EU weighs limiting countries' power to ban swaps

By AOIFE WHITE

BRUSSELS

The European Union's executive said Monday that it may limit member states' power to temporarily ban credit default swaps in order to better coordinate countries' responses to market crises.

Germany shocked investors last month with a go-it-alone ban on naked credit default swaps -- when a trader buys a form of insurance on government bonds or stocks that he doesn't own.

The European Commission suggested that any such ban would be temporary and only be made in emergency situations and after talks with supervisors from all 27 EU nations.

It laid this out as one of several options that it is weighing up for legislation it aims to propose on Sept. 8, officials said. The EU is seeking advice from financial market players and regulators before completing two draft laws on short-selling and derivatives.

A European Commission document said EU states have created problems by reacting very differently to market fluctuations in eurozone government bonds -- such as Germany's move to ban while other nations did nothing. It says different attitudes limit the effectiveness of any move.

Instead, it suggests that any ban should be coordinated with a new European markets authority, due to be set up by the end of this year, which could hold talks with all national supervisors in the EU.

It also proposes that the ban could exempt market makers and shares whose main markets are outside Europe -- which could allow European investors to continue trading on U.S. markets.

It also wants traders to give regulators more information on the short positions they hold -- which would allow supervisors to decide if a large build-up of financial bets could cause a risk to the entire market. Large positions could be made public, it says.

The EU is asking whether regulators should seek information on significant net short positions in EU government bonds to monitor whether they are "creating disorderly markets or systemic risks or are being used for abusive purposes."

The European Commission also proposed options for new rules on derivatives trading to handle such trades through a central clearing house -- instead of privately as they are done currently -- and to give regulators more information on the trades.