The EU’s Naked Derivatives Ambitions

French and German officials lauded the near-completion of rules limiting “naked” CDS positions, where the buyer does not own the underlying bond, which were originally blamed for magnifying Greece’s sovereign distress last year to compel unprecedented outside bilateral and multilateral credit lines. Subsequent investigations absolved the shorting technique as the main cause of double-digit Greek yields and long-term market access loss which have persisted amid continued private restructuring and official program expansion talk. The tools, which had been subject to temporary national bans, did not feature as prominently in the ensuing Irish and Portugal debt sagas, and US counterparts have argued that restrictions would undermine liquidity and standard business hedging. The European approach tends to presume a speculative bias and also affords less flexibility in moving permitted derivatives activity generally to mandatory clearinghouses. For foreign exchange trading in contrast Washington regulators have agreed to broad exemptions, while newer EU members in the East trying to develop and deepen futures and swap capability have questioned the balance between commercial growth and prudential stability. Transatlantic differences have likewise been pronounced in areas like securitization, credit ratings, compensation, and proprietary dealing. Brussels requires issuers to retain 5 percent of securitizations and strict disclosure. Ratings agency oversight has been transferred to the new European Securities Market Authority, which has proposed changing the issuer-pays model and opening competition to a broader range of industrial and emerging economy-based firms. Under the 2010 revised Capital Requirements Directive, banker bonuses must observe a detailed formula proportionate to salaries with provisions for up-front and deferred versions and claw-backs upon performance decline. With their traditional universal banking framework European supervisors do not subscribe to the so-called Volcker Rule, named after the former US Federal Reserve head, which seeks to circumscribe securities portfolio scope in affiliates. However in the stand-alone hedge fund and private equity sphere which New York and London-based managers dominate recently-added European Commission controls that cover valuation, leverage, marketing, and remuneration are much tougher than in other jurisdictions. 

In accounting, in turn, the US GAAP is slowly converging with Europe-designed international practice that has spread to the wider G-2O group now debating a range of global system protection measures. The specific breakdown of capital and liquidity ratios under Basel III, too-big to fail designation and cross-border resolution methods, and creation of multilateral cooperation bodies beyond the IMF-located Financial Stability Board are among other issues where despite mutual solidarity pledges member countries and regions prefer to pursue their own naked interests.