March 2, 2011 / 3:08 PM / 9 years ago

EU lawmakers to demand ban on debt speculation

BRUSSELS (Reuters) - EU lawmakers are set to demand a ban on some types of trading in debt insurance from 2012 to curb speculation blamed for exacerbating the euro-zone debt crisis, sources involved in the talks said on Wednesday.

Parliamentarians in Brussels will likely propose next Monday a ban on so-called naked trading of credit default swaps — tradeable debt insurance derivatives — upping the pressure on European Union countries to follow suit when ministers meet this month.

“We want to specifically target the speculators,” said one source, commenting on preparations for a new EU law that will curb short-selling of shares and other securities.

Naked trading of credit default swaps (CDS) on government bonds came under fire during the euro-zone crisis when Athens lashed out at speculators for driving up the cost of its debt and compounding its borrowing difficulties.

Naked trading refers to buying a CDS contract without owning the underlying government debt being “insured.” EU lawmakers want to ban anyone who does not own the debt from buying such insurance.

Some policymakers accuse buyers of naked CDS contracts of simply betting on price falls in the underlying government debt, rather than wanting to “insure” themselves.

But hedge funds and other buyers say the CDS market is too small influence 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 also wants tough curbs, believing speculators are behind swings in government borrowing costs.

Both have clashed with Britain, which is opposed to regulation that could harm London’s standing as a major financial centre.

The European parliament’s view carries weight because it has equal say with EU countries in deciding the rules on short-selling — although it will need to persuade Britain before it can write measures such as a ban into law.


The new EU law will not impose a blanket ban on short-sellers, who typically borrow shares or securities and sell them on, in anticipation that the price will fall and they can repay the lender with stock bought for less.

But it will demand that investors who want to sell stock short will also have to prove they can later borrow the shares to close the deal.

The draft law will also force investors to report short positions to regulators.

Both EU Internal Markets Commissioner Michel Barnier and the European Parliament want a new markets policing agency, the European Securities and Markets Authority, to have the power to impose temporary bans on short-selling.

Experts, however, question the usefulness of a crackdown on short-sellers.

“While naked short-selling can be conceptually problematic, its role in the ongoing crisis has been rather limited,” said Sony Kapoor, of London think tank Re-define.

His view was echoed by others.

“It is short-selling that can bring inflated prices back down to earth,” said Graham Bishop, an adviser to banks on EU financial policy. “It was hedge funds that spotted the subprime mortgage problems before anyone else.”

“Short-selling also plays an important role in making markets work. The question is where does market-making stop and immoral behaviour begin?”

Additional reporting by Ilona Wissenbach. Editing by Jane Merriman

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