Earlier today, José Manuel Durão Barroso, President of the European Commission, addressed a Plenary Session of the European Parliament regarding the situation in Greece and the regulation of Credit Default Swaps (CDSs). With respect to Greece, he noted that Greece "has taken the necessary measures to reduce its government deficit," showing "the determination of the Greek government to tackle their structural problems." He said that the EC is "actively working with euro area member states to design a mechanism which Greece could use in case of need," but acknowledged that any such mechanism would have to be "in conformity with the current Lisbon Treaty, in particular with the no bail-out clause" and would include "stringent conditionality."
With respect to credit default swaps (CDS), President Barroso stated that "the current problems in Greece were not caused by speculation on the financial markets, but it is also true that this speculation was an aggravating factor," highlighting the "importance of fundamental reform in the derivatives market." He said that systemic legislative proposals will be presented before the end of the year which will "increase market transparency and limit the risks [associated with CDSs]." He specifically emphasized the importance of "new 'ad hoc' reflection" regarding whether it is appropriate to allow "naked" CDS with respect to sovereign debt. President Barroso further noted the need for coordination between member states of the EU as well as between the EU and other international partners.
Separately, the European Parliament's Economic Affairs Committee met Monday evening to discuss the first draft of report by the Committee on Economic and Monetary Affairs on policy actions to ensure safer derivatives markets. At the Committee meeting, various MEP focused particularly on CDS. Some of the report's recommendations include:
- compulsory independent clearing between financial institutions for all standardized derivatives,
- future derivative prices should accurately reflect risk for market participants and such risk should be borne by the participant and not the taxpayer,
- broader authority for the European Securities and Markets Authority,
- reporting standards for all derivatives to be reported to central trade repositories, and
- central clearing houses should have greater independence from users and should not compete over risk assessments.
The Committee has until March 24 to present amendments before the next hearing is held on April 27.
Update: Germany's Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) has released a report concluding that "data published by the US Depository Trust & Clearing Corporation (DTCC), a trade repository, do not indicate that new open positions [in Greek government credit default swaps] are being built up, nor do they point to speculative activities on a massive scale" and that "the market data currently available to BaFin do not support the conclusion that speculation is taking place on a massive scale."