Euro leaders aim to ban derivatives speculation

Gary Gensler of the US Commodity Futures Trading Commission has called for stricter controls on derivatives trading after the recent wave of speculation that is said to have exacerbated the Greek debt debacle. Gensler specifically warned against credit-default swaps, the insurance-like contracts blamed for most severe losses during the financial crisis.

However, many European leaders, while open to consider regulated use, would prefer to go a stage further - with an all-out ban. Jose Manuel Barroso, president of the European Commission, said the commission would examine the possibility of banning outright "purely speculative" trading of the swaps.

And German Chancellor Angela Merkel (above) said yesterday that her government is backing an initiative to curb this type of trade. France, Greece and Luxembourg are already on board and may push ahead regardless of US support.

"It's important that this is done on the American side, too, but we think that a step ahead from our side, from the European Union, would help us,"  the Chancellor said.

The tone of the comments suggests European leaders are ready to accept that credit-default swaps are not merely a symptom but a cause of financial instability - a charge the banking industry says is no more than self-serving political posturing.

Greek Prime Minister George Papandreou also added his voice to the debate, saying he "found a very positive response" from President Barack Obama on proposals to curb the kind of activity he believes could trigger another financial crisis.

Lawmakers and regulators note that the credit-default swaps market is still booming. According to the Wall Street Journal, a market that was worth $3 trillion seven years ago is now valued at more than $25 trillion.

The Journal notes that there is little publicly available information about who is buying and selling the contracts, making it hard for regulators to monitor.

It's only when the cost of insuring against debt default soars - as it did with Greece - that the trades come to light. However, it is hard to prove that these bets are purely speculative or that they exacerbate a bad situation and make it ruinous.

Germany's financial regulator, BaFin, says it has uncovered no evidence that credit-default swaps have been used to speculate against Greek national debt. The volume of outstanding credit-default contracts on Greek debt remains unchanged at $9 billion compared to a total Greek national debt of $400 billion.

The regulator concluded: "The market data do not show massive speculation in CDSs." ·