January 14, 2010 / 10:51 AM / 10 years ago

EU executive to target derivatives speculation

BRUSSELS (Reuters) - Speculation in commodity derivatives has been “scandalous” and needs to be regulated carefully, the European Union’s nominee for chief financial watchdog said on Wednesday.

“Why do we have this speculation we have had over the last two to three years in raw materials,” Michel Barnier, EU internal market commissioner-designate, said.

“I am talking about speculation which to me is scandalous on agricultural raw materials ... We have to do something about that,” Barnier told a confirmation hearing in the European Parliament.

The European Commission has the sole right to initiate pan-EU financial services legislation and is expected to put forward a draft law by mid-year to regulate the vast off-exchange traded derivatives market.

The Commission would be implementing a pledge it made along with other members of the G20 rich and developing countries in September to increase transparency in the derivatives sector, such as central clearing of privately negotiated contracts.

The United States is also adopting new rules for derivatives, and banks worry about possible divergences with the EU.

Barnier described the sums in the $450 trillion (276 trillion pound) over-the-counter derivatives markets as “almost scary” and said action was needed.

“I don’t believe we need to wait until we have international regulations,” Barnier said.

“I will have legislative proposals once I have sounded out everyone on this topic.”

The draft EU law is expected to give supervisors powers to impose position limits on contracts.

“We have to look at derivatives. Speculation is linked to derivatives which are linked to raw materials. That is something we want to regulate very carefully in order to tackle speculation in raw materials,” Barnier said.

The U.S. Commodity Futures Trading Commission aims to rein in speculation in energy and commodity trading, especially oil.

Excessive speculation has been blamed for sending food and oil prices to record highs in 2008. Some analysts dispute whether price swings were due to speculation in derivatives.

Barnier said 85 to 90 percent of market moves linked to derivatives were not subject to any controls and there was a need to “act as broadly as possible.”

There was also a requirement to examine the role of dark pools, or anonymous trading of shares, he said.

Writing by Huw Jones, editing by Dale Hudson

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