EU leaders eye new rules on derivatives

(BERLIN) - German Chancellor Angela Merkel and French President Nicolas Sarkozy are working on new rules for derivatives markets including controversial credit default swaps (CDS), Germany said on Monday.

"A joint proposal", also backed by Luxembourg Prime Minister Jean-Claude Juncker, head of the Eurogroup of eurozone finance ministers, will be presented to the European Commission, Merkel's spokesman Ulrich Wilhelm told reporters.

Derivatives -- complex and high-risk financial instruments -- have come under close scrutiny since the outbreak of the global financial crisis.

They have been thrust further into the spotlight by reports of coordinated market action by hedge funds to bring down the value of the euro.

But Wilhelm said it would be "difficult" to ban CDS trading altogether.

Credit default swaps are a type of insurance to protect holders of bonds or other types of debt against the risk of default but the market is seen as highly opaque and can help fuel panic on markets.