EU, US agree to work together on derivatives markets

(BRUSSELS) - EU and US officials agreed Monday to work together to improve the transparency of derivatives markets, favoured by speculators, after Washington warned Brussels against over-regulating hedge funds.

"We are talking about standardisation and registration for considerable sums, 600 trillion dollars in derivatives products, 80 percent of which escape any transparency," said EU Financial Services Commissioner Michel Barnier.

"That's what we have to change... and we have to do it together, some 80 percent of the trades I am talking about are transatlantic exchanges, between Europe and the United States," he told reporters after talks with Gary Gensler, chairman of the US Commodity Futures Trading Commission (CFTC).

"Our dialogue about credit default swaps is one (area) where we're exploring together how to best protect the public and the markets," Gensler said.

Credit default swaps are derivative products originally aimed at covering against the risk of a debtor defaulting.

European Commission chief Jose Manuel Barroso told the EU parliament in Strasbourg last week that commission regulators "will examine closely the relevance of banning purely speculative naked sales on Credit Default Swaps (CDS) of sovereign debt."

So-called "naked" selling means taking out insurance on bonds or other types of debt without actually owning them, which is seen as a purely speculative gamble and which observers say accounts for most CDS sales.

Derivatives have been thrust further into the spotlight by reports of coordinated market action by multi-billion-dollar hedge funds to bring down the value of the euro as the Greek crisis hit fever pitch.

The European Commission first announced plans last October to move the trading of over-the-counter derivatives, many of which change hands privately outside of exchanges, into organised trading platforms by the end of 2010.

It said then that the collapse of US investment bank Lehman Brothers in 2008 had highlighted the risks of such derivatives in the absence of a central clearing party.

Gensler said that the US and Europe were now "more together" than they were six or nine months ago on bringing transparency to derivatives trading.

His comments came a week after US Treasury Secretary Timothy Geithner warned the European Commission that its plans to regulate hedge funds and private equity groups could spark a transatlantic row.

Geithner hit out at a draft European Union directive that would impose tighter restrictions on the investment funds in a letter to Barnier, the Financial Times said.

Proposed new rules might damage US hedge funds, private equity groups and banks by curbing their ability to do business with Europe, Geithner argued in the one-page letter sent on March 1.

The changes would restrict the access of EU investors to funds based outside the 27-nation bloc, and non-EU funds would also be forced to comply with new rules in order to do business inside the bloc.