Comparing the current climate on financial markets to the 'Wild West', EU Financial Services Commissioner Michel Barnier has outlined plans for tougher controls on the sector, especially on derivatives trading.
Barnier wants a showdown with Wild West financial traders
The European Financial Services Commissioner, Michel Barnier, presented his proposals on the second anniversary of the collapse of US investment bank Lehman Brothers, the day widely considered as the start of 2008's dramatic financial downturn.
Barnier said he wanted new European legislation to curb derivatives and short selling, two high-risk, poorly regulated forms of trading widely perceived to be the primary cause of the past recession.
"If I said we are going to ban speculation that would be like saying we are going to ban the rain from falling," Barnier told journalists at Wednesday's press conference.
"But speculation has become unrestrained. So we have to limit the risks of hyper-speculation. How are we going to do this? By shedding light on it, by forcing markets to be transparent. Together with the Americans and other regions, we must know who does what."
Barnier said most derivative contracts which banks and firms trade privately rather than on a stock exchange should still be reported to central databases in order to provide regulators with a clearer picture of the market.
The financial services commissioner also suggested establishing a tracking system for "short selling", a practice in which traders sell an asset that belongs to someone else - usually it is borrowed from a broker - with the intention of buying it back later for a lower price. Provided the stock price falls as expected, this enables them to turn a profit when they come to repurchase the asset and return it to the owner.
Risky trading can turn a quick profit, or backfire drastically
"In normal times, short selling enhances market liquidity and contributes to efficient pricing, but in distressed markets short selling can amplify price falls, leading to disorderly markets and systemic risk," Barnier said.
The EU especially wants to limit short selling of sovereign credit default swaps, a derivative that partially represents insurance against the risk of a country defaulting on its national debt. Such trading further destabilized Greece as its debt problems came to light, and with most of the eurozone spending beyond its means, it could pose future threats as well.
Barnier's new proposals are bound to meet opposition in Europe, however, with some saying that the new regulations will disadvantage the EU against other, less regulated markets.
"I've been to the United States, and you will find they are preparing measures very similar to what we have suggested today," Barnier said, adding that he would also be travelling to China, India and Brazil to see if other G20 members would commit to implementing comparable regulations.
"Some of them might feel tempted to save themselves in the short term, but in the end nobody will escape."
First of all, though, Barnier has the unenviable task of trying to sell his non-binding EU Commission suggestions to the European Parliament and individual EU member states - only then can they be implemented as law.
Author: Christoph Hasselbach, Brussels (msh)
Editor: Susan Houlton