investigations into "false market rumors," such as speculation that Spain would follow Greece in requiring a bailout to help pay off a large budget deficit.
He said credit rating agencies should be put under the microscope "to remove suspicion" over the sudden downgrade of Greece's debt by Moody's on April 22 which helped push Greece toward asking for an EU and International Monetary Fund bailout of some 110 billion euros ($134 billion).
Barnier said he would also ask the G-20 summit to examine setting up a "preventative" bailout fund for banks which would "allow taxpayer to take a step back and not be the ones to pay up first." The IMF will also put forward its ideas to the G-20 leaders.
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