EU proposes tougher rules for financial markets

The European Union’s executive today proposed tougher curbs on financial market practices seen to have contributed to the global market crisis that drove the world’s largest economies into recession.

EU Services Commissioner Michel Barnier said today he wants to rein in the market for derivatives – financial instruments based on the value of other assets – and insisted regulators should have powers to restrict, and even ban, short selling.

Mr Barnier said the measures on the derivatives market would kick in in 2012 and bring Europe in line with restrictions the US Congress passed over the summer to get a better grip on banks and Wall Street.

“We have to limit the risks of this hyper speculation by shedding light, by forcing people to be transparent. We have to know on all of these markets, with the Americans and the other regions, who is doing what,” Mr Barnier said.

“No player, no market, no territory, must remain outside this supervision,” he said.

“No financial market can afford to remain a Wild West territory,” Mr Barnier said, arguing that lack of controls on specialised financial products compounded the global financial crisis.

He said such specialised markets had been working too long as an entity unto themselves, without control or scrutiny. He said his proposals would increase transparency and make the markets safer.

The proposals still need to be adopted by the EU member states and parliament before they become law.

In Berlin, German Chancellor Angela Merkel renewed a call for tougher financial market regulation and welcomed a move to oblige banks to hold more capital.

Ms Merkel told parliament that Germany still believes “every product, every actor, every financial market participant must be regulated so that we have an overview of what is happening on the financial markets”.

She also insisted Germany expects the EU to “regulate derivatives markets properly”.

Mr Barnier said trade in the 600 trillion derivatives market will change, with over-the-counter contracts – those not traded through an exchange – reported to central databases where authorities will have access to find any potential trouble or excessively risky behaviour.

When it comes to short selling and credit default swaps, the proposal wants to increase transparency by forcing investors to report short positions in shares to regulators if they are above 0.2% in issued share capital and to the market if they are above 0.5%.

The proposals won a mixed review from European legislators, who will have to rule on them.

“These proposals should be welcomed as they will provide greater transparency which will help make the financial markets safer and more stable,” Kay Swinburne, a British legislator of the European Conservatives and Reformists group said.

For the European Greens, the proposals did not go nearly far enough.

“Given the central roles played by derivatives and short selling in the financial crisis, the commission should have proposed far-reaching legislative measures that would fully address their flaws. Unfortunately, today’s proposals are not ambitious enough,” said France’s Green legislator Pascal Canfin.