March 11, 2010 / 2:51 PM / 10 years ago

UPDATE 1-Four EU states call for inquiry into CDS market

* France, Germany, Greece, Luxembourg call for CDS probe

* Europe should intensify moves to increase transparency

* Europe must have its own repository for reporting trades

* Need for euro zone based clearing house for derivatives

(Adds details, background)

By Sophie Taylor

PARIS, March 11 (Reuters) - An inquiry must be opened into the role and impact of speculation linked to credit default swaps trading in EU government bonds as soon as possible to determine any market abuse, the heads of four countries said.

The move stops short of repeating recent calls for an immediate ban on selling CDS contracts to ‘naked’ buyers who have no interest in the underlying asset — thereby making it easier to find broad backing from the bloc’s finance ministers who will discuss CDS markets next Tuesday.

In a joint letter to European Commission President Jose Manuel Barroso and Spanish Prime Minister Jose Luis Rodriguez Zapatero, dated March 10, Germany, Luxembourg, France and Greece also called for more transparency on derivative markets.

The moves would be aimed at preventing undue speculation, enhancing transparency and improving the safety of derivative transactions, according to the letter, which was released by the office of French President Nicolas Sarkozy on Thursday.

"We therefore propose that the EU Commission initiates as quickly as possible at European level an inquiry into the role and impact of speculative practices in connection with CDS trading in the government bonds of European countries," it said. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic on Greek sovereign CDS and bond spreads here For story CFTC head scolds Wall Street for resisting reforms [ID:nN11133346] Forget Greece: Italy derivatives bomb also ticking [ID:nLDE6291C5] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

“We must prevent speculative actions from causing so much uncertainty on the market that prices no longer provide accurate information and state financing reaches a fundamentally unjustifiable high level,” the letter said.

A CDS offers insurance against a default on corporate or government debt. Trading the swaps without exposure to the asset being insured is therefore seen as perverse by some regulators.

Regulators like BaFin in Germany and the Financial Services Authority in Britain have cast doubt on the ability of the sovereign CDS market to influence government bond prices or the practicality of banning naked CDS selling.

Barroso has already pre-empted the letter, saying on Tuesday the Commission will examine a possible ban on naked selling of CDS contracts.


Greece has blamed naked CDS trades on its sovereign debt for amplifying its difficulties in funding a huge budget deficit.

“Should the inquiry ascertain market abuses or that there is a well-founded suspicion that speculative practices are having a considerable impact on the development of yields, we should quickly examine measures to determine whether they are suitable and, if necessary, pass the appropriate legislation,” the letter said.

Measures could include minimum holding periods for CDSs, banning speculative CDS trading and banning the purchase of CDSs not being used for hedging purposes, the letter said.

The leaders also said supervisors should have access to current portfolio and trading information related to all derivatives transactions through mandatory reporting to a repository in Europe.

“We also have to work towards ensuring that European regulators receive the relevant detailed information from non-European trade repositories,” the letter said.

The world’s only repository for recording transactions and copies of CDS contracts is operated by the U.S. Depository Trust and Clearing Corp in the United States.

The letter will put pressure on the Commission to harden its plans for a draft derivatives law due around July.

The four leaders also want European central clearing houses within the euro zone area to clear derivatives trades. The bulk of CDS clearing in the EU, which began last July, is being done by ICE (ICE.N), a U.S. headquartered operation.

Efforts by Germany’s Eurex (DB1Gn.DE) to win market share have so far yielded only modest results.

The letter was signed by Sarkozy, Luxembourg’s Prime Minister Jean-Claude Juncker, German Chancellor Angela Merkel and Greek Prime Minister Georgios Papandreou. (Additional reporting by Tamora Vidaillet; Editing by Ruth Pitchford)

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