The influential EU Economic and Monetary Affairs Committee has called for an outright ban on speculative trading in certain derivatives contracts and the imposition of higher capital requirements for firms handling contracts that are not cleared centrally.
In a resolution approved Wednesday, the Committee says proposed EU rules on derivatives trading must be made clearer and tougher, so as to reduce speculative trading and ensure that as many derivatives as possible are traded through open channels that are subject to standards.
The Committee resolution advocates "abandoning the misjudgement that derivatives need no further regulation because they are only used by expert financial professions". Instead, it calls for strict rules to prevent inexperienced users and speculators from building up dangerous levels of risk and a total ban on speculative credit default swap (CDS) trading,
The resolution calls on the Commission to study ways to significantly reduce the overall volume of derivatives traded. It also backs proposed rules that would impose higher capital requirements on financial institutions involved in bilateral derivative contracts which are not cleared centrally, but suggests that such requirements may be waived if the clearing system used is deemed strong. It also proposes granting regulators the power to impose trading position limits, so as to counter "unsustainable levels of speculation".
The Committee urges that future EU legislation should include rules banning purely speculative trading in commodities and agricultural products. Upper risk limits should be considered for trade in agricultural products and in each specific commodity, including greenhouse gas emission allowances, so as to reduce speculation and help these markets to function transparently, adds the resolution.
On central clearing, the resolution stresses that CCPs must not be organised wholly by users and that their risk management systems must not be in competition with each other. Neither should market players have a controlling influence on CCP governance and risk management.