EU lets financial watchdogs off the leash

An array of new European financial supervisory bodies designed to monitor and avert future economic crises on the continent have opened their doors for business.

Michel Barnier, the European commissioner for the Internal Market and Services, said in a statement that the new surveillance structures would give Europe "the control tower and the radar screens that the financial sector needs".

As well as scanning markets, banks, insurance and stock, the new agencies can alert EU countries to potential risks to financial stability, such as speculative bubbles. They will also have the power to recommend Europe-wide technical standards and, in emergency situations, temporarily ban or restrict trade in financial products and services.  

Initially though, their focus will be on creating a common rule book, establishing coordination with national authorities, and ensuring a smooth handover of power from the previous regulatory agencies.

Recruiting "the right people" is also a priority, according to Chantal Hughes, Barnier's spokesperson. "It will take a bit of time until the authorities are fully up to strength in terms of personnel," she told EURACTIV.

The Commission has received around 300 applications for the top six posts.

Already though, market practices such as short selling and high frequency trading have been identified as areas of particular concern.

"Last year Germany took unilateral action to suspend short selling at one point when it felt under pressure," Hughes said. "We would hope that [under a repeat scenario] in the new system, there would be much more coordinated and structured action [taken] upfront and across the board."

The Internal Markets Commission is currently considering proposals to meet its objective of inverting the current ratio of derivatives monitoring, approximately 90% of which is traded 'over the counter' and so completely unregulated. In December 2009, the total value of the derivatives market was estimated at $615 trillion.

Hughes singled out credit default swaps as a trading practice that could be suspended in an emergency situation, and noted their position in a bigger puzzle. "We have proposals on the table that are being negotiated on derivatives, short selling or credit default swaps and those would fit into the wider foundation," she said.

A European Commission proposal unveiled last September suggested that derivatives trading be brought under the regulations of stock exchanges and processed by clearing houses or central counter-parties, which would have to comply with stricter governance rules.