14/11/2011

European Parliament biting back at financial market speculation
New rules to limit speculation with sovereign debt and strengthen standards for short selling

By Lasse Böhm, German Press Adviser


The European Parliament is biting back at financial markets by clamping down on excessive speculation with government bonds, a key factor exacerbating the effects of the breakdown of the US merchant bank, Lehman brothers. After weeks of negotiations with EU Member States, MEPs managed to push through new rules to limit speculation with sovereign debt and strengthen standards for short selling.



Rules for credit default swaps

The agreement, negotiated for the EPP Group by German member, Markus Ferber (CSU), to be formally approved by plenary in mid-November, will establish Europe-wide rules for credit default swaps (CDS), the infamous financial instruments originally conceived as a form of insurance for buyers of government bonds. What started off as an instrument to provide stability for financial markets - any investor who held government bonds could buy CDS insurance for a little extra to guarantee the ability to get money back in the case of the debtor country being unable to pay back the bond upon maturity - has since been fuelling the world's financial crisis.

Its most dangerous variant, the 'naked' short selling of CDS, i.e. the sale of CDS by a trader who does not even own them with the sole purpose of gaining a short-term profit, will be banned completely, apart from in exceptional circumstances when national authorities authorise CDS sales in order to stabilise their bond market.

Automatic sanctions

These tough new rules for financial markets come just after the EPP Group managed to secure another hard-won agreement with EU Member States to strengthen the Euro's Stability and Growth Pact, by establishing more automatic sanctions for deficit countries. Both measures, an end to financial market speculation based on CDS short selling and the crack-down on countries running a deficit higher than allowed under the Euro's rules, are two key steps to stabilisation of financial markets and the strengthening of the Euro area. Together, they demonstrate that European politics still has the teeth to bite back at financial market speculation and clamp down on excessive government debt.