Regulation of complex financial instruments such as credit default swaps (CDS) is a key priority, the chief of the European Central Bank (ECB), Jean-Claude Trichet, said today, backing calls made by four leading European politicians, according to dpa. Authorities in the European Union and United States are investigating whether speculative use of CDS has contributed to Greece's budget crisis, first by helping its government mask its fiscal woes, then by fuelling market anxiety over a possible default. Trichet said "certain financial instruments, which were introduced in consideration of their positive effects for the hedging of risks, should not be used in a speculative manner". Earlier in March, French President Nicolas Sarkozy, German Chancellor Angela Merkel, and the prime ministers of Luxembourg and Greece, Jean-Claude Juncker and George Papandreou, signed a letter urging the EU to ban speculative trading tied to government bonds. Regulators' attention is focusing on trading on so-called "naked" CDS - essentially buying insurance against default without holding a stake in the bonds themselves. Critics say that in the Greek case that created an incentive to put pressure on Athens' finances, as holders of naked CDS on Greek bonds had nothing to lose if they defaulted. Trichet appeared to back away from the most radical form of intervention, involving an outright ban of naked CDS. Speaking at a conference in Brussels, he said the "key priority" was to establish a central clearing system for CDS, stressing that would "reduce the incentive (for traders) to take excessive risks," as well as boosting transparency. "We need more transparency in CDS markets, and so do investors. Transparency of markets is a public good. Authorities must be able to gather information, to assess possible risks for financial stability and detect possible improper conduct," the ECB president stressed. The EU's internal market commissioner, Michel Barnier, confirmed Wednesday he would come forward with proposals to regulate the derivatives market in June. He said a specific initiative on naked CDS trading would be put on the table later this year.
