EC to rein in derivatives

EUROPEAN politicians are poised to crack down on derivatives trading after blaming speculators for exerbating fears over Greece and Spain’s finances to their own advantage.

Internal markets commissioner Michel Barnier will kick off his term by bringing in new rules as early as June. They are expected to fall along lines set out by the US, which is talking about capping the size of individual derivatives trades and forcing the traditionally opaque instruments onto open exchanges.

The move follows the national debt crisis in Greece and borderline crises in Eurozone economies including Spain and Portugal. Politicians have accused hedge funds of driving up the cost of insuring against Greek and Spanish debt default by buying up credit default swaps (CDS).

The use of derivatives to make trades based on underlying assets has boomed over the past decade. The currency derivatives market expanded from $100 trillion (£65.6 trillion) in 1998 to $700 trillion in 2008. The CDS market, expected to receive special attention from politicians, grew from $900bn in 2001 to $62 trillion in 2007.

Over the weekend, American investment veteran Warren Buffett warned US authorities not to impose overly harsh rules on derivatives.