Many European political leaders have blamed speculators for aggravating the rocky financial markets that forced them to agree a bumper emergency package for struggling countries on Sunday.The bloc's finance ministers agreed on Sunday that rapid progress was needed on new derivatives markets rules.Here are questions and answers about the speculators that politicians in the 27-country bloc want to call to heel.WHO ARE THE SPECULATORS BLAMED FOR EXACERBATING THE CRISIS?Political leaders often single out hedge funds as the culprits for making Greece's borrowing problems worse by snapping up default insurance on its debt.They believe such buying exaggerated a price spiral of this insurance -- credit default swaps -- which was already rising in cost amid fears Greece could go bankrupt.This in turn aggravating Athens' attempts to borrow money on the open market, forcing them to turn to their European neighbours for help and triggering fears problems could spread elsewhere.In particular, politicians denounced the buying of CDS by speculators who do not own the bond it insures -- otherwise known as naked buying.Country leaders also want to stop investors who bet on the euro falling in value, by agreeing contracts to buy it for less than it is worth now. Many believe such short-selling adds to pressure on the currency.DID SPECULATORS FAN THE FLAMES OF CRISIS?Nobody knows.Investors such as airlines and manufacturers use financial instruments called derivatives to shield themselves against price swings in currencies, government debt or commodities like fuel. This is not seen as speculating.But banks and hedge funds are known to use derivatives to bet on falling prices in the underlying asset.There is no detailed monitoring of the $450 trillion derivatives market though the United States and EU are planning new rules.Efforts by governments to probe the marketplace, where there are no central records of trading and the only proof of many multimillion euro deals is a fax, have been unsuccessful.The only ones who have insight into the obscure trading ground are the fewer than one dozen banks such as Goldman Sachs and Deutsche Bank who execute trades.German markets watchdog Bafin investigated to see if it could pin responsibility for market swings in Greek debt on individual investors.It gave up, concluding that the jump in the cost of default insurance may simply reflect fears of the country's financial collapse. The Committee of European Securities Regulators is also probing for speculation in derivatives and so far has not found any major evidence.HOW IS EUROPE PLANNING TO TACKLE SPECULATION?The European Union is in the midst of an overhaul of rules for financial services. It hopes that measures such as curbs on pay and demanding banks set aside more for unpaid loans will brake risk-taking.Michel Barnier, the EU's financial services chief, is also set to unveil a new regime to control derivatives trading as soon as next month. The Frenchman is likely, for example, to give watchdogs the power to cap the size of individual trades by speculators in derivatives.In order to keep proper tabs on the market, Barnier will also demand central clearing and recording of derivatives trades and gradually push the market onto exchanges.These are the first rules for trading in instruments to bet on the price of a currency or commodity like oil. The market which ballooned from less than $100 trillion in 1998 to roughly $700 trillion in 2008, just before the economic crash.Trading of credit default swaps, which rocketed from roughly $900 billion 2001 to more than $62 trillion in 2007, will get special attention in rules to be outlined later this year.WILL IT WORK?European lawmakers are approving tighter controls on hedge fund and private equity firms, controlling their borrowing, investment and pay.The new regime should make it easier for supervisors to see what hedge funds are doing as well as intervene if they see speculators crowding a market by banning short selling, for example.But experts predict the laws will fall flat if new European watchdogs do not get sufficient powers to police them. Proving and defining speculation is also difficult.Britain has insisted on watering down the new watchdogs' influence, fearing they will gain too much say over London's financial centre.European parliamentarians want to give them more clout but, in the face of British opposition, many fear the new policing authorities will be reduced to mere talking shops.News posted by www.newsinfoline.com
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