The European Commission said yesterday it wants measures to control risks in the shadowy $60 trillion credit derivatives market, seen as one of the causes of the worst financial crisis since the 1930s, as a leading French bank said it has lost around 600m (£480m) in a derivatives trading "incident" during last week's market turmoil.
The European Commission said yesterday it wants measures to control risks in the shadowy $60 trillion credit derivatives market, seen as one of the causes of the worst financial crisis since the 1930s, as a leading French bank said it has lost around 600m (£480m) in a derivatives trading "incident" during last week's market turmoil.
"Regulators need to have a much better view of where the real risks in these instruments lie," EU internal market commissioner Charlie McCreevy said at Euro- pean Union headquarters in Brussels.
"I would like to have by the end of this year concrete proposals as to how the risks from credit derivatives can be mitigated," McCreevy said.
The contracts are traded over the counter or off an exchange, and are more lightly regulated with risks less controlled.
Contracts could be standardised more, the commissioner stated. "But there is a far more pressing need and that is to have a central clearing counterparty for these derivatives."
Standardised derivatives are already traded and cleared on exchanges such as Eurex in Paris, Liffe in London and the Chicago Mercantile Exchange. But the off-exchange market, with its bespoke contracts, is far bigger.
One sector, credit default swaps (CDS) are "insurance" against a company defaulting and have been widely traded, with poor records of where these contracts have ended up or whether the owners have the capital to honour them if needed.
Central clearing for credit derivatives such as CDS contracts was urgent, McCreevy said. "No-one is able to say how these swaps will unwind. Regulators have little sight of potential liabilities that could be building up for individual participants," he added.
McCreevy's moves are simi-lar to those in the US where the Securities and Exchange Commission and US Federal Reserve chairman Ben Bernanke have said there should be more oversight of credit derivatives.
The Commodity and Futures Trading Commission, that oversees derivatives in the US, has said centralised clearing of contracts is an "immediate" step that could be taken to cut risk.
Liffe said on Thursday it has struck a deal with Markit Group, a financial information provider, to introduce exchange-traded credit default swaps that are cleared centrally.
Meanwhile, the French bank Caisse d'Epargne said it lost around 600m in a deriva-tives trading "incident" during last week's market chaos.
"Because of the extreme volatility in the markets and the stock market crash of the week of October 6, the bank underwent a major incident in the derivatives market," it said in a statement.
A company official, speaking on condition of anonymity, said that a finance director from the group had been sacked and six members of the team that made the losing trades had been sanctioned.
"The necessary steps to close this position and end this activity were taken. Sanctions have been decided upon and the necessary regulatory bodies have been informed," the company statement said.
The bank insisted the loss did not effect its stability.
Rumours of a big derivatives loss at a large bank spooked the share market last week, forcing Societe Generale and Dexia to issue denials.
Caisse d'Epargne plans to merge with Banque Populaire. The two banks are majority shareholders in investment bank Natixis, which has been among those hardest hit in France by the meltdown in US sub-prime mortgage markets. It was recently forced to raise 3.7bn in new capital.
