Brussels wants EU-wide criminal sanctions on rogue traders

Oct 20, 2011, 8:48 GMT

Brussels - Fines are not enough to dissuade rogue traders, the European Union's executive warned Thursday, while calling for the introduction of bloc-wide criminal sanctions for insider trading and market manipulation.

'Sanctions for market abuse today are too divergent and lack the necessary deterrent effect,' EU Market Regulation Commissioner Michel Barnier said in a statement.

The EU executive also said that the maximum sanction that can be levied on rogue traders should be at least 5 million euros (6.9 million dollars), while for financial firms it should be at least 10 per cent of their annual turnover.

In parallel, the commission proposed an extension of EU financial regulation laws on over-the-counter (OTC) trading - where banks and firms exchange assets privately rather than through a stock exchange.

That would bring all derivatives - including controversial short selling and credit default swaps (CDS) practices - under the scrutiny of EU regulators.

Sony Kapoor, head of the financial think tank Re-Define, said 'the new transparency regime for bond, structured products and derivative markets and the enhanced data collection regime is a giant leap of regulatory reform.'

A network of anti-poverty campaign groups said EU proposals would also 'shed light on betting on food commodities by financial traders,' but would not be 'enough to prevent speculation from fuelling high and volatile food prices.'

'It's unacceptable to leave big traders of grain or maize outside the scope of the market regulation and let them profit from high and volatile food prices,' said Daniel Pentzlin from Friends of the Earth Europe.

EU governments and the European Parliament would have to approve and ratify the commission draft before it can enter into force - a process that normally takes several years.

The commission's plans came out two days after the EU's Polish presidency and EU lawmakers agreed on legislation restricting short-selling and banning 'naked' CDS trades.

Short-selling involves promising a future sale of something you do not own, calculating that its price will fall in the meantime, allowing you to make a profit.

CDS are a form of insurance against default. Under the 'naked' variety, traders insure themselves on the default of an asset that they don't own - such as a government bond - giving them an incentive to bet against it.

Short-selling and naked CDS trading have been blamed for exacerbating market volatility during the eurozone crisis - prompting several European governments to temporarily ban the practices.