February 9, 2011 / 3:49 PM / 9 years ago

EU mulls penalties to control derivatives trade

* EU eyes charges on derivative betting as grain prices rise

* Penalties to push opaque market under watch of regulators

* EU pushes for tighter monitoring of $600 trillion market

BRUSSELS, Feb 9 (Reuters) - The European Union’s executive is examining penalties on derivative trading, according to a document released on Wednesday, to force controls on the opaque sector that has been blamed for spiraling grain prices.

Michel Barnier, the top EU official in charge of changing the rules of finance, wants to force curbs on a global market for derivatives — one worth about $600 trillion but which remains largely unchartered, with many trades not registered.

On Wednesday, he announced possible penalties to force traders to keep extra capital if they do not route their business through central clearing houses, which connect traders, record their activity and step in if a deal breaks down.

Officials believe this makes the financial system safer because clearing houses provide a safety net in the event of a collapse like that of Lehman Brothers, by intervening if either buyer or seller in a trade go bust. They also keep a paper trail, making it easier for regulators to enforce order.

Barnier is considering penalties to force reluctant traders to use such clearing houses or otherwise hold more capital, driving up their cost of doing business and squeezing profits.

The plans introduce globally agreed rules from 2013, known as Basel III, into EU law.

Most derivatives, whose value is linked to the price of a financial instrument such as a share or commodity such as oil, are now traded over-the-counter or off-exchange, far from the watch of regulators.

The Commission wants better identification of trades in a market, where many multi-million-euro deals are recorded only by a fax between seller and buyer.

Forcing transparency would likely challenge the dominance of the half a dozen or so large banks that run the market now.

These banks, which include Deutsche Bank (DBKGn.DE), Barclays (BARC.L), Goldman Sachs (GS.N), JP Morgan (JPM.N), Bank of America (BAC.N) and Citigroup (C.N), design derivatives for customers and trade among themselves.

“Derivatives transfer risk. But the difficulty is seeing where to? In the case of AIG, it was the U.S. taxpayer,” said Graham Bishop, an adviser to banks on EU financial policy.

Barnier also wants more power for regulators to intervene when speculative positions in commodity-linked derivatives send grain or energy prices spiraling.

The EU Commission, which writes the first drafts of rules that then go to countries for approval, plans to push traders to disclose positions and is also considering imposing so-called position limits to stop mega-trades that could upset markets.

A clampdown on commodity derivatives by the European Union, one of the world’s biggest food exporters, is being driven by France, with backing from Germany. [ID:nLDE6941VX]

As in the past, however, Berlin and Paris are likely to face opposition to any new regulations from London, Europe’s commodity trading hub, presenting an obstacle that could force them to water down their proposals. (Reporting by John O’Donnell; Editing by Hans Peters)

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