EU unveils short-selling curbs, derivatives controls

* Commission reforms target most opaque parts of finance

* Rules would give powers to new agency to ban short-selling

* Regime to identify risky gambles in derivatives

By John O'Donnell

BRUSSELS, Sept 15 (Reuters) - The European Union's executive unveiled proposals on Wednesday to curb or temporarily ban short-selling and tighten controls on derivatives in one of its most ambitious financial reforms since the economic crisis.

The European Commission's proposals will make it mandatory to report all trading in derivatives to central data banks, which regulators will then use to keep tabs on the market.

The reforms will also hand powers to a new agency that will police European financial markets and have powers to suspend short-selling -- the sale of a security the seller does not own which is typically a bet that the price will fall by the time the seller must buy the stock to settle the trade.

The shake-up is intended to tackle two of the most opaque parts of financial services, seen by many politicians as the hunting ground for speculators seeking quick profits.

Derivatives, once described by billionaire U.S. investor Warren Buffett as "financial weapons of mass destruction", were widely blamed for triggering panic after the collapse of Lehman Brothers in 2008 and some politicians say short-selling exacerbated Greece's problems during its sovereign debt crisis.

The laws, if agreed by the European Parliament and the bloc's 27 countries, will hand significant powers such as banning short-selling to a new markets watchdog that will be up and running by the start of next year.

"No financial market can afford to remain a Wild West territory," said Michel Barnier, the EU commissioner in charge of reform of financial services.

"Today, we are proposing rules ... so we know who is doing what, and who owes what to whom."

INCREASED TRANSPARENCY

Most derivatives, whose value is linked to the price of a financial instrument such as a company share or commodity such as oil, are now traded over-the-counter or off-exchange, far from the watch of regulators.

The Commission wants better identification of trades in this $600 trillion market, where many multi-million-euro deals are recorded only by a fax between seller and buyer.

It will also ask derivative traders to use clearing houses which provide a safety net in the event of a collapse like Lehman, by stepping in should either buyer or seller to a trade go bust.

By forcing transparency, the rules are likely to challenge the dominance of the roughly half a dozen large banks that run the market now.

These banks, which include Deutsche Bank (DBKGn.DE), Barclays (BARC.L), Goldman Sachs (GS.N), JP Morgan (JPM.N), Bank of America (BAC.N) and Citigroup (C.N), design derivatives for customers and trade them among themselves.

The European Securities and Markets Authority will be allowed to temporarily stop short selling or prevent unilateral bans by countries such as one imposed by Germany earlier this year.

There will also be strict curbs that come close to an effective ban on naked short-selling -- when sellers have not arranged to borrow the assets such as a company share they promised to sell.

Under the Commission's proposals, regulators will be able to demand a "naked" seller show how he intends to complete the deal. This means that to enter a short sale, an investor must have borrowed the instruments concerned, have a commitment to borrow them.

For more on the proposals, double-click on [ID:nLDE68C0VM] (Reporting by John O'Donnell, , editing by Mike Peacock)