EU lawmakers ban "speculative" derivatives trades

STRASBOURG, France (Reuters) - EU lawmakers have approved a ban on some trading in debt insurance derivatives from 2012 to curb what some policymakers say is speculation that deepens the euro-zone debt crisis.

Monday's vote marks the first milestone in bringing the hotly-disputed measure onto the bloc's statutes.

The European Parliament's economic and monetary affairs committee approved by a 34-to-8 vote a draft law from the European Union's executive European Commission.

The broad, cross-party majority means the assembly is in a strong position to negotiate with EU states, who have joint say on the final version of the measure. EU finance ministers, who have been split over key elements, meet next week.

Green Party lawmaker Pascal Canfin, who is steering the measure through the assembly, said sovereign debt speculation is still causing chaos in the euro zone.

"Banning uncovered credit default swaps (CDS), which allow market players to speculate on sovereign debt of European countries, would be a major step forward," Canfin said.

Hedge funds and other investors have been accused of using so-called naked CDS to bet on falls in government bond prices.

A naked CDS is where the person buying the CDS does not own the underlying sovereign debt being "insured" against.

WRIGGLE ROOM

Canfin said the draft law as amended "amounts to effectively banning naked short selling."

Nevertheless, wriggle room has been built into the text.

A hedge fund not holding the underlying government debt would be allowed to buy a "naked" sovereign CDS if it held a proxy "asset or portfolio of assets" whose prices have a "high correlation" with government bond prices.

The European Securities Markets Authority (ESMA) would also need permission of the government in question if it wants to ban naked selling of sovereign CDS linked to its debt.

The measure would also curb shorting of shares -- the practice of borrowing a share expected to fall and selling it, hoping to buy it back later at a lower price, pocketing the difference.

These curbs are less contentious and brokers have even welcomed a pan-EU approach to end unilateral curbs introduced by some states at the height of the financial crisis.

Short positions above a certain threshold would also have to be reported to regulators as already done in many countries.

Positions reaching a second threshold would be published.

Investors who want to sell stock short would also have to prove they can later borrow the shares to close the deal.

ESMA would play a central role in deciding whether a temporary pan-EU ban on stock shortselling is introduced.

A WARNING ON LIQUIDITY

Hedge funds and other buyers say the CDS market is too small of an influence on bond prices, which have been falling because investors are spooked by the size of government debts.

In demanding a ban, the European Parliament is throwing its weight behind France, whose president, Nicolas Sarkozy, is pushing for a clampdown on speculation in markets from grain to energy.

Germany, which unilaterally introduced a ban on naked selling of CDS, also wants tough curbs, though other EU states declined to follow suit, accusing the country of confusing markets.

Britain, which is opposed to regulation that could harm London's standing as a major financial centre, has questioned the usefulness of bans.

The Alternative Investment Management Association (AIMA), a hedge fund lobby, said there was no evidence that CDS markets lay behind the euro zone's sovereign debt woes and curbs will damage the economy.

"Debt markets would be less efficient, liquid and transparent," said AIMA Chief Executive Andrew Baker.

"The cost of borrowing would increase and the availability of credit to borrowers would decrease, with a concomitant negative impact on growth and jobs," Baker said.

(Reporting by Huw Jones, Julien Toyer and John O'Donnell; Editing by Padraic Cassidy)