There is no case for emergency action to crack down on naked selling of credit default swaps, as called for by France and Germany, British authorities said on 10 March. At the same time, the US warned that EU plans to regulate hedge funds could cause a transatlantic rift.
In a letter sent to the Spanish Presidency of the EU, Greece, Germany, France and Luxembourg have called for speedy action to limit or even ban naked credit default swap (CDS) contracts, whereby the buyer has no stake in the underlying asset being insured against default.
Greece has blamed naked CDS contracts on its sovereign debt for amplifying its bond market woes as it grapples with a huge budget deficit.
"We need to think about it and think about it clearly but, given that, it is not the key driver of what has gone on with perceptions of Greek risk," Britain's Financial Services Authority chairman, Adair Turner, told reporters.
European Union finance ministers will discuss possible action in the CDS market on 16 March after the bloc's executive said on Tuesday it would consider a ban on naked selling.
"It would be wrong to rush into saying, 'yes because that has occurred we are going to take immediate action and deal with it'. We are trying to take that issue and think it through in a rounded fashion," Turner said.
There are increasing doubts, however, that hedge funds and others are the source of Greece's problems.
Germany's financial watchdog, BaFin, which investigated hedge funds' involvement with the country, said this week it had found nothing to prove widespread speculation.
Analysts and hedge funds also dispute that CDS markets can determine moves in the much larger sovereign debt sector, arguing that CDS values are a useful health check.
London and New York are the world's main derivatives trading centres and effective curbs in the EU would need Britain and the United States to take part.
A US official said on Tuesday that Greece's central task should be to restore fiscal stability.
Turner suggested that thrashing out a practical framework for curbs would be difficult.
"What is a hedge and what is not a hedge? It's easy to say why is somebody allowed to take an insurance policy on somebody else's house and they have got the incentive to burn it down," Turner said.
It was trickier to decide on the motives of someone who holds a naked short position on Greek debt and a long position on Greek banks, he added.
"You can have significant volatility in credit spreads of a sovereign even if no CDS market existed. There is a danger of an over-simplistic belief that everything going on is shorting in the CDS market," Turner said.
The EU is already set to propose a draft law in the summer to boost central clearing, transparency and trade reporting in the whole derivatives market and may address CDS abuse issues in a review of its market abuse rules later in the year.
(EURACTIV with Reuters.)